(CN) - A federal appellate panel upheld the dismissal of a class action against Textron Inc. which claimed the company isled shareholders about its subsidiary, Cessna Aircraft Company, and its ability to weather the recession.
Ted French, a Textron senior executive, told investors in an April 17, 2008 conference call that Cessna's robust backlog of orders was key to the aircraft company's survival through economic hardship and that they would even compensate for a "fall-off" in Textron's financial services business.
Automotive Industries Pension Trust Fund and City of Roseville Employees' Retirement System filed suit, however, after stock prices fell on news of backlog order cancellations.
They claimed Textron artificially inflated the health of the backlog and accused Textron President and CEO Lewis Campbell and executives Buell Carter and Douglas Wilburne, head of Investor Relations, of making similar claims that were misleading and false.
"Over the course of 2007 and 2008, on the edge and outset of the recession, Textron made public statements assuring its investors of the strength and depth of the backlog of orders at Cessna, which Textron represented would help carry it through difficult economic times," the complaint stated. "In July and October 2007, and January, July and November 2008, Textron reported record levels of 'aircraft and defense' backlog. Campbell and Wilburne also assured investors that Cessna did not permit customers to sell delivery positions, that is, the customer's priority in receiving ordered aircraft."
In 2007, Campbell told Reuters that "if we were running on a very low backlog, I'd be nervous, but the converse is true."
Plaintiffs also accused Campbell of making misleading public statements in January and July of 2008 regarding the status of order cancellations.
"Again, in October 2008, Campbell said that 'cancellations are not even noteworthy ... As late as November 2008, Campbell said 'on the cancellations front, which is encouraging and interesting, we aren't seeing any more cancellations than we did last year or the year before at this time. So, we don't have a huge buildup of cancellations.'"
Campbell remained positive after Textron downgraded Cessna's jet aircraft production schedule.
"We believe our record aerospace and defense backlog and pending customer orders of nearly $30 billion will provide a cushion and ballast to weather the uncertainties we face as we go forward," he said.
In January 2009, however, Textron reported sizable cuts to Cessna's production based on 23 cancellations and an "unprecedented number of deferrals of delivery dates by customers," the complaint said.
That same day, Textron stock closed at $9.09, for a 31 percent decline over the previous day and 87 percent from the class period high.
Judge Michael Boudin of the 1st Circuit appellate panel, however, said there is no evidence to suggest Textron's officers were negligent.
"Nothing in the complaint suggests that any of the named officer believed, or was recklessly unaware, that the backlog's significance has been undermined by weakened underwriting standards, sales to intermediates, or any of the other flaws on which the plaintiffs rely," the ruling states. "And the questionable materiality of the practices, depending importantly on matters of degree and detail, deprives any inference of scienter of forward momentum that would be helpful to plaintiffs."
Boudin specifically dismissed the Funds' accusations that Campbell knew there were more cancellations than what he was revealing.
"If Campbell knowingly understated the number of cancellations in July 2008, this would be in 'classic evidence of scienter,'" he said. "But, as the district court observed, on the crucial question of when cancellations began piling up, Campbell's statement and the confidential witness' description of cancellations increasing 'suddenly' in 'late summer' are not in conflict."
Boudin added that, "This complaint's scienter allegations were weaker than its materiality allegations and did not even arguably fall into a gray area encouraging further proceedings."