UNITED STATES DISTRICT COURT FOR THE NORTHERN …media.cleveland.com/plain_dealer_metro/other/motiontodismiss.pdf · UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO

UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

Florida Carpenters RegionalCouncil Pension Plan, et al.,

Plaintiff, Case No. 1:12-cv-02001-PAG

v. Judge: Hon. Patricia Gaughan

Eaton Corporation, et al.,

Defendants.

MEMORANDUM OF LAW IN SUPPORT OFDEFENDANTS EATON CORPORATION, ALEXANDER M. CUTLER, MARK M.

MCGUIRE, TARAS G. SZMAGALA, JR., AND DONALD J. MCGRATH’S MOTIONTO DISMISS THE CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Joseph A. Castrodale (0018494)Frances Floriano Goins (0018631)Andrew G. Fiorella (0077005)ULMER & BERNE LLP1660 West 2nd Street, Suite 1100Cleveland, Ohio 44113-1448Telephone: (216) 583-7000Facsimile: (216) [email protected]@[email protected]

Attorneys for DefendantsEaton Corporation, Alexander M. Cutler,Mark M. McGuire, Taras G. Szmagala, Jr.,and Donald J. McGrath

Case: 1:12-cv-02001-PAG Doc #: 39-1 Filed: 03/01/13 1 of 41. PageID #: 312

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TABLE OF CONTENTS

Table of Authorities ....................................................................................................................... iii

Table of Abbreviations ................................................................................................................ viii

Statement of Issues to be Decided ................................................................................................. ix

Summary of the Arguments Presented ............................................................................................x

Certification of Compliance........................................................................................................... xi

I. Introduction..........................................................................................................................1

II. Facts .....................................................................................................................................3

A. Lead Plaintiff and The Florida Carpenters Regional Council Pension Plan............3

B The Defendants ........................................................................................................3

C. Eaton, Its Success, and Its Share Price During the Putative Class Period ...............4

D. The Well-Publicized Eaton v. Frisby Litigation in Mississippi ..............................5

1. Frisby Hires Former Engineers Who Stole Eaton’s Aerospace Designs.....5

2. Eaton’s Agreement with Whistleblower Milan Georgeff ............................5

3. Detailed Facts about Frisby Were Publicly Reported beforethe Beginning of the Putative Class Period..................................................6

4. Eaton’s Claims in Frisby Were Dismissed More than Two Years Ago ....11

E. Just Days before the Alleged “Corrective Disclosures,” Eaton Announces an$11.8 Billion Acquisition and Its Credit Rating is Downgraded ...........................12

F. Plaintiffs’ Allegations ............................................................................................13

III. Standard of Review............................................................................................................15

IV. Plaintiffs’ Securities Fraud Claim (Count I) Must be Dismissed ......................................16

A. The Complaint Alleges No Actionable Fraud or Misrepresentations....................16

1. Denials of Liability in Litigation Are Not Actionable...............................17

2. Eaton’s Statements Did Not Add to the Total Mix of Information ...........18

3. Plaintiffs do not Allege that Cutler Said Anything False orMisleading During his Appearance on CNBC’s Mad Money...................20

4. The May 2012 “Disclosures” Were Not Material......................................20

B. The Complaint Fails To Plead Scienter .................................................................21

1. Defendants’ Alleged Desire to “Secur[e] Their Ongoing Positions” withEaton Has Been Universally Rejected as a Basis for Scienter...................22

2. Incentive-Based Compensation Cannot Establish Scienter .......................22

3. Cutler’s Sales of Eaton Shares Are Not Indicative of Scienter .................23


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4. The More Compelling Inference is of Non-Fraudulent Intent...................25

C. Plaintiffs Have Not Adequately Alleged Loss Causation......................................26

V. Plaintiffs’ Control Person Claims (Count II) Must Also Be Dismissed ............................28

VI. Conclusion .........................................................................................................................29


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TABLE OF AUTHORITIES

Cases

Acito v. IMCERA Group, Inc.,47 F.3d 47 (2d Cir. 1995).......................................................................................23

Applestein v. Medivation, Inc.,861 F. Supp. 2d 1030 (N.D. Cal. 2012) .................................................................25

Ashcroft v. Iqbal,556 U.S. 662, 129 S. Ct. 1937 (2009)....................................................................15

Ashland, Inc. v. Oppenheimer & Co., Inc.,648 F.3d 461 (6th Cir. 2011) ........................................................................... 21-22

Atkins v. City of Chicago,631 F.3d 823 (7th Cir. 2011) ........................................................................... 15-16

Basic Inc. v. Levinson,485 U.S. 224, 99 L.Ed.2d 194 (1988).............................................................. 18-20

Bell Atl. Corp. v. Twombly,550 U.S. 544, 127 S. Ct. 1955 (2007)....................................................................15

Bishop v. Lucent Techs., Inc.,520 F.3d 516 (6th Cir. 2008) .................................................................................15

Brent v. Midland Funding, LLC, No. 3:11 CV 1332,2011 WL 3862363 (N.D. Ohio Sept. 1, 2011).......................................................18

Brodsky v. Yahoo! Inc.,630 F. Supp. 2d 1104 (N.D. Cal. 2009) .................................................................15

Bldg. Trades United Pension Trust Fund v. Kenexa Corp., No. CIV.A. 09-2642,2010 WL 3749459 (E.D. Pa. Sept. 27, 2010) ........................................................24

D.E.&J. Ltd. P’ship v. Conaway,133 F. App’x 994 (6th Cir. 2005) .................................................................... 26-27

DiLeo v. Ernst & Young,901 F.2d 624 (7th Cir. 1990) ...................................................................................2

Dura Pharm., Inc. v. Broudo,544 U.S. 336, 125 S.Ct. 1627 (2005)......................................................... 16, 26-27

Fishbaum v. Liz Claiborne, Inc.,189 F.3d 460 (2d Cir. 1999)............................................................................. 24-25


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Garber v. Legg Mason, Inc.,347 F. App’x 665 (2d Cir. 2009) ...........................................................................19

Granada Invs., Inc. v. DWG Corp.,962 F.2d 1203, 1205 (6th Cir. 1992) .....................................................................18

I.B.E.W. v. Ltd. Brands, Inc.,788 F. Supp. 2d 609 (S.D. Ohio 2011) ..................................................................23

Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc.,537 F.3d 527 (5th Cir. 2008) .................................................................................24

In re Agnico-Eagle Mines Ltd. Sec. Litig., No. 11 CIV. 7968 JPO,2013 WL 144041 (S.D.N.Y. Jan. 14, 2013) ..........................................................23

In re Apollo Group, Inc. Sec. Litig., No. CV-10-1735-PHX-JAT,2011 WL 5101787 (D. Ariz. Oct. 27, 2011)..........................................................25

In re Bristol-Myers Squibb Sec. Litig.,312 F. Supp. 2d 549 (S.D.N.Y. 2004)..............................................................23, 24

In re Ceridian Corp. Sec. Litig.,542 F.3d 240 (8th Cir. 2008) .................................................................................24

In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367 (S.D.N.Y. 2004) aff'd sub nom.Albert Fadem Trust v. Citigroup, Inc., 165 F. App’x 928 (2d Cir. 2006) .............17

In re Comshare Inc. Sec. Litig.,183 F.3d 542 (6th Cir. 1999) .................................................................................21

In re Keithley Instruments, Inc. Sec. Litig.,268 F. Supp. 2d 887 (N.D. Ohio 2002)............................................................15, 28

In re K-tel Int’l, Inc. Sec. Litig.,300 F.3d 881 (8th Cir. 2002) .................................................................................22

In re NVIDIA Corp. Sec. Litig., No. C 08-04260 RS,2011 WL 4831192, (N.D. Cal. Oct. 12, 2011).......................................................24

In re Officemax, Inc. Sec. Litig., No. 1:00-CV-2432,2002 WL 33959993 (N.D. Ohio Mar. 26, 2002) ...................................................25

In re Royal Appliance Sec. Litig., No. 94-3284,1995 WL 490131 (6th Cir. Aug. 15, 1995)............................................................15

In re UBS AG Sec. Litig., No. 11225,2012 WL 4471265 (S.D.N.Y. Sept. 28, 2012).......................................................17


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In re UBS Auction Rate Sec. Litig., No. 08 CIV. 2967 (LMM),2010 WL 2541166 (S.D.N.Y. Jun. 10, 2010) ........................................................15

La. Mun. Police Employees Ret. Sys. v. Cooper Indus. plc, No. 12 CV 1750,2012 WL 4958561 (N.D. Ohio Oct. 16, 2012) ..........................................15, 16, 28

Mo. Portland Cement Co. v. Cargill, Inc.,498 F.2d 851 (2d Cir. 1974)...................................................................................17

Phillips v. LCI Int’l, Inc.,190 F.3d 609 (4th Cir. 1999) ...........................................................................15, 19

PR Diamonds, Inc. v. Chandler,364 F.3d 671 (6th Cir. 2004) ...........................................................................22, 28

Pugh v. Tribune Co.,521 F.3d 686 (7th Cir. 2008) .................................................................................24

Santa Fe Indus., Inc. v. Green,430 U.S. 462 (1977)...............................................................................................25

Shields v. Citytrust Bancorp, Inc.,25 F.3d 1124, 1130 (2d Cir. 1994)...................................................................22, 28

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,551 U.S. 308, 127 S. Ct. 2499 (2007).................................................... 2, 15, 21-22

Tuchman v. DSC Commc’s Corp.,14 F.3d 1061 (5th Cir. 1994) .................................................................................23

Wilson v. Bernstock,195 F. Supp. 2d 619 (D.N.J. 2002) ........................................................................23

Wolf v. Assaf, No. C.A. 15339,1998 WL 326662 (Del. Ch. Jun. 16, 1998)...................................................... 17-18

Zaluski v. United Am. Healthcare Corp.,527 F.3d 564 (6th Cir. 2008) .................................................................................18

Statutes and Rules

17 C.F.R. § 240.10b–5................................................................................................................... ix

15 U.S.C. § 78j(b) .......................................................................................................................... ix

15 U.S.C. § 78u–4(b)(1) ................................................................................................................16

15 U.S.C. § 78u-4(b)(2) .................................................................................................................21


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15 U.S.C. § 78u-4(b)(3)(A)............................................................................................................21

FED. R. CIV. P. 9(b) ........................................................................................................................16

Other Authorities

Adding to an Indus.,TheStreet.com, Jun. 4, 2012 (Ex. 1) ................................................................13, 27

Ronnie Agnew, Op-Ed.,CLARION-LEDGER (Jackson, Miss.), Apr. 5, 2009, at C3 (Ex. 2).............................7

Robert Broens, Eaton’s Acq. of Cooper Indus. Creates Sig. Upside Potential,seekingalpha.com, May 29, 2012 (Ex. 3) ..............................................................13

Fitch May Cut Cooper Indus. Ratings (Ex. 4) .........................................................................13, 27

Gabelli & Company, Inc. 5/22/12 Eaton Report (Ex. 5) ...............................................................13

Jimmie E. Gates, Former DA Under Scrutiny,CLARION-LEDGER (Jackson, Miss.), Feb. 26, 2008, at A1 (Ex. 6).......................7, 8

Jimmie E. Gates, Counts Tossed in Theft Case,CLARION-LEDGER (Jackson, Miss.), May 12, 2008, at A1 (Ex. 7) ..........................7

Jimmie E. Gates, Info Sought to Clarify ex-DA’s Role in $1B Suit,CLARION-LEDGER (Jackson, Miss.), July 29, 2008, at B1 (Ex. 8) ...........................9

Jimmie E. Gates, Hold Sought on $1B Lawsuit,CLARION-LEDGER (Jackson, Miss.), July 29, 2008, at B1 (Ex. 9) ...........................9

Jimmie E. Gates, Report Heightens Scrutiny of Judge,CLARION-LEDGER (Jackson, Miss.), Nov. 24, 2008, at A1 (Ex. 10)....................8, 9

Jimmie E. Gates, Watchdog Probe Ongoing,CLARION-LEDGER (Jackson, Miss.), Feb. 14, 2009, at B1 (Ex. 11) .......................10

Jimmie E. Gates, Judge Puts Hold on Trade Theft Case,CLARION-LEDGER (Jackson, Miss.), Mar. 5, 2009, at B1 (Ex. 12) ........................10

James R. Hagerty & Bob Tita, Rivals Strike $11.8 Billion Merger,WALL ST. J., May 21, 2012 (Ex. 13) ......................................................................13

Hinds Judge Questions Former DA Work in Trade Secrets Case,ASSOCIATED PRESS, Feb. 26, 2008 (Ex. 14).............................................................7

Hinds Official Quits Special Court Post,COMM. APPEAL (Mem., TN), Jan. 31, 2008, at 2 (Ex. 15).......................................8


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Judge Chastises Eaton, Dismisses Trade Secret Suit,ASSOCIATED PRESS, Dec. 31, 2010 (Ex. 16) ..........................................................12

Mississippi: Judge Enters Plea,NEW YORK TIMES, Jul. 31, 2009, at A16 (Ex. 17) .................................................10

Jerry Mitchell, Feds Expand Bribery Probe,CLARION-LEDGER (Jackson, Miss.), Jan. 28, 2008, at A1 (Ex. 18) .........................7

Jerry Mitchell, Court: Charges Rightly Tossed,CLARION-LEDGER (Jackson, Miss.), Aug. 14, 2008, at B1 (Ex. 19) ........................9

Adam Nossiter, Civil Rights Hero, Now a Judge, Is Indicted in a Bribery Case,N.Y. TIMES, Feb. 14, 2009, at A12 (Ex. 20) ..........................................................10

Dan Shingler, Eaton Suit Over Trade Secret Theft May be Dead Due to Improprieties,CRAIN’S CLEVELAND BUSINESS, Jan. 17, 2011, at 1 (Ex. 21) ................................12

S&P Revises Eaton Corp. Outlook to Negative (Ex. 22).........................................................13, 27

Special Master Steps Down in DeLaughter-Related Lawsuit,ASSOCIATED PRESS, MAY 25, 2008 (Ex. 23)............................................................8


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TABLE OF ABBREVIATIONS

“¶” ...............................................................................Paragraph in the Consolidated AmendedClass Action Complaint (Docket No. 31)

“(Ex. __)”...........................................................Exhibits to the Declaration of Andrew G. Fiorella

“1934 Act” ............................................ Securities Exchange Act of 1943, 15 U.S.C. § 78a, et seq.

“2009 10-K” .....................Feb. 26, 2010 Eaton Corporation Annual report on Form 10-K (Ex. 24)

“2009 Proxy” ....................................................Mar. 13, 2009 Eaton Corporation Proxy StatementPursuant to Section 14(a) of the Securities Exchange Act of 1934 (Ex. 25)





“5/21/12 8-K Ex. 99.1” ............................................................ Exhibit 99.1 to Eaton Corporation’sMay 21, 2012 Report on Form 8-K (Ex. 30)

“Eaton” ................................................................................................................Eaton Corporation

“Eaton v. Frisby” or “Frisby” ..................................Eaton Corp., et al. v. Jeffrey D. Frisby, et al.,Cir. Ct. Hinds Cty. Miss. Case No. 251-04-642

“Frisby Compl.” ................................July 9, 2004 Original Complaint in Eaton v. Frisby (Ex. 31)

“Individual Defendants” ............................................................Alexander Cutler, Mark McGuire,Taras Szmagala, Jr., and Donald McGrath

“KBC” .........................................................................Lead Plaintiff KBC Asset Management NV

“Miss. Order” ................. Dec. 22, 2010 Rulings of the Ct. Relating to the Defs’ Mot. to Dismiss,the Defs.’ Mot. to Dismiss, as Supplemented, the Nov. 25, 2009

Report and Recommendation of the Special Master, and the Aug. 11, 2010Report and Recommendation of the Special Master in Eaton v. Frisby (Ex. 32)

“Private Securities Litigation Reform Act” or “Reform Act”..... The Private Securities LitigationReform Act of 1995, Pub. L. 104-67, 109 Stat. 737

(codified as amended in scattered sections of 15 U.S.C.)

“Q2 2012” ..........................................................Apr. 24, 2012 Eaton Corporation Quarterly reportfor the quarterly period ended June 30, 2012 on Form 10-Q (Ex. 33)


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STATEMENT OF ISSUES TO BE DECIDED

ISSUE ONE: Whether Plaintiffs’ Count I, for violations of Section 10(a) of the

1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b–5, must be dismissed where:

Plaintiffs, led by sophisticated investment fund manager KBC, have failedto plead facts under the heightened Reform Act pleading requirementssufficient to allow the Court to conclude that there was any actionablefraud or misrepresentation by Eaton or any of the Individual Defendants indenying liability for litigation misconduct in a trade secrets case in whichEaton was the plaintiff;

Plaintiffs have failed to plead facts under the heightened Reform Actpleading requirements sufficient to allow the Court to conclude that anyalleged “misstatement” would have been material to a reasonable investorin light of the constant countervailing mix of press reports, litigationfilings, and Mississippi trial court order dismissing the trade secrets casein Mississippi;

Plaintiffs have failed to plead facts under the heightened Reform Actpleading requirements sufficient to allow the Court to conclude that therewas scienter or any plausible motive for Eaton or any of the IndividualDefendants to engage in securities fraud; and

Plaintiffs have failed to plead facts under the heightened Reform Actpleading requirements sufficient to allow the Court to conclude that thereis a causal connection between either Defendants’ statements and a rise inEaton’s share price, or the minor, non-material disclosures they allege“corrected” the market in May and June 2012 (18-19 months after theMississippi case was dismissed and amidst market furor over Eaton’s$11.8 billion acquisition of Cooper Industries) and a drop in Eaton’s shareprice.

ISSUE TWO: Whether Plaintiffs’ Count II, for so-called “control person”

liability under Section 20(a) of the 1934 Act against the Individual Defendants must be

dismissed where Plaintiffs have failed to allege any primary securities law violation,

a prerequisite for “control person” liability, and alternatively dismissed as to McGrath and

Szmagala because they are not adequately alleged to be control persons.


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SUMMARY OF THE ARGUMENTS PRESENTED

Plaintiffs’ first Count for securities fraud must be dismissed because Plaintiffs

have failed to allege facts under the heightened Reform Act pleading requirements that allow the

Court to conclude that Defendants made a false or misleading statement, that the alleged

“misstatement” would have been material to any reasonable investor, that there was scienter or

any plausible motive for Eaton or any of the Individual Defendants to engage in securities fraud;

and that there is a causal connection between either Defendants’ statements and any change in

Eaton’s share price.

Plaintiffs’ second Count for so-called “control person” liability against the

Individual Defendants must also be dismissed because Plaintiffs have failed to allege any

primary securities law violation, and alternatively dismissed as to McGrath and Szmagala

because they are not adequately alleged to be control persons.


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CERTIFICATION OF COMPLIANCE

I, Frances Floriano Goins, hereby certify that this case has been assigned to the

Complex Track pursuant to Local Rule 16.2(a). (See Joint Stipulation and Case Management

Order ¶ 1 (Docket No. 12).) I further hereby certify that this Memorandum of Law in Support of

Defendants Eaton Corporation, Alexander M. Cutler, Mark M. McGuire, Taras G. Szmagala, Jr.,

and Donald J. McGrath’s Motion to Dismiss the Consolidated Amended Class Action Complaint

complies with the page limitations set forth in Local Rule 7.1(f) for complex cases.

s/ Frances Floriano GoinsFrances Floriano Goins


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I. INTRODUCTION

This case is not about securities fraud or even a plausible claim of harm to

Eaton’s shareholders. Instead, this case is about exploiting Eaton’s misfortunes in a Mississippi

state court case styled as Eaton v. Frisby to manufacture some sort of federal securities claim

where one does not exist.

The saga began in July 2004 when Eaton sought recovery through Mississippi

litigation for the theft of its trade secrets by six former engineers, who then used those trade

secrets for a competitor. In December 2010, the Mississippi trial court dismissed Eaton’s claims

with prejudice as a sanction for alleged litigation misconduct that the court stated Eaton either

knew about or ignored.

Plaintiffs in this case implausibly allege that 18 months later, in May 2012, the

release of cumulative, non-material information to the same effect as the court’s December 2010

decision and innumerable pejorative press accounts of Defendants’ alleged actions in Frisby –

both before and throughout the putative class period – somehow produced a negative effect on

Eaton’s share price. Plaintiffs’ claim is unsupported, implausible, and makes no sense.

There can be no fraud when the information needed to evaluate the statements was publicly

known, and, indeed, appeared in the very same press articles as the alleged misstatements.

Plaintiffs’ theory relies entirely on fanciful assertions that the mere possibility that

Eaton might someday recover (and collect) a large judgment in the Frisby trade secrets case

caused Eaton’s share price to be somehow artificially inflated. Eaton, however, never assigned a

value to its Frisby claim in its financial statements or other filings with the Securities and

Exchange Commission. Nor was a value ever attached to the claim by, or cited by any analyst as

a basis for a recommendation to buy Eaton shares. There has never been a restatement of those

financial statements or a qualified accountants’ report related to Frisby – one way or the other.


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It is even more farfetched to suggest that the release of cumulative information 18 months after

the “loss” of those ephemeral claims could cause Eaton’s share price to decline. The Frisby case

might have been valued by some at a “big number, but even a large column of big numbers need

not add up to fraud.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

Plaintiffs’ claims become even more improbable when the other events of May

2012 are considered. The supposed “corrective disclosures” came just a few days after Eaton

announced an $11.8 billion acquisition of Cooper Industries plc. Concerns about that transaction

and increased debt caused Eaton’s credit rating to be lowered. Without so much as mentioning

Frisby, market analysts at the time attributed the drop in Eaton’s share price to “the global equity

correction and uncertainty about the execution of the [Cooper] deal” and “fears of a slowdown in

global growth” and “disappointing . . . truck orders” – factors that are a far more plausible cause

of the price drop than Plaintiffs’ fanciful fraud theory.

As to Count II of their Complaint, absent an underlying securities law claim,

Plaintiffs have alleged no basis for so-called “control-person” liability, and this claim likewise

fails.

Plaintiffs’ allegations do not state a plausible claim under the 1934 Act.

Regardless of how the allegations are construed, this case is precisely the type of “frivolous,

lawyer-driven litigation” that Congress wanted to curb through passage of the Private Securities

Litigation Reform Act. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127

S. Ct. 2499 (2007). The Eaton Defendants’ motion to dismiss should be granted with prejudice,

and Plaintiffs should not be given an opportunity to replead.


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II. FACTS

A. Lead Plaintiff and the Florida Carpenters Regional Council Pension Plan

Both Lead Plaintiff KBC and Plaintiff the Florida Regional Council Pension Plan

are experienced and sophisticated investors. KBC manages investment funds. In 2011, for

example, KBC held 148 million Euros (€) in assets under management. (See KBC Fin. Report,

available at https://www.kbcam.be/PBL/CC028/~E (Ex. 39).) At a Euro-to-Dollar conversion

rate of €1:$1.33, that is $197 million. Moreover, based on its representations to the Court, KBC

purchased and sold Eaton shares 221 times during the putative class period. (See Mot. of KBC,

Ex. C (Docket No. 16-5) (Ex. 40).) Those transactions included 102 sales, including eight sales

during the last month of the putative class period, May 2012, but no sales after the close of the

class period. (Id.)

Plaintiff Florida Carpenters is a large pension fund. It represented to this Court

that it did not even own Eaton shares until February 2012, including purchasing 2,090 shares

after the Cooper acquisition was announced. (See Mot. of Fl. Carpenters, Ex. B (Docket No. 15-

2) (Ex. 41).) Those purchases were years after Frisby was dismissed and after Eaton’s supposed

“misrepresentations” had been fully countered in court filings and the press.1

B. The Defendants

In addition to Eaton, there are five individual Defendants in this case:

Alexander Cutler (chairman and CEO), Mark McGuire (General Counsel), Taras Szmagala, Jr.

(in-house counsel), Donald McGrath (director of communications); and Victor Leo (former in-

house counsel). (¶ 2.) (Defendant Leo is not a party to this Motion and is not represented by the

undersigned counsel.)

1 To the extent that Lead Plaintiff and Plaintiff Florida Carpenters’ extensive trading allowed themto benefit from the alleged “inflation” in Eaton’s share price for they did not sell until the market price went backup, they might be unable to show an actual loss from the conduct alleged in the Complaint.


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C. Eaton, Its Success, and Its Share Price During the Putative Class Period

Eaton “is a global technology leader in electrical components and systems for

power quality, distribution and control; hydraulics components, systems and services for

industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for

commercial and military use; and truck and automotive drivetrain and powertrain systems for

performance, fuel economy and safety.” (2011 10-K at 2; see also ¶ 38.) Eaton is presently an

operating subsidiary of Eaton Corporation plc, and has offices in Cleveland, Ohio, and has

approximately 100,000 employees in more than 50 countries. (See 2011 10-K at 2; ¶ 38.)

Eaton has been very successful. During the putative class period, the company

reported net sales of almost $50 billion and net income of almost $3.2 billion. (See 2011 10-K at

19; Q2 2012 10-Q at 2.) During that same time, Eaton’s net sales and net income steadily

increased. (See 2011 10-K at 19.)

Eaton’s share price increased in value more than 51% from a close of $25.96 on

the first day of the putative class period (August 2, 2009) to $39.21 on the last day (June 4,

2012). (See Eaton Corp. Closing Share Price from Aug. 2, 2009 through Aug. 3, 2012 (Ex. 34);

¶ 126.) By August 3, 2012, one month after the putative class period and after the “corrective

disclosures,” Eaton’s share price had risen to $44.23 – a 70.38% increase:

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

August 2, 2009 August 2, 2010 August 2, 2011 August 2, 2012

Eaton's Share Price from August 2, 2009 through August 3, 2012


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D. The Well-Publicized Eaton v. Frisby Litigation in Mississippi

Plaintiffs’ claims center on Eaton’s public reactions to the equally public

disclosures of events in the Mississippi state-court litigation known as Eaton Corp., et al. v.

Jeffrey D. Frisby, et al. (See generally Frisby Compl.) Eaton was the plaintiff in Frisby.

1. Frisby Hires Former Engineers Who Stole Eaton’s Aerospace Designs

In 2002, six engineers left Eaton’s aerospace division to join Frisby Aerospace.

(See ¶ 39; Frisby Compl. ¶ 75.) The former engineers stole Eaton’s “design database

contain[ing] all of the product designs developed” by Eaton aerospace “over the past 15 years,”

including the design of “thousands of products, assemblies, components and parts.” (Frisby

Compl. ¶¶ 104, 113.) Frisby and the former Eaton engineers also used Eaton’s confidential

information “to design, manufacture and sell aeronautical hydraulics products.” (Id. ¶ 115.)

Before the Eaton engineers arrived, Frisby had “little significant design, development, laboratory

testing, manufacturing,” or other capabilities for the development of aviation hydraulics. (Id.

¶ 89.) Eaton, however, did. (Id. ¶ 65.) A few months after the hiring, Frisby announced it was

building a large facility to develop aviation hydraulics. (Id. ¶ 88.)

In 2004, Eaton filed suit against Jeffrey Frisby, the former Eaton engineers, and

other parties, alleging a theft of trade secrets and a number of other counts. (See generally

Frisby Compl.) The Frisby case was assigned to then-Mississippi state court Judge Bobby B.

DeLaughter. (¶ 42.) In 2006, the United States also indicted the former Eaton engineers on

counts of conspiracy to steal trade secrets, theft of trade secrets, and defrauding Eaton. (¶ 43;

Indictment in United States v. Case, et al. (Ex. 35).)

2. Eaton’s Agreement with Whistleblower Milan Georgeff

Before the Frisby case was filed, a former Frisby employee, Milan Georgeff,

tipped off Eaton that its former engineers had stolen trade secrets and proprietary information


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about Eaton’s products. (See ¶ 39.) Plaintiffs allege that Eaton then “entered into a contract with

Georgeff,” in which Eaton promised to “pay Georgeff’s expenses, defend any possible criminal

or civil litigation brought against him, reimburse him for his time,” and employ him as an

engineer. (Id. ¶ 40.)

The agreement with Georgeff was not initially produced or disclosed in the Frisby

case, but was eventually produced by Georgeff in separate litigation against Frisby brought by

him in North Carolina. (¶¶ 44-46.) On January 4, 2006, the Frisby defendants filed a motion to

dismiss and for sanctions. (See Miss. Order, at 2.) That motion argued that Eaton had provided

“unlawful compensation to Milan Georgeff, a fact witness and ‘whistleblower’.” (Id.)

DeLaughter referred the task of determining “whether there was a discovery violation, whether it

was intentional, and who was responsible” to Special Master Jack Dunbar. (¶ 48.)2

3. Detailed Facts about Frisby Were Publicly Reported beforethe Beginning of the Putative Class Period

As to Eaton’s alleged role in the case, the events that followed the Georgeff

matter are still in dispute. The allegations as to Eaton and its officers’ conduct are repeated here

only to demonstrate the availability of information to Eaton’s investors and to the market, not as

an endorsement of what Eaton considers to be incomplete and inaccurate facts. Moreover, Eaton

disagrees with Plaintiffs’ characterizations of the events.

What is certain, however, are the fulsome public disclosures both before and

during the putative class period (August 2, 2009 to June 4, 2012) of revelations adverse to Eaton,

including that former Judge DeLaughter had gone to prison, Mississippi attorney Ed Peters (who

for a short time represented Eaton) had surrendered his law license, and a new Judge had

2 Eventually, on January 6, 2011, the Mississippi trial court sanctioned Eaton more than $1.5million “relating to the Georgeff issue(s).” (Miss. Order, at 10.) The court later found that those “monetarysanctions made [the Frisby] Defendants’ whole in regards to Georgeff.” (Id.)


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dismissed the Frisby case. That dismissal is now on appeal to the Mississippi Supreme Court.

(See Docket Report in Eaton Corp. v. Frisby, No. 2011-CA-00019 (Ex. 36).)

In January 2008, DeLaughter publicly recused himself from the Frisby case.

(¶ 71.) Later that month, it was “publicly reported” that an FBI investigations of Peters and

DeLaughter’s actions in an unrelated case (not involving Eaton) “was being expanded to include

an investigation of improper contacts between Peters and DeLaughter” in Frisby. (Id. ¶ 74.)

The focus of the federal investigation was on “whether Peters used his close friendship with

DeLaughter . . . to influence the judge’s rulings.” Jimmie E. Gates, Former DA Under Scrutiny,

CLARION-LEDGER, Feb. 26, 2008, at A1 (Ex. 6); see also Jimmie E. Gates, Counts Tossed in

Theft Case, CLARION-LEDGER, May 12, 2008, at A1 (Ex. 7) (same); Hinds Judge Questions

Former DA Work in Trade Secrets Case, ASSOCIATED PRESS, Feb. 26, 2008 (Ex. 14).

Press coverage at that time trumpeted the Frisby defendants’ allegations that

Peters had a “secret” role in the case and unduly influenced DeLaughter. “Very serious

questions have been raised-and circulated throughout the country-about the relationship of Ed

Peters and Judge DeLaughter.” Jerry Mitchell, Feds Expand Bribery Probe, CLARION-LEDGER

(Jackson, Miss.), Jan. 28, 2008, at A1 (Ex. 18) (emphasis added); see also Ronnie Agnew,

Op-Ed., CLARION-LEDGER, Apr. 5, 2009, at C3 (Ex. 2) (commenting that “[b]ecause of

DeLaughter and Peters’ involvement, the Eaton case is being watched closely”). The Frisby

defendants sought review by an “impartial judge” (Judge Swan Yerger) of “rulings by Judge

DeLaughter after Peters became involved” in the case. Feds Expand Bribery Probe (Ex. 18).

The Frisby defendants argued that “Peters apparently has been involved in the

case since at least January 2007 despite not being listed as an attorney of record.” Id.

“Peters’ involvement” in Frisby was supposedly “confirmed” by defendants on

“March 15[, 2007], when [Peters] accidentally sent an e-mail to a secretary for Frisby’s


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attorneys.” Id. Even the text of Peters’ e-mail was reported. Id. (reporting that Peters wrote to

Eaton’s in-house counsel, “I would respond to their responce [sic] that we agree w/Defs that the

pending issue about discovery does not need to be rehashed & that the Court should enter it’s

[sic] ruling without further pleadings or hearing.”).

Moreover, as early as January 2008, the supposed impact of Peters on the

acceptance of Special Master Dunbar’s rulings was also reported. “‘Prior to the involvement of

Peters, Judge DeLaughter generally accepted the rulings of Special Master (Jack) Dunbar,”

Frisby’s attorneys wrote.” Id. “However, after Peters became involved in the case, Judge

DeLaughter rejected most of the Special Master’s Reports and Recommendations.” Id.; see also

¶¶ 54, 56, 60, 68 (alleging that DeLaughter “rejected” recommendations from Special Master

Dunbar).

Earlier, in October 2007, DeLaughter had removed Dunbar as special master and

replaced him with Larry Latham. (¶ 67.) On January 31, 2008, Latham resigned “citing his

concern that a conversation with former Dist. Atty. Ed Peters may have tainted his credibility in

handling the matter.” See Hinds Official Quits Special Court Post, COMM. APPEAL (Memphis,

TN), Jan. 31, 2008, at 2 (Ex. 15); see also Special Master Steps Down in DeLaughter-Related

Lawsuit, ASSOCIATED PRESS, MAY 25, 2008 (Ex. 23).

In February 2008, it was reported that Judge Yerger agreed to review the earlier

rulings made by DeLaughter. Former DA Under Scrutiny (Ex. 6). Judge Yerger said that the

court had “a number of questions” and that the matter would “definitely” be investigated. Id.

The next month, in March 2008, DeLaughter was suspended from the bench while

the Mississippi Commission on Judicial Performance investigated complaints against him.

Jimmie E. Gates, Report Heightens Scrutiny of Judge, CLARION-LEDGER, Nov. 24, 2008, at A1

(Ex. 10).


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In July 2008, Judge Yerger ordered “documents to be presented in court” to

determine whether Peters was “hired by [Eaton] to try to influence” DeLaughter. Jimmie E.

Gates, Info Sought to Clarify ex-DA’s Role in $1B Suit, CLARION-LEDGER, July 29, 2008, at B1

(Ex. 8). Eaton’s intent was part of the Court’s focus: “To the extent a truthful answer to any part

of this interrogatory would reveal intent on Eaton’s part to hire Ed Peters for the purpose of

attempting to improperly influence a judicial officer, then it must be answered.” Id. In August

2008, one of Frisby’s lawyers claimed that “[t]here is circumstantial evidence that Ed Peters had

inside information in the case and was using that inside information, trying to get the special

master dismissed from the case.” Jerry Mitchell, Court: Charges Rightly Tossed, CLARION-

LEDGER, Aug. 14, 2008, at B1 (Ex. 19).

In November 2008, the first recommendations of the new Special Master, David

Dogan III, were publicly reported. See Report Heightens Scrutiny of Judge (Ex. 10).

Although that Recommendation was under seal, the press “obtained a copy of it” (id.), and

reported that Dogan found that DeLaughter had “improperly communicated” with Peters “based

on e-mails and other documents” he reviewed. Id. The Recommendation also found a “design”

for Peters to contact DeLaughter ex parte. “‘The documents to be produced show a design, and

in certain cases direct evidence, of engaging in contact with Judge DeLaughter on an ex parte

basis,’ the report said.” Id. (emphasis added). “Such conduct is not permissible and is, as a

matter of law, improper.” Id.; see also ¶ 78 (quoting same).

The Special Master ordered Eaton to produce documents related to Peters and

DeLaughter. (¶ 78.) Eaton had objected to producing these documents based on the attorney-

client privilege, but Special Master Dogan recommended that the court find that the crime-fraud

exception applied. See Report Heightens Scrutiny of Judge (Ex. 10).


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In January 2009, in the wake of Dogan’s Recommendation, Peters agreed to

surrender his law license. Jimmie E. Gates, Hold Sought on $1B Lawsuit, CLARION-LEDGER,

July 29, 2008, at B1 (Ex. 9). The same report quoted Frisby’s counsel as arguing that the “fact

of wrongdoing by counsel for Eaton has now been conclusively established.” Id. (emphasis

added). “Peters . . . has now admitted he engaged in improper ex parte contact with Judge

DeLaughter while Judge DeLaughter presided over this case.” Id.

In February 2009, DeLaughter was indicted on bribery charges in the case

unrelated to Frisby.3 Adam Nossiter, Civil Rights Hero, Now a Judge, Is Indicted in a Bribery

Case, N.Y. TIMES, Feb. 14, 2009, at A12 (Ex. 20). In response, Frisby’s counsel was quoted as

saying that Peters and DeLaughter’s actions in the Frisby case were “eerily similar” to that case.

Jimmie E. Gates, Watchdog Probe Ongoing, CLARION-LEDGER, Feb. 14, 2009, at B1 (Ex. 11).

In March 2009, the Frisby case was stayed until Peters’ influence on

DeLaughter’s rulings and his role with Eaton could be determined. Jimmie E. Gates, Judge Puts

Hold on Trade Theft Case, CLARION-LEDGER, Mar. 5, 2009, at B1 (Ex. 12); ¶ 80. Again, it is

publicly reported that Eaton was accused of hiring Peters with the intent to influence

DeLaughter.

Circuit Judge Swan Yerger . . . ruled Wednesday the lawsuitshould be put on hold until it can be determined whether Petersimproperly influenced DeLaughter’s rulings and the role theformer attorney had with Eaton Corp. and its attorneys . . . .Frisby’s argument is that it needs to be determined whetherEaton hired Peters with expressed intent to influenceDeLaughter.

Judge Puts Hold on Trade Theft Case (Ex. 12) (emphasis added).

3 On July 31, 2009, DeLaughter pleaded guilty to a federal obstruction of justice charge.Mississippi: Judge Enters Plea, NEW YORK TIMES, Jul. 31, 2009, at A16 (Ex. 17.)


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4. Eaton’s Claims in Frisby Were Dismissed More than Two Years Ago

Although public disclosures of information continued throughout the putative

class period, the most significant event occurred when Frisby was dismissed with prejudice more

than two years ago. On December 22, 2010, Judge Yerger issued his ruling dismissing Frisby,

finding facts, and pointing to documents that disclosed the same information Plaintiffs claim

were “corrective disclosures” in 2012. (See generally Miss. Order (Ex. 32).)

In fact, Judge Yerger clearly and publicly articulated his view of the Defendants’

capability. “The Court finds, by clear and convincing evidence, that Eaton and its counsel were

aware of and, in fact, sanctioned Peters’ clandestine actions, either through affirmation or

inaction, with then-Judge DeLaughter, for Eaton’s benefit.” (Id. at 22.) “It is clear . . . that

Peters was hired due to Eaton’s being assured that he was the ‘closest possible associate’ of then-

Judge DeLaughter, to work on Eaton’s behalf.” (Id. at 16.) “[C]ontrary to Eaton’s claim of

being victimized by Peters’ allegedly ‘unauthorized’ misconduct, Eaton is not the true victim.

Instead the true victim is the justice system and its integrity.” (Id. at 22.)

Documents like the ones that Plaintiffs now claim were new “disclosures” in May

2012 (see ¶ 98-99) formed the basis of the Mississippi trial court’s conclusion that Eaton “knew”

about Peters’ activities. The December 2010 decision described in detail two emails from

Defendant Leo that the Mississippi trial court found were the “most direct documents which

evidence Eaton’s and its counsel and/or corporate officers’ knowledge of Peters’ improper

contact on its behalf.” (Miss. Order at 20.)

The first e-mail was from Leo to Sharon O’Flaherty (another in-house attorney),

Defendants McGuire and Szmagala, and others. Leo wrote that Peters “intends to speak with the

Court Administrator and the Judge about the trial date. This may take some finessing.” (Id.

at 20.) When Leo asked Peters “what the chances were that the Judge would simply withhold


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ruling on the amount of any monetary sanctions against Allred and Eaton until later in the case,

possibly after the trial,” Peters allegedly said that there was “‘a 100% chance that would happen;

maybe I am off a percent or two.’” (Id.)

The second e-mail was also from Leo to O’Flaherty and McGuire regarding the

possible recusal of a judge in the federal criminal case. Leo wrote that “Judge DeLaughter felt

uncomfortable about the contact from [Federal District Court] Judge Lee and certainly Ed

Peters has taken his . . . temperature on this meeting and he is recommending that we go

forward with it.” (Id. at 21 (emphasis in original).) The Mississippi trial court concluded that

Peters was referring to Judge DeLaughter. (Id.) Judge Yerger concluded by imposing “the most

severe sanctions available: dismissal with prejudice of all of the [Eaton’s] claims against the

Defendants.” (Id. at 25.)

The press covered Judge Yerger’s opinion in detail. See, e.g., Judge Chastises

Eaton, Dismisses Trade Secret Suit, ASSOCIATED PRESS, Dec. 31, 2010 (Ex. 16) (“Eaton knew

about and sanctioned secret actions that attorney Ed Peters took to influence another judge”);

Dan Shingler, Eaton Suit Over Trade Secret Theft May be Dead Due to Improprieties, CRAIN’S

CLEVELAND BUS., Jan. 17, 2011, at 1 (Ex. 21) (“Eaton Corp. may have made a billion-dollar

blunder in Mississippi”).

E. Just Days before the Alleged “Corrective Disclosures,” Eaton Announces an$11.8 Billion Acquisition and Its Credit Rating Downgraded

On May 21, 2012, just a few days before the alleged “corrective disclosures”

about Frisby, Eaton and Cooper Industries plc announced that Eaton was acquiring Cooper.

(5/21/12 8-K Ex. 99.1 at 1.) The cost of the acquisition to Eaton is approximately $11.8 billion

in cash and stock. (Id. at 2.) The acquisition price represented a 29% premium over Cooper’s

share price at the time the transaction was announced. (Id.) On the day the acquisition was


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announced, Eaton’s shares closed down .73% and Cooper’s shares skyrocketed more than 21%.

(See Cooper Share Chart (Ex. 37); Eaton Share Chart (Ex. 34).)

Analysts took note of the premium paid by Eaton for Cooper. An analyst from

J.P. Morgan Chase & Co., for instance, commented that the price Eaton paid was “definitely not

cheap.” James R. Hagerty & Bob Tita, Rivals Strike $11.8 Billion Merger, WALL ST. J., May 21,

2012 (Ex. 13). Another called the price paid for Cooper to be a “rich valuation” of that

company. (Eaton, Gabelli & Company, Inc. 5/22/12 (Ex. 5).)

The rating agencies were quick to pan the effect of the Cooper acquisition on

Eaton’s financial outlook. The same day as the merger was announced, S&P lowered its outlook

on Eaton from “stable” to “negative” to reflect “the potential for a lower rating if weak market

conditions, deterioration in operating performance, or a less conservative financial policy delays

expected improvements.” (S&P Revises Eaton Corp. Outlook to Negative (Ex. 22).) The next

day, on May 22, 2012, Fitch put Eaton on “Rating Watch Negative” because of the “the material

increase in [debt] at the combined company.” (Fitch May Cut Cooper Indus. Ratings (Ex. 4).)

On May 29, 2012, a few days after the Cooper acquisition was announced, one

analyst wrote that the “12% retreat in Eaton’s share price in recent weeks” was the result of

“the global equity correction and uncertainty about the execution of the [Cooper] deal.” Robert

Broens, Eaton’s Acq. of Cooper Indus. Creates Sig. Upside Potential, seekingalpha.com,

May 29, 2012 (Ex. 3). No mention was made of Frisby.

On June 4, 2012, the last day of the putative class period, an analysis of Eaton’s

share price drop put the blame for the 4% drop in the share price over the previous few days on

“fears of a slowdown in global growth and disappointing May Nafta Class 8 truck orders.”

Adding to an Indus., TheStreet.com, Jun. 4, 2012 (Ex. 1). Still no mention was made of Frisby.


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F. Plaintiffs’ Allegations

Despite the market’s prior knowledge of the dismissal of Eaton’s Frisby claims,

the years of extensive media coverage of that case, and the announcement of the $11.8 billion

Cooper acquisition, Plaintiffs alleged that the May 2012 release by the Mississippi trial court of a

few Eaton affidavits regarding document production and the dismissal of the criminal case

against the Frisby engineers caused the drop in Eaton’s share price. (See ¶¶ 103-08.)

Plaintiffs allege that the “price decline in Eaton’s securities” was “a result of the nature and

extent of Defendants’ fraud finally being revealed to investors and the market.” (¶ 114.)

According to Plaintiffs, the May 2012 events “revealed” that Eaton’s reactions to

publicly reported events in the Frisby case were somehow false. Those reactions were published

in newspaper accounts of the Mississippi proceedings, quoting McGrath repeating that Eaton

“didn’t hire him (Peters) to do anything improper . . . . [Eaton] in no way asked Ed Peters to try

to influence Judge DeLaughter or any other Judge.” (¶ 88 (quoting a Dec. 26, 2009 article); ¶ 84

(Aug. 2, 2009 article); ¶ 86 (Sept. 22, 2009 article); ¶ 90 (Jun. 28, 2010 article); ¶ 93 (Dec. 31,

2010 article); see also ¶ 95 (Jan. 17, 2011 article paraphrasing a non-defendant Eaton employee

as saying essentially the same thing).4

Plaintiffs also allege that Defendant Cutler appeared on CNBC’s Mad Money on

January 28, 2011 in “an effort to downplay the Mississippi decision” from December 2010, but

without citing any statements to such effect. (¶ 96.) (A transcript of Defendant Cutler’s

interview on that program is attached as Exhibit 38.) No statements by any of the other

Individual Defendants are alleged.

4 Plaintiffs also allege that McGrath’s statement that “[n]othing we did with that whistle-blower[Georgeff] was illegal under Mississippi law” was false (see ¶ 84 (quoting McGrath in an Aug. 2, 2009 Clarion-Ledger article)), because the discovery sanctions order in January 2010 “directly” contradicted that statement (¶ 89).This cannot form the basis of Plaintiffs’ claims, however, because the Mississippi trial court refused to dismissFrisby because of the Georgeff allegations.


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Based on these very slim factual allegations, Plaintiffs assert two counts:

(1) violation of Section 10(b) of the Exchange Act and Rule 10b-5 by all Defendants

(¶¶ 138-49); and (2) violation of Section 20(a) of the 1934 Act, by Eaton’s officers on a theory of

“control-person” liability (¶¶ 150-57).

III. STANDARD OF REVIEW

To survive a motion to dismiss, a complaint must allege a claim that is “plausible

on its face.” La. Mun. Police Employees Ret. Sys. v. Cooper Indus. plc, No. 12 CV 1750,

2012 WL 4958561, at *4 (N.D. Ohio Oct. 16, 2012) (dismissing claims purportedly arising from

the Eaton/Cooper merger) (Gaughan, J.) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct.

1937 (2009)); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S. Ct. 1955 (2007)

(holding that allegations must “plausibly” suggest that “the pleader is entitled to relief”).

“A claim has facial plausibility when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the defendant is liable for the misconduct

alleged.” Iqbal, 556 U.S. at 678; see also Bishop v. Lucent Techs., Inc., 520 F.3d 516, 519

(6th Cir. 2008) (“a complaint containing a statement of facts that merely creates a suspicion of a

legally cognizable right of action is insufficient”).5

Under the Iqbal-Twombly standard, the Court may not rely upon factual

allegations that are “unrealistic or nonsensical” or are speculative “in the sense of implausible

5 Defendants have separately filed a request for judicial notice of Exhibits attached to Declarationof Andrew G. Fiorella. Briefly, the Court “must consider . . . sources courts ordinarily examine when ruling on Rule12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters ofwhich a court may take judicial notice.” Tellabs, 551 U.S. at 322; see also In re Royal Appliance Sec. Litig., No. 94-3284, 1995 WL 490131, at *2 (6th Cir. Aug. 15, 1995) (“[w]e may consider the full texts of the SEC filings [and]analyst’s reports and statements integral to the complaint, even if not attached, without converting the motion intoone for summary judgment”) (internal quotation omitted). The Court must also “examine the other information thatwas publicly available to reasonable investors” because Plaintiffs rely on a “fraud on the market” theory. Phillips v.LCI Int’l, Inc., 190 F.3d 609, 617 (4th Cir. 1999) (considering a news article); In re UBS Auction Rate Sec. Litig.,No. 08 CIV. 2967 (LMM), 2010 WL 2541166, at *15 (S.D.N.Y. Jun. 10, 2010) (“what information was available tothe investing public . . . and when that information was made available are relevant to the Court’s consideration ofthis motion to dismiss.”). The Court may also notice historic stock prices, see, e.g., Brodsky v. Yahoo! Inc., 630 F.Supp. 2d 1104, 1111-12 (N.D. Cal. 2009), and public records of stock sales, In re Keithley Instruments, Inc. Sec.Litig., 268 F. Supp. 2d 887, 902 n.10 (N.D. Ohio 2002).


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and ungrounded . . . . en route to deciding whether the complaint has enough substance to

warrant putting the defendant to the expense of discovery.” Atkins v. City of Chicago, 631 F.3d

823, 832 (7th Cir. 2011) (affirming dismissal).

IV. Plaintiffs’ Securities Fraud Claim (Count I) Must be Dismissed

Plaintiffs’ Complaint fails to plead sufficient facts that are sufficiently plausible

on their face to allow the Court to draw the reasonable inference that: (1) Defendants made a

material misrepresentation or omission; (2) Defendants acted with scienter; (3) anyone relied

upon any of the alleged “misstatement;” or (4) there was a causal connection between the

“corrective disclosures” in May 2012 and any drop in Eaton’s share price. See Dura Pharm.,

Inc. v. Broudo, 544 U.S. 336, 341–42, 125 S.Ct. 1627 (2005) (setting forth the elements

necessary to state a securities fraud claim). For these reasons, the Count I must be dismissed.6

A. The Complaint Alleges No Actionable Fraud or Misrepresentations

Plaintiffs have failed to meet the exacting pleading standard for fraud allegations

imposed by the Federal Rules of Civil Procedure and the Reform Act. Federal Rule 9(b) requires

that a party pleading fraud of any sort must state the circumstances constituting fraud with

“particularity.” FED. R. CIV. P. 9(b). In securities cases, the Reform Act further heightens the

Plaintiffs’ burden by requiring that, for each supposedly false or misleading statement, the

Complaint must “specify each statement alleged to have been misleading [and] the reason or

reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1); see also La. Mun. Police,

2012 WL 4958561, at *4-*5.

6 In a recent case about class certification in securities fraud cases, the Supreme Court reiteratedthat the Reform Act imposed “heightened pleading requirements” for securities-fraud actions. See Amgen Inc. v.Conn. Retirement Plans and Trust Funds, No. 11-1085, slip op. at 19-20, 568 U.S. ___ (2013).


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1. Denials of Liability in Litigation Are Not Actionable

McGrath’s denials that Eaton hired Peters to influence DeLaughter cannot form

the basis for a fraud claim. “[T]he federal securities laws do not require a company to accuse

itself of wrongdoing.” In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377 (S.D.N.Y.

2004) (dismissing claims), aff'd sub nom. Albert Fadem Trust v. Citigroup, Inc., 165 F. App’x

928 (2d Cir. 2006); see also Mo. Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 873

(2d Cir. 1974) (“Courts should tread lightly in imposing a duty of self-flagellation”).

Moreover, the general denials at issue in this case are the sort of “puffery” that is “too general to

cause a reasonable investor to rely upon them.” In re UBS AG Sec. Litig., No. 11225, 2012 WL

4471265 (S.D.N.Y. Sept. 28, 2012).

The law does not require a company to “admit wrongdoing that it intends to

attempt to disprove.” Wolf v. Assaf, No. C.A. 15339, 1998 WL 326662, at *5 (Del. Ch. Jun. 16,

1998). Woolf, a fiduciary duty case, is instructive for analyzing Plaintiffs’ claims here. In that

case, shareholders complained that the company failed to disclose facts about an ongoing federal

securities class action. Defendants disclosed certain facts about the case and “the company’s

intention to ‘vigorously defend’ against the claim.” Id. at *3. Plaintiff claimed that the company

should have disclosed that its chairman had “admitted” in the federal securities action that he

knew of the accounting irregularities at issue in that case. Id. at *2. The court rejected this as a

basis for liability, calling the alternative a “bottomless pit of self-flagellation,”

Where can it be said that a bright line rule should apply requiring adisclosure of facts disgorged in litigation when those facts and themany inconsistent inferences that could be drawn from them arehotly contested? A bright line rule demanding that all such factsbe disclosed would suck management into a bottomless pit of self-flagellation worthy of the imagination of Dante.

Id. at *4 (emphasis added).


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Preventing McGrath or Eaton more generally from denying liability based on the

“hotly contested” facts of the Frisby case is precisely what worried the court in Wolf. An appeal

in the Frisby case is still pending, and a requirement that Eaton (or any company) refrain from

addressing litigation with anything but “no comment” would be both unfair and impractical.

“The Sixth Circuit has recognized that complex litigation is ‘notoriously difficult and

unpredictable.’” Brent v. Midland Funding, LLC, No. 3:11 CV 1332, 2011 WL 3862363, at *12

(N.D. Ohio Sept. 1, 2011) (quoting Granada Invs., Inc. v. DWG Corp., 962 F.2d 1203, 1205 (6th

Cir. 1992)). Plaintiffs’ proposed rule – that defendants should admit liability and forego a

defense – would leave every public company to choose between litigation loss and risk of federal

securities liability in every such notoriously “difficult and unpredictable” situation.

Moreover, there is no end to the potential liability under the Plaintiffs’ theory,

including extending to statements made about litigation answers or motions.

McGrath’s statements were (and are) consistent with Eaton’s positions in the Frisby litigation.

The securities laws do not require a public company to censor itself in litigation for fear of

liability.

2. Eaton’s Statements Did Not Add to the Total Mix of Information

Eaton’s statements were immaterial to the total mix of information available to its

investors because of the public scrutiny of the Frisby case at the time. A false statement is only a

basis for actionable securities fraud where “there is a ‘substantial likelihood that the disclosure of

the omitted fact would have been viewed by the reasonable investor as having significantly

altered the ‘total mix’ of information made available.’” Zaluski v. United Am. Healthcare Corp.,

527 F.3d 564, 571 (6th Cir. 2008) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32,

99 L.Ed.2d 194 (1988)). The prevalence of opposing views in the Frisby filings and the press

makes it implausible that the alleged misrepresentations could not have affected the stock price.


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See, e.g., Basic, 485 U.S. at 248-49 (“[I]f, despite [defendants’] allegedly fraudulent attempt to

manipulate market price, [the truth] credibly entered the market and dissipated the effects of the

misstatements, those who traded . . . after the corrective statements would have no direct or

indirect connection with the fraud.”).

Bluntly put, “even lies are not actionable” when an investor “possesses

information sufficient to call the misrepresentation into question.” Phillips v. LCI Int’l, Inc.,

190 F.3d 609, 617 (4th Cir. 1999) (finding that a statement by a company’s CEO that “[w]e’re

not a company that’s for sale,” made at a time he knew company was engaged in merger

negotiations, was not material misstatement made with intent to defraud) (alteration and

quotation omitted). The “total mix of information may include information already in the public

domain and facts known or reasonably available to the shareholders.” Garber v. Legg Mason,

Inc., 347 F. App’x 665, 668 (2d Cir. 2009);

Here, the very news articles from which Plaintiffs lift McGrath’s statements, as

well as the very public order of the Mississippi trial court, included allegations of Eaton’s alleged

wrongdoing. Even Plaintiffs’ Amended Complaint recognizes this by pointing to no fewer than

five media reports before the beginning of the putative class period on August 2, 2009 (only a

few of the many public reports and sources of information about the allegation.) (See ¶ 74

(citing a public report); ¶ 76 (same); ¶ 78 (same); ¶ 79 (same); ¶ 80 (same).) In addition, detailed

reporting continued well into the putative class period, including about the December 2010

dismissal of the Frisby litigation and the Mississippi trial Court’s view of the events in that case.

(See Section II.C.4, infra.) The Supreme Court long ago rejected “the proposition that

information becomes material by virtue of a public statement denying it.” Basic, 485 U.S. at

249.


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Moreover, “[m]ateriality in the [litigation] context depends on the probability that

the [litigation will be successful], and its significance to the issuer of the securities.” Basic,

485 U.S. 250. Given the speculative nature of litigation generally and the comparative

unimportance of Frisby to Eaton’s sustained success specifically, Frisby itself was immaterial.

It follows that it is implausible for McGrath’s statements to have altered the mix of information

available to Eaton’s shareholders, and implausible for those statements to have been material.

3. Plaintiffs do not Allege that Cutler Said Anything False or MisleadingDuring his Appearance on CNBC’s Mad Money

In an attempt to distract from the paucity of facts supporting their claims,

Plaintiffs allege that Cutler appeared on CNBC’s Mad Money in an “effort to downplay the

Mississippi decision.” (¶ 96.) But missing from their allegations is any statement by Cutler

(or the show’s host, Jim Cramer, for that matter) that the Frisby defendants’ claims were false,

incomplete, or misleading in any way. In fact, the subject of the Frisby lawsuit was not raised,

even though Judge Yerger’s decision dismissing the case had been public for almost a month.

(See generally Mad Money Tr. (Ex. 38).) These throwaway allegations and cannot form the

basis for Plaintiffs’ securities fraud claim.

4. The May 2012 “Corrective Disclosures” Were Not Material

The May 2012 “corrective disclosures” were not material because they did not

change the status of the Frisby litigation and consisted of only the same type of information that

the market had (and ignored) at least 18 months earlier. Plaintiffs try to dress up an allegation

that “Eaton had . . . attempted to illegally influence Judge DeLaughter” as a the new “disclosure”

of something in May 2012. (See e.g., ¶ 108.) But this claim is no different from the publicly

known view of the Mississippi trial court from December 2010. (See, e.g., Miss. Order at 22

(“Eaton and its counsel were aware of and, in fact, sanctioned Peters’ clandestine

actions . . . with then-Judge DeLaughter, for Eaton’s benefit”).)


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Most important, however, nothing about the status of Frisby or Eaton’s appeal

changed in May 2012. The case had still been dismissed with prejudice since the December

2010 decision, and Eaton’s appeal of that decision remained pending. In short, from the

perspective of a reasonable investor, nothing in the landscape of the Frisby case changed.

Consequently, the alleged “corrective disclosures” in May 2012 were not material.

B. The Complaint Fails To Plead Scienter

Plaintiffs’ Complaint fails to allege Eaton and its executives acted with scienter,

which has a very specific meaning (and a very high pleading standard) in securities fraud cases.

In order to meet their burden, Plaintiffs must allege particularized and plausible facts that allow

the Court to infer that Defendants acted with a “mental state embracing intent to deceive,

manipulate or defraud” Eaton’s investors or the market. The Complaint’s allegations do not give

rise to a strong (or any) inference that Eaton’s leaders were trying to deceive anyone.

A securities fraud complaint must “state with particularity facts giving rise to a

strong inference that the defendant acted with the required state of mind,” “with respect to each

[alleged] act or omission.” 15 U.S.C. § 78u-4(b)(2). The Reform Act “imposes exacting

pleading requirements for pleading scienter . . . , which we define as knowing and deliberate

intent to manipulate, deceive, or defraud, and recklessness.” Ashland, Inc. v. Oppenheimer &

Co., Inc., 648 F.3d 461, 469 (6th Cir. 2011); In re Comshare Inc. Sec. Litig., 183 F.3d 542, 548

(6th Cir. 1999) (finding that scienter is a “mental state embracing intent to deceive, manipulate

or defraud”).

“To qualify as strong . . . , an inference of scienter must be more than merely

plausible or reasonable – it must be cogent and at least as compelling as any opposing inference

of nonfraudulent intent.” Tellabs, 551 U.S. at 314. In determining whether Plaintiffs’

allegations are probative of scienter, “the court’s job is not to scrutinize each allegation in


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isolation but to assess all the allegations holistically.” Ashland, 648 F.3d at 469 (quoting

Tellabs, 551 U.S. at 326)). Where, as here, scienter is not properly pled, the Reform Act requires

dismissal. 15 U.S.C. § 78u-4(b)(3)(A).

1. Defendants’ Alleged Desire to “Secur[e] Their Ongoing Positions”with Eaton Has Been Universally Rejected as a Basis for Scienter

Plaintiffs’ generic allegation that the Defendants were motivated “to deceive the

investing public with respect to the Frisby Litigation because doing so inflated Eaton’s stock

price, thereby increasing their personal wealth and securing their ongoing positions with the

Company” (see ¶ 117) cannot as a matter of law constitute scienter.

Such desire is present in all executives (indeed all employees), and does not

constitute the type of particularized motive needed to support a finding of scienter.

PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 690 (6th Cir. 2004), abrogated in part on other

grounds by Tellabs, 551 U.S. 308 (rejecting “executive’s desire to protect his position within a

company or increase his compensation” as a basis for scienter); In re K-tel Int’l, Inc. Sec. Litig.,

300 F.3d 881, 895 (8th Cir. 2002) (“[G]eneral allegations of a desire to increase stock prices,

increase officer compensation or maintain continued employment are too generalized and are

insufficient.”); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994) (“If motive

could be pleaded by alleging the defendant’s desire for continued employment, . . . the required

showing of motive and opportunity would be no realistic check on aspersions of fraud, and mere

misguided optimism would become actionable under the securities laws.”).

2. Incentive-Based Compensation Cannot Establish Scienter

Plaintiffs allege that Eaton’s officers “were highly motivated” to commit fraud

because a “large portion” of their “compensation packages were dependent upon Eaton posting

favorable financial results.” (¶ 118; see also ¶ 117 (alleging that Defendants were “motivated to


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deceive” to increase “their personal wealth”).) Such allegations are boilerplate and do not

support an inference of scienter.

Courts have “uniformly held that incentive compensation alone cannot provide a

sufficient basis on which to support allegations of a motive to create the illusion of corporate

profitability, whether by active misrepresentation or wrongful nondisclosure of materially

adverse information.” Wilson v. Bernstock, 195 F. Supp. 2d 619, 636 (D.N.J. 2002) (dismissing

claim); see also In re Agnico-Eagle Mines Ltd. Sec. Litig., No. 11 CIV. 7968 JPO, 2013 WL

144041, at *11 (S.D.N.Y. Jan. 14, 2013) (“[C]ourts have repeatedly explained that the desire to

increase officer compensation by inflating stock prices does not constitute motive.”); see also

I.B.E.W. v. Ltd. Brands, Inc., 788 F. Supp. 2d 609, 631 (S.D. Ohio 2011) (“courts have rejected

the assertion that an inference of fraudulent intent can be drawn from the mere fact that an

executive is given an incentive to ensure that his or her corporation succeeds.”); In re Bristol-

Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 561 (S.D.N.Y. 2004) (rejecting this as a motive

for fraud because such “plans are typical of nearly every corporation”).

There is a practical reason for this consensus holding. “On a practical level, were

the opposite true, the executives of virtually every corporation in the United States would be

subject to fraud allegations.” Tuchman v. DSC Commc’s Corp., 14 F.3d 1061, 1068 (5th Cir.

1994) (quotation omitted); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (“If

scienter could be pleaded on that basis alone, virtually every company in the United States that

experiences a downturn in stock price could be forced to defend securities fraud actions.”).

3. Cutler’s Sales of Eaton Shares Are Not Indicative of Scienter

Plaintiffs’ throwaway allegations that Cutler sold some Eaton shares in 2010 and

again in February and March 2011 do not allow a strong (or indeed any) inference of scienter.


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(See ¶¶ 97, 119.) Initially, it jumps off the page that the alleged sales in 2011 were after the

Frisby case has been dismissed and the Mississippi trial court’s views were publicly disclosed.

“[E]xecutive stock sales, standing alone, are insufficient to support a strong

inference of fraudulent intent.” In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 561

(S.D.N.Y. 2004). Executives “sell stock all the time,” so in order “to constitute circumstantial

evidence of scienter,” the stock sales must be “unusual or suspicious.” Pugh v. Tribune Co.,

521 F.3d 686, 695 (7th Cir. 2008) (affirming dismissal).

“Because corporate executives are often paid in stock and stock options, they will

naturally trade those securities in the normal course of events, and courts will not infer fraudulent

intent from the mere fact that some officers sold stock.” Ind. Elec. Workers’ Pension Trust Fund

IBEW v. Shaw Group, Inc., 537 F.3d 527, 543 (5th Cir. 2008) (ordering dismissal of claim)

(quotation omitted); Bldg. Trades United Pension Trust Fund v. Kenexa Corp., No. CIV.A. 09-

2642, 2010 WL 3749459, at *9 (E.D. Pa. Sept. 27, 2010) (dismissing case and holding that

“stock options are typically included in an executive’s compensation package”).

Plaintiffs here have only alleged a sale of shares before May 2012. There are no

allegations about whether these sales differed in timing or amount from other sales Cutler made

during the putative class period or at other times. Moreover, a sizable percentage (35% in 2010)

of Cutler’s compensation is paid in Eaton shares. (2011 Proxy at 25), so it is logical that he

would need to sell shares at times to cover expenses (such as taxes).

Even with the sales of shares alleged by Plaintiffs, Cutler’s sizable holdings of

Eaton common shares increased during the putative class period from 1,957,606 shares at the

end of 2008 to 2,343,127 shares at the end of 2011. (Compare 2009 Proxy at 57 with 2012

Proxy at 70.) Where, as here, an executive “was a net acquirer of stock during the class period,”

sales are not evidence of scienter. In re NVIDIA Corp. Sec. Litig., No. C 08-04260 RS, 2011 WL


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4831192, at *10 (N.D. Cal. Oct. 12, 2011); In re Ceridian Corp. Sec. Litig., 542 F.3d 240, 247

(8th Cir. 2008) (“executives increased their total share holdings during the class period”);

Fishbaum v. Liz Claiborne, Inc., 189 F.3d 460 (2d Cir. 1999) (no scienter where “an insider’s

sales of stock are offset by even larger stock acquisitions during the relevant time period”).

In fact, not only is there “no apparent financial incentive for [Cutler] to engage in

the deceptive practices alleged in the Complaint,” but there was “a disincentive to do so” because

of his sizable holding of Eaton shares. In re Officemax, Inc. Sec. Litig., No. 1:00-CV-2432,

2002 WL 33959993, at *14 (N.D. Ohio Mar. 26, 2002) (dismissing complaint); Applestein v.

Medivation, Inc., 861 F. Supp. 2d 1030, 1043 (N.D. Cal. 2012) (no scienter even where

defendants “sold $22 million worth of stock,” because defendants “substantially increased their

stock holdings during the Class Period” and lost money when the share price fell).7

4. The More Compelling Inference is of Non-Fraudulent Intent

The more cogent and compelling inference from Plaintiffs’ allegations is that

Defendants had no fraudulent intent in responding to what Defendants continue to believe were

incorrect decisions by the Mississippi trial court. With no plausible motivation for the “fraud,”

no allegations of falsity, and no link of any kind between the ultimate outcome of the Frisby

litigation and any aspect of Eaton’s past or future performance, the substantially more

compelling inference to be drawn from Plaintiffs’ allegations is that Eaton and the Individual

Defendants acted and continue to act with non-fraudulent intent.

If anything, Plaintiffs’ allegations try to make out a conclusory and legally

insufficient mismanagement claim. (See, e.g., ¶¶ 120-21.) But such generic allegations cannot

7 Moreover, Plaintiffs make no allegations of stock sales by any of the other Defendants, althoughthey allege that all Defendants were involved in the “scheme.” (See, e.g., ¶ 139 (“Eaton and the IndividualDefendants carried out a plan” and a “scheme”). “Typically large sale amounts and corroborative sales by otherdefendants are required to allow insider trading to support scienter.” In re Apollo Group, Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 WL 5101787, at *11 (D. Ariz. Oct. 27, 2011) (quotation omitted).


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support an inference of scienter (much less a strong one), because mismanagement is not

actionable under the securities laws. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 473 (1977);

Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 640 (3d Cir. 1989) (“where the incremental

value of disclosure is solely to place potential investors on notice that management is capable

of . . . incompetence, the failure to disclose does not violate the securities acts”).

C. Plaintiffs Have Not Adequately Alleged Loss Causation

Perhaps the most glaring flaw in the Complaint is the failure to plead facts

(as opposed to conclusory statements) that connect the Frisby litigation to an inflation of Eaton’s

share price or connect the repetitive disclosures 18 months after the Frisby dismissal to the drop

in Eaton’s share price in 2012. For these reasons alone, the Complaint must be dismissed.

Plaintiffs bear the burden of pleading specific facts demonstrating the plausibility

of loss causation. See Dura, 544 U.S. 336, 346–48 (2005) (affirming dismissal with prejudice);

see also 15 U.S.C. § 78u-4(b)(4) (“the plaintiff shall have the burden of proving that the act or

omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff

seeks to recover damages”). There must be “a causal connection between the material

misrepresentation and the loss.” Dura at 342. Price inflation alone is insufficient; rather,

Plaintiffs must show that an economic loss occurred after the truth behind the misrepresentation

or omission became known to the market. See id. at 346–47.

The lack of any rational connection between a drop in Eaton’s share price in 2012

and the dismissal of Frisby 18 months earlier – particularly when that drop occurred in the

shadow of an $11.8 billion acquisition and a credit downgrade – is the type of farfetched claim

animating Dura. “Even if the purchaser later resells those shares at a lower price, ‘that lower

price may reflect, not the earlier misrepresentation, but changed economic circumstances,

changed investor expectations, new industry-specific or firm-specific facts, conditions, or other


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events, which taken separately or together account for some or all of that lower price.’”

D.E.&J. Ltd. P’ship v. Conaway, 133 F. App’x 994, 998-99 (6th Cir. 2005) (quoting Dura)

(affirming dismissal for failure to allege loss causation).

Moreover, Plaintiffs do not (and cannot) point to a restatement of earnings,

change in financial projects, or analyst criticisms related to the Frisby litigation, including after

the so-called “corrective disclosures” in May 2012. Frisby was not discussed in Eaton’s public

filings with the SEC, nor was an estimated value of the claims in that case.

In fact, Frisby (although not mentioned by name) was included with the litigation

involving Eaton that would not have a material effect, either positive or negative, on its financial

statements:

Eaton is subject to a broad range of . . . legal proceedings . . . .Although it is not possible to predict with certainty the outcome orcost of these matters, the Company believes they will not have amaterial effect on the consolidated financial statements.

(2011 10-K at 36 (emphasis added); see also 2010 10-K at 65 (same); 2009 10-K at 40 (same).)

Instead of the phantoms that Plaintiffs try to connect to the drop in Eaton’s stock

price, there were other, more concrete causes that had nothing to do with the stale news about

Frisby. In addition to the announcement of the very large and “definitely not cheap” Cooper

acquisition, the major ratings agencies, S&P and Fitch, had both just lowered Eaton’s credit

rating based in part on the acquisition costs. (See S&P Revises Eaton Corp Outlook to Negative

(Ex. 22) and Fitch May Cut Cooper Indus. Ratings (Ex. 4).) Analysts at the time blamed the

share-price drop alternatively on “the global equity correction and uncertainty about the

execution of the [Cooper] deal” or “fears of a slowdown in global growth and disappointing May

Nafta Class 8 truck orders.” Eaton’s Acq. of Cooper Indus. (Ex. 3); Adding to An Indus. (Ex. 1).

No analyst mentioned Frisby as a cause of the drop.


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Pleading coincidence, which is at best what Plaintiffs have done, is not the same

thing as pleading the necessary causal connection between the events in the Frisby case and the

price drop. “[T]he observation that a stock price dropped on a particular day . . . is not the same

as an allegation that a defendant’s fraud caused the loss.” Conaway, 133 F. App’x at 1000-01.

Against the factual background of the material events occurring in the market and at Eaton,

Plaintiffs have failed to plead loss causation in a plausible way.

V. Plaintiffs’ Control Person Claims (Count II) Must Also Be Dismissed

Because Plaintiffs have failed to state any actionable claim for a violation of

Section 10(b) of the 1934 Act or Rule 10b-5, Count II, alleging so-called control-person liability

under Section 20(a), must also be dismissed. Absent an underlying securities law claim, there

can be no derivative claim for control-person liability. See PR Diamonds, 364 F.3d at 696;

La. Mun. Police Employees Ret. Sys., 2012 WL 4958561, at *10; Shields, 25 F.3d at 1132

(finding no error in district court’s dismissal of Section 20 claims where “the primary violation

asserted by [plaintiff was] not adequately pleaded”).

In the alternative, as to McGrath and Szmagala, Plaintiffs have failed to allege

facts showing these individual are “control persons.” “In order to prove a prima facie case under

section 20(a), a plaintiff must prove a primary violation of federal securities laws and that the

targeted defendants . . . exercised actual power or control over the primary violator.” In re

Keithley Instruments, Inc. Sec. Litig., 268 F. Supp. 2d 887, 906 (N.D. Ohio 2002).

Plaintiffs make no factual allegations that either Szmagala or McGrath had the ability to control

Eaton in any respect (and can make no such allegations). Instead, Plaintiffs make vague

allegations about all Defendants’ “high-level positions and ownership and contractual rights”

(whatever that means) without particularized facts about McGrath and Szmagala.


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(See, e.g., ¶153.) That is not enough. Consequently, the Section 20(a) claims against McGrath

and Szmagala should be dismissed.

VI. CONCLUSION

For the foregoing reasons, the Motion to Dismiss should be granted and the

Consolidated Amended Class Action Complaint should be dismissed with prejudice.

Dated: March 1, 2013 Respectfully submitted,

s/ Frances Floriano GoinsJoseph A. Castrodale (0018494)Frances Floriano Goins (0018631)Andrew G. Fiorella (0077005)ULMER & BERNE LLP1660 West 2nd Street, Suite 1100Cleveland, Ohio 44113-1448Telephone: (216) 583-7000Facsimile: (216) [email protected]@[email protected]

Attorneys for Defendants Eaton Corporation,Alexander Cutler, Mark McGuire, TarasSzmagala, Jr., and Donald J. McGrath
