In re Garrett Motion Inc. Securities Litigation

Background

Honeywell International Inc. spun off its technology and automotive division as Garrett Motion Inc. in October 2018. Garrett assumed substantial debt, tax obligations, and responsibility for much of Honeywell’s asbestos-related liabilities. Investors alleged that Garrett, its directors and officers, and Su Ping Lu made misleading statements about those obligations and their effects on Garrett’s financial flexibility, liquidity, research and development, technology capabilities, and ability to reduce debt.

The investors asserted claims under section 10(b) of the Securities Exchange Act and Rule 10b-5, which prohibit materially misleading statements or omissions connected with securities transactions. They also asserted control-person claims under section 20(a) against the Director and Officer Defendants and Lu. In addition, they alleged that Lu participated in a deceptive scheme under Rule 10b-5(a) and (c). The defendants moved to dismiss the entire Second Amended Complaint.

Court’s analysis

For the claims against Garrett and its directors and officers, the court focused on scienter. Scienter means an intent to deceive, manipulate, or defraud, or sufficiently reckless conduct. Securities-fraud claims must plead facts creating a strong inference of that state of mind. The court held that the investors did not meet that requirement.

The investors’ main theory was that the Garrett Defendants knew from the spin-off’s beginning that Garrett’s capital structure and Honeywell obligations would inevitably cause the company to fail. The court found no adequate motive to support that theory. Ordinary compensation incentives and a desire to maintain the company’s stock price were not enough, and the complaint did not allege that the defendants personally profited by selling shares or selling the company at an inflated value. The court also found that later bankruptcy statements could not establish what the defendants knew when they made earlier statements. Allegations about financial advisers retained later likewise did not establish that earlier statements were reckless. The court further concluded that allegations concerning Garrett’s core business operations could not independently establish scienter.

The court did not decide whether the investors adequately pleaded a material misstatement or loss causation as to the Garrett Defendants because the failure to adequately plead scienter was dispositive. It also held that the section 20(a) control-person claims failed because those claims required an adequately pleaded underlying section 10(b) or Rule 10b-5 violation.

As to Lu, the court held that her alleged misstatements were made before the class period. Under the applicable rule, a defendant is liable only for statements made during the class period. The court rejected the investors’ arguments that the timing of Garrett’s first public trading or the later incorporation of Lu’s statements into another filing made those earlier statements actionable.

The court separately considered the scheme-liability claim against Lu. It held that the investors did not adequately plead a deceptive or manipulative act distinct from an alleged misstatement. The spin-off’s terms, including the Honeywell obligations, were fully disclosed in Garrett’s registration materials and publicly filed agreements. The solvency opinion was prepared by an independent financial adviser rather than Lu, and the investors did not adequately allege that investors knew of or relied on that opinion.

Disposition

The court granted the defendants’ motions to dismiss. It dismissed with prejudice all claims against Lu because her pre-class-period statements were not actionable and amendment could not cure the scheme-liability deficiencies. It dismissed without prejudice the claims against the Garrett Defendants and granted the investors thirty days to file a Third Amended Complaint. The court stated that failure to amend within thirty days, without good cause, would result in dismissal of those claims with prejudice. The Clerk was directed to close the pending motions and terminate Lu from the case.