United States District Court, N.D. Ohio
Florida Carpenters Regional Council Pension Plan, et al., Plaintiffs,
Eaton Corporation, et al., Defendants
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Florida Carpenters Regional Council Pension Plan, Plaintiff: David R. Scott, LEAD ATTORNEY, Scott & Scott - Colchester, Colchester, CT; Alan Eichenbaum, Plantation, FL; Donald A. Broggi, Joseph Daniel Cohen, Joseph P. Guglielmo, Scott & Scott - New York, New York, NY; Roger W. Van Deusen, Gulfport, FL; Geoffrey M. Johnson, Scott & Scott - Chagrin Falls, Cleveland Heights, OH.
For Eaton Corporation, Defendant: Andrew G. Fiorella, Frances F. Goins,Joseph A. Castrodale, Ulmer & Berne - Cleveland, Cleveland, OH; Robert C. Psaropoulos, Eaton Corporation, Cleveland, OH.
For Alexander M Cutler, Mark M. McGuire, Taras G Szmagala, Jr., Donald J. McGrath, Defendants: Andrew G. Fiorella, Frances F. Goins, Joseph A. Castrodale, Ulmer & Berne - Cleveland, Cleveland, OH.
For Victor Leo, Defendant: Darrell A. Clay, Ralph E. Cascarilla, Walter & Haverfield, Cleveland, OH.
For KBC Asset Management NV, Movant: Andrew M. McNeela, Ira M. Press, J. Brandon Walker, LEAD ATTORNEYS, Kirby McInerney, New York, NY; Deborah M. Sturman, New York, NY; Roger W. Van Deusen, Gulfport, FL.
Memorandum of Opinion and Order
PATRICIA A. GAUGHAN, United States District Judge.
This is a securities fraud class action brought against Defendant Eaton Corporation (Eaton) and individual defendants who served as senior executives of Eaton at the time of the events alleged, Alexander M. Cutler, Mark M. McGuire, Victor Leo, Donald J. McGrath, and Taras G. Szmagala, Jr. Eaton and the individual defendants who are current Eaton executives (Cutler, McGuire, McGrath, and Szmagala) have filed a Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint (complaint). (Doc. 39.) Defendant Victor Leo, Eaton's former Vice President and Chief Counsel of Litigation (who is not currently employed by Eaton) has filed unopposed motions to join Eaton's motion to dismiss and their briefs. (Doc. Nos. 41, 46.) Leo's unopposed motions to join are granted. In addition, for the reasons stated below, defendants' motion to dismiss plaintiffs' securities fraud complaint is also granted.
Eaton is an Ohio corporation headquartered in Cleveland, Ohio. Plaintiffs KBC Asset Management NV and Florida Carpenters Regional Counsel Pension Plan are purchasers of shares of Eaton common stock during the period of August 2, 2009 through June 4, 2012. Plaintiffs' allegations against Eaton in this case stem from events transpiring in a 2004 state court lawsuit filed by Eaton against former employees in Mississippi. The following allegations are contained in plaintiffs' complaint.
In 2002, six Eaton engineers left Eaton and joined a North Carolina-based competitor of Eaton, Frisby Aerospace, Inc., now known as Triumph Actuation Systems (Frisby). A former Frisby employee, Milan Georgeff, approached Eaton in 2003 and informed it that the six of its former engineers had improperly taken thousands of documents from Eaton containing trade secrets and proprietary information concerning products developed by Eaton. On January 28, 2003, Eaton entered into a contract with Georgeff. In exchange for Georgeff agreeing to provide information and testimony on Eaton's behalf, Eaton promised to pay Georgeff's expenses, defend any possible criminal or civil litigation brought against him, reimburse him for his time, and guarantee him lifetime employment.
Based on Georgeff's allegations, Eaton filed a lawsuit against Frisby in Mississippi state court on July 9, 2004, alleging theft and conspiracy against the former Eaton engineers (" the Frisby Litigation" ). The Frisby Litigation was assigned to then-Hinds County, Mississippi Circuit Court Judge Bobby DeLaughter. Subsequently, Eaton's General Counsel Mark McGuire " used Georgeff's allegations to convince the U.S. Attorney's office in Jackson, Mississippi to file criminal charges against five of the six former Eaton engineers." (Complt., ¶ 43.)
Plaintiffs allege that Eaton engaged in discovery abuse and litigation misconduct from the very beginning of the Frisby Litigation and, ultimately, the Mississippi
state court dismissed Eaton's claims with prejudice as a sanction for its litigation misconduct.
In late 2005, in response to specific document requests from Frisby, Eaton did not produce the compensation agreement between Eaton and Georgeff, and denied that such an agreement existed. Frisby later obtained the compensation agreement in connection with a concurrently-pending lawsuit by Georgeff against Frisby in North Carolina. (Complt., ¶ 46.) On January 6, 2006, Frisby sought sanctions and dismissal of the Frisby Ligitation for Eaton's discovery violations and for improperly compensating a fact witness. Judge DeLaughter referred the matter to Special Master Jack Dunbar for review and recommendation as to whether there had been discovery violations by Eaton and whether they were intentional.
On June 13, 2006, and December 5, 2006, Special Master Dunbar issued report and recommendations finding that Eaton had committed discovery violations and that they were intentional. (Complt., ¶ ¶ 49, 51.)
" In late 2006, when it became clear that Special Master Dunbar's Report and Recommendation would find that Eaton had committed intentional discovery violations and that Eaton and its lawyers would be subject to serious sanctions, Eaton hired [Ed] Peters [ a former Hinds County district attorney and DeLaughter's former boss and associate] to secretly influence DeLaughter." (Complt., ¶ 52.) Eaton's local trial counsel, Michael Allred, had recommended hiring Peters to defendant Leo because the lawyers were worried about the impact of the Special Master's report. Eaton agreed to pay Peters a contingency fee of at least 1% of two hundred million dollars if the Frisby Litigation was ultimately successful. ( Id .)
After Eaton hired Peters, the litigation " took a dramatic turn in Eaton's favor." ( Id . at ¶ 10.) Judge Delaughter " rejected nearly every recommendation Special Master Dunbar made in the coming months from everything from the schedule of the engineers' depositions to Dunbar's recommendation of more than $1.5 million in sanctions against Eaton for its discovery violations related to Georgeff." ( Id .) Further, in October 2007, unhappy with Special Master Dunham, Peters called Larry Latham . . . and asked him if he would be willing to serve as special master on the case . . . . Latham told Peters he would, and, on October 27, 2007, DeLaughter sua sponte issued an order removing Dunbar as special master and replacing him with Latham." ( Id . at 11.)
DeLaughter's relationship with Peters became the subject of a federal investigation in December of 2007, when evidence from two investigations of trial lawyer Dickie Scruggs suggested that Scruggs had used Peters to influence DeLaughter. Both Peters and DeLaughter were subpoenaed in the Scruggs investigation. DeLaughter recused himself from the Frisby Litigation in January 2008. Later, DeLaughter pleaded guilty to obstruction of justice, was suspended from the bench, and served 18 months in prison. In January 2008, it was publicly reported that the federal investigation of Peters and DeLaughter was being expanded to include an investigation of improper contacts between Peters and DeLaughter in the Frisby Litigation.
Following DeLaughter's recusal, Judge Swan Yerger was assigned to the Frisby Litigation. Judge Yerger stayed the proceedings and during 2008 and 2009, conducted an investigation of Peter's ex parte contacts with DeLaughter in the case, including requiring Eaton to produce all documents related to its retention of Peters.
Meanwhile, " Peters' testimony in the criminal case against Scruggs revealed that, if he had been asked to testify regarding his role in the Frisby Litigation on behalf of Eaton, Peters would have said he was 'brought into the case by Eaton . . . as someone who could influence DeLaughter'. . ." (Complt., ¶ 14.) But when Eaton responded to the public revelation of the government's outline of Peters' expected testimony on August 2, 2009, and various times thereafter, Eaton made " false and misleading" public statements that it did not hire Peters to influence Judge LeLaughter. Eaton also denied that there was " anything wrong with agreeing to illegally compensate Georgeff in exchange for certain testimony and . . . failing to disclose the Company's agreement with Georgeff despite repeated discovery requests from Frisby." ( Id., ¶ 85.)
However, in November 2009, Special Master David Dogan (the Special Master appointed in the case after Special Master Latham resigned from the case) issued a Report and Recommendation finding that Eaton was aware of the impact Peters had on the rulings Eaton received from Judge DeLaughter. ( Id . at ¶ 87.)
On January 6, 2010, Judge Yerger entered an order imposing sanctions of more than $1.5 million against Eaton for intentional discovery violations concerning Georgeff -- " contradicting Eaton's August 2, 2009 statement that [nothing Eaton did regarding Georgeff] was illegal under Mississippi law." ( Id., ¶ 89.)
On August 11, 2010, Special Master Dogan filed an R& R recommending that Eaton's lawsuit be dismissed with prejudice due to Eaton's repeated unlawful conduct in the litigation. The Special Master detailed findings of fact demonstrating that Eaton knew or should have known of Peters's improper conduct. He found that Eaton and its counsel kept Peters's involvement a secret despite Eaton's knowledge that Peters had been having improper ex parte conversations with DeLaughter. ( Id . at ¶ 91.) The August 11, 2010 Report and Recommendation was filed under seal and remained under seal until a redacted version was released after the class period. ( Id .)
On December 22, 2010, in an opinion that was unsealed on December 29, 2010, Judge Yerger dismissed the Frisby Litigation because Eaton had hired Peters to improperly influence DeLaughter. The opinion stated that Eaton's in-house counsel was aware of Peters' ex parte contacts and that Eaton's general counsel, defendant McGuire, was aware of the scheme. Judge Yerger's December 2010 opinion stated: " The court finds, by clear and convincing evidence, that Eaton and its counsel were aware of and, in fact, sanctioned Peters' clandestine actions, either through affirmation or inaction, with then-Judge DeLaughter, for Eaton's benefit." ( Id . at ¶ 92.)
" Despite Judge Yerger's findings, Eaton continued to proclaim its innocence and did nothing to remedy its wrongdoing." ( Id . at ¶ 93.) In particular, Eaton took no action regarding its general counsel, defendant McGuire, or other in-house attorneys. Following the dismissal of Eaton's case, McGrath again stated, " We in no way asked Ed Peters to try and influence Judge DeLaughter or any other judge." McGrath went on to state that " Eaton is a value-based organization . . . . [and was] very disappointed in the decision." McGrath said that Judge Yerger's decision would be appealed and that Eaton would " continue to work with federal prosecutors' efforts to convict the engineers." ( Id .) According to plaintiffs' complaint, Eaton's appeal is still pending before the Mississippi Supreme Court, and Frisby's counterclaims
against Eaton are still pending in the Frisby Litigation. (Complt., at ¶ 16.)
Judge Jeff Weill was assigned to the Frisby Litigation in January 2011 following the retirement of Judge Yerger on December 31, 2010. In 2011, Eaton continued to deny wrongdoing. Its spokesman Gary Klasen stated, " Eaton strongly disagrees with Judge Yerger's ruling. Eaton was not aware that Mr. Peters was ...