Pension Trust Fund For Operating Engineers v. DeVry Education Group, Inc. et al

Northern District of Illinois, ilnd-1:2016-cv-05198

REPLY by Defendant Daniel Hamburger to motion to dismiss 91 the third amended complaint

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Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 1 of 8 PageID #:1819 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION) PENSION TRUST FUND FOR) OPERATING ENGINEERS,) Individually and on Behalf of All Others) Case No. 1:16-cv-05198 Similarly Situated,)) Plaintiff,) Judge: Jorge L. Alonso) v.))) DEVRY EDUCATION GROUP, INC.,) DANIEL HAMBURGER, RICHARD M.) GUNST, PATRICK J. UNZICKER,) AND TIMOTHY J. WIGGINS,) Defendants.)) DEFENDANT DANIEL HAMBURGER'S REPLY IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS THE THIRD AMENDED COMPLAINT LATHAM & WATKINS LLP Sean M. Berkowitz Eric R. Swibel 330 North Wabash, Suite 2800 Chicago, IL 60611 Telephone: (312) 876-7700 sean.berkowitz@lw.com eric.swibel@lw.com Attorneys for Defendant Daniel Hamburger Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 2 of 8 PageID #:1820 Defendant Daniel Hamburger ("Mr. Hamburger") respectfully submits this reply in support of the motion to dismiss Plaintiff's1 third amended complaint ("TAC"), which was filed by Defendants Adtalem Global Education, Inc. f/k/a DeVry Education Group, Inc., Mr. Hamburger, Richard M. Gunst, Patrick J. Unzicker, and Timothy J. Wiggins. Mr. Hamburger incorporates by reference Defendants' reply in support of their motion to dismiss, and respectfully submits this reply to address two points unique to Mr. Hamburger. First, Mr. Hamburger is not collaterally estopped from arguing the TAC fails to plead scienter. Second, Plaintiff's generalized allegations of Mr. Hamburger's "hands-on management style" do not create a strong inference of scienter. See Opp. Br. at 25-28, 30-32. Despite repeated efforts, Plaintiff still has not pleaded sufficient facts to give rise to a strong inference of scienter. For the reasons stated in Defendants' reply and herein, the TAC should be dismissed with prejudice. I. PRELIMINARY STATEMENT Unable to carry its pleading burden on scienter, Plaintiff has tried new scienter arguments specific to Mr. Hamburger. They, like their predecessors, are without merit. First, Plaintiff is wrong that Mr. Hamburger is collaterally estopped from arguing the TAC fails to plead scienter under the PSLRA. To start, courts routinely reject attempts to use collateral estoppel based on a decision on the pleadings – which is precisely what Plaintiff is trying to do here. Regardless, collateral estoppel requires the identical issue to already have been litigated, which is not true here. Plaintiff asks the Court to apply collateral estoppel based on a Delaware Chancery Court's order in a related derivative lawsuit (the "Derivative Lawsuit"), which addressed the sufficiency of pleadings based on a different legal claim (breach of fiduciary 1 Unless otherwise noted, capitalized terms shall have the same meanings ascribed to them as in Defendants' reply in support of their motion to dismiss filed concurrently herewith. Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 3 of 8 PageID #:1821 duty versus securities fraud) involving a different pleading standard ("reasonable inference of bad faith" versus "strong inference of scienter"). See Opp. Br. at 30-32; City of Hialeah Emps. Ret. Sys. v. Begley, 2018 WL 1912840 (Del. Ch. Apr. 20, 2018). Indeed, as this Court already explained, to plead scienter here, Plaintiff must plead facts supporting an inference that is "more than merely plausible or reasonable." Pension Tr. Fund for Operating Eng'rs v. DeVry Educ. Group, Inc., 2017 WL 6039926, *6 (N.D. Ill. Dec. 6, 2017) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)). Different claim plus different pleading standard equals no identical issue. Collateral estoppel does not apply. Second, Plaintiff fails in trying to patch over pleading gaps by alleging that because Mr. Hamburger purportedly had a "hands-on management style," he must have acted with scienter. See TAC ¶ 358. Of course, hands-on management is not a substitute for particularized scienter allegations under the PSLRA. See In re Bally Total Fitness Sec. Litig., 2007 WL 551574, *8 (N.D. Ill. Feb. 20, 2007) (granting motion to dismiss in part because general allegations that executives were "familiar with every aspect of [company] financial results and operations" fail to provide a basis for an inference that defendants "acted with the requisite reckless or intent"). For these reasons as well as those outlined in Defendants' reply filed concurrently herewith, the Court should grant Defendants' motion and dismiss the TAC. II. ARGUMENT A. The Chancery Court Of Delaware's Order In The Derivative Lawsuit Has No Preclusive Effect Here The Delaware court's order in the Derivative Lawsuit has no preclusive effect for the independent reason that a "ruling on a motion to dismiss [in a related action] is not a 'final judgment,'" thus, the underlying issues have not been "actually litigated" for purposes of determining whether to apply collateral estoppel. Ong v. Sears, Roebuck & Co., 388 F. Supp. 2d 2 Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 4 of 8 PageID #:1822 871, 912 (N.D. Ill. 2004); see also, e.g., Bruhl v. Conroy, 2007 WL 983228, at *2 n.1 (S.D. Fla. Mar. 27, 2007) ("[A] ruling on a motion to dismiss" does not carry "sufficient indicia of finality for collateral estoppel to be applied."); City of Amsterdam v. Goldreyer, Ltd., 882 F. Supp. 1273, 1279 (E.D.N.Y. 1995) (holding "collateral estoppel [is] inapplicable" because "issues have not been fully litigated" at the motion to dismiss stage). In any event, the Delaware court answered a different question than the question this Court must answer. See Ong, 388 F. Supp. 2d at 911 (rejecting collateral estoppel argument where cases "involved different complaints … and different causes of action"); see also Green Tree Fin. Corp. v. Honeywood Dev. Corp., 2001 WL 62603, *5 (N.D. Ill. Jan. 24, 2001) (rejecting collateral estoppel argument because "[d]efendants have not established that the issue sought to be precluded … was identical"). Plaintiff alleges violations of Section 10(b) of the Securities Exchange Act, which requires Plaintiff to meet the heightened pleading standard in the PSLRA that mandates that plaintiffs plead with particularity "sufficient facts to give rise to a 'strong inference' that the defendant acted with scienter." DeVry, 2017 WL 6039926, at *6 (citation omitted) (emphasis added); see also 15 U.S.C. § 78u-4 (same). A "strong inference" that the defendant acted with scienter, in turn, "is an inference that is 'more than merely plausible or reasonable' – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." DeVry, 2017 WL 6039926, at *6 (citing Tellabs, 551 U.S. at 314) (emphasis added). The plaintiff in the Derivative Lawsuit, on the other hand, alleged that the defendants breached fiduciary duties established under Delaware law. See Begley, 2018 WL 1912840, at *1 ("The plaintiff asserts claims for breach of fiduciary duty derivatively on behalf of the Company[.]"). The pleading standard in a Delaware breach-of-fiduciary-duty case "is whether 3 Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 5 of 8 PageID #:1823 the Complaint pleads particularized facts supporting a reasonable inference of bad faith" – a notably lower bar than the one Plaintiff must meet in this case. Id. at *3 (emphasis added). Not only are the pleading standards different, but the plaintiff in the Derivative Lawsuit barely overcame the "reasonable inference" standard. The Delaware court specified that "[t]he inference" of bad faith "is not the only inference that can be drawn" and that "[d]oubtless other scenarios are possible in which the directors acted legitimately." Id. at *4. The Delaware court's order is a far cry from supporting the notion that bad intent is "more than merely plausible."2 DeVry, 2017 WL 6039926, at *6; cf. id. at *13 ("[T]he PSLRA requires more than plausibility or reasonableness."); Bally, 2007 WL 551574, at *14 ("The inference [of scienter] must not only be reasonable; it must be strong, and the amended complaint again fails to meet this standard."). In short, "[t]he fact that defendants seek dismissal on similar grounds in two related cases does not establish that the issues raised are identical."3 Ong, 388 F. Supp. 2d at 911. 2 Not only do the two cases involve disparate pleading standards, but what Plaintiff here must allege Defendants to have "known" does not align with what the plaintiff in the Derivative Lawsuit had to plead. Here, Plaintiff must plead "knowledge of the statement's falsity or reckless disregard of a substantial risk that the statement is false." Higginbotham v. Baxter Int'l, Inc., 495 F.3d 753, 756 (7th Cir. 2007); see also 15 U.S.C. § 78u-4(b)(2) (same). By contrast, the plaintiff in the Derivative Lawsuit had to plead that the defendants "knowingly … cause[d] the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators." Begley, 2018 WL 1912840, at *4; see also id. ("The knowing use of illegal means to pursue profit for the corporation is director misconduct."). 3 Neither case relied upon by Plaintiff supports the application of collateral estoppel. See Opp. Br. at 31. In Gilldorn Savings Association v. Commerce Savings Association, it was "undisputed that … the identical … issue was raised and actually litigated in the" earlier action; the opposite is true here. 804 F.2d 390, 393 (7th Cir. 1986) (emphasis added). And Cosek v. Chinn Enterprises, Inc., applied collateral estoppel without any substantive analysis of the issues litigated in the related case or mention of the factors required for collateral estoppel to apply. See 1996 WL 377056 passim (N.D. Ill. July 1, 1996). Cosek certainly does not support the use of offensive issue preclusion as an end-run around the PSLRA's heightened pleading standard. 4 Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 6 of 8 PageID #:1824 B. The New Allegations Describing Mr. Hamburger As A "Hands-On" Manager Do Not Create A Strong Inference Of Scienter Plaintiff fails in trying to bridge the scienter gap through allegations about Mr. Hamburger's purported "hands-on management style" as evidence of a fraudulent state of mind. TAC ¶ 358; see also id. ¶¶ 359, 372, 412. Specifically, Plaintiff asks the Court to leap from non- fraudulent claims about Mr. Hamburger being "very involved in the day-to-day operations" of the company where he served as CEO (id. ¶ 372), to the conclusion that such involvement supports a strong inference that he acted with the required state of mind. As Plaintiff concedes, however, such generalized "allegations … have been held insufficient" to support a strong inference of scienter, which makes sense because a CEO is expected to be involved in the operations of the organization. Opp. Br. at 26; see also Def. Br. at 19-20 n.11 (citing cases). Moreover, as Plaintiff did in the last round of motion to dismiss briefing, Plaintiff asks the Court to accept allegations that "Hamburger reviewed employment statistics" as sufficient to plead that Mr. Hamburger knew or was reckless in not knowing an alleged falsity underlying those statistics. Opp. Br. at 26. But as this Court held when it granted Defendants' first motion to dismiss, "there is a big difference between knowing about the [statistics] and knowing that the [statistics] are false." DeVry, 2017 WL 6039926, at *13 (quoting Higginbotham, 495 F.3d at 758). Put simply, accepting Plaintiff's "hands-on management" allegations as pleading scienter "requires a degree of speculation that the PSLRA does not tolerate." Id. III. CONCLUSION WHEREFORE, Mr. Hamburger respectfully requests that the Court grant Defendants' motion to dismiss Plaintiff's third amended complaint with prejudice. Mr. Hamburger further requests whatever other relief the Court deems appropriate. 5 Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 7 of 8 PageID #:1825 Dated: June 28, 2018 Respectfully Submitted, /s/ Sean M. Berkowitz One of the Attorneys for Defendant Daniel Hamburger Sean M. Berkowitz Eric R. Swibel LATHAM & WATKINS LLP 330 North Wabash, Suite 2800 Chicago, IL 60611 Telephone: (312) 876-7700 sean.berkowitz@lw.com eric.swibel@lw.com 6 Case: 1:16-cv-05198 Document #: 103 Filed: 06/28/18 Page 8 of 8 PageID #:1826 CERTIFICATE OF SERVICE I hereby certify that on June 28, 2018, a true and correct copy of DEFENDANT DANIEL HAMBURGER'S REPLY IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS THE THIRD AMENDED COMPLAINT was filed with the Clerk of Court using the CM/ECF system, which will send notification of such filing to all counsel of record. /s/ Sean M. Berkowitz_______________ Sean M. Berkowitz