Class Action

PSLRA Class Action Defense Cases–Akerman v. Arotech: New York Federal Court Denies Motion To Dismiss Securities Fraud Class Action Finding Class Action Complaint Adequately Alleged Materiality, Scienter And Particularity

By Michael J. Hassen

Securities Fraud Class Action Survives Motion to Dismiss because Class Action Complaint Adequately Alleged that Defendants Failed to Timely Discover and/or Disclose Material Adverse Information New York Federal Court Holds

Plaintiffs filed a class action against Arotech Corporation, a defense contractor, and three of its officers alleging violations of federal securities laws; the class action complaint violations Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeking to hold the individual defendants liable as “control persons” under Section 20(a) of the Act. Akerman v. Arotech Corp., ___ F.Supp.2d ___ (E.D.N.Y. March 30, 2009) [Slip Opn., at 1]. According to the allegations underlying the class action, defendants made materially false statements and withheld materials facts concerning Arotech’s financial condition, id. The class action centered on Arotech’s acquisition of Armour of America (AofA) in August 2004 for $19 million in cash “with additional possible earn-outs if AofA is awarded certain material contracts” up to a maximum of $40 million. Id., at 2-3. Arotech’s total revenue in 2003 was only $17.3 million, but its revenue in 2004 increased to $50.4 million, id., at 3-4. Defense attorneys moved to dismiss the class action complaint “principally on the grounds of materiality, scienter and particularity” as required by the Private Securities Litigation Reform Act (PSLRA). Id., at 1. The district court concluded that the class action complaint adequately alleged securities fraud.

The class action complaint cited various confidential witnesses who alleged that “Arotech’s pre-acquisition due diligence did not reveal all material information about AofA before the acquisition.” Akerman, at 4. In particular, the confidential witnesses cited the federal government’s cancellation of a substantial helicopter contract with AofA based on a “termination for default” (T4D), that is, the government’s belief that AofA had overstated the armor weight of the helicopters. Id., at 4-5. The T4D, together with stigma accompanying the T4D, created a “domino effect” at AofA that seriously impacted sales, id., at 5. The class action alleged that defendants had access to this information, despite the fact that AofA did not disclose it, id., at 5-6. Additionally details may be found in the district court opinion at pages 6 through 11.

Full post as published by Class Action Defense Blog on April 08, 2009 (boomark / email).