Just yesterday (at about the time Credit Suisse was dropping Textura’s price target to $15, and Zacks was labeling the company a “Sell”), the very able federal District Court Judge Robert W. Gettleman, in the US District Court for the Northern District of Illinois (i.e., Chicago) entered an important interim opinion — as to the probable future of the federal securities law putative class action lawsuit (and related claims) against Textura Corproation and Mr. Allin, personally (among other defendants).
First, forgive me a small bit of legal education, here, for the uninitiated: under the federal securities laws, a “strong inference of scienter” is a essentially a strong suggestion that the involved actors knew what they were doing was wrong, and that they were doing it to acheive a wrongful end — here to inflate the per share value at which Textura priced its IPO, and then support all subsequent trading in the shares of the company — by making (now more than arguably) knowingly false-by-omission statements, specifically about Mr. Allin’s prior business experience.
In sum, SEC rules require only five prior years of an executive’s business experience be disclosed in an SEC IPO prospectus, but Textura (and Mr. Allin, personally, as the control person of the company — at least allegedly) chose to disclose well over a decade’s worth. However, he and they also chose to omit all the negative information, from that longer period, specifically as it related to his now infamous tenure — as interim CFO and CEO of Patron.
That, according to Judge Gettleman, will allow the securities plaintiffs in the current federal suit to amend their complaint yet again — to specify just how that particular omission caused the run-up, and then decline, in Textura’s stock (for example, once Citron issued its damning reports on this matter — Citron is admittedly an avowed short seller).
That Mr. Allin pocketed well-over $8 million in cash, from his stock sales alone — at the higher prices (see chart above in our masthead illustration) I think will strongly suggest that Textura’s current management and board ought to agree to settle this, after the amended complaint is filed. Note that Judge Gettleman also mentions the CFO’s sales in passing. This is the proverbial hand-writing on the wall, in my opinion (the able Judge is suggesting it will go badly for Textura should it roll the dice, and decide to go to trial on these matters). So, Textura would be wise to heed this warning — and settle quietly, perhaps by tendering its insurance coverage for D&O errors and omissions, to the plaintiffs. Even then, Mr. Allin may still be personally responsible — if he doesn’t come in to setlle, as well. Here’s a bit — and the court full opinion (as a PDF file), entered yesterday:
…Defendants… chose to add more of Allin’s professional background to the biography. This included the following language: “Prior to co-founding Textura, Mr. Allin served as a Senior Client Delivery Partner, Chief Operating Officer and Chief Financial Officer of the Global Consulting Practice at PricewaterhouseCoopers, LLP,” and then set out most, if not all, of Allin’s other business experience, except for his tenure at Patron, which immediately preceded Textura. The way the biography was worded suggests that Allin was at PricewaterhouseCoopers immediately before starting Textura. The failure to list his immediately preceding position when it is the lone “negative” in is background suggests an intent to deceive.
Rule 10b-5 makes it unlawful “to omit to state a material fact necessary in order to make the statements made in light of the circumstances in which they were made not misleading.” Having elected to disclose Allin’s business experience beyond five years and prior to his eight years with Textura, defendants had a duty to do so in a manner that was not misleading. “If one speaks, he must speak the whole truth.” Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 1995).
Defendants’ suggestion that Allin’s affiliation with Patron is not material is unpersuasive. An omission renders a statement materially misleading when it creates an “impression of a state of affairs that differs in a material way from the one that actually exists.” Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Defendants’ omission of Allin’s time with Patron certainly accomplished that. Having touted Allin’s prior experience, defendants had a duty to disclose all of the experience, including any negative experience. The court rejects defendants’ argument that they did not “tout” Allin’s prior experience. Having convincingly argued that it was not required to include any of Allin’s prior experience, there could be no other reason for then deciding to do so.
Finally, the court concludes that plaintiff has alleged facts giving rise to a strong inference of scienter. If, as defendants argue, the key question is “whether they knew or should have known that their failure to disclose those facts presented a danger of misleading buyers or sellers,” City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp., 632 F.3d 751, 758 (1st Cir. 2011), the answer is obviously yes. The inference of scienter is “at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.
Consequently, the court concludes that Count I states a claim based on defendants’ failure to include Allin’s affiliation with Patron in his biography….
And that, my friends is a pretty strongly worded opinion, from a usually pretty taciturn and deeply-experienced federal trial court judge. Textura may yet ignore it at the company’s considerable peril. Just my $0.02; but it should be yours, too.