A Minnesota district judge has granted a motion to dismiss a proposed securities class action lawsuit against Apogee Enterprises due to a lack of clarity and failure to state a claim. The lawsuit, filed in November 2018 in the U.S. District Court for the District of Minnesota by several investors, alleged that Apogee and two of its executive officers committed securities fraud by hiding the extent of problems with its EFCO business.
Apogee acquired EFCO Corp. from Pella Corp. in 2017. Apogee periodically disclosed challenges it was having with the business over the next two years, according to the order to dismiss. In April 2019, Apogee announced that it would take a $45.7 million charge, due in large part to the problems with EFCO.
The plaintiffs had brought claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934. They alleged that Apogee learned of multiple problems with EFCO during its due diligence process prior to the acquisition and then concealed these problems during the class period.
“Plaintiffs claim that ‘defendants knew or should have known this significant weakening in EFCO’s sales pipeline would adversely affect EFCO’s and Apogee’s future revenue and operating results’ following the acquisition,” reads the order to dismiss. “Another problem was EFCO’s underestimation of the costs of certain large construction projects that Apogee acquired in the EFCO transaction, which Apogee called legacy projects. Before the acquisition, ‘Pella attempted to expand EFCO’s reach into the large construction project market by contracting [for] certain large projects … for which EFCO had significantly underestimated the actual costs necessary to complete those projects.’ Plaintiffs maintain that defendants admitted to ‘learn[ing] in due diligence’ of problems with EFCO’s legacy projects.”
In its motion to dismiss, Apogee argued that the plaintiffs’ complaint fails to allege fraud with particularity and fails to give rise to a strong inference of scienter, or an intent of wrongdoing. In its order granting the motion to dismiss, the Court says the complaint fails to allege with particularity any facts indicating that defendants knew the significance of the problems with EFCO’s legacy projects during the due diligence process. It also states that the complaint failed to give rise to a strong inference of scienter and that the plaintiffs failed to state a claim for securities fraud, hence the dismissal.