throbber
Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 1 of 23 PageID #:3514
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF ILLINOIS
`EASTERN DIVISION
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`
`)
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`ASHLEY PIERRELOUIS, individually
`and on behalf of all others similarly situated, )
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`)
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`Plaintiff,
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`GOGO, INC., MICHAEL J. SMALL,
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`NORMAN SMAGLEY, BARRY ROWAN,
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`and JOHN WADE,
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`v.
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`Defendants.
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`No. 18 C 4473
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`Judge Jorge L. Alonso
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`MEMORANDUM OPINION AND ORDER
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`
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`Lead plaintiff Daniel Rogers1 has filed a Third Amended Class Action Complaint for
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`Violation of the Federal Securities Laws (“Third Amended Complaint”), asserting violations of
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`sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the Securities Exchange
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`Commission (“SEC”). Defendants, Gogo, Inc. (“Gogo”), Michael J. Small, Norman Smagley,
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`Barry Rowan, and John Wade, move to dismiss the complaint pursuant to Federal Rule of Civil
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`Procedure 12(b)(6) for failure to state a claim under Rule 8, Rule 9(b), and the Private Securities
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`Litigation Reform Act of 1995 (“PSLRA”). For the following reasons, the motion is denied.
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`BACKGROUND
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`The Court assumes familiarity with its previous decision in this case, in which it granted
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`defendants’ motion to dismiss plaintiff’s amended complaint for failure to state a claim.
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`Pierrelouis v. Gogo, Inc., 414 F. Supp. 3d 1164, 1176-77 (N.D. Ill. 2019). Since then, plaintiff has
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`1 This class action was initially brought by the above-captioned plaintiff, but class members Maria Zingas
`and Daniel Rogers, among others, moved for appointment as lead plaintiffs. After the other movants
`withdrew, the Court granted Zingas and Rogers’s motions and appointed them as co-lead plaintiffs. (Oct.
`10, 2018 Order, ECF No. 41.) Zingas became unable to continue serving as a lead plaintiff (see Lead Pl.’s
`Mem. In Supp. Of Mot. For Leave to Amend at 1 n.1, ECF No. 98), leaving Rogers as the sole lead plaintiff.
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 2 of 23 PageID #:3515
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`twice repleaded, but the core of the complaint has not changed. As before, plaintiff alleges that,
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`during the class period between February 27, 2017 and May 4, 2018, defendants—Gogo and
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`several of its executives—made certain false and misleading public statements about the reliability
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`of Gogo’s in-flight internet connectivity services and its impact on Gogo’s financial picture.
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`According to plaintiff, Gogo installed its new “2Ku” antenna-and-satellite-based in-flight wifi
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`systems on numerous partner airplanes before and during the class period, although defendants
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`knew that the 2Ku systems sometimes did not work after the airplanes had been sprayed with de-
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`icing fluid. As a result, plaintiff alleges, defendants knew that Gogo would be unable to hit its
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`service availability targets during periods of winter weather unless it made costly modifications to
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`its 2Ku systems, which would hurt the company’s financial performance. Nevertheless, according
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`to plaintiff, defendants concealed the de-icing issue from investors for months, and then, even after
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`disclosing it in February 2018, still concealed its true seriousness, until Gogo’s new CEO finally
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`disclosed the extent of the problem in May 2018. The May 2018 disclosure caused Gogo’s
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`allegedly artificially inflated stock price to plummet, to the detriment of plaintiff and other
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`investors.
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`The Court described these allegations in more detail in its prior opinion, see id. at 1168-
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`70, and, apart from the above brief summary, it will not repeat that description here. In the present
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`Third Amended Complaint, plaintiff’s core allegations are the same, but he includes new
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`allegations about the 2Ku system’s importance to Gogo’s business prospects and about Gogo
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`employees’ attempts to assess and correct the de-icing problem.
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`According to plaintiff, Gogo’s financial future was heavily dependent on the success of the
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`2Ku system. Investors perceived Gogo as a company that needed to make capital expenditures in
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`the short term in order to achieve profitability in the long term. That meant that Gogo needed to
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 3 of 23 PageID #:3516
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`spend heavily to install its systems on more and more aircraft so that it could reach more customers.
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`Additionally, the improved bandwidth of the new 2Ku satellite system, as compared with the old
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`air-to-ground system, was meant to attract more passengers per flight and increase average revenue
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`per aircraft, a key accounting metric. Analysts perceived Gogo’s ability to (a) contract with airline
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`partners to install its systems on new planes and then (b) successfully and efficiently install its
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`systems on the resulting “backlog” of planes as crucial to its fortunes. Gogo had incurred
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`significant debt to finance 2Ku installations and buy satellite capacity, and it continued to borrow
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`throughout the class period for the same purpose, expecting that it its investment would pay off
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`with revenue growth as soon as the 2Ku installations were complete. In light of the expectations
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`of analysts and investors and the increased debt, plaintiff alleges, any disruption to the rollout of
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`the 2Ku product or to the installation of 2Ku systems on Gogo’s backlog of partner airplanes would
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`have had a significant impact on Gogo’s financial position.
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`According to plaintiff, several former employees have confirmed that Gogo discovered the
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`de-icing problem in the winter of 2016-2017, recognized its seriousness, and began to make an
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`extensive, concerted effort to correct it by the start of the class period in February 2017. The first
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`of these former employees, identified only as “FE-1,” served as Director of Aircraft Engineering.
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`FE-1 recalls that multiple planes began to have connectivity problems in December 2016 and
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`January 2017. An airline partner grounded one plane so that engineers from ThinKom, the
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`company that designed the 2Ku system, could inspect it. The ThinKom engineers determined that
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`the problem was caused by de-icing fluid leaking into the “radome,” the compartment that housed
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`the 2Ku system’s antennas. FE-1 recalled that the problem affected a dozen planes that winter, and
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`the outages appeared on an outage list that was circulated to everyone in management.
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 4 of 23 PageID #:3517
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`Based on these developments, FE-1 recalled, Gogo engineers began working on a solution
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`to the problem in February 2017. Gogo obtained an old airplane fuselage, affixed a 2Ku system to
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`it, installed a camera in the radome, and sprayed it with de-icing fluid to determine how and where
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`the fluid penetrated the radome. This testing revealed that the fluid leaked in under the rubber seal
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`between the radome and the fuselage. Gogo continued to install the 2Ku systems on new airplanes
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`while it sought a remedy for this problem. By October 2017, when FE-1 left the company, Gogo
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`had managed to engineer a couple of repair procedures, but the repairs took about three days to
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`implement, which was difficult to arrange with the airlines.
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`FE-2 served as a Project Engineer who oversaw installations of 2Ku systems, and he
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`recalled that Gogo discovered the de-icing problem when cold weather arrived in the latter part of
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`2016. However, Gogo continued to install 2Ku systems on new airplanes, not wanting to disrupt
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`its aggressive installation schedule. FE-2 was involved in the installations of supplemental
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`equipment to address the de-icing problem, following an effort by a “fully coordinated, integrated
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`product team comprised of people with subject matter expertise” to develop a fix to the problem.
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`(3d Am. Compl. ¶ 77, ECF No. 101.) Gogo began to roll out its remedy for the de-icing problem
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`in the spring or summer of 2017, after months of testing. FE-2 recalled that the de-icing fluid was
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`a big concern that had reached the attention of many executives, given the importance of the 2Ku
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`product for the company and the sophistication of the equipment. As FE-2 explained, “when you’re
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`putting stuff on an airplane, even if you’re drilling one hole, there are about three dozen people at
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`the company that know about that one hole.” (Id. ¶ 79.)
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`FE-3 joined Gogo in February 2017 as “Director – Airline Technical Operations.” (Id. ¶
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`42.) At that time, Gogo was working on finding a solution to the de-icing problem. During FE-3’s
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`first few months at the company, fixing the de-icing problem before winter set in again was a
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 5 of 23 PageID #:3518
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`priority for Gogo, and everyone was aware of what was going on, including defendant John Wade,
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`Gogo’s chief operating officer during the class period. FE-3 recalled attending weekly meetings at
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`which the de-icing problem was discussed. Wade also attended these meetings.
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`FE-4 worked at Gogo from 2013 to May 2017, advancing to the role of “Senior VP, Airline
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`Technical Operations.” (Id. ¶ 43.) He recalls learning of the 2Ku problems in the winter of 2016-
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`2017, and that Gogo was still working on assessing and fixing the problem when he left the
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`company.
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`FE-5 worked at Gogo from 2014 to May 2017, advancing to the role of “Director, Aircraft
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`Certification and Compliance.” (Id. ¶ 44.) He recalls that the 2Ku system was having problems in
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`the winter of 2016-2017. He learned of them because his team served as liaison between Gogo and
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`the FAA for obtaining “Supplemental Type Certificates” or “STCs.” Any modification to the
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`outside of an airplane must receive an STC, which the FAA defines as “a type certificate . . . issued
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`when an applicant has received FAA approval to modify an aeronautical product from its original
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`design.” (3d Am. Compl. ¶ 92.) Gogo was required to obtain an STC for each type of aircraft on
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`which it installed 2Ku systems, and indeed even for different configurations of the same aircraft
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`type. This was a time-consuming, multi-step process that could take months or even years. In the
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`case of the 2Ku system, according to FE-5, the STC application required testing the equipment
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`under different environmental conditions and against different contaminants that the equipment
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`might encounter once it was in use. Gogo’s airline partners would have to supply specific parts for
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`testing. Before FE-5 left the company in May 2017, his team had been involved in internal
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`discussions at Gogo about whether the company’s attempts to address the de-icing issue would
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`require a new STC. FE-5 told members of the department tracking the functionality of the 2Ku
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`system that he could not say whether a fix would require a new STC until after he saw the design
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 6 of 23 PageID #:3519
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`of the proposed fix. He did not recall seeing a revised design before he left in May 2017, but he
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`knew that Wade was aware of what was going on.
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`Plaintiff claims that defendants’ false statements deceived and defrauded investors in
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`violation of the Securities Exchange Act and Rule 10b-5 of the SEC. Additionally, plaintiff claims
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`that the individual defendants are liable as “controlling persons” of Gogo under § 20(a) of the
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`Securities Exchange Act, 15 U.S.C. § 78t. Defendants have moved to dismiss for failure to state a
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`claim under Federal Rule of Procedure 12(b)(6).
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`ANALYSIS
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`Section 10(b) of the Securities Exchange Act prohibits the use “in connection with the
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`purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in
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`contravention of such rules and regulations as the [Securities and Exchange] Commission may
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`prescribe.” 15 U.S.C. § 78j. Under SEC Rule 10b-5, it is unlawful for any person:
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`(a) To employ any device, scheme, or artifice to defraud,
`(b) To make any untrue statement of a material fact or to omit to state a material
`fact necessary in order to make the statements made, in the light of the
`circumstances under which they were made, not misleading, or
`(c) To engage in any act, practice, or course of business which operates or would
`operate as a fraud or deceit upon any person,
`in connection with the purchase or sale of any security.
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`17 C.F.R. § 240.10b-5. Thus, under § 10(b) and Rule 10b-5, “a plaintiff can obtain damages if she
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`can prove (1) the defendant made a false statement or omission (2) of material fact (3) with scienter
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`(4) in connection with the purchase or sale of securities (5) upon which the plaintiff justifiably
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`relied and (6) that the false statement proximately caused the plaintiff damages.” Makor Issues &
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`Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 595 (7th Cir. 2006) (“Tellabs I”), vacated and remanded
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`on other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). The
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`required scienter is “an intent to deceive, demonstrated by knowledge of the statement’s falsity or
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`6
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 7 of 23 PageID #:3520
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`reckless disregard of a substantial risk that the statement is false.” Higginbotham v. Baxter Int’l,
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`Inc., 495 F.3d 753, 756 (7th Cir. 2007).
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`“A motion [to dismiss] under Rule 12(b)(6) tests whether the complaint states a claim on
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`which relief may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). Under
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`Rule 8(a)(2), a complaint must include “a short and plain statement of the claim showing that the
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`pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule
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`8(a)(2) must “‘give the defendant fair notice of what the claim is and the grounds upon which it
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`rests.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S.
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`41, 47 (1957) (ellipsis omitted)).
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`Under federal notice-pleading standards, a complaint’s “[f]actual allegations must be
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`enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. Stated
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`differently, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
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`to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
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`Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual
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`content that allows the court to draw the reasonable inference that the defendant is liable for the
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`misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). “In reviewing the sufficiency of a
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`complaint under the plausibility standard, [courts must] accept the well-pleaded facts in the
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`complaint as true, but [they] ‘need[ ] not accept as true legal conclusions, or threadbare recitals of
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`the elements of a cause of action, supported by mere conclusory statements.’” Alam v. Miller
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`Brewing Co., 709 F.3d 662, 665-66 (7th Cir. 2013) (quoting Brooks v. Ross, 578 F.3d 574, 581
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`(7th Cir. 2009)).
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`Additionally, any claims of or including acts of fraud must comply with Federal Rule of
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`Civil Procedure 9(b), which requires the pleading party to “state with particularity the
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`7
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 8 of 23 PageID #:3521
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`circumstances constituting fraud.” U.S. ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836
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`F.3d 770, 775 (7th Cir. 2016). Although fraudulent or deceptive intent “may be alleged generally,”
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`Rule 9(b) requires a plaintiff to describe the “circumstances” of the alleged fraudulent activity with
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`“particularity” by including such information as “the identity of the person who made the
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`misrepresentation, the time, place and content of the misrepresentation, and the method by which
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`the misrepresentation was communicated.” Windy City Metal Fabricators & Supply, Inc. v. CIT
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`Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir. 2008).
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`The Private Securities Litigation Reform Act (“PSLRA”) imposes heightened pleading
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`requirements on private, class action claims of securities fraud under § 10(b) and Rule 10b-5:
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`(b) Requirements for securities fraud actions
`(1) Misleading statements and omissions
`In any private action arising under this chapter in which the plaintiff alleges that
`the defendant—
`(A) made an untrue statement of a material fact; or
`(B) omitted to state a material fact necessary in order to make the statements
`made, in the light of the circumstances in which they were made, not
`misleading;
`the complaint shall specify each statement alleged to have been misleading, the
`reason or reasons why the statement is misleading, and, if an allegation
`regarding the statement or omission is made on information and belief, the
`complaint shall state with particularity all facts on which that belief is formed.
`(2) Required state of mind
`(A) In general
`Except as provided in subparagraph (B), in any private action arising under this
`chapter in which the plaintiff may recover money damages only on proof that
`the defendant acted with a particular state of mind, the complaint shall, with
`respect to each act or omission alleged to violate this chapter, state with
`particularity facts giving rise to a strong inference that the defendant acted with
`the required state of mind.
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`15 U.S.C. § 78u-4 (italicized emphasis added). Thus, under the PSLRA, private securities fraud
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`plaintiffs not only must plead with particularity the factual circumstances constituting fraud,
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`including by specifying the alleged misrepresentations and the basis for any allegations made on
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`information and belief, but they must also plead with particularity sufficient facts to give rise to a
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`8
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 9 of 23 PageID #:3522
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`“strong inference” that the defendant acted with scienter. See Tellabs I, 437 F.3d at 594 (“[T]he
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`PSLRA essentially returns the class of cases it covers [i.e., private securities fraud class actions]
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`to a very specific version of fact pleading—one that exceeds even the particularity requirement of
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`. . . Rule . . . 9(b).”).
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`A “strong inference” is one that is “strong in light of other explanations.” Tellabs, 551
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`U.S. at 323. That is, it is “more than merely plausible or reasonable—it must be cogent and at
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`least as compelling as any opposing inference of nonfraudulent intent.” Id. at 314. Determining
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`whether allegations give rise to such an inference requires courts to “take into account plausible
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`opposing inferences” because “[t]he strength of an inference cannot be decided in a vacuum,” and
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`“[t]he inquiry is inherently comparative.” Id. at 323 (internal quotation marks omitted); see Makor
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`Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 711 (7th Cir. 2008) (“Tellabs II” ) (“The plausibility
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`of an explanation depends on the plausibility of the alternative explanations.”).
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`The required state of mind under the PLSRA is “an intent to deceive, demonstrated by
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`knowledge of the statement’s falsity or reckless disregard of a substantial risk that the statement is
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`false.” Higginbotham, 495 F.3d at 756. Defendants acted with the required scienter if they spoke
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`in disregard of a risk of falsity that was “‘so obvious that [they] must have been aware of it.’” See
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`Tellabs II, 513 F.3d at 702, 704 (quoting In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 76 (2d
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`Cir. 2001)). “When the facts known to a person place him on notice of a risk, he cannot ignore
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`the facts and plead ignorance of the risk.” Tellabs II, 513 F.3d at 704.
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`In support of their motion to dismiss, defendants argue—as before—that plaintiff does not
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`meet his burden to plead falsity and plaintiff’s complaint fails to raise a strong inference of scienter.
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`Additionally, they argue that certain of the statements that plaintiff challenges were forward-
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`looking statements protected by the PSLRA safe harbor, see 15 U.S.C. § 78u-5, and that defendants
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`9
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 10 of 23 PageID #:3523
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`cannot be liable as control persons under § 20(a) of the Securities Exchange Act, 15 U.S.C. §
`78t(a), because plaintiff does not state a claim for an underlying violation of § 10(b).
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`I. Material Falsity
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`
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`Under the PSLRA, a complaint containing a Rule 10b-5 claim must “specify each
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`statement that is allegedly misleading, the reasons why it is so, and, if based on information and
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`belief, what specific facts support that information and belief.” Tellabs I, 437 F.3d at 595 (citing
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`15 U.S.C. § 78u–4(b)(1)). That does not mean that a complaint “automatically survives” if it states
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`all the known facts that might support an inference of falsity, nor that it fails if it “leaves out a
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`redundant detail.” Tellabs I, 437 F.3d at 595. “[T]he relevant question is ‘whether the facts alleged
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`are sufficient to support a reasonable belief as to the misleading nature of the statement or
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`omission.’” Id. (quoting Novak v. Kasaks, 216 F.3d 300, 314 n.1 (2d Cir. 2000)). “A litany of
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`alleged false statements, unaccompanied by the pleading of specific facts indicating why those
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`statements were false, does not meet” the standard set by the PSLRA. Metzler Inv. GMBH v.
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`Corinthian Colls., Inc., 540 F.3d 1049, 1070 (9th Cir. 2008).
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`
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`Plaintiffs list all of the materially misleading statements and omissions defendants are
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`alleged to have made in a thirty-one page, eighty-four-paragraph section of the Third Amended
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`Complaint. (3d Am. Compl. ¶¶ 140-224.) The Court previously held that plaintiff had not alleged
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`sufficiently “specific facts to demonstrate when the 2Ku problems showed themselves to be of
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`[such] . . . magnitude” that they made the challenged statements false, at the time defendants made
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`them, for failing to disclose the 2Ku problems or their severity. Pierrelouis, 414 F. Supp. 3d at
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`1174 (internal quotation marks and citations omitted). Plaintiff had alleged that Gogo tracked
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`service outages, the individual defendants had access to the outage reports, and the outage reports
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`showed that service availability had dropped; but without allegations bearing on “when the data
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`10
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 11 of 23 PageID #:3524
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`revealed that the de-icing problem had caused a precipitous drop in availability, or when it became
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`clear that costly remediation efforts were necessary,” the Court reasoned, plaintiff had not made
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`sufficiently specific allegations to permit a plausible inference that defendants’ statements were
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`false when made. Id.
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`Defendant argues that the Third Amended Complaint suffers from the same defects, but
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`the Court disagrees. The new former-employee allegations, combined with the allegations
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`establishing the importance for Gogo’s financial health of keeping to the 2Ku installation schedule,
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`correct this deficiency. The former-employee allegations, particularly the allegations of FE-1,
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`show that the de-icing fluid issue had begun to manifest itself prior to the beginning of the class
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`period on February 27, 2017. According to FE-1, a dozen planes—12% of Gogo’s 2Ku fleet, at
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`that time—were experiencing problems. Such a high failure rate among 2Ku systems in the field
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`would have been an extremely ominous sign, given the critical importance of the 2Ku product to
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`Gogo’s fortunes. Gogo was forced to make extensive efforts, beginning before the class period, to
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`correct the problem, and the former-employee allegations show that Gogo’s efforts involved not
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`only extensive engineering and technical work, including the acquisition and testing of an old
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`airplane fuselage, but also preparations to clear potential regulatory hurdles by obtaining new
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`STCs, if necessary.
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`True, these allegations still lack certain specifics that might make plaintiff’s claim more
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`convincing, but the claim need not be airtight to survive a motion to dismiss. At this stage, the
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`Court must ensure that “the grounds for the plaintiff’s suspicions
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`.
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`.
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`. make the
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`allegations plausible,” while “remain[ing] sensitive to information asymmetries that may prevent
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`[plaintiff] from offering more detail” before he has had the benefit of discovery. See Pirelli
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`Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 443 (7th Cir.
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`11
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`2011); see Pension Tr. Fund for Operating Engineers v. DeVry Educ. Grp., Inc., No. 16 C 5198,
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`2017 WL 6039926, at *8-9 (N.D. Ill. Dec. 6, 2017). Given the extent of the company’s efforts to
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`address the de-icing problem and the importance of the 2Ku product, and given the limited
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`information available to plaintiff concerning Gogo’s internal deliberations and operations, plaintiff
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`has alleged enough factual matter to make it at least plausible that the de-icing problem had shown
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`itself to be of a “sufficient magnitude” to make defendants’ statements misleading at the time they
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`were made. Cf. Pierrelouis, 414 F. Supp. 3d at 1174-75 (citing DeVry, 2017 WL 6039926, at *8-
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`9, and Jones v. Corus Bankshares, Inc., 701 F. Supp. 2d 1014, 1020-21 (N.D. Ill. 2010)).
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`II.
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`Scienter
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`As stated above, the PSLRA requires plaintiffs to make not general but particularized
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`allegations of “facts giving rise to a strong inference that the defendant acted with the required
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`state of mind.” 15 U.S.C. § 78u-4. A “strong inference” of scienter is one that is “cogent and at
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`least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314;
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`see id. at 323-24. The Court previously held that plaintiff did not make sufficiently particularized
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`allegations of facts giving rise to a strong inference of scienter because he did not allege when
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`defendants knew or should have known of the magnitude of the de-icing problem. Defendants
`
`argue that plaintiff has not corrected this deficiency. As above, the Court disagrees.
`
`Plaintiff has added particularized allegations based on accounts of former employees
`
`demonstrating that, by the beginning of the class period, an ominously large percentage of the 2Ku
`
`systems in operation had experienced problems, and Gogo was engaged in an extensive internal
`
`effort to assess and correct the de-icing fluid problem in late 2016 and early 2017. Further, plaintiff
`
`has explained in more detail that not only was the 2Ku product central to Gogo’s success, but also
`
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 13 of 23 PageID #:3526
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`the timing of its rollout was critical, and any disruption to Gogo’s installation plans risked
`
`endangering Gogo’s financial position.
`
`Adding these new allegations to the old ones changes the relative strength of the competing
`
`inferences. Previously, the Court concluded that, “because the complaint contains so little factual
`
`detail about what defendants knew and when, there might be any of a number of different plausible
`
`explanations for why defendants did not disclose more facts about the 2Ku de-icing problems to
`
`investors at an earlier date.” Pierrelouis, 414 F. Supp. 3d at 1176.
`
`For example, defendants could have reasonably believed subordinates who told
`them erroneously that the problem was not serious or widespread and could be
`easily repaired or avoided, and it may have taken time to realize that they were
`wrong. . . . They may have thought outages were caused by other factors apart from
`the de-icing fluid that were easier to fix . . . ; they may not have known how
`expensive and difficult the necessary repairs would be at first; the weather may
`have been different from what they expected, preventing the problem from
`revealing itself right away or worsening it once it did, and so on and so forth.
`
`
`Id. The Court relied on Tellabs II, which explained that a fraudulent inference is not “cogent” if
`it is only one of many possible explanations:
`
`
`Suppose a person woke up one morning with a sharp pain in his abdomen. He
`thought it was due to a recent operation to remove his gall bladder, but realized it
`could equally well have been due to any number of other things. The inference that
`it was due to the operation could not be thought cogent.
`
` 513 F.3d at 710-11; see Pierrelouis, 414 F. Supp. 3d at 1176-77.
`
`
`
`In light of the new allegations in the Third Amended Complaint, the fraudulent inference
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`is no longer essentially speculative. This case is now less like the above-quoted hypothetical in the
`
`Tellabs II decision and more like the Tellabs case itself. In Tellabs, the defendant company
`
`allegedly “paint[ed] the prospects” for its “key products” in misleadingly “rosy hues,” Tellabs II,
`
`513 F.3d at 710, by failing to acknowledge in public statements that there had been a reduction in
`
`orders for its “flagship” product and that orders for the flagship product’s “heralded successor”
`
`had not materialized, id. at 709, due to “the bursting of the fiber-optics bubble,” id. at 706. The
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 14 of 23 PageID #:3527
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`Seventh Circuit explained that it was “exceedingly unlikely” that the defendants’ misleading
`
`statements were “the result of merely careless mistakes at the management level . . . rather than of
`
`an intent to deceive or a reckless indifference to whether the statements were misleading,” because
`
`the challenged statements concerned the company’s “most important products.” Id. at 709. It was
`
`“very hard to credit” that “no member of the company’s senior management who was involved in
`
`authorizing or making public statements about the demand” for these products “knew that they
`
`were false,” at least in the absence of any “plausible story” to the contrary. Id.
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`Similarly, in this case, it seems unlikely, given the importance of the 2Ku product to Gogo’s
`
`fortunes and the scale of the internal effort to fix the de-icing problem, that Gogo and members of
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`“senior management” such as the individual defendants were unaware of the magnitude of the
`
`problem. Indeed, the former employees specifically allege that defendant Wade, the company’s
`
`COO, did know of these problems at the start of the class period. Further, plaintiff alleges that
`
`defendants Small and Wade made private statements to an investor in February 2018 that showed
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`that at least by that time, still several months before the full truth came out, they were aware of the
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`problem to a greater extent than they had revealed in public comments. (3d Am. Compl. ¶ 228.)
`
`Defendants argue that the Court must “discount,” Higginbotham, 495 F.3d at 757, the value
`
`of allegations based on information from anonymous sources such as the numbered—but not
`
`named—former employees mentioned in the Third Amended Complaint. The argument has some
`
`force, but this Court has previously recognized that the value of allegations from anonymous
`
`sources “need not be discounted to zero,” if the accounts of the anonymous sources are “set forth
`
`in ‘convincing detail’ and the witnesses provide enough information about their jobs to
`
`demonstrate that they ‘were in a position to know at first hand the facts to which they are prepared
`
`to testify.’” Pension Tr. Fund for Operating Engineers v. DeVry Educ. Grp., Inc., No. 16 C 5198,
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`Case: 1:18-cv-04473 Document #: 115 Filed: 04/26/21 Page 15 of 23 PageID #:3528
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`2018 WL 6714326, at *3 n.2 (N.D. Ill. Dec. 20, 2018) (quoting Tellabs II, 513 F.3d at 711-12). As
`
`in DeVry, here the former employees’ accounts are “rendered in sufficient detail to afford them a
`
`high degree of reliability.” 2018 WL 6714326, at *3 n.2.
`
`Defendants argue that plaintiff has not established a motive for them to lie to Gogo’s
`
`investors. In fact, defendants argue, Small purchased $100,000 shares of Gogo stock in November
`
`2017, and, according to defendants, this all but proves that he was totally unaware that Gogo’s
`
`stock value was artificially inflated. The Court does not find this line of argument convincing.
`
`Plaintiff does not need to allege any motive, see Tellabs, 551 U.S. at 325, and plaintiff succeeds
`
`in making allegations that permit a strong inference of scienter even without allegations that
`
`directly establish a clear motive or demonstrate that the fraud was directly or purely in the
`
`individual defendants’ own rational economic self-interest. The point

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