In re Resideo Technologies, Inc. Securities Litigation

Background

This putative class action was brought by investment management companies, investment funds, and the Oklahoma Firefighters Pension and Retirement System. They purchased Resideo Technologies, Inc. stock during the class period, October 29, 2018, through November 6, 2019.

The lawsuit arose from Honeywell International Inc.’s October 2018 spin-off of Resideo. The amended complaint alleged that Honeywell used the spin-off to shift liabilities and failing business lines to Resideo shareholders, and that Resideo executives made public statements concealing problems with Resideo’s products and internal operations. Resideo’s stock began trading at $28 per share on October 29, 2018, and closed at $10.02 per share on November 6, 2019. Resideo also reduced its projected 2019 adjusted earnings before income tax, depreciation and amortization, or EBITDA, during the class period.

The amended complaint asserted two counts. Count I alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 based on allegedly false or misleading statements and omissions. Count II asserted a derivative control-person claim under Section 20(a) against Michael G. Nefkens, Joseph D. Ragan III, and Niccolo de Masi. The defendants moved to dismiss the amended complaint and requested judicial notice of documents attached to a declaration.

Judicial Notice

Judicial notice allows a court to consider certain facts or documents without requiring formal proof when their accuracy is not reasonably disputable. The court took judicial notice of Exhibits A, I, O, Q, R, W, Y, BB, EE, FF, and HH because they were documents Resideo filed with the Securities and Exchange Commission or publicly available call transcripts, press releases, and presentation materials.

The court declined to take judicial notice of the remaining twenty-four exhibits. It concluded that the parties disputed their relevance and accuracy, that the exhibits were not needed to resolve the motion to dismiss, and that the amended complaint did not necessarily embrace them. The motion for judicial notice was therefore granted in part and denied in part.

Motion to Dismiss

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests whether the complaint alleges enough facts to state a plausible claim. Securities-fraud claims are also subject to the Private Securities Litigation Reform Act, or PSLRA, which requires a complaint to identify each allegedly misleading statement and explain why it was misleading, and to plead particular facts supporting a strong inference that the defendants acted with intent to deceive, manipulate, or defraud.

The defendants argued that the plaintiffs had not adequately pleaded a material misrepresentation or omission. They also argued that Resideo’s forward-looking statements were protected by the PSLRA’s safe harbor because they included cautionary language, and that the complaint improperly relied on hindsight. The court rejected those arguments at the pleading stage. Accepting the allegations as true, the court concluded that the plaintiffs plausibly alleged that the defendants already knew about supply-chain problems, a lack of production facilities, and a shortage of engineers when they described those matters as possible future risks. The court therefore concluded that the cautionary language was not meaningful for purposes of the motion.

The court also found that the plaintiffs adequately pleaded knowledge and scienter, meaning the required wrongful state of mind. The plaintiffs relied on statements from fifteen confidential witnesses, allegations that employees were directed to use WhatsApp for adverse or potentially damaging information, and allegations about a new chief financial officer’s discovery of severe problems after the individual defendants left. The court concluded that, considered together, these allegations made the plaintiffs’ inference of scienter at least as compelling as the defendants’ competing explanation that the stock decline resulted from spin-off-related challenges, supply-chain problems, and market conditions.

Because the plaintiffs adequately pleaded the material-misrepresentation and scienter elements of Count I, the court denied the motion to dismiss Count I. The court did not address the remaining elements because the defendants did not challenge them.

For Count II, the defendants argued that the control-person claim necessarily failed because Count I failed. The court rejected that argument because Count I survived. The court therefore denied the motion to dismiss Count II as well.

Disposition

The defendants’ motion for judicial notice was granted in part and denied in part: judicial notice was taken of the specified exhibits, and judicial notice was declined as to the other exhibits. The defendants’ motion to dismiss was denied.