Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 1 of 144
UNITED STATES DISTRICT COURT
DISTRICT OF KANSAS
WAYNE E. ANDERSON, Individually and on ) Civil Action No. 2:13-cv-02261-EFM-TJJ Behalf of All Others Similarly Situated, ) ) CLASS ACTION Plaintiff, ) CONSOLIDATED COMPLAINT FOR ) vs. VIOLATIONS OF THE FEDERAL ) ) SECURITIES LAWS SPIRIT AEROSYSTEMS HOLDINGS, INC., ) JEFFREY L. TURNER, PHILIP D. ) DEMAND FOR JURY TRIAL ANDERSON, ALEXANDER K. KUMMANT, ) AND TERRY J. GEORGE, ) ) Defendants. ) )
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TABLE OF CONTENTS
Page
I. INTRODUCTION ...... 2
II. JURISDICTION AND VENUE ...... 7
III. PARTIES ...... 7
A. Lead Plaintiffs ...... 7
B. Defendants ...... 8
IV. DEFENDANTS’ FRAUDULENT SCHEME AND COURSE OF BUSINESS ...... 12
V. BACKGROUND AND OVERVIEW OF THE FRAUD ...... 12
A. Spirit’s Drive for Independence ...... 12
B. Spirit’s Accounting Rules and GAAP Requirements ...... 15
C. Spirit’s Rapid Expansion Met Significant Headwinds ...... 16
VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS
ANDOMISSIONS ...... 20
A. Third Quarter 2011 Earnings Release and Conference Call, and November
30, 2011 Credit Suisse Aerospace & Defense Conference ...... 20
B. Fourth Quarter and Full-Year 2011 Earnings Release and Conference Call,
and February 22, 2012 Barclays Industrial Select Conference ...... 30
C. Defendants’ False and Misleading Statements During Spirit’s 2012
Investor Conference ...... 39
D. First Quarter 2012 Earnings Release and Conference Call, and Deutsche
Bank Global Industrials and Basic Materials Conference ...... 49
E. Second Quarter 2012 Earnings Release and Conference Call, Jefferies Group, Inc. Global Industrial and Aerospace & Defense Conference, RBC Capital Market Global Industrials Conference and Morgan Stanley
Industrials and Autos Conference ...... 58
VII. THE TRUTH ABOUT DEFENDANTS’ FALSE AND MISLEADING
STATEMENTS AND OMISSIONS EMERGES ...... 68
VIII. SPIRIT’S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD ...... 76
A. Description of Contract Accounting ...... 79 - i - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 3 of 144
Page
B. Increased Costs Were Known and Improperly Deferred ...... 81
C. Boeing 787 Program ...... 82
D. Gulfstream Programs and Bogus Cost Savings ...... 83
E. Spirit’s Financial Results Violated Fundamental Accounting Policies ...... 85
IX. ADDITIONAL INDICIA OF DEFENDANTS’ SCIENTER ...... 87
X. CORROBORATING WITNESSES ...... 99
XI. LOSS CAUSATION/ECONOMIC LOSS ...... 127
XII. CLASS ACTION ALLEGATIONS ...... 129
XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-
MARKET DOCTRINE ...... 131
XIV. NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS ...... 133
COUNTI ...... 134
COUNTII ...... 137
XV. PRAYER FOR RELIEF ...... 138
XVI. JURY DEMAND ...... 139
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1. Lead Plaintiffs District No. 9, I.A. of M. & A.W. Pension and Welfare Trusts
(“District No. 9”) and Arkansas Teacher Retirement System (“Arkansas Teacher”) (collectively,
“Lead Plaintiffs”), by their undersigned counsel, bring this action individually and on behalf of all persons or entities who purchased or otherwise acquired the securities of Spirit AeroSystems
Holdings, Inc. (“Spirit” or the “Company”) during the period from November 3, 2011 through
October 24, 2012, inclusive (the “Class Period”), and were damaged thereby (the “Class”)
Excluded from the Class are defendants (as defined herein), present or former officers and directors
of Spirit, their immediate family members, (as defined in 17 C.F.R. §229.404, Instructions (1)(a)(iii)
and (1)(b)(ii)), and their legal representatives, heirs, successors or assigns, and any entity in which
defendants have or had a controlling interest. This action seeks to recover damages caused by
defendants’ violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange
Act”), and Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder.
2. Lead Plaintiffs allege the following based upon personal knowledge as to themselves
and their own acts and upon information and belief as to all other matters. Lead Plaintiffs’
information and belief is based on, inter alia, their counsel’s independent investigation, review and
analysis of: (i) Spirit’s public filings with the SEC; (ii) documents and information disclosed in other
litigation naming Spirit and/or its directors as defendants or nominal defendants, arising from the
same misstatements or circumstances as this action; (iii) research reports by securities and financial
analysts regarding Spirit; (iv) transcripts of Spirit investor conference calls; (v) Spirit press releases
and media reports; (vi) economic analyses of the historical movement, pricing and trading data for publicly traded Spirit common stock; (vii) consultation with relevant experts; (viii) interviews with
former Spirit employees (identified herein as Corroborating Witness (“CW__”), see §X, ¶¶193-202);
and (ix) other publicly available material, data and analyses identified herein. The investigation into - 1 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 5 of 144
the factual allegations contained herein is ongoing, and many of the relevant facts are known only by
the defendants named herein, or are exclusively within their custody or control. Lead Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein
after a reasonable opportunity for discovery.
I. INTRODUCTION
This securities fraud class action concerns Spirit’s desperate efforts to reinvent itself
as more than just a contract build-to-print aerostructure supplier to its former parent, The Boeing
Company (“Boeing”), but as an independent industry leader in the design and manufacture of
cutting-edge aerostructures. As numerous former Spirit employees confirm, however, the Company
“bit off more than it could chew” and grossly underbid and mismanaged its development programs,
worsening the downward spiral of Spirit’s massive and ever-mounting cost overruns. 1
4. The individual defendants – all top officers of the Company – were acutely aware of
the pervasive production problems and cost overruns through their receipt and monitoring of detailed
reports, and because of the critical importance of Spirit’s development programs. Yet, defendants
concealed these adverse business conditions from investors. Instead, defendants repeatedly and
falsely assured investors throughout the Class Period that the Company was making great strides to
improve efficiencies and minimize costs on its most significant new design and development
contracts, including its flagship Boeing 787 and Gulfstream programs. Defendants also falsely told
investors that these important programs were “on track,” progressing well and “really screaming
1 The accounts of numerous former longtime Spirit employees who worked for the Company in its Tulsa and Wichita facilities and headquarters during the Class Period and who had direct first-hand knowledge of the Company’s contracts, production, design, engineering and manufacturing problems, and cost overruns (see §X, ¶¶193-202) confirm that defendants’ Class Period statements were false and misleading when made and that defendants knew or recklessly disregarded the internal information known or available to them that was inconsistent with defendants’ public statements.
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down the cost curves,” all the while omitting that the projects were plagued by major design and
engineering flaws and production problems that resulted in repeated delays and massive cost
overruns. Indeed, Spirit was so desperate to make up for delayed deliveries of wing components
contracted to Israel Aerospace Industries (“IAI”) that it routinely chartered huge Antanov cargo planes to expedite delivery of the parts – at a staggering cost of almost $1 million per flight .
5. Deliberately concealing these serious and pervasive design and production problems
which were causing the company to incur and project severe cost overruns, and disregarding internal
cost forecasts and cost reports which demonstrated that the development programs were woefully out
of control, defendants violated their own accounting rules to avoid recording a forward loss and
caused the Company to falsely report its financial results in violation of Generally Accepted
Accounting Procedures (“GAAP”), SEC rules and Spirit’s own stated accounting policy.
6. Throughout the Class Period, defendants concealed these serious and pervasive
design and manufacturing problems and resulting costs overrun and, instead, repeatedly and falsely
assured the market that the Company was continually monitoring and “updating” its profitability performance, which reflected “solid core performance.” Defendants assured investors that “cost
reduction” was a “top priority,” and repeatedly claimed in analyst conference calls, SEC filings and
investor conferences that they were “ intensely focused on productivity and efficiency
improvements ” because cost reduction was the Company’s “ top priority .” In particular, defendant
Terry J. George emphasized the Company’s “ laser focus” on reducing 787 costs, detailing Spirit’s
“regimented” and “systematic” process to review costs on a “daily, weekly, monthly, quarterly” basis. And, defendants claimed that “cost improvements” on Spirit’s marquee – but hugely
expensive – 787 program were “going very well” and “ tracking per plan .”
7. Similarly, defendants boasted about the “momentum” for the Company’s new design
and manufacturing projects for its other major customer, Gulfstream, stating they were seeing - 3 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 7 of 144
“major improvements ” in the “cost curve flow” for the Gulfstream 280 program, in particular. Even before the start of the Class Period, defendants claimed that their other Gulfstream project, the 650 program, was a “long, long ways from a forward loss .” When questioned during the Class Period
about potential concerns over Spirit’s profitability on the 650 program, defendant Jeffrey L. Turner
stated “I’m very bullish on the G650,” claiming the Company was making “significant progress.”
Turner added that both the G650 and G280 programs were making “ [g]ood progress, really screaming down the cost curves on both programs and feeling better about it .” Defendant Philip
D. Anderson similarly claimed the Company was making “substantial improvements” on costs for both the G280 and G650 programs.
8. Analysts and investors were thoroughly deceived by defendants’ misstatements and
omissions. In fact, analysts adopted and repeated defendants’ rosy claims of cost reduction and
improved efficiency in reports evaluating and recommending Spirit stock to investors. For example,
a Wells Fargo Securities, LLC analyst reported that “Spirit has made substantial progress and probably is running ahead of its cost reduction targets.” The analyst further stated that Spirit’s progress on costs reductions was only expected to continue. Similarly, The Buckingham Research
Group issued a “solidly bullish” recommendation for Spirit in March 2012, explaining that the
Company was “executing well on the 787-8 production program with costs at or below projected
levels.”
9. In reality, defendants had little or no control over cost overruns, which were being
incurred at alarming rates throughout the Class Period because the Company failed to implement
cost controls or reductions, improve manufacturing conditions and quality control, or secure supply
chain costs savings as they had claimed throughout the Class Period. Contrary to their consistently positive statements about Spirit’s most important Boeing and Gulfstream programs, the Company
was in fact experiencing significantly “increasing supply chain, factory support, and labor costs.” - 4 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 8 of 144
According to information obtained from former Spirit employees with first-hand knowledge of the
Company’s internal workings and financial conditions, and as confirmed by financial information
subsequently released by the Company, Spirit and the individual defendants were acutely aware of
the cost overruns on the development programs, which were regularly discussed during quarterly
Business Management Group meetings and referred to by defendants Turner and Anderson with
charts during the meetings that displayed the financial condition of the Gulfstream 650 program,
showing the program was behind schedule and over budget. A former Spirit Cost Analyst at Spirit’s
Tulsa facility confirmed that management received a financial report each quarter that detailed all
external costs incurred for development programs during the quarter, including costs of vendors and
suppliers. This report was submitted to Spirit’s main finance group, which handled reporting on
“internal costs,” and was then “thoroughly vetted” by management and passed along to Spirit
corporate headquarters in Wichita and distributed to Turner, the Chief Executive Officer, and
Anderson, Spirit’s Chief Financial Officer. These reports clearly showed the severity and increasing
nature of cost overruns on Spirit’s most important development programs.
10. Despite the extensive internal documentation and reports regarding the Company’s
inability to control and reduce costs, defendants were able to hide the Company’s deteriorating
financial condition and avoid reporting the mounting losses by violating the Company’s own
accounting policies, SEC rules and GAAP, which required Spirit to immediately record and report
forward losses on their development programs when they became reasonably certain that the
Company would be unable to achieve forecasted costs. Under GAAP and Spirit’s own accounting policies, the Company was required to immediately record forward losses on its development programs by the start of the Class Period, at least as early as the fourth quarter of 2011. To maintain
Spirit’s inflated stock price, however, defendants engaged in a scheme to avoid reporting a forward
loss on the Boeing 787 and Gulfstream 280 and 650 programs by deliberately and improperly - 5 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 9 of 144
deferring unrecoverable production costs and failing to record forward losses in the quarters incurred. As a result, defendants were able to report these programs at zero or low margins when, in truth, they were incurring massive unrecoverable losses.
11. Defendants’ scheme came to a crashing end on October 25, 2012, when Spirit
“dropped a bombshell on investors” (as one analyst put it) and announced a massive $590 million forward-loss charge. News of Spirit’s massive charge caused the Company’s stock price to plummet
30% (or $6.55 per share), wiping out nearly $800 million.
12. Analysts immediately questioned management’s credibility: “ [H]ow could such a large charge not have been better anticipated? ” Other analysts put it more bluntly, calling the announcement a “surprise” and a “blow to credibility.” Still other analysts honed in on defendants’ now-apparent accounting manipulations to avoid disclosing the massive cost overruns, calling the charge “doubly bad because it . . . undermines the integrity and accuracy of the accounting assumptions that underpin [Spirit’s] GAAP earnings” and noting the charge – which was equal to one-third of the Company’s earnings before interest and tax – “damages the credibility of the accounting assumptions behind [Spirit’s] GAAP earnings” rendering “all of the assumptions underlying accounting profit . . . now likely to be viewed with skepticism by the market.” Shortly thereafter, the Company announced that its Chief Executive Officer, defendant Turner, had
“resigned.”
13. The SEC also took note of the Company’s extraordinarily large and inexplicably sudden charge and within days of its announcement, advised Spirit that it was initiating an inquiry focused on the timing of forward losses recognized in the third quarter of 2012. As of the date of this Complaint, the SEC’s investigation remains ongoing.
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II. JURISDICTION AND VENUE
14. The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act (15
U.S.C. §§78j(b), 78t(a) and 78t-1) and Rule 10b-5 (17 C.F.R. §240.10b-5), promulgated thereunder by the SEC. Jurisdiction is conferred by §27 of the Exchange Act (15 U.S.C. §78aa). Venue is proper pursuant to §27 of the Exchange Act. Spirit’s headquarters are located at 3801 South Oliver,
Wichita, Kansas and many of the acts and transactions constituting the violations of the securities
laws alleged herein occurred in this District.
15. In connection with the acts alleged in this Complaint, defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
III. PARTIES
A. Lead Plaintiffs
16. District No. 9 provides retirement and welfare benefits to current and retired members
of its affiliated local unions. During the Class Period, District No. 9 purchased and held shares of
Spirit common stock as detailed in its certification filed with the Court in support of its motion to be
appointed Lead Plaintiff and incorporated by reference herein. As a result of the defendants’
conduct detailed in this Complaint, District No. 9 suffered damages in connection with its purchases
of Spirit securities.
17. Arkansas Teacher was established in 1937 to provide retirement benefits for the
employees of Arkansas’ education community and manages over $10 billion in assets. During the
Class Period, Arkansas Teacher purchased and held shares of Spirit common stock as detailed in its
certification filed with the Court in support of its motion to be appointed Lead Plaintiff and
incorporated by reference herein. As a result of the defendants’ conduct detailed in this Complaint,
Arkansas Teacher suffered damages in connection with its purchases of Spirit securities.
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B. Defendants
18. Spirit purports to be one of the largest non-Original Equipment Manufacturer
(“OEM”) designers and manufacturers of commercial aerostructures in the world. Spirit is headquartered at 3801 South Oliver, Wichita, Kansas. At all relevant times, Spirit common stock traded under the symbol “SPR” on the New York Stock Exchange (“NYSE”), which is an efficient market. According to Spirit’s 2012 Annual Report on Form 10-K, as of February 21, 2013, there were over 119 million shares of Spirit’s common stock outstanding.
19. Jeffrey L. Turner (“Turner”) was Chief Executive Officer (“CEO”), President and a director of Spirit throughout the Class Period. In the wake of Spirit’s massive $590 million charge, defendant Turner announced his resignation from the Company.
(a) During the Class Period, defendant Turner was responsible for the issuance of false and misleading statements about Spirit and failed to disclose the true facts about Spirit’s growing inefficiencies and cost overruns. See, e.g. , ¶¶48, 49, 50-51(a)-(b), (d)-(e), 54-59, 65(a), (d)-
(e), 71, 75, 88, 92-93, 96, 98, 100, 102, 107-108, 113, 115-117, 122-123. In addition to issuing false and misleading statements throughout the Class Period, Turner repeatedly had the opportunity to correct the misstatements and omissions by and on behalf of Spirit, and failed to do so.
(b) As CEO, President and a member of the Board of Directors, Turner was responsible for directing Spirit’s financial and business affairs. Specifically, during conference calls with analysts and investors, Turner repeatedly held himself out as knowledgeable about Spirit’s 787 and Gulfstream programs, cost reduction initiatives, labor and supply chain issues, and the
Company’s business prospects and financial results. Moreover, in conjunction with each of Spirit’s
Class Period financial reports publicly filed with the SEC during the Class Period, Turner assured investors that he, together with defendant Anderson: (i) was personally “establishing and maintaining disclosure controls and procedures . . . and internal control over financial reporting”; - 8 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 12 of 144
and (ii) had “[e]valuated the effectiveness of the registrant’s disclosure controls and procedures.” At
no time during the Class Period did Turner assert that he was not aware of material aspects of
Spirit’s core business operations, including the existing and forecasted costs associated with Spirit’s
development programs.
(c) In 2011 and 2012, Turner received over $4.8 million in total compensation.
During the Class Period, Turner sold 42,250 shares of his Spirit stock for proceeds of over $1.0
million.
20. Philip D. Anderson (“Anderson”) was, at all relevant times, Chief Financial Officer
(“CFO”) of Spirit. Effective September 23, 2013, Anderson transitioned to Senior Vice President –
Defense and Contracts.
(a) During the Class Period, defendant Anderson was responsible for the issuance
of false and misleading statements about Spirit and failed to disclose the true facts about Spirit’s
growing inefficiencies and cost overruns. See, e.g. , ¶¶48, 50, 51(c), 65(b)-(c), 68-71, 76-78, 92, 98,
101, 104, 118, 122, 127, 129. In addition to issuing false and misleading statements throughout the
Class Period, Anderson repeatedly had the opportunity to correct the misstatements and omissions by and on behalf of Spirit, and failed to do so.
(b) As CFO, Anderson was responsible for directing Spirit’s financial and business affairs. Specifically, during conference calls with analysts and investors, Anderson
repeatedly held himself out as knowledgeable about Spirit’s 787, Gulfstream and other programs,
cost reduction initiatives, labor and supply chain issues, and the Company’s business prospects and
financial results. Moreover, in conjunction with each of Spirit’s Class Period financial reports publicly filed with the SEC during the Class Period, Anderson assured investors that he, together
with defendant Turner: (i) was personally “establishing and maintaining disclosure controls and procedures . . . and internal control over financial reporting”; and (ii) had “[e]valuated the - 9 - 930043_1
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effectiveness of the registrant’s disclosure controls and procedures.” At no time during the Class
Period did Anderson assert that he was not aware of material aspects of Spirit’s core business
operations, including the existing and forecasted costs associated with Spirit’s development
programs.
(c) In 2011 and 2012, Anderson received over $2.3 million in total compensation.
During the Class Period, Anderson sold 4,694 shares of his Spirit stock for proceeds of $115,727.
21. Alexander K. Kummant (“Kummant”) was, at the start of Class Period and until his
departure in September 2012, the Senior Vice President (“SVP”) of Oklahoma Operations at Spirit.
(a) During the Class Period, defendant Kummant was responsible for the issuance
of false and misleading statements about Spirit and failed to disclose the true facts about Spirit’s
growing inefficiencies and cost overruns. See, e.g. , ¶¶81-84. In addition to issuing false and
misleading statements throughout the Class Period, Kummant repeatedly had the opportunity to
correct the misstatements and omissions by and on behalf of Spirit, and failed to do so.
(b) As SVP of Oklahoma Operations, Kummant was responsible for the
management and oversight of design and manufacturing at Spirit’s Tulsa and McAlester, Oklahoma,
facilities, including wing programs for the 787 and Gulfstream jets. Kummant repeatedly held
himself out as knowledgeable about Spirit’s Oklahoma operations, including cost reduction
initiatives, labor and supply chain issues, for example, at Spirit’s March 2012 Investor Conference.
At no time during the Class Period did Kummant assert that he was not aware of material aspects of
Spirit’s core business operations, including the existing and forecasted costs associated with Spirit’s
development programs.
22. Terry J. George (“George”) is, and at all relevant times was, Vice President (“VP”) of
Spirit’s 787 Program.
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(a) During the Class Period, defendant George was responsible for the issuance of
false and misleading statements about Spirit and failed to disclose the true facts about Spirit’s
growing inefficiencies and cost overruns. See, e.g. , ¶¶85-88. In addition to issuing false and
misleading statements throughout the Class Period, George repeatedly had the opportunity to correct
the misstatements and omissions by and on behalf of Spirit, and failed to do so.
(b) As VP of Spirit’s 787 program, George was responsible for the management
and oversight of all aspects of the 787 program. George repeatedly held himself out as
knowledgeable about the 787 program, including on matters pertaining to the program’s forecasts,
cost reduction initiatives and labor and supply chain. At no time during the Class Period did George
assert that he was not aware of material aspects of Spirit’s core business operations, including the
existing and forecasted costs associated with Spirit’s 787 development program.
23. Defendants, because of their positions with the Company, substantial stock ownership
and responsibility for and oversight of Spirit’s critical development programs, possessed the power
and authority to control the contents of Spirit’s quarterly and annual reports, press releases, and presentations to securities analysts, money and portfolio managers and individual and institutional
investors. They were provided with copies of the Company’s reports and press releases alleged
herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions with the Company,
and their access to material non-public information available to them but not to the public, these
defendants knew that the adverse facts specified herein had not been disclosed to and were being
concealed from the public and that the positive representations being made were then materially
false and misleading.
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IV. DEFENDANTS’ FRAUDULENT SCHEME AND COURSE OF BUSINESS
24. Defendants are liable for knowingly or recklessly: (i) making false statements; or (ii)
failing to disclose adverse facts known to them about Spirit. Defendants’ fraudulent scheme and
course of business that operated as a fraud or deceit on purchasers of Spirit securities was a success,
as it: (i) deceived the investing public regarding Spirit’s prospects and business; (ii) artificially
inflated the price of Spirit common stock; (iii) caused Lead Plaintiffs and other members of the Class
to purchase Spirit common stock at inflated prices; and (iv) permitted the officer and directors of
Spirit to sell 237,749 shares of their Spirit stock at artificially inflated prices during the Class Period
for proceeds of over $5.8 million.
V. BACKGROUND AND OVERVIEW OF THE FRAUD
A. Spirit’s Drive for Independence
25. Spirit was formed in 2005 when Onex Corporation, a private equity investment firm,
acquired the Wichita Division of Boeing, including its Tulsa and McAlester, Oklahoma facilities, in
a transaction valued at $1.2 billion. Subsequently, Spirit held its initial public offering in November
2006, selling 55.1 million shares at $26.00, raising $1.43 billion.
26. Spirit prides itself on being one of the world’s largest, independent non- OEM
designers and manufacturers of aerostructures for commercial, military and business/regional
aircraft. Aerostructures are the structural components of an airframe, which include fuselage
sections, propulsion systems such as nacelles, struts, pylons and other engine components, and wing
systems and flight control surfaces. Headquartered in Wichita, Kansas, Spirit is organized into three business segments: (i) Fuselage Systems, which operates in Wichita; Kinston, North Carolina; and
Saint-Nazare, France; (ii) Propulsion Systems, which operates in Wichita; and (iii) Wing Systems,
which operates in Kinston; Tulsa and McAlester, Oklahoma; Prestwick, Scotland; and Subang,
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Malaysia. In 2011, Spirit derived 49.9% of revenues from its Fuselage segment, 25.1% from
Propulsion, and 24.8% from Wing.
27. Following the spin-off, Spirit became Boeing’s largest aerostructures supplier, as it procured long-term, volume-based supply contracts to manufacture and supply components for every
Boeing commercial aircraft currently in production, including the 737, 747, 767 and 777. Spirit’s
so-called “legacy” or “heritage” programs lacked any meaningful design/engineering component and
required Spirit to simply manufacture aerostructures according to Boeing’s already established
design specifications (i.e. , “build-to-print”).
28. In an effort to diversify itself away from Boeing, Spirit embarked on an enormously
ambitious challenge: establish itself as a market-leading design and manufacturing operation. As
stated by CW72, Spirit “wanted to go out and show the world, ‘We don’t need Boeing.’” As a stand-
alone supplier, Spirit was now in competition with other non-OEM aerostructure suppliers and, thus,
had to prove it could be more efficient than its competitors, both as a supplier to Boeing and much
needed new customers. Turner emphasized the importance of diversifying Spirit’s business: “From
the start, the goal has been to grow, diversify its customers and diversify geographically.”
29. To build its independent identity, Spirit made its first key acquisition in 2006,
acquiring BAE Systems’ U.K. aerostructures division. The transaction gave Spirit “a seat at the
table with Airbus.” The establishment of a European presence and other global investments powered
Spirit to the status of Airbus’ largest supplier, securing a $2.75 billion contract for fuselage
structures and wing leading edges on Airbus’ A350 XWB (extra wide body) commercial jetliner.
2 Corroborating Witness 7 (“CW7”) was employed as a Manufacturing Engineer at Spirit from 2006, right after the Company was formed, until August 2012. CW7 was in meetings with people in high-level positions at Spirit, and therefore, had insight into the problems the Company was experiencing – especially problems related to the Gulfstream programs. See ¶199.
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30. Spirit’s quest for expansion came to a height in 2008, when along with the A350
contract, Spirit landed two contracts with Gulfstream, one with Rolls Royce, and one with
Mitsubishi, representing much needed new customers. On March 13, 2008, Spirit announced it had been awarded a contract worth over $1 billion to design and produce a flight-ready wing for the
G650, Gulfstream’s flagship business jet. Turner would comment on the new business, saying: “It is
such a great opportunity for us to gain such a customer.” The Gulfstream contract, Spirit’s first
foray into the business jet market, was a major breakthrough. The 650 program came with a price, to
secure the 650 contract, Spirit had hastily agreed to take on the smaller, unwanted Gulfstream 280
contract. Because Spirit lacked experience in the business jet market and was looking past the 280
to the 650, Spirit acquiesced to highly unfavorable contract terms on the 280, leaving it burdened
with a program destined to drain resources for years. 3
31. The very next day, Spirit announced it had contracted with Rolls-Royce to design, build and service the nacelle thrust reverser and engine components for the Gulfstream 650’s Rolls-
Royce BR725 engine. The Rolls-Royce deal was valued at $600 million.
32. Although the Gulfstream and Rolls-Royce business jets programs are vital to Spirit’s
diversification away from Boeing, Spirit’s “most important program” is the Boeing 787 Dreamliner
(“787”). In 2003, Spirit (then Boeing’s Wichita Division) began work on an exclusive, long-term
contract to supply fuselage and wing components for the 787-8 Dreamliner, Boeing’s newest and the
world’s most technologically advanced commercial airliner, as well as the 787-9, a larger, variant
model of the 787-8. The 787 was praised for its revolutionary design and new technologies, as it
was the first commercial airliner to be made from carbon composites. Spirit and other suppliers
3 Although they had already been working on the program for nearly two years, Spirit revealed it would design and build the wing for Gulfstream’s 250 super mid-sized business jet on October 6, 2008. On July 18, 2011, Gulfstream announced that it renamed the 250 as the 280.
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were called upon to develop new technologies and processes to enhance efficiencies in the build process. For example, the “carbon fibers are wound around a carbon barrel and baked – a departure
from traditional aluminum fuselage sections. Spirit call[ed] it a technology milestone.” Although praised at the time, Spirit’s design and build efforts would prove to be far more difficult than the
Company let on.
33. Under the 787 contract, Spirit was responsible for all necessary capital and equipment
investments required to eventually produce ten 787 shipsets per month, as well as certain support,
development and redesign engineering services. The 787 contract covered the entire life of the 787 programs, and was expected to generate substantial revenue for decades to come. Defendants
repeatedly emphasized the “long-term value” of the 787 program and touted the critical nature of this
watershed program, projected to account for 20% of Spirit’s sales by 2014.
B. Spirit’s Accounting Rules and GAAP Requirements
34. Throughout the Class Period, Spirit utilized contract accounting – specifically the
units of delivery method (a modification of the percentage-of-completion method) of accounting –
for forecasting and reporting the revenues and costs of its long term production contracts, including
on the Company’s development programs. Under this method, Spirit’s allocable costs are
recognized in the period that the units of production are delivered, and costs allocated to undelivered
units are deferred and reported as inventory. Deferring production costs is only allowed, however, if
those inventoried costs will be realizable, i.e. , if those costs will be recovered by sufficient future
revenues on a particular contract. If, however, total production costs to date plus estimated future
costs exceed total estimated revenue on a contract, the contract is considered to be in a “forward
loss” position and that loss must be immediately recognized. And, GAAP explicitly requires
recognition of the entire anticipated loss as soon as the loss becomes evident. In their Form 10-K
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filed December 31, 2011, Spirit described their accounting obligations with respect to forward-loss charges, as follows:
When the current estimates of total contract revenue and total contract cost indicate a loss, a provision for the entire loss on the contract, known as a forward-loss charge, is recorded to cost of sales in the period in which it becomes evident.
35. In some circumstances, the use of a “zero profit estimate” is allowed if it is impractical to estimate the final outcome of a particular contract. However, GAAP mandates that this “zero margin” estimate is allowed only if there is assurance that no loss will be incurred .
36. As explained herein, at all times during the Class Period, defendants violated GAAP,
SEC rules and Spirit’s own accounting policies by failing to timely recognize and report forward losses for the Boeing 787 and Gulfstream 280 and 650 programs in the quarters in which they were incurred. To maintain Spirit’s inflated stock price, defendants engaged in a scheme to avoid reporting a forward loss on the Boeing 787 and Gulfstream 280 and 650 programs by deliberately and improperly deferring unrecoverable production costs and failing to record forward losses in the quarters incurred. As a result, defendants were able to report these programs at zero or low margins when, in truth, they were incurring massive unrecoverable losses.
C. Spirit’s Rapid Expansion Met Significant Headwinds
37. Spirit’s rapid expansion and the hurried development of its product design capabilities created significant problems for the Company. For example, as Spirit’s Tulsa facility transitioned from a traditionally build-to-print facility to a design-and-build facility, the Company quickly expanded its Tulsa workforce from roughly 1,000 employees in 2005 to 3,000 during the Class
Period. And, because Spirit no longer had access to Boeing’s senior engineers and other valuable industry resources, it was forced to rely on less experienced, less knowledgeable engineers to implement and drive its development programs. The 787 program itself also proved troublesome; although originally scheduled to be in service by 2008, repeated significant delays pushed that date - 16 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 20 of 144
to 2011. These significant schedule slides exacerbated Spirit’s inability to simultaneously manage
multiple development programs.
38. Given the significance of Spirit’s development programs, investors and analysts were
intensely focused on the Company’s ability to achieve efficiencies and manage costs associated with
these programs, especially with respect to the 787 and Gulfstream programs. Of particular interest
was whether Spirit could successfully execute in line with defendants’ forecasted cost curves and preserve the fragile margins assigned to these development programs.
39. Given the poorly negotiated and thinly-margined business jet contracts, and the
additional costs inherent in design work, defendants expected to generate little or no profit on several
of the Company’s development programs heading into the Class Period, including the 787, 280, 650
and BR725 programs. Therefore, defendants reported the programs at zero (“break-even”) or low
margins, promising that a “cushion” had been built into the estimate to protect from any future
forward losses.4 These zero margin programs were particularly vulnerable to increased cost pressures because in the event the estimated costs for a given program exceeded program revenues by any measure, the Company was required to immediately recognize the entire loss in that quarter.
See infra §VIII.
40. It was critical then that the Company effectively manage and control the costs for
these programs. Fully aware of investors’ concerns, defendants painted a rosy picture that left
analysts and investors with the impression that they had taken significant steps to implement cost
improvements into the development programs, thereby preventing cost overruns and mitigating the
risk of a forward loss. Defendants touted that they were “pleased with the progress [our joint Spirit
4 During the Class Period, Spirit used a “zero profit estimate” or “zero margin” ( i.e. , break-even profit) on the 787 program and low margins on the 650 program until 2Q 2012 when it was reported as a “zero margin” program. The 280 program was identified as being in a forward-loss position.
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and Boeing 787 teams] are making as they work together closely to identify and implement cost
improvements for the program,” and assured investors that “expense management continues to be a
top priority for the Company as we expand our core programs and bring new programs into production.”
41. Defendants’ announcements in 2011 that the 787, 280, and 650 (which would include
the BR725 nacelle) were at or near certification and moving into full production signaled to the
market that Spirit had made progress overcoming the design and development challenges that had
historically affected those programs. And, analysts “believe[d] development risk peaked in 2011
with the move of the 787 into production as the most notable swing factor,” and that “as the balance
of the company’s development portfolio inches closer to production . . . [we] expect the company to
realize fewer development charges going forward.”
42. Heading into the Class Period, defendants repeatedly assured investors of its
“conservative assessments of our labor productivity and our cost curves” and that the “ 650 is a long,
long ways from a forward loss .” And, defendants emphasized that there was a cushion on the 650
and 787 programs’ margins to prevent them from slipping into a forward loss position, and that the
development programs are “in place where there’s adequate contingency for the risk.”
43. Despite knowing that they were unable to implement cost improvements, improve
factory conditions, and secure supply chain savings throughout the Class Period, defendants
continually reassured investors that Spirit was controlling costs, improving efficiencies and
effectively transitioning its development programs to commercial production according to each program’s forecasted cost curves. Easing investor concerns regarding Spirit’s developments programs by assuring that they had a “laser focus” on costs and efficiency improvements, defendants
emphasized that “cost reduction” was the “top priority on [the 787] program.” Defendants also
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reassured investors that perceived issues at the Tulsa facility were in hand, explaining that they were personally spending “a lot of time [in Tulsa] . . . making sure the changes are taking hold.”
44. As a result, investors believed Spirit was in fact “tracking per plan” on the 787 program, was “really screaming down the cost curves on both [Gulfstream] programs” and had
“turn[ed] the corner” on program write-offs and was successfully maintaining thin or zero margins
on the development programs. Indeed, on October 26, 2011, only days before the start of Class
Period, Auriga USA issued an analyst report aptly conveying the market sentiment following months
of assurances by defendants:
. . . [W]ith more than half of the company’s current programs under development, one-time costs and write-offs related to design changes have kept shares range bound throughout the past few years. Looking forward, we believe the company has begun to turn the corner, and expect write-offs to decelerate and free cash flow to turn positive into 2012 .
45. Unbeknownst to investors, however, and directly contrary to defendants’
representations, Spirit’s development programs were not “tracking per plan” and defendants were
not seeing the kinds of “substantial improvements” needed to meet forecasts. Far from “screaming
down the cost curves,” Spirit was experiencing significantly “increasing supply chain, factory
support, and labor costs,” which led to the development and implementation of a costly “recovery plan” in a last ditch effort to put the 787 program back on schedule. And, due to these pervasive and
known production problems and the resulting cost overruns occurring throughout the Class Period,
defendants knew or were reckless in not knowing that they were unable to achieve forecasted costs
and were unable to maintain the zero or low margins on its development programs. Thus,
defendants were required to immediately record forward losses on its development programs as early
as 4Q 2011. Instead, defendants deliberately and improperly hid pervasive production problems,
continued to defer unrecoverable production costs, failed to properly and timely record forward
losses and artificially maintained the 787 and Gulfstream programs at a zero or low margins. - 19 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 23 of 144
46. Ultimately, defendants could no longer hide the massive costs overruns and production problems, and, thus, could no longer avoid recording the forward losses that, based on
their own accounting rules, should have been recorded in the preceding quarters. On October 25,
2012, the Company “dropped a bombshell on investors” when it announced a massive $590 million
forward-loss charge. Analysts were dumbfounded and questioned defendants’ credibility – “how
could such a large charge not have been better anticipated? ” The market reacted swiftly, sending
Spirit’s stock price plunging 30%, or $6.55 per share – a one-day market cap loss of over $790
million .
47. In the wake of the devastating forward-loss charge, Turner was forced to resign,
ostensibly to allow for “a fresh set of eyes running the company.” When the full extent of the
development programs’ costs was finally revealed, it was discovered that contrary to being “on plan,” defendants had understated actual production costs on the 787 by as much as 17.6%, while the
Gulfstream production costs were understated by as much as 70%.
VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS
A. Third Quarter 2011 Earnings Release and Conference Call, and November 30, 2011 Credit Suisse Aerospace & Defense Conference
48. The Class Period begins on November 3, 2011, when defendants issued a press
release over PR Newswire in which they reported the Company’s financial results for 3Q 2011,
which “reflect[ed] solid core operating performance .”
Spirit’s third quarter 2011 revenues were $1.130 billion, up from $1.002 billion for the same period of 2010 as the company benefited from higher production deliveries during the quarter.
Operating income was $121 million, compared to $82 million for the same period in 2010, primarily driven by increased volume and model mix. In comparison, the third quarter of 2010 operating income included a $6 million one- time expense and a $4 million unfavorable cumulative catch-up adjustment associated with new program development.
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49. Defendant Turner touted the Company’s 3Q 2011 results, explaining that “‘[t]his quarter marked a number of important milestones, including the certification of the 787-8 and 747-8
Freighter, the initial delivery of a 787-8 to an airline customer and the announcement of the 737
MAX, where we look to play a significant role on the derivative that extends the life of this very successful platform . . . . For the 747-8 and 787-8, these are notable achievements that enable us to move on to the programs’ production phase where we can begin to realize their long-term value .’”
Turner continued to address Spirit’s operational health, and led investors to believe that the
Company was closely monitoring and adjusting profitability estimates on its all-important development projects:
Spirit updated its contract profitability estimates during the third quarter of 2011, resulting in a net pre-tax $4 million favorable cumulative catch-up adjustment and an additional $10 million forward-loss on the CH-53K program due to a shift in the make versus buy strategy in the development phase of the program. In comparison, Spirit recognized a ($4) million unfavorable cumulative catch-up adjustment for the third quarter of 2010.
50. On November 3, 2011, defendants filed Spirit’s quarterly report with the SEC on
Form 10-Q for 3Q 2011. The Company’s Form 10-Q was signed and certified by defendants Turner and Anderson, and reported Spirit’s financial results for 3Q 2011.
51. On November 3, 2011, defendants hosted a conference call with investors and analysts to discuss Spirit’s 3Q 2011 financial results and the Company’s business and operations.
Defendants repeated and addressed information previously made public in Spirit’s November 3,
2011, press release, including the achievement of the “important milestones.” Defendants Turner and Anderson led the call and addressed analysts’ and investors’ questions and concerns about
Spirit’s business.
(a) During his opening statement, Turner highlighted the “efforts to implement cost improvements on the 787” touting “the joint Boeing and Spirit teams, are tracking per plan to
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identify and implement cost improvements, across the program on the current product structure,
its producibility, efficiency, and productivity .”
(b) Turner also noted the importance of the 787 certification, highlighting that
“our focus remains fixed on execution and managing costs , for long-term value. Looking ahead,
we expect to continue to benefit from the expanding demand for commercial aircraft, while
achieving productivity and efficiency improvements across our business .”
(c) Anderson further represented that Spirit’s “cost reduction” efforts on the 787 program were “going very well ” and were “on plan .”
I think the curves , you know, I think 787 more broadly, George, we feel very good about how it is going . . . . So very optimistic about where it is at in the market. Our activity with our customer, focused on cost reduction is right on plan , which it is early, as I would categorize it and I think Jeff would agree. It is early in the process, but going very well and on plan . I think we like the 787 quite a lot, and looks like it going to be a good program for us.
(d) Addressing the risk in Spirit’s development programs and specifically whether
“there [are] any long tent poles in the 787 right now, that you are keeping your eye on.” Turner
stated: “ We don’t have any big major tent poles , that we are worried about right now,” adding “ our
condition of assembly is extremely good . It is right at 100% complete with the functional tests, and
all of the hardware it is supposed to have.” Turner also “rank[ed the development plans] by
uncertainty in making the [cost] curves,” but failed to identify any “uncertainty in making the [cost]
curve[]” with respect to the 787 program.
(e) Speaking very positively about the Gulfstream programs, Turner noted:
. . . I like the momentum that I’m seeing . I will speak a little bit about the 280, specifically, and the 650, which you guys know, have been challenging programs for us. We’ve got -- I like the momentum that I see, I like the management team we have in place. I think we we’ve seen major improvements in flow, on the 280.
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52. Defendants’ false and misleading statements on November 3, 2011, had a direct effect
on Spirit’s stock price, causing it to continue trading at artificially inflated levels. For example, on
November 3, 2011, in response to defendants’ statements, Spirit’s stock price increased over 12.6%.
53. Under the impression that Spirit was indeed “turning the corner,” analysts reacted positively to defendants’ false and misleading statements on certification and productivity
improvements, noting that “Q3 results and ‘color’ suggest SPR is making progress getting troubled
new programs (~20% of revenues) under control.” Similarly, Wedbush Securities Inc. issued a
report on November 4, 2011, explaining “we believe the risk associated with a charge on either [the
787 or A350] programs has gone down.” On November 11, 2011, The Buckingham Research Group
issued a report which provided: “[W]e think the majority of development risk is behind them.”
SunTrust Robinson Humphrey also issued a November 11, 2011, research report touting the
certification milestone and stating that the “risk [on Spirit’s development programs] is offset by the
removal of 787 and 747-8 risk now that the aircraft have been certified and delivered.”
54. On November 30, 2011, Turner made a presentation to analysts and investors at the
Credit Suisse Aerospace & Defense Conference, during which he discussed Spirit’s 787 program,
assuring the market that: “ We’re working with our suppliers to ensure production ramp-up
readiness . . . . [W]ith cost reduction as our top priority on [the 787] program, we are intently focused on productivity and efficiency improvements .” Turner also touted the 280 and 650 programs, noting that “[t]he Gulfstream programs continue their progress , as we build the initial production wings for the G280 and G650,” and emphasized that “ we are seeing growing tailwinds .”
55. Responding to questions concerning the point at which defendants saw “cash cost
equaling book cost” on the 787 program, Turner stated: “I think we have forecasted in the 125 to
150-unit range is where it normally hits; it can be plus or minus, but it sounds like it would probably be a little bit earlier for us .” Turner later discussed Spirit’s “margin profile” and the - 23 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 27 of 144
“healthy management reserve,” giving the false impression that defendants had properly set the purportedly conservative zero margins on the 787 program which would allow Spirit to convert
some of the “management reserve into profitability” or would, at worst, provide a protective
“cushion” against losses.
The 787, as you know, we’ve set the first block of 500 units of that at a zero margin . At this point in time, we’ve reserved – have a healthy management reserve on that and have focused activity to bring – to come down the cost curve on that program . If we achieve that cost curve, we will be able to convert some of that management reserve into profitability . If we don’t achieve that, that cost curve, we’ll have some management reserve to cushion it .
. . . [C]learly we believe the tailwinds are stronger now than the headwinds and we’ve got the opportunity to have an expansion – or expanding topline and be able to hold or improve our margins overall .
56. Turner continued to speak positively “about the assumptions in the cost curve and
where ... the opportunities [are] to outperform and then where ... the primary risks” are:
I think about it like this. We have a very focused joint team with ourselves and Boeing on the program. We have a regimented process by which we generate improvement activities, mature those and then bring them into the production lines, into the configuration of the airplane . . . .
And I think that, again, another way to think about it is we look at the cost curve. We’ve compared that cost curve to previous programs; the cost curve is not more aggressive than programs – program cost curves we’ve made in the past on 737s and 777s. . . .
57. Touting the Tulsa facility, where the Gulfstream and 787 wing programs were
located, Turner assured the market that he was “ very pleased with my Tulsa team, the operations
team there, and the progress they’re making in the factory .”
58. Continuing to highlight that Spirit’s “third quarter was cleaner than some previous
recent quarters in terms of execution and charges,” Turner explained:
. . . [T]he way to think about overall risk is I go back to what I said earlier which is headwinds and tailwinds. I think 2.5 years ago or so, we began to talk about headwinds and we saw frankly in our business more headwinds than we saw tailwinds. And I’m feeling very much the opposite now .
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We’re really sensing the strong tailwinds . . . .
59. Turner again discussed the all-important break-even, or crossover, point on the 787 program and Spirit’s progress “towards positive free cash generation”:
We have stated and are continuing to state, we anticipate cash flow positive in 2012. And clearly, the tailwinds for solid, strong cash generation are all there . The core programs, having paid back the $396 million on the 787 as we move toward the crossover point on the 787, we’ll be seeing a diminishing excess over average or deferred production inventory . So, cash – my projection is cash flow is going to continue to strengthen.
60. Defendants’ false and misleading statements on November 30, 2011, had a direct
effect on Spirit’s stock price, causing it to continue trading at artificially inflated levels. For
example, on November 30, 2011, in response to defendants’ statements, Spirit’s stock price
increased over 4.3%.
61. Analysts bought into the rosy picture defendants painted. On December 27, 2011,
Auriga USA issued a highly positive research report “[i]ncreasing [Spirit’s] Price Target to $27.50 from $25.00 ” (Spirit stock closed at $21.13 on previous trading day). According to Auriga, “we
look for a turn to positive cash flow and a descent from a peak year of development risk to serve as
catalysts to carry the stock to our price target. . . . [W]e believe development risk peaked in 2011
with the move of the 787 into production as the most notable swing factor.”
62. Defendants’ statements on November 3 and 30, 2011, (¶¶48-51, 54-59) were false
and misleading when made. As set forth below, defendants knew or recklessly disregarded, but
failed to disclose, that the Company’s 787 and Gulfstream programs were experiencing rampant and
ongoing production problems, leading to severe current and projected cost overruns, which
defendants concealed in an effort to artificially maintain zero margin on the 787 and avoid taking a
forward loss on it and the Gulfstream programs.
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(a) As detailed in §VIII, ¶¶149-167, defendants knew at the time they released
their 3Q 2011 financial results, that Spirit was incurring and internally projecting material amounts
of costs overruns due to pervasive and severe production problems. In violation of GAAP, SEC
rules and Spirit’s own accounting policy, defendants deliberately and improperly failed to expense
these unrecoverable costs in an effort to artificially report a zero margin (break-even profit) on the
787 program and avoid recording a forward loss on the 787 and Gulfstream development programs.
In doing so, defendants materially understated expenses and inflated Spirit’s reported earnings
during 3Q 2011.
(b) Despite defendants’ positive representations concerning the 787 program in
¶¶49, 51(a)-(d), 54-59, including that cost improvements were “tracking per plan,” the Company
expected to achieve “productivity and efficiency improvements” across Spirit’s business, there was a
“healthy management reserve” to “cushion” the 787’s “zero margin,” and Spirit was experiencing
increasing “tailwinds” and an “extremely good” “condition of assembly” on the 787 program:
(i) Spirit’s “forecasted cost curves” on the 787 program were, according
to CW3 5, inconsistent with the underlying internal analyses done by Spirit’s Functional Managers,
and “there was no way” the mandated cost levels could be achieved (¶195(b)-(d));
(ii) Spirit did not have adequate reserves to prevent the 787 program from
moving to a forward loss position and was unable to “come down the cost curve on that program,” because as explained in ¶¶172-173, Table 2, by 3Q 2011 defendants had already understated costs by
16%; and
5 Corroborating Witness 3 (“CW3”) was a Cost Management Manager and New Program Implementation Manager in the Wichita facility throughout the Class Period. As a Cost Management Manager, CW3 was a member of Spirit’s Finance Department and discussed matters relating to cost forecasts with defendant George, the Program Manager with responsibility for the entire 787 program. See ¶195.
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(iii) As corroborated by CW2 6, CW47 and CW108, Spirit was not able to
implement planned cost improvements on the 787 program, and was experiencing wasted labor
hours, a lack of synchronization between personnel, costly scrap including entire fuselages, repeated
design changes that led to severe supply chain disruptions, delays and missed deadlines, rampant part shortages and expedited shipping costs to replace missing parts, and other ongoing and pervasive issues within the 787 program. ¶¶194, 196, 202. For example, CW4 recounted an
instance when Spirit overpaid by $22,000-$23,000 to expedite a $2,000-$3,000 part to replace
missing inventory. ¶196(c).
(c) Contrary to defendants’ positive representations concerning the Gulfstream programs in ¶¶49, 51(e), 54, 57, including that they were “seeing growing tailwinds,” “like[d] the
momentum [they were] seeing” and had “seen major improvements in flow”:
(i) According to CW5, and as corroborated by CW10, Spirit’s internal
cost-down targets on the Gulfstream programs called for a 70-80% “learning curve” reduction in
material costs which was “very steep and maybe unrealistic,” particularly in light of the fact that any
actual savings achieved were offset by increasing engineering costs and a problematic supply chain.
¶¶197(d), 202. In fact, according to CW5, an internal Spirit study conducted on the Gulfstream
6 Corroborating Witness 2 (“CW2”) was a Master Lean Coach on the 787 fuselage program in Wichita throughout the Class Period. CW2 reported to Lean Manager Phil Fletcher, who reported to second-level Manager Tom Stout, who in turn reported to Vic McMillian, Vice President of Production. See ¶194.
7 Corroborating Witness 4 (“CW4”) was Materials Analyst in the Tulsa facility throughout the Class Period, during which CW4 worked on the 787 Wing project. During the Class Period, CW4 oversaw the supply of parts utilized by the manufacturing personnel and worked to make sure the manufacturing personnel had all of the parts needed for the various projects underway. See ¶196.
8 Corroborating Witness 10 (“CW10”) worked at Spirit’s Tulsa facility throughout the Class Period, first as a Cost Analyst in the Procurement Cost Support (“PCS”) Department and later, in 2012, as a Procurement Manager in Supply Chain. See ¶202.
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program at the end of 2011 demonstrated that Spirit was not getting the results it needed and that
only 30% of the Bills-of-Material (“BOM”) parts could be found at prices needed to achieve the
cost-down goals (¶197(e));
(ii) As explained in ¶174, Table 4, by 3Q 2011 defendants had already
understated costs on the 280 program by 74.1%. As a result, Spirit did not have adequate reserves to
avoid taking forward-loss charges on the Gulfstream programs, which were then experiencing
massive cost overruns;
(iii) As described by CW1 9, CW610, CW7 and CW8 11, the Gulfstream program had become so delayed that Spirit could not ship the G280 wings using normal delivery,
and instead was forced to rely on a special Russian “Antanov” aircraft to fly the wings to a fabricator
in Israel at a cost of almost $1 million each time – significantly more than alternative economically
viable and cost conscious methods such as overland freight and sea transport. ¶¶193, 198-200. In
some instances, wing structures became further delayed even after the Antanov arrived at Tulsa,
costing an additional $40,000 each day the aircraft waited on the Tulsa tarmac (¶198(e));
(iv) According to CW1, contractors and employees were charged with
manufacturing Gulfstream components with “planning papers” rather than blueprints, leading to
9 Corroborating Witness 1 (“CW1”) served as a Lean Manager in the Tulsa facility throughout the Class Period. CW1 reported directly to Chris Collins, the VP of Operations for the Tulsa facility, who in turn reported to defendant Turner. See ¶193.
10 Corroborating Witness 6 (“CW6”) was a Level II Buyer/Procurement Agent at Spirit’s Tulsa facility throughout the Class Period. CW6 handled various procurement functions related to the Gulfstream 280 program. See ¶198.
11 Corroborating Witness 8 (“CW8”) served as Production Manager on Spirit’s Gulfstream 650 program throughout the Class Period. As Production Manager, CW8 was responsible for approximately 20 to 40 Assembly Mechanics who assembled various elements of the Gulfstream 650 wing, and ensured that Mechanics accurately installed the parts and completed the installations in a timely fashion. See ¶200.
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items being installed incorrectly and additional costs. ¶193. And, as corroborated by CW8, each
650 wing Spirit produced carried with it an average of 700 “rejection tags,” each costing an average
of $1,000 to remedy. ¶200(e). According to CW1, CW6, CW8 and CW9 12, the Gulfstream programs were “so delayed” and “consistently behind schedule.” ¶¶193, 198, 200-201. In fact,
CW8 recounted a manager meeting in mid-2011, led by Turner and Anderson, where they
emphasized the 650 program was behind schedule and over budget (¶200(h)); and
(v) According to CW6, Spirit’s 280 program was “hemorrhaging money”
(¶198(a)) due to repeated cost overruns and because Spirit had “underbid” the 280 contract, as
corroborated by CW6, CW7 and CW10. ¶¶198-199, 202. And, according to CW5 and corroborated by CW9, because the contracts for the Gulfstream programs were “not thought through” when they
were negotiated, Spirit was forced to absorb the costs of the numerous engineering changes.
¶¶197(g), 201(a). Also, as described by CW7 (¶199), Spirit did not opt for buying parts in bulk on
the 280 program, which led to cost overruns that “just kept getting bigger and bigger” – “It was just
a madhouse; it really was.” ¶199(b). Spirit was also unable to improve its supply chain contracts on
its Gulfstream programs – a significant portion of the programs’ costs – to planned levels, preventing
Spirit from reducing program costs as planned.
(d) Contrary to defendants’ positive representations concerning production on the
787 and Gulfstream programs at the Tulsa and Wichita facilities, ¶¶49, 51, 54-59, including that
Turner was “very pleased with my Tulsa team . . . and the progress they’re making in the factory,” as
explained and corroborated by CW1, CW4, CW6 and CW8, the Tulsa facility was suffering from
12 Corroborating Witness 9 (“CW9”) started working at Spirit’s Tulsa facility as a Materials & Process Engineer on the Gulfstream 650 Wing project in May 2009, and became a Senior Engineer and Liaison with the Materials Review Board for the 650 wing project around the start of the Class Period. CW9 reported to Manager of Materials & Process Engineering John Vogt, who in turn reported to the Program Manager for the Gulfstream 650 project David Fillmore. See ¶201.
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chronic inventory problems and parts shortages, tooling problems, missing tools, high rates of scrap
and overall poor factory conditions, as it was having difficulty managing its rapid expansion with
new customers and new and unfamiliar lines of work, including transitioning the Tulsa facility from
a traditionally build-to-print facility to a design-build facility without the appropriate personnel and
machinery, and managing multiple development programs concurrently due to repeated delays.
¶¶193, 196, 198, 202.
(e) As a result of the foregoing, and based on ¶¶149-202, defendants lacked a
reasonable basis for their positive statements about the Company and its outlook, including
statements about its ability to achieve cost targets on the development programs, maintain zero
margin on the 787 and avoid forward losses on it and the Gulfstream programs, and that the 787 cash
costs would equal book costs “in the 125 to 150-unit range.” ¶55.
B. Fourth Quarter and Full-Year 2011 Earnings Release and Conference Call, and February 22, 2012 Barclays Industrial Select Conference
63. On February 9, 2012, defendants issued a press release over PR Newswire in which
they reported the Company’s financial results for 4Q 2011 and FY 2011 financial results, which
according to defendants, “reflect[ed] strong revenue growth on higher ship set deliveries and solid
core operating performance.”
Spirit’s fourth quarter 2011 revenues were $1.219 billion, up from $1.071 billion for the same period of 2010 as the company benefited from higher production deliveries during the quarter. * * *
Operating income for the fourth quarter 2011 was $102 million, compared to $96 million for the same period in 2010, primarily driven by increased production volumes, partially offset by the charges recorded on development programs. Net income for the quarter was $60 million, or $0.42 per fully diluted share, compared to $62 million, or $0.44 per fully diluted share, in the same period of 2010. . . .
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64. Defendants further led investors to believe that the Company was closely monitoring
and adjusting profitability estimates on its all-important development projects:
Spirit updated its contract profitability estimates during the fourth quarter of 2011, resulting in a net pre-tax $21 million, or $0.10 per share, favorable cumulative catch-up adjustment primarily associated with productivity and efficiency improvements in the 737 contract block completed in the fourth quarter of 2011. In comparison, Spirit recognized a net pre-tax $10 million unfavorable cumulative catch-up adjustment for the fourth quarter of 2010.
65. On February 9, 2012, defendants hosted a conference call with investors and analysts
to discuss Spirit’s 4Q 2011 and FY 2011 financial results and the Company’s business and
operations. The call repeated and addressed information previously made public in defendants’
February 9, 2012, press release, including information about Spirit’s 787 program and cost
improvements.
(a) During opening statements, Turner noted “the joint Boeing and Spirit teams
continue to make progress on cost improvements across the [787] program.” Anderson confirmed
that Spirit had “made good progress on 787 cost reduction initiatives . We also make good progress
as we focused on the basics including physical inventory management, period expense control, as
well as capital investment decisions and implementations. We continue to focus on meeting
customer requirements on new programs as we manage design evolution, testing, certification, and
transition to production.”
(b) Responding to questions about Spirit’s “zero margin” business, Anderson
explained that the 787 “is volume at zero margin. So that is a clear headwind for us as the core business volumes improve. G280 of course that is zero booking rate now, as well. 650 is a thinly
margined program.”
(c) Responding to questions about the cash break-even point on the 787 program,
Anderson explained that “[t]he breaking across the average cost line , we still view that as the line
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units which we have been very consistent on talking about, between line unit 125 and 150 , which
we always are pushing to do better than that.” Anderson then assured investors that the headwinds
experienced in Spirit’s development programs in 2011 would not be present, explaining that “we had
some bigger challenges [in 2011], obviously. At this point, there is nothing that tells us those are going [to] repeat .” One of the call participants confirmed: “So in other words you have derisked
enough” on the development programs. Anderson also confirmed that “ [o]ur progress on 787 has
been very, very good ,” and assured that for 2012, “[n]o there’s really no anomalies . . . . [N]othing stands out that we should talk about .”
(d) With respect to the state of the 280 and 650 programs, Turner explained:
. . . I will say that our operations tempo is improving . Inside the factory is becoming more stable. We are adding some support and some labor as needed as we come up the curve in terms of higher rates , working very closely with the customer. . . . Inside our factory is progressing well ; we are smoothing out the supply chain , there has been some issues there as there are on almost all new development programs. We are seeing that improve . So overall we are seeing the kind of improvement that we need on that program.
(e) Turner then discussed the “critical” nature of Spirit’s “supply chain,”
explaining that “the continual development and support of the supply chain both for current stable production, for bringing new programs in, and for facilitating it for the rate increases is a very
critical part of our rate management process . . . . [W]e frankly look for is places where supply
might be constrained. We try to look far enough ahead that we can do something about it .”
66. Defendants’ statements on February 9, 2012, were false and misleading when made
and had a direct effect on Spirit’s stock price, causing it to continue trading at artificially inflated
levels. For example, on February 9, 2012, in response to defendants’ statements, Spirit’s stock price
increased nearly 4.7%.
67. With the market accepting as true defendants’ foregoing false and misleading
statements, as alleged in ¶¶48-51, 54-59, analysts continued to fire off positive reports. For example, - 32 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 36 of 144
on February 9, 2012, Sterne, Agee & Leach, Inc. issued a highly positive research report raising the price target on Spirit by $6 to $34 (stock closed at $23.08 on previous trading day) “reflecting
increased confidence in risk profile within development programs.” The report also noted that “we believe the company is turning the corner as more development programs transition into production.” And, on February 9, 2012, KeyBanc Capital Markets issued a favorable report, noting
that “based on continued progress and ongoing risk retirement ” in the development programs, “ the
likelihood of material charges occurring in 2012 is low .” A Jefferies & Company, Inc. research
report issued February 9, 2012, noted that “ [t]he learning curve on the B787 also appears to be
improving .” Similarly, a Wells Fargo Securities, LLC research report issued February 9, 2012,
emphasized defendants’ sentiment that “the company is making substantial progress in moving down
the learning curve on the 787 program.” Finally, a February 10, 2012, Wedbush Securities Inc.
research report stated that, given the charges in 2011, “ [w]e would be surprised to see any
additional charges at this point associated with . . . the G650 .”
68. On February 22, 2012, Anderson addressed investors and analysts at the Barclays
Industrial Select Conference, during which he discussed the 787 program and its “learning curve,”
and addressed the measures implemented to improve efficiencies and recover costs:
We’re actually having very good success with our working and our work requires Boeing to work and so it’s a truly enjoying effort. When we are talking about re-design for costs, they are very focused on that as well as you would imagine right. The second component is the value chain -- supply chain , right, where we’ve designed an airplane and we need, it’s got a big supply chain and we need supply chain help to make the parts cheaper and ultimately many of the parts are first generation composite type parts which will improve in terms of cost as we go forward. So we are looking for those opportunities jointly as well . And then the third leg is, which is inside our walls while we can do with improving efficiencies in automation and ultimately labor, labor component .
69. Discussing the state of the Gulfstream programs, Anderson explained that “the 650 to
280 designs are firming up nicely where now we have a much better view of the bill of material .”
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And, acknowledging past problems with the Gulfstream programs in Tulsa, Anderson assured investors that “a lot of the risk looks like it’s behind us . And we’ve got a path forward we think is executable. . . . And I’ve spent a lot of time [in Tulsa], so is Jeff [Turner], making sure the changes are taking hold and we are actually pretty encouraged by what we see .”
70. As for achieving milestones and retiring risk in 2012 on the development programs, and the market’s false perception that Spirit’s “conservatism” was providing “protection for some of th[e] risk” in the development programs, Anderson highlighted “the supply chain initiatives that we are working diligently on ,” assuring investors that “ we do expect them to play out this year by a large measure .”
71. On February 23, 2012, defendants filed Spirit’s Annual Report with the SEC on Form
10-K for 4Q 2011 and fiscal year 2011. The Company’s Form 10-K was signed and certified by defendants Turner and Anderson and reported Spirit’s financial results for 4Q 2011 and fiscal year
2011 as previously provided in defendants’ February 9, 2012, press release.
72. Defendants’ statements on February 22 and 23, 2012, were false and misleading when made and had a direct effect on Spirit’s stock price, causing it to continue trading at artificially inflated levels.
73. Analysts continued to subscribe to defendants’ positive assurances that the costs for
Spirit’s 787 program were under control and that the risks were diminishing. For example, a Wells
Fargo Securities, LLC research report issued on February 23, 2012 noted that “ the company continues to make better-than-expected progress down the learning curve on the 787 ,” explaining that “[a]s SPR improves the costs of its 787 production, it moves ever closer to when the 787 turns cash positive around unit #125-150 .” And, on February 27, 2012, Sterne, Agee & Leach, Inc. released a report highlighting the “ De-Risking” of Spirit’s development programs, and explained
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that based on management’s assurances, “[w]e believe SPR is turning the corner as more
development programs transition into production.”
74. Defendants’ statements in February 2012, (¶¶63-65, 68-71) were false and misleading
when made. As set forth below, defendants knew or recklessly disregarded, but failed to disclose,
that the Company’s 787 and Gulfstream programs were experiencing rampant and ongoing production problems, leading to severe current and projected cost overruns, which defendants
concealed in an effort to artificially maintain zero margin on the 787 and avoid taking a forward loss
on it and the Gulfstream programs.
(a) As detailed in §VIII, ¶¶149-167, defendants knew by at least 4Q 2011 that
Spirit was incurring and internally projecting material amounts of cost overruns due to pervasive and
severe production problems. In violation of GAAP, SEC rules and Spirit’s own accounting policy,
defendants deliberately and improperly failed to expense these unrecoverable costs in an effort to
artificially report a zero margin (break-even profit) on the 787 program and avoid recording a
forward loss on the 787 and Gulfstream development programs. In doing so, defendants materially
understated expenses and inflated its reported earnings during the 4Q and full year 2011.
(b) Despite defendants’ positive representations concerning the 787 program in
¶¶64, 65(a)-(c), (e), 68, 70, including that Spirit was making “good progress on [the] 787 cost
reduction initiatives” and “[o]ur progress on 787 has been very, very good”:
(i) Spirit’s “forecasted cost curves” on the 787 program were, according
to CW3, inconsistent with the underlying internal analyses done by Spirit’s Functional Managers,
and defendants knew, or were reckless in not knowing, that “there was no way” the mandated cost
levels could be achieved (¶¶195(b)-(d));
(ii) Spirit did not have adequate reserves to prevent the 787 program from
moving to a forward loss position because the Company was unable to “come down the cost curve - 35 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 39 of 144
on that program,” and as explained in ¶¶172-173, Table 2, by 4Q 2011 defendants had already
understated costs by 16.5%; and
(iii) as corroborated by CW2, CW4 and CW10, Spirit was not able to
implement planned cost improvements on the 787 program, and was experiencing wasted labor
hours, a lack of synchronization between personnel, costly scrap including entire fuselages, repeated
design and engineering changes that led to severe supply chain disruptions, delays and missed
deadlines, rampant part shortages and expedited shipping costs to replace missing parts, and other
ongoing and pervasive issues within the 787 program. ¶¶194, 196, 202 For example, CW4
recounted an instance when Spirit overpaid by $22,000-$23,000 to expedite a $2,000-$3,000 part to
replace missing inventory. ¶196(c).
(c) Contrary to defendants’ positive representations concerning the Gulfstream programs in ¶¶64-65(d)-(e), 69-70, including that defendants “ha[d] a much better view of the bill of
material” on the 280 and 650 programs, and “a lot of risk looks like its behind us”:
(i) Spirit admitted that defendants were unable to ensure that the “bill of
materials used in the accounting estimate was complete and provided a sound basis for estimating
future costs” (¶148);
(ii) According to CW5, and as corroborated by CW10, Spirit’s internal
cost-down targets on the Gulfstream programs called for a 70-80% “learning curve” reduction in
material costs which was “very steep and maybe unrealistic,” particularly in light of the fact that any
actual savings achieved were offset by increasing engineering costs and a problematic supply chain.
¶¶197(d), 202. In fact, according to CW5, an internal Spirit study conducted on the Gulfstream program at the end of 2011 demonstrated that Spirit was not getting the results it needed and that
only 30% of the BOM parts could be found at prices needed to achieve the cost-down goals
(¶197(e)); - 36 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 40 of 144
(iii) As explained in ¶174, Tables 3-4, by 4Q 2011 defendants had already
understated costs on the 280 and 650 programs by 65% and 58%, respectively. As a result, Spirit did
not have adequate reserves to avoid taking forward-loss charges on the Gulfstream programs, which
were then experiencing massive cost overruns;
(iv) As described by CW1, CW6, CW7 and CW8, the Gulfstream program
had become so delayed that Spirit could not ship the G280 wings using normal delivery, and instead
was forced to rely on a special Russian “Antanov” aircraft to fly the wings to a fabricator in Israel at
a cost of almost $1 million each time – significantly more than alternative economically viable and
cost conscious methods such as overland freight and sea transport. ¶¶193, 198-200. In some
instances, wing structures became further delayed even after the Antanov arrived at Tulsa, costing an
additional $40,000 each day the aircraft waited on the Tulsa tarmac (¶198(e));
(v) According to CW1, contractors and employees were charged with
manufacturing Gulfstream components with “planning papers” rather than blueprints, leading to
items being installed incorrectly and additional costs. ¶193. And, as corroborated by CW8, each
650 wing Spirit produced carried with it an average of 700 “rejection tags,” each costing an average
of $1,000 to remedy. ¶200(e). According to CW1, CW6, CW8 and CW9, the Gulfstream programs
were “so delayed” and “consistently behind schedule.” ¶¶193, 198, 200-201. In fact, CW8
recounted a manager meeting in mid-2011, led by Turner and Anderson, where they emphasized the
650 program was behind schedule and over budget (¶200(h)); and
(vi) According to CW6, Spirit’s 280 program was “hemorrhaging money”
due to repeated cost overruns and because Spirit had “underbid” the 280 contract, as corroborated by
CW6, CW7 and CW10. ¶¶198-199, 202. And, according to CW5 and corroborated by CW9, because the contracts for the Gulfstream programs were “not thought through” when they were
negotiated, Spirit was forced to absorb the costs of the numerous engineering changes. ¶¶197(g), - 37 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 41 of 144
201(c). Also, as described by CW7, Spirit did not opt for buying parts in bulk on the 280 program,
which led to cost overruns that “just kept getting bigger and bigger” – “It was just a madhouse; it
really was.” ¶199(b). Spirit was also unable to improve its supply chain contracts on its Gulfstream programs – a significant portion of the programs’ costs – to planned levels, preventing Spirit from
reducing program costs as planned.
(d) Contrary to defendants’ positive statements concerning production on the 787
and Gulfstream programs in ¶¶64-65, 68-70, including that “[i]nside the factory is becoming more
stable . . . progressing well [and] we are smoothing out the supply chain,” and that “[a]t this point,
there is nothing that tells us” that the bigger challenges of 2011 “are going [to] repeat,” as explained
and corroborated by CW1, CW4, CW6 and CW8, the Tulsa facility was suffering from chronic
inventory problems, tooling problems, missing tools, high rates of scrap and overall poor factory
conditions, as it was having difficulty managing its rapid expansion with new customers and new
and unfamiliar lines of work, including transitioning the Tulsa facility from a traditionally build-to- print facility to a design-build facility without the appropriate personnel and machinery, and
managing multiple development programs concurrently due to repeated delays. ¶¶193, 196, 198,
200. And, as defendants admitted after the Class Period, the Tulsa facility was suffering from severe performance issues that resulted in changes to contract estimates and caused Spirit to fall woefully behind on the delivery schedule for its 787 wing project. ¶146. Defendants were forced to dedicate
more and costly resources to the Tulsa-based program in an effort to bring the delivery schedule
current. Id.
(e) As a result of the foregoing, and based on ¶¶149-202, defendants lacked a
reasonable basis for their positive statements about the Company and its outlook, including
statements about its ability to achieve cost targets on the development programs, maintain zero
margin on the 787 and avoid forward losses on it and the Gulfstream programs, and that the 787 cash - 38 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 42 of 144
costs would equal book costs between “line unit 125 and 150.” ¶65(c). Indeed, as Spirit admitted
after the class period, at least as early as 1Q 2012, defendants were unable to and failed to accurately
and timely evaluate current actual trends impacting estimates of supply chain and labor costs that
were identified and incorporated into Spirit’s accounting estimate on a timely basis. ¶148.
C. Defendants’ False and Misleading Statements During Spirit’s 2012 Investor Conference
75. On March 6 and 7, 2012, defendants hosted the Spirit 2012 Investor Conference at
Spirit headquarters in Wichita, Kansas. As explained in a February 29, 2012, Cowen & Company
research report, the 2012 Investor Conference and Spirit’s “increasing investor interaction” – “SPR’s
first since 2009 when program glitches emerged” – was “view[ed] . . . as a sign that new program
issues are abating.” Speaking first, Turner set the tone of the presentation, stressing that Spirit
“continue[s] to improve our low cost structure ,” highlighting the “focus on operation efficiency, on
value engineering and on new program management.” As Turner emphasized, “with cost reduction
as a top priority on [the 787] program we are intensely focused on productivity and efficiency
improvements .”
76. Anderson then assured investors that operating margins would be maintained or
improved, explaining that “maintaining ” “a solid high single-digit or a low double-digit margin . . .
over the near term requires the benefits of the core business volume leverage, which we expect to
capture, and operating efficiencies that we expect to drive .” Anderson also explained that “[f]rom
an accounting perspective, we ended the year with about $2.6 billion of total inventory, and half of
that is really expense and cost that we’ve incurred on these development programs. And so as we go
through time we expect to recover that inventory buildup as we go down the learning curve and
move into production .” Anderson concluded with defendants’ theme, stating: “ I assure you we’re focused on the productivity and the efficiencies which we always are.”
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77. Focused on Spirit’s zero margin and deferred inventory balances for the 787 program,
investors were assured by Anderson that on the “787, you’ve seen the improvement we’re making
there and those deferred balances. . . . [W]e’re very much on plan where we expected to be , but it’s
a big, challenging program given it’s been as late as it is, but we feel good about where we’re at .”
Anderson also touted the positive catalysts for Spirit on the 787 program’s “margin expansion”:
. . . [T]here’s 787, right, which is a big, big volume growth and today we’re booking that at zero gross margins and we’re making good progress , but the challenge still remains. Not as much challenge as there was, but still a challenge in front of us. And to the extent we stay on plan it’ll be a great long term program and it by itself, if we get it to where we need it, in the timeframe, right, we’ll dial that at some point to positive margins .
Now Terry’s got the challenge of convincing Jeff and I when that is because it’s about sustainable profitability and that’s where we want to take the program, to sustainable profitability, and I think we’re well on our way . Those are the biggest dials to move, Doug, I think, core business, 787 focus, turn us toward to where we can actually show the margin expansion at the consolidated level.
78. Anderson’s presentation was accompanied by a slideshow which gave the false
impression that Spirit’s accounting estimates were reasonable and accurate. The slideshow
identified the “Contract Accounting” method as the “Most Important SPR Accounting Policy,”
noting that “SPR updates profit estimates every quarter.” With the length of the contract blocks
central to the contract accounting method, and with upcoming negotiations with Spirit customers on
new contract blocks, Anderson assured investors of the reasonableness and accuracy of Spirit’s profit estimates, explaining that while it was “not a foregone conclusion that we end up with two-
year blocks,” “[t]wo-year blocks tend to be just more predictable, right, in terms of forecasting cost
in the supply chain .”
79. David Coleal, Spirit’s Senior Vice President, General Manager – Fuselage Segment,
also addressed investors and continued with defendants’ theme of reduced costs, improving margins
and “focus on execution.” Coleal reassured investors that “[i]t’s about reducing our operating
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costs, focus on quality, improving our margins and really focusing on our customers.” Coleal emphasized three “elements” that the Company was deploying as part of its focus on execution:
The first is our value engineering and John Pilla is going to talk a lot more about the detail here. But as you know, very important that we get the design right up front that we can bring to bear Spirit EXACT and the value that we can bring those products to make sure we can produce it efficiently and cost effectively.
The second is operational discipline and you saw a little bit of that yesterday on the tour. Very important that we make our plans every day. And you use the analogies of athletics. Having a good game is great, but having consistent good games makes for great seasons. So it’s no different in the – from an operational prospective.
Having a good day, having a good week, a good month, and a good quarter ultimately makes a good year and a great Company. So we’re very focused on making sure that every day our teams are engaged, we’re solving problems, and we can hit the ball out of the park.
And finally, how we bring to bear Lean maturity. So it’s not just about running the daily operations, but how do we make sure we engage our teams to extract value and bring all the Lean thinking to bear to continually improve the operation.
80. Coleal also highlighted Spirit’s operational efficiencies, drawing attention to the “the daily operational discipline” of Spirit’s “formalized system.” “What we do is every day our crew leaders get together with their teams and they go through their safety, quality, delivery cost and how the team’s doing overall .”
[T]he teams come together. I go down there, and they report on how they’re doing.
The goal is not to report to me, but I’m there to help. And all the leadership team is there to make sure that we can help those teams, if they have a problem that they couldn’t solve at the lower level, get them solved that day . So the importance of this is not to have a meeting, but to have a dialogue to solve issues.
*
But finally, the notion is we have a robust operating model, right, that the teams are engaged. Everyday we’re working hard to make sure we’re meeting our goals and objectives. But more so continuing to improve our margin and drive value for our customer.”
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81. Defendant Kummant, SVP of Oklahoma Operations, also emphasized Spirit’s Lean
Events and the use of Spirit EXACT products to reduce costs and improved efficiencies. Kummant
described the “strong push on a Lean maturity focus in the whole Company . . . that’s really touching
all of our programs,” and touted the “operations maturity in Tulsa where it is fully-blown Lean production system.” Kummant further highlighted how the Company was making operational
improvements to the Gulfstream programs through the implementation of Lean and Spirit EXACT programs:
. . . [W]e are putting a third line in for the 280 program and this is really heavily using Spirit EXACT thought processes. And you will see a lot less fixtures, you’ll see a lot of automation and you’ll see labor hours come out of this product fairly dramatically. But here’s an example of using Spirit EXACT and continue driving margin and cash out of an existing program . . . .
82. Kummant then boasted in the accompanying slideshow that Spirit had targeted “200+
Lean Events for 2012,” emphasizing that by comparison “[w]e probably had five Lean events last
year so this is a fairly dramatic thrust we’re doing across the entire business and is core to what we
need to do to drive Oklahoma.”
I just need to leave you with the feeling that the plant floor rhythm is entirely different . So we’re truly making progress there on both programs. . . . [W]e are certainly happy with what we’re achieving on the plant floor . . . .
83. Kummant’s presentation was accompanied by a slideshow in which he described as
“critical” the Company’s campaign to “Reduce Operating Costs and Improve Product Quality to
Increase Margins and Enhance Customer Satisfaction” and “Engage/Optimize Supply Base to Meet
Initiatives.” These “critical” campaigns were complimented by an emphasis on “Lead New
Programs for Manufacturable / On Schedule / Cost Efficient Produce to Ensure Profitability.”
84. With respect to the 650 program, Kummant assured investors that “[w]e are in a
completely different operational rhythm than [the Oklahoma facilities] were a year ago ,”
explaining that “we feel like we’ve made tremendous progress [on the G650] .” - 42 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 46 of 144
85. Defendant George, VP of the 787 program, closed out the presentation portion of the
conference and touted the Company’s “fully integrated supply chain . . . [t]hat allows for the systems
integration to happen very quickly at the end of the line.” George reiterated defendants’ “ laser focus” on reducing 787 program costs, succinctly highlighting Spirit’s “focus on quality” and “cost
improvements”:
One of my focus areas is cost reduction, so I’m working really hard with the Boeing leaders. We’ve been doing this about 15 months . It’s a systematic approach. It’s very regimented. We do this daily, weekly, monthly, quarterly . . . . I do in fact go to Boeing every month, make sure that we are staying on track .
Mr. Turner and the leaders at Boeing we meet quarterly so that they can hold us accountable in making sure that we’re doing what we need to do on the cost reduction . . . .
86. George then assured investors that the 787 cost curve was “ pretty good-looking ,”
emphasizing the cost curve improvements within the program:
. . . [S]o we have a plan. We have a timeline. We have a value that we need to get to on the costs. We are on that plan and it looks to me like, especially in that first [b]lock that . . . it’s promising. It’s promising in terms of profitability .”
87. Responding to a question about whether there was any remaining risk in the 787-9 program, George had this to say:
When I think about our production system, again, internally I’m thrilled with the way that we’re stepping up in rate. I don’t have any concerns with our supply base. The [787-9] like it’s phenomenal right now. I don’t expect dealing there.
The fear would be any anomalies throughout the entire supply base. And I’m talking about for the entire airplane, or any anomalies, any surprises in quality kind of what we saw recently in the [aft] fuselage. But for Spirit I’m not – I’m not concerned. . . .
88. Responding to George’s highly positive portrayal of the 787 program, a Wedbush
analyst noted that while “it sounds really very positive and encouraging on the 787 . . . is there
anything still that you’d highlight that still keeps you up at night or risks around the program that
outside of obviously from Boeing’s standpoint that you’re still dealing with?” George confirmed
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simply, “Well, like I said earlier, not really .” Turner closed the presentation by reiterating Spirit’s
alleged “laser focus on cost improvements ,” declaring: “Hopefully, you walked away with a sense
of . . . our intense emphasis on managing our costs and driving productivity .”
89. Defendants’ statements during the March 2012 investor conference were false and
misleading when made and had a direct effect on Spirit’s stock price, causing it to continue trading
at artificially inflated levels. For example, in response to defendants’ statements during the investor
conference, Spirit’s stock price increased 2.4% on March 7, 2012.
90. Scores of analysts bought into defendants’ highly positive, yet false, portrayal of the
current status of Spirit’s development programs. For example, a March 7, 2012, Wells Fargo
Securities, LLC research report informed investors that cash flow “should accelerate over the next few years as newer programs (i.e., 787) continue to move down the learning curve .” According to
the Wells Fargo report, the take away from the factory visit was that Spirit “probably is running
ahead of its cost reduction targets . . . we expect [cost reductions] to continue .”
91. The next day, March 8, 2012, The Buckingham Research Group issued a “solidly bullish” recommendation, explaining that “[b]y most accounts, SPR is executing well on the 787-8 production program with costs at or below projected levels .” Cowen & Company also issued a
report on March 8, 2012, noting Spirit’s “abating risk” and highlighting “changes that appear to have bolstered controls and implemented lean initiatives that should enhance productivity.” KeyBanc
Capital Markets’ March 8, 2012, positive research report following the Investor Conference
emphasized “that the likelihood of additional charges surfacing in 2012 is low .”
92. On March 28, 2012, defendants filed Spirit’s Annual Report to Security Holders
(“ARS”) with the SEC which attached Form 10-K for 4Q 2011 and fiscal year 2011. The
Company’s Form 10-K was signed and certified by defendants Turner and Anderson and reported
Spirit’s financial results for 4Q 2011 and fiscal year 2011. In the ARS, defendants touted that - 44 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 48 of 144
“[f]rom the beginning” they had “structured the company conservatively,” and assured investors that
“[w]ith cost reduction as our top priority on this program, we are intensely focused on productivity
and efficiency improvements .
93. Accompanying the ARS was a “Letter to Shareholders,” signed by Turner and Bob
Johnson, Chairman of Spirit’s Board of Directors, which highlighted the Company’s financial performance for 2011, as well as provided a glowing outlook for the Company in 2012. The Letter
to Shareholders touted the Company’s progress with respect to the “ramp-up” of the 787 program,
explaining: “Our strong production program base has allowed us to successfully weather significant program delays and overlapping new program development timelines that strained
resources .”
94. Defendants’ statements on March 7 and 28, 2012, (¶¶75-78, 81-88, 92-93) were false
and misleading when made. As set forth below, defendants knew or recklessly disregarded, but
failed to disclose, that the Company’s 787 and Gulfstream programs were experiencing rampant and
ongoing production problems, leading to severe current and projected cost overruns, which
defendants concealed in an effort to artificially maintain zero margin on the 787 and avoid taking a
forward loss on it and the Gulfstream programs.
(a) As detailed in §VIII, ¶¶149-167, defendants knew by at least 4Q 2011 that
Spirit was incurring and internally projecting material amounts of cost overruns due to pervasive and
severe production problems. In violation of GAAP, SEC rules and Spirit’s own accounting policy,
defendants deliberately and improperly failed to expense these unrecoverable costs in an effort to
artificially report a zero margin (break-even profit) on the 787 program and avoid recording a
forward loss on the 787 and Gulfstream development programs. In doing so, defendants materially
understated expenses and inflated its reported earnings during the 4Q and full year 2011.
- 45 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 49 of 144
(b) Despite defendants’ positive representations concerning the 787 program in
¶75-78, 81-83, 85-88, 92-93, including that “we’re booking ... at zero gross margins and we’re
making good progress,” “we’re very much on plan where we expected to be,” the 787 cost curve was
“pretty good looking” and defendants “don’t have any concerns with our supply base”:
(i) Spirit’s “forecasted cost curves” on the 787 program were, according
to CW3, inconsistent with the underlying internal analyses done by Spirit’s Functional Managers,
and defendants knew, or were reckless in not knowing, that “there was no way” the mandated cost
levels could be achieved (¶¶195(b)-(d));
(ii) Spirit did not have adequate reserves to prevent the 787 program from
moving to a forward loss position because the Company was unable to “come down the cost curve
on that program,” and as explained in ¶¶172-173, Table 2, by 4Q 2011 defendants had already
understated costs by 16.5%; and
(iii) As corroborated by CW2, CW4 and CW10, Spirit was not able to
implement planned cost improvements on the 787 program, and was experiencing wasted labor
hours, a lack of synchronization between personnel, costly scrap including entire fuselages, repeated
design and engineering changes that led to severe supply chain disruptions, delays and missed
deadlines, rampant part shortages and expedited shipping costs to replace missing parts, and other
ongoing and pervasive issues within the 787 program. ¶¶194, 196, 202. For example, CW4
recounted an instance when Spirit overpaid by $22,000-$23,000 to expedite a $2,000-$3,000 part to
replace missing inventory. ¶196(c).
(c) Contrary to defendants’ positive representations concerning the Gulfstream programs in ¶¶75-76, 78, 81-84, 92-93, including that defendants “we’ve made tremendous progress
[on the 650]”:
- 46 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 50 of 144
(i) Spirit admitted that defendants were unable to “ensure that the bill of
materials used in accounting estimates were accurate and provided a sound basis for estimating
future costs” (¶148);
(ii) According to CW5, and as corroborated by CW10, Spirit’s internal
cost-down targets on the Gulfstream programs called for a 70-80% “learning curve” reduction in
material costs which was “very steep and maybe unrealistic,” particularly in light of the fact that any
actual savings achieved were offset by increasing engineering costs and a problematic supply chain.
¶¶197(d), 202. In fact, according to CW5, an internal Spirit study conducted on the Gulfstream program at the end of 2011 demonstrated that Spirit was not getting the results it needed and that
only 30% of the BOM parts could be found at prices needed to achieve the cost-down goals
(¶197(e));
(iii) As explained in ¶174, Tables 3-4, by 4Q 2011 defendants had already
understated costs on the 280 and 650 programs by 65% and 51%, respectively. As a result, Spirit did
not have adequate reserves to avoid taking forward-loss charges on the Gulfstream programs, which
were then experiencing massive cost overruns;
(iv) As described by CW1, CW6, CW7 and CW8, the Gulfstream program
had become so delayed that Spirit could not ship the G280 wings using normal delivery, and instead
was forced to rely on a special Russian “Antanov” aircraft to fly the wings to a fabricator in Israel at
a cost of almost $1 million each time – significantly more than alternative economically viable and
cost conscious methods such as overland freight and sea transport. ¶¶193, 198-200. In some
instances, wing structures became further delayed even after the Antanov arrived at Tulsa, costing an
additional $40,000 each day the aircraft waited on the Tulsa tarmac (¶198(e));
(v) According to CW1, contractors and employees were charged with
manufacturing Gulfstream components with “planning papers” rather than blueprints, leading to - 47 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 51 of 144
items being installed incorrectly and additional costs. ¶193. And, as corroborated by CW8, each
650 wing Spirit produced carried with it an average of 700 “rejection tags,” each costing an average
of $1,000 to remedy. ¶200(e). According to CW1, CW6, CW8 and CW9, the Gulfstream programs
were “so delayed” and “consistently behind schedule.” ¶¶193, 198, 200-201. In fact, CW8
recounted a manager meeting in mid-2011, led by Turner and Anderson, where they emphasized the
650 program was behind schedule and over budget (¶200(h)); and
(vi) According to CW6, Spirit’s 280 program was “hemorrhaging money”
due to repeated cost overruns and because Spirit had “underbid” the 280 contract, as corroborated by
CW6, CW7 and CW10. ¶¶198-199, 202. And, according to CW5 and corroborated by CW9, because the contracts for the Gulfstream programs were “not thought through” when they were
negotiated, Spirit was forced to absorb the costs of the numerous engineering changes. ¶¶197(g),
201(c). Also, as described by CW7, Spirit did not opt for buying parts in bulk on the 280 program,
which led to cost overruns that “just kept getting bigger and bigger” – “It was just a madhouse; it
really was.” ¶199(b). Spirit was also unable to improve its supply chain contracts on its Gulfstream programs – a significant portion of the programs’ costs – to planned levels, preventing Spirit from
reducing program costs as planned.
(d) Contrary to defendants’ positive statements concerning production on the 787
and Gulfstream programs in ¶¶75-78, 81-88, 92-93, including that “[o]ur strong production program base has allowed us to successfully weather significant program delays and overlapping new program development timelines that strained resources,” “we’re truly making progress . . . on both programs [and] are certainly happy with what we’re achieving on the plant floor,” as explained and
corroborated by CW1, CW4, CW6 and CW8, the Tulsa facility was suffering from chronic inventory problems, tooling problems, missing tools, high rates of scrap and overall poor factory conditions, as
it was having difficulty managing its rapid expansion with new customers and new and unfamiliar - 48 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 52 of 144
lines of work, including transitioning the Tulsa facility from a traditionally build-to-print facility to a
design-build facility without the appropriate personnel and machinery, and managing multiple
development programs concurrently due to repeated delays. ¶¶193, 196, 198, 200. And, as
defendants admitted after the Class Period, the Tulsa facility was suffering from severe performance
issues that resulted in changes to contract estimates and caused Spirit to fall woefully behind on the
delivery schedule for its 787 wing project. ¶146. Defendants were forced to dedicate more and
costly resources to the Tulsa-based program in an effort to bring the delivery schedule current. Id.
(e) As a result of the foregoing, and based on ¶¶149-202, defendants lacked a
reasonable basis for their positive statements about the Company and its outlook, including
statements about its ability to achieve cost targets on the development programs, maintain zero
margin on the 787 and avoid forward losses on it and the Gulfstream programs, and that the 787 cash
costs would equal book costs between units 125 and 150. Indeed, as Spirit admitted after the class period, at least as early as 1Q 2012, defendants were unable to and failed to accurately and timely
evaluate current actual trends impacting estimates of supply chain and labor costs that were
identified and incorporated into Spirit’s accounting estimate on a timely basis. ¶148.
D. First Quarter 2012 Earnings Release and Conference Call, and Deutsche Bank Global Industrials and Basic Materials Conference
95. On May 3, 2012, defendants issued a press release over PR Newswire in which they
reported the Company’s financial results for 1Q 2012 which, according to defendants, “reflect[ed]
solid core operating performance across the company.”
Spirit’s first quarter 2012 revenues were $1.266 billion, up 21% from $1.050 billion for the same period of 2011 as the company benefited from higher production deliveries during the quarter.
Operating income was $122 million, compared to $70 million for the same period in 2011, primarily driven by increased volume. In the quarter the company recognized a pre-tax ($11) million, or ($0.05) per share, additional forward-loss on the G280 program and a pre-tax ($3) million, or ($0.01) per share, additional - 49 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 53 of 144
forward-loss on the 747-8 wing program. In comparison, the first quarter of 2011 operating income included a net pre-tax ($3) million unfavorable cumulative catch- up adjustment and a ($28) million pre-tax charge on the CH-53K program.
96. In the press release, Turner highlighted the Company’s cost and efficiency
improvements, touting that “‘Spirit’s first quarter results reflect the increase in demand for our core products and the benefits of our ongoing commitment to productivity and efficiency across the
company .’” The release also announced that on April 18, 2012, Spirit completed a $1.2 billion
refinancing of its senior secured credit facilities. In connection with the refinancing, Spirit’s
corporate credit rating was affirmed by Standard & Poor’s (BB, stable outlook) and placed on positive credit outlook by Moody’s while maintaining its Ba2 corporate rating.
97. Defendants further led investors to believe that the Company was closely monitoring
and adjusting profitability estimates on its all-important development projects:
Spirit updated its contract profitability estimates during the first quarter of 2012, resulting in a pre-tax ($11) million, or ($0.05) per share, additional forward- loss on the G280 program driven by certain supply chain costs and a pre-tax ($3) million, or ($0.01) per share, additional forward-loss on the 747-8 wing program due to specific manufacturing cost growth. In comparison, Spirit recognized a net pre-tax ($3) million unfavorable cumulative catch-up adjustment and a pre-tax ($28) million charge for the first quarter of 2011.
98. On May 3, 2012, defendants filed Spirit’s quarterly report with the SEC on Form 10-
Q for 1Q 2012. The Company’s Form 10-Q was signed and certified by defendants Turner and
Anderson, and reported Spirit’s financial results for 1Q 2012.
99. After releasing its 1Q 2012 results on May 3, 2012, defendants hosted an earnings
conference call with analysts and investors to discuss the Company’s 1Q 2012 financial results and
Spirit’s business and financial operations. The call repeated and addressed information previously
made public in defendants’ May 3, 2012, press release, including the cost reductions and efficiency
improvements within Spirit’s development programs. Defendants Turner and Anderson led the call
and addressed analysts’ and investors’ questions and concerns about Spirit’s business. - 50 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 54 of 144
100. During his opening statement, Turner emphasized that “the joint Boeing and Spirit
teams continue to track per plan to identify and implement cost improvements across the [787] program through value engineering, supply chain architecture, and production flow.” “[T]he [wing] segment made progress on development programs as early production efforts continued on the
G650 and G280 wing programs . . . .”
101. Responding to questions regarding the margin and risk profiles for Spirit’s 787 program, Anderson explained that Spirit was “ on plan as of the end of the first quarter here in
2012.” Defendants’ praise of the 787 program continued as Anderson “echo[ed]” analyst sentiment
that “the per production cost on 787, obviously nice progress there, ” stating “[i]t is very good progress .” Anderson continued, “ We are very pleased with where we are at right now. . . . And we
are very happy with how it is going. We are just going to continue to execute our plan . We
certainly talked about 125 or in that range. We are working hard to beat that, I can assure you. . . .
We are happy with our progress both in Wichita and in Tulsa . . . .”
102. Assuaging investor concern about the $11 million forward-loss charge on the G280 program in the quarter, Turner explained: “We are doing several things on the 280 to enhance its
long-term run. And part of that was an intense review of the supply chain itself . As we got into
that review there were a couple areas where we thought the risk associated with hitting the cost curve
that we had cast the team with was a higher risk than we had originally assumed. . . . [W]e would just take it to the program profitability. Again what Phil said was we have an intense focus on that
to get it on the footing for a long-term production run .”
103. Responding to a question concerning the progress of the design engineering on the
787-9, Anderson expressed optimism that the program was on schedule: “[F]irst of all let me start by
saying it is on schedule. It is performing well . Our design team is integrated with customer’s
design team there. That’s actually part of our strategy on bringing the overall cost of the production - 51 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 55 of 144
of the 787 down. So as much as we can we are doing -8, -9 commonality with better efficiency. We
are between 25% and 40% released depending on which of our components. Again doing very well
staying on the schedule.”
104. Anderson ended the investor conference call by reinforcing an analyst’s observation
that the “787 is obviously coming in pretty well,” stating simply: “ 787 is doing well .”
105. Defendants’ statements on May 3, 2012, were false and misleading when made and
had a direct effect on Spirit’s stock price, causing it to continue trading at artificially inflated levels.
For example, on May 3, 2012, Spirit’s stock price increased nearly 1.7%.
106. Analysts continued to issue positive reports based on defendants’ misstatements. For
example, on May 3, 2012, The Buckingham Research Group reiterated its “Buy rating” for Spirit
and raised its estimates and target price to $30 (stock closed at $25.30 on previous trading day).
Buckingham explained that Spirit “may be on track to hit the cross-over point when deferred production begins declining [for the 787 program] sooner than the forecasted 125th unit.” Cowen &
Company’s May 3, 2012, research report highlighted Spirit’s “pattern of declining number & size of
negative adjustments, which suggest improving productivity as new programs move out of
development and into production.” Wells Fargo Securities, LLC also issued a favorable research
report which, as to the 787 program, noted that “the risk of the development programs appear
contained” and highlighted the apparent “strong performance improvement in moving down the
learning curve on 787 production.” The Wells Fargo report also confirmed that “SPR continues to
expects to reach the break-even point, on a cash basis, between units 125-150.” Cowen &
Company’s May 4, 2012 report, titled “Q1 Beat Bolsters Turnaround Story, ” noted Spirit’s
reported financials on the 787 program were “suggesting improving productivity,” and that the “new
G280 wing management . . . appears to have a credible plan to reduce supply chain risks.” Finally,
Sterne, Agee & Leach, Inc. also issued a positive report on May 4, 2012, in which they explained - 52 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 56 of 144
that “SPR is turning the corner as development programs transition into production,” reasoning that
defendants’ affirmation of their 2012 guidance “ demonstrates the de-risking of SPR’s development programs going forward as they transition into production .”
107. On June 13, 2012, defendants Turner and Anderson addressed analysts and investors
at the Deutsche Bank Global Industrials and Basic Materials Conference. In his opening remarks,
Turner highlighted the 787 program and touted the program’s “ cost reduction ” and “efficiency
improvements ,” stating that “We’re pleased that the [787] aircraft is certified and in service. . . .
With cost reduction as our top priority on this program, we are intensely focused on productivity
and efficiency improvements .” Turner also addressed analysts’ concerns about the G650 program,
declaring; “So I mean I’m very bullish on the G650 . Our production line is running smoothly on
that and I think making some significant progress .”
108. In addition, Turner addressed the question of whether there was “margin opportunity”
on the 787 program, i.e., whether the program would go above zero margin in the near term. Turner
responded optimistically: “We have a great working relationship with our customer in the program
and our customer we’ve got teams together driving the productivity, the producibility, the supply
chain, all the things -- all the elements to drive a cost curve . We are pleased with the trajectory
that those teams are on at this point in time and that momentum needs to be sustained . I think
we’ve got a chance. We certainly have a good chance of converting some of what we have in the
reserve into profitability .”
109. Defendants’ highly positive, yet false and misleading statements on May 3 and June
13, 2012, had a direct effect on Spirit’s stock price, causing it to continue trading at artificially
inflated levels.
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110. Seizing on Turner’s assurances, Deutsche Bank Research issued a very favorable
research report on June 14, 2012, emphasizing that “787 cash costs are improving . . . because
learning curve effects are showing up with a target for cash costs to equal shipset price at unit 125.”
111. Defendants’ statements on May 3 and June 13, 2012, (¶¶95-98, 101-104, 107-108)
were false and misleading when made. As set forth below, defendants knew or recklessly
disregarded, but failed to disclose, that the Company’s 787 and Gulfstream programs were
experiencing rampant and ongoing production problems, leading to severe current and projected cost
overruns, which defendants concealed in an effort to artificially maintain zero margin on the 787 and
avoid taking a forward loss on it and the Gulfstream programs.
(a) As detailed above and in §VIII, ¶¶149-167, defendants knew by at least 4Q
2011 that Spirit was incurring and internally projecting material amounts of cost overruns due to pervasive and severe production problems. In violation of GAAP, SEC rules and Spirit’s own
accounting policy, defendants deliberately and improperly failed to expense these unrecoverable
costs in an effort to artificially report a zero margin (break-even profit) on the 787 program and
avoid recording a forward loss on its 787 and Gulfstream programs. In doing so, defendants
materially understated expenses and inflated its reported earnings during the 1Q 2012.
(b) Despite defendants’ positive representations concerning the 787 program in
¶¶96-97, 100-101, 103-104, 107-108, including that the 787 program was “on plan as of the end of
the first quarter here in 2012,” the Company expected to achieve productivity and efficiency
improvement across Spirit’s business, defendants “have a good chance of converting . . . reserve into profitability,” “787 is doing well,” the “teams continue to track per plan”:
(i) Spirit’s “forecasted cost curves” on the 787 program were, according
to CW3, inconsistent with the underlying internal analyses done by Spirit’s Functional Managers,
- 54 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 58 of 144
and defendants knew, or were reckless in not knowing, that “there was no way” the mandated cost
levels could be achieved (¶¶195(b)-(d));
(ii) Spirit did not have adequate reserves to prevent the 787 program from
moving to a forward loss position because the Company was unable to “come down the cost curve
on that program,” and as explained in ¶¶172-173, Table 2, by 1Q 2012 defendants had already
understated costs by 16.9%; and
(iii) As corroborated by CW2, CW4 and CW10, Spirit was not able to
implement planned cost improvements on the 787 program, and was experiencing wasted labor
hours, a lack of synchronization between personnel, costly scrap including entire fuselages, repeated
design and engineering changes that led to severe supply chain disruptions, delays and missed
deadlines, rampant part shortages and expedited shipping costs to replace missing parts, and other
ongoing and pervasive issues within the 787 program. ¶¶194, 196, 202. For example, CW4
recounted an instance when Spirit overpaid by $22,000-$23,000 to expedite a $2,000-$3,000 part to
replace missing inventory. ¶196(c).
(c) Contrary to defendants’ positive representations concerning the Gulfstream programs in ¶¶96-97, 100, 102, 107, including that “I’m very bullish on the G650,” “our production
line is running smoothly” and “we’ve made tremendous progress [on the 650]”:
(i) Spirit admitted that defendants were unable to “ensure that the bill of
materials used in accounting estimates were accurate and provided a sound basis for estimating
future costs” (¶148);
(ii) According to CW5, and as corroborated by CW10, Spirit’s internal
cost-down targets on the Gulfstream programs called for a 70-80% “learning curve” reduction in
material costs which was “very steep and maybe unrealistic,” particularly in light of the fact that any
actual savings achieved were offset by increasing engineering costs and a problematic supply chain. - 55 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 59 of 144
¶¶197(d), 202. In fact, according to CW5, an internal Spirit study conducted on the Gulfstream program at the end of 2011 demonstrated that Spirit was not getting the results it needed and that
only 30% of the BOM parts could be found at prices needed to achieve the cost-down goals (¶97(e));
(iii) As explained in ¶174, Tables 3-4, by 1Q 2012 defendants had already
understated costs on the 280 and 650 programs by 62% and 61%, respectively. As a result, Spirit did
not have adequate reserves to avoid taking forward-loss charges on the Gulfstream programs, which
were then experiencing massive cost overruns;
(iv) As described by CW1, CW6, CW7 and CW8, the Gulfstream program
had become so delayed that Spirit could not ship the G280 wings using normal delivery, and instead
was forced to rely on a special Russian “Antanov” aircraft to fly the wings to a fabricator in Israel at
a cost of almost $1 million each time – significantly more than alternative economically viable and
cost conscious methods such as overland freight and sea transport. ¶¶193, 198-200. In some
instances, wing structures became further delayed even after the Antanov arrived at Tulsa, costing an
additional $40,000 each day the aircraft waited on the Tulsa tarmac (¶198(e));
(v) According to CW1, contractors and employees were charged with
manufacturing Gulfstream components with “planning papers” rather than blueprints, leading to
items being installed incorrectly and additional costs. ¶193. And, as corroborated by CW8, each
650 wing Spirit produced carried with it an average of 700 “rejection tags,” each costing an average
of $1,000 to remedy. ¶200(e). According to CW1, CW6, CW8 and CW9, the Gulfstream programs
were “so delayed” and “consistently behind schedule.” ¶¶193, 198, 200-201. In fact, CW8
recounted a manager meeting in mid-2011, led by Turner and Anderson, where they emphasized the
650 program was behind schedule and over budget (¶200(h)); and
(vi) According to CW6, Spirit’s 280 program was “hemorrhaging money”
due to repeated cost overruns and because Spirit had “underbid” the 280 contract, as corroborated by - 56 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 60 of 144
CW6, CW7 and CW10. ¶¶198-199, 202. And, according to CW5 and corroborated by CW9, because the contracts for the Gulfstream programs were “not thought through” when they were
negotiated, Spirit was forced to absorb the costs of the numerous engineering changes. ¶¶197(g),
201(a). Also, as described by CW7, Spirit did not opt for buying parts in bulk on the 280 program,
which led to cost overruns that “just kept getting bigger and bigger” – “It was just a madhouse; it
really was.” ¶199(b). Spirit was also unable to improve its supply chain contracts on its Gulfstream programs – a significant portion of the programs’ costs – to planned levels, preventing Spirit from
reducing program costs as planned.
(d) Contrary to defendants’ positive statements concerning production of the 787
and Gulfstream programs in ¶¶96-97, 100-104, 107-108, including that “[w]e are happy with our progress both in Wichita and Tulsa” and would “continue to execute our plan,” as explained and
corroborated by CW1, CW4, CW6 and CW8, the Tulsa facility was suffering from chronic inventory problems, tooling problems, missing tools, high rates of scrap and overall poor factory conditions, as
it was having difficulty managing its rapid expansion with new customers and new and unfamiliar
lines of work, including transitioning the Tulsa facility from a traditionally build-to-print facility to a
design-build facility without the appropriate personnel and machinery, and managing multiple
development programs concurrently due to repeated delays. ¶¶193, 196, 198, 200. And, as
defendants admitted after the Class Period, the Tulsa facility was suffering from severe performance
issues that resulted in changes to contract estimates and caused Spirit to fall woefully behind on the
delivery schedule for its 787 wing project. ¶146. Defendants had already begun formulating their
massive “recovery plan” and were forced to dedicate more and costly resources to the Tulsa-based programs in an effort to bring the delivery schedule current. Id.
(e) As a result of the foregoing, and based on ¶¶149-202, defendants lacked a
reasonable basis for their positive statements about the Company and its outlook, including - 57 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 61 of 144
statements about its ability to achieve cost targets on the development programs, maintain zero margin on the 787 and avoid forward losses on it and the Gulfstream programs, and that the 787 cash costs would equal book costs “about 150 or in that range.” Indeed, as Spirit admitted after the Class
Period, at least as early as 1Q 2012, defendants were unable to and failed to accurately and timely evaluate current actual trends impacting estimates of supply chain and labor costs that were identified and incorporated into Spirit’s accounting estimate on a timely basis.
E. Second Quarter 2012 Earnings Release and Conference Call, Jefferies Group, Inc. Global Industrial and Aerospace & Defense Conference, RBC Capital Market Global Industrials Conference and Morgan Stanley Industrials and Autos Conference
112. On August 2, 2012, defendants issued a press release on PR Newswire in which they reported the Company’s financial results for 2Q 2012.
. . . Spirit’s second quarter 2012 revenues were $1.341 billion, down from $1.466 billion for the same period of 2011 as the previous period included recognition of deferred revenue associated with the 787 program contract amendment. * * *
Operating income was $83 million, compared to $64 million for the same period in 2011, driven by increased production volume. In the quarter, as previously announced, the company recognized a pre-tax ($55) million, or ($0.26) per share, charge for expenses related to the April 14, 2012 severe weather event at its Wichita, KS facility. The company also recognized a pre-tax ($7) million, or ($0.03) per share, additional forward-loss on the A350 non-recurring wing program. In comparison, the second quarter of 2011 operating income included a pre-tax ($53) million additional forward-loss on the Gulfstream G280 wing program.
113. Addressing the Company’s financial position, Turner touted that “[o]verall, this quarter exemplifies how Spirit AeroSystems is well positioned to meet the demand for large aircraft as we are focused on continued reliability, capability, and teamwork to align the business for long- term value creation.” Defendants further led investors to believe that the Company was closely monitoring and adjusting profitability estimates on its all-important development projects:
- 58 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 62 of 144
Spirit updated its contract profitability estimates during the second quarter of 2012, resulting in a net pre-tax $6 million, or $0.03 per share, favorable cumulative catch-up adjustment driven by core program productivity and efficiency.
114. On August 2, 2012, defendants hosted a conference call with investors and analysts to
discuss Spirit’s 2Q 2012 financial results and the Company’s business and operations. The call
repeated and addressed information previously made public in defendants’ August 2, 2012, press
release. Defendants Turner and Anderson led the call and addressed investors’ and analysts’
questions and concerns about Spirit’s business.
115. During his introductory remarks, Turner explained that “ [w]e continue to see progress as the joint Boeing and Spirit teams remain focused on identifying and implementing cost
improvement across the 787 program, and value engineering, supply-chain architecture, and production flow.” Turner continued, touting that ‘[d]uring the [second] quarter, the [wing] segment
made progress on enhanced production plans , . . . with improved production flow for our G280
and G650 programs in our Tulsa facility .” Anderson then remarked that “787 deferred inventory
growth rates continued to moderate as we continue to improve our unit cost performance, as planned .”
116. During the question and answer portion of defendants’ presentation, Turner discussed
the “substantial improvements ” in the 280 and 650 cost curves and addressed a BB&T analyst’s
inquiry that “All quiet on the G280 front in this quarter. Should we assume that, that program is
mostly de-risked?” In response, Turner stated: “Well Carter, I think we – I mean, we clearly came
through the quarter without additional issues . . . . In both [the 280 and 650], as I think I’ve
mentioned for the last couple quarters, we are making substantial improvements in our cost curves.
. . . Good progress, really screaming down the cost curves on both programs, and feeling better
about it . . . .”
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117. Turner also responded to an analyst’s question about rate increases on the 787,
explaining: “Clearly, we’re very, very focused on this, spending a lot of management time and
energy doing everything we can to anticipate issues that we’ll have.” Turner continued: “ We’ve
talked in the past about the activity we have underway to improve the 787 with value engineering,
and supply chain design, and production efficiencies, all those things are being worked on
continually, and phased in . . . .”
118. During the conference call, a Shapiro Research analyst posed the question to
Anderson that “with the steady reduction in 787 deferred, it would look to me like you probably get
to break-even around unit 100, somewhat better than what you thought before, and if that is true, you probably can – would you start to book profits next year, since you’ll probably get to unit 100 by the
end of this year?” Anderson stated: “I’m not going to answer,” but assured the analyst that “ [w]e are
continuing to improve, that’s the good news, right ? . . . [W]e feel really good about the plan
we’re on .”
119. Defendants’ statements on August 2, 2012, were false and misleading when made and
had a direct effect on Spirit’s stock price, causing it to continue to trade at artificially inflated levels.
120. Analysts continued to buy into the rosy picture defendants painted, continuing to
issue positive research reports about the “cash break even”/”inflection point” on the 787 program
and the de-risking of the Company’s development programs. For example, an August 2, 2012,
Credit Suisse research report gave Spirit a favorable “Outperform” rating and set a $30 price target
(stock closed at $22.98 on previous trading day), reasoning that the “ 787 Learning Curve
Continues to Show Healthy Improvement ,” and explaining that the “inflection point on 787 cash
costs (from negative to positive) is around unit 125-150.” KeyBanc Capital Markets also released a positive report on August 2, 2012, reasoning that “we continue to believe investor attention should be focused on the current de-risking of the 787 program, which now appears to be closer to crossing - 60 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 64 of 144
its cash-cost break-even point as deferred inventory growth continues to moderate. . . . Management
indicated that it continues to make solid progress on the 787 program. . . . Given the recent progress
and improvements in learning curve, it would appear that the program could be in line to break even prior to management’s original stated goal of line unit 150.” Finally, a BB&T Capital Markets
report released on August 3, 2012, issued a Buy rating for Spirit, praising the Company for its
“greatly needed, clean quarter that significantly weakened the Bear case that Spirit has both
execution and earnings reliability issues.”
121. The next day, analysts continued to issue favorable research reports based on
defendants’ positive, but false and misleading, statements. For example, an August 3, 2012,
Deutsche Bank Research report stated that “management appears to be performing well on its
various programs, and is steadily building a track record of good execution.” Deutsche Bank further
noted that the “[c]harges taken year-to-date on development programs have totaled $21M, compared
to $82M over the same period last year, reflecting a lower risk profile and management’s enhanced
execution.” A similarly positive report was issued by Sterne, Agee & Leach, Inc. on August 3, 2012,
as analysts perceived that “SPR is turning the corner as development programs transition into production.” Sterne Agee highlighted that “2012 EPS guidance was reiterated” which “demonstrates
the de-risking of SPR’s development programs going forward as they transition into production.”
122. On August 7, 2012, defendants filed Spirit’s quarterly report with the SEC on Form
10-Q for 2Q 2012. The Company’s Form 10-Q was signed and certified by defendants Turner and
Anderson, and reported Spirit’s financial results for 2Q 2012.
123. Also on August 7, 2012, defendant Turner addressed investors and analysts at the
Jefferies Group, Inc. Global Industrial and Aerospace & Defense Conference, moderated by analyst
Howard Rubel. In his opening statement, Turner discussed the 787 program’s cost curve and
“excess over average”: - 61 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 65 of 144
[Rubel]: [W]e’re going to talk about the shape of the 787 learning curve. And I mean the deferred production cost, . . . the excess over average for the most recent quarter was a remarkable year on year improvement. . . . [T]hese are really terrific numbers . . . .
[Turner]: [W]e anticipate we will continue to track that curve . . . . [W]e are making some progress, and I think we will we’re not going to flatten. We’re going to keep coming down the curve .
124. Defendants’ statements during the investor conference on August 7, 2012, were false
and misleading when made and had a direct effect on Spirit’s stock price, causing it to continue
trading at artificially inflated levels. For example, in response to defendants’ statements Spirit’s
stock price increased nearly 4% on August 7, 2012.
125. Following the conference, as a result of defendants restatements, analysts continued
to issue highly positive research reports. On August 7, 2012, Jeffries & Company, Inc. issued a
report explaining that “[w]e gain the sense that the learning curve on the G650 . . . is starting to
approach planned targets. The 787 curve is also doing well.” Shortly thereafter, on September 4,
2012, Imperial Capital, LLC reported favorably that “ [t]he 787 fundamentals are improving, and
this is the most important program for SPR. We expect positive movement with the G280 and
G650 as the next potential catalysts. . . . In our view, sentiment regarding the 787 has been perhaps the most important factor for SPR stock and its free cash flow outlook for 2012 and 2013 .
We believe that the risk profile on the 787 is declining faster for SPR than was expected.”
126. On August 8, 2012, as a result of defendants’ false and misleading statements, Spirit
stock reached its Class Period high of $25.85.
127. On September 12, 2012, Anderson attended the RBC Capital Market Global
Industrials Conference. Anderson discussed the 787 program and any risk the program posed to the
Company: “Now, we’re doing reasonably well on executing on our [787] plan as we’ve come now
– we’re approaching 100 in the factory. So that feels good; the plan looks okay.”
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128. During the September 12, 2012, conference, Anderson hinted at the potential of near- term charges on the Gulfstream programs and stated that he was “very concerned” about the issues at
Spirit’s Tulsa facility, where the Company has been “deeply challenged.” Anderson identified a management change on September 6, 2012, whereby Coleal replaced defendant Kummant as head of
Oklahoma operations. With Coleal’s arrival, Anderson explained “we’re going to be very aggressive on figuring what it really takes to correct the Tulsa factory.” Anderson noted Spirit’s need to
“bring[] the supply chain on line to support the production rates,” but cautioned that defendants’
“ability to secure the parts . . . outside of Spirit, and do them for the price we need to be successful financially on the programs . . . represents quite a bit of risk at this point in time.” When questioned whether it was a “reasonable expectation” that there would be “a reassessment of the costs,”
Anderson stated “I think it always is.” Anderson ominously added, “it’s time for Tulsa to be fixed kind of once and for all.”
129. On September 13, 2012, Turner and Anderson both attended the Morgan Stanley
Industrials and Autos Conference. During the conference, Anderson discussed the progress made on the 787 program’s cost curve, explaining “ so far – so far so good . . . . But we are seeing improvement across all of our products on 787 and continue to have a level of optimism that we will be able to come down the curve .” Turner then echoed Anderson’s statements from the prior day, admitting the Gulfstream supply chain “represents some risks to our Company, near term and medium term, as we go out and get longer-term contracts in place into the supply base.”
130. Defendants’ statements on September 12 and 13, 2012, were false and misleading when made and had a direct effect on Spirit’s stock price, causing it to continue trading at artificially inflated levels.
131. Defendants’ statements in August and September 2012, (¶¶112-113, 115-118, 122-
123, 127, 129) were false and misleading when made. As set forth below, defendants knew or - 63 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 67 of 144
recklessly disregarded, but failed to disclose, that the Company’s 787 and Gulfstream programs were
experiencing rampant and ongoing production problems, leading to severe current and projected cost
overruns, which defendants concealed in an effort to artificially maintain zero margin on the 787 and
avoid taking a forward loss on it and the Gulfstream programs.
(a) As detailed above and in §VIII, ¶¶149-167, defendants knew by at least 4Q
2011 that Spirit was incurring and internally projecting material amounts of cost overruns due to pervasive and severe production problems. In violation of GAAP, SEC rules and Spirit’s own
accounting policy, defendants deliberately and improperly failed to expense these unrecoverable
costs in an effort to artificially report a zero margin (break-even profit) on the 787 program and
avoid recording a forward loss on its 787 and Gulfstream development program. In doing so,
defendants materially understated expenses and inflated its reported earnings during the 2Q 2011.
(b) Despite defendants’ positive representations concerning the 787 program in
¶113, 115, 117-118, 123, 127, 129, including that defendants “continue to improve our unit cost performance, as planned,” “[w]e’re going to keep coming down the curve,” “we will continue to
track that curve,” “so far so good” and “[w]e are continuing to improve . . . we feel really good
about the plan we’re on”:
(i) Spirit’s “forecasted cost curves” on the 787 program were, according
to CW3, inconsistent with the underlying internal analyses done by Spirit’s Functional Managers,
and defendants knew, or were reckless in not knowing, that “there was no way” the mandated cost
levels could be achieved (¶¶195(b)-(d));
(ii) Spirit did not have adequate reserves to prevent the 787 program from
moving to a forward loss position because the Company was unable to “come down the cost curve
on that program,” and as explained in ¶¶172-173, Table 2, by 2Q 2012 defendants had already
understated costs by 17.6%; and - 64 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 68 of 144
(iii) as corroborated by CW2, CW4 and CW10, Spirit was not able to
implement planned cost improvements on the 787 program, and was experiencing wasted labor
hours, a lack of synchronization between personnel, costly scrap including entire fuselages, repeated
design and engineering changes that led to severe supply chain disruptions, delays and missed
deadlines, rampant part shortages and expedited shipping costs to replace missing parts, and other
ongoing and pervasive issues within the 787 program. ¶¶194, 196, 202. For example, CW4
recounted an instance when Spirit overpaid by $22,000-$23,000 to expedite a $2,000-$3,000 part to
replace missing inventory. ¶196(c).
(c) Contrary to defendants’ positive representations concerning the Gulfstream programs in ¶¶113, 115-116, including that defendants were “making substantial improvements in
our cost curves,” were “really screaming down the cost curves on both programs,” there was
“improved production flow for our G280 and G650 programs in our Tulsa facility” and “we clearly
came through the quarter without additional issues”:
(i) Spirit admitted that defendants were unable to “ensure that the bill of
materials used in accounting estimates were accurate and provided a sound basis for estimating
future costs” (¶148);
(ii) According to CW5, and as corroborated by CW10, Spirit’s internal
cost-down targets on the Gulfstream programs called for a 70-80% “learning curve” reduction in
material costs which was “very steep and maybe unrealistic,” particularly in light of the fact that any
actual savings achieved were offset by increasing engineering costs and a problematic supply chain.
¶¶197(d), 202. In fact, according to CW5, an internal Spirit study conducted on the Gulfstream program at the end of 2011 demonstrated that Spirit was not getting the results it needed and that
only 30% of the BOM parts could be found at prices needed to achieve the cost-down goals
(¶197(e)); - 65 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 69 of 144
(iii) As explained in ¶174, Tables 3-4, by 2Q 2012 defendants had already
understated costs on the 280 and 650 programs by 62% and 70%, respectively. As a result, Spirit did
not have adequate reserves to avoid taking forward-loss charges on the 280 and 650 programs, which
were then experiencing massive cost overruns;
(iv) As described by CW1 and CW6, the Gulfstream program had become
so delayed that Spirit could not ship the G280 wings using normal delivery, and instead was forced
to rely on a special Russian “Antanov” aircraft to fly the wings to a fabricator in Israel at a cost of
almost $1 million each time – significantly more than alternative economically viable and cost
conscious methods such as overland freight and sea transport. ¶¶193, 198-200. In some instances,
wing structures became further delayed even after the Antanov arrived at Tulsa, costing an additional
$40,000 each day the aircraft waited on the Tulsa tarmac (¶198(e));
(v) According to CW1, contractors and employees were charged with
manufacturing Gulfstream components with “planning papers” rather than blueprints, leading to
items being installed incorrectly and additional costs. ¶193. And, as corroborated by CW8, each
650 wing Spirit produced carried with it an average of 700 “rejection tags,” each costing an average
of $1,000 to remedy. ¶200(e). According to CW1, CW6, CW8 and CW9, the Gulfstream programs
were “so delayed” and “consistently behind schedule.” ¶¶193, 198, 200-201. In fact, CW8
recounted a manager meeting in mid-2011, led by Turner and Anderson, where they emphasized the
650 program was behind schedule and over budget (¶200(h)); and
(vi) According to CW6, Spirit’s 280 program was “hemorrhaging money”
due to repeated cost overruns and because Spirit had “underbid” the 280 contract, as corroborated by
CW6, CW7 and CW10. ¶¶198-199, 202. And, according to CW5, and corroborated by CW9, because the contracts for the Gulfstream programs were “not thought through” when they were
negotiated, Spirit was forced to absorb the costs of the numerous engineering changes. ¶¶197(g), - 66 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 70 of 144
201(c). Also, as described by CW7, Spirit did not opt for buying parts in bulk on the 280 program,
which led to cost overruns that “just kept getting bigger and bigger” – “It was just a madhouse; it
really was.” ¶199(b). Spirit was also unable to improve its supply chain contracts on its Gulfstream programs – a significant portion of the programs’ costs – to planned levels, preventing Spirit from
reducing program costs as planned.
(d) Contrary to defendants’ positive statements concerning the 787 and
Gulfstream programs in ¶¶113, 115-118, 123, 127, 129, including that there was “improved production flow” and that “we clearly came through the quarter without additional issues,” as
explained and corroborated by CW1, CW4, CW6 and CW8, the Tulsa facility was suffering from
chronic inventory problems, tooling problems, missing tools, high rates of scrap and overall poor
factory conditions, as it was having difficulty managing its rapid expansion with new customers and
new lines of work, including transitioning the Tulsa facility from a traditionally build-to-print
facility to a design-build facility without the appropriate personnel and machinery, and managing
multiple development programs concurrently due to repeated delays. ¶¶193, 196, 198, 200. And, as
defendants admitted after the Class Period, the Tulsa facility’s severe performance issues had
magnified, resulting in further changes to contract estimates and causing Spirit’s long delayed
delivery schedule for its 787 wing project to fall further behind. ¶146. In fact, defendants had
already, no later than July 2012, implemented their massive “recovery plan” and were forced to
dedicate more and costly “additional resources” to the Tulsa-based programs in an effort to bring the
delivery schedule current. Id.
(e) As a result of the foregoing, and based on ¶¶149-202, defendants lacked a
reasonable basis for their positive statements about the Company and its outlook, including
statements about its ability to achieve cost targets on the development programs, maintain zero
margin on the 787 and avoid forward losses on it and the Gulfstream programs, and that the 787 cash - 67 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 71 of 144
costs would equal book costs between units 125 and 150. Indeed, as Spirit admitted after the Class
Period, at least as early as 1Q 2012, defendants were unable to and failed to accurately and timely
evaluate current actual trends impacting estimates of supply chain and labor costs that were
identified and incorporated into Spirit’s accounting estimate on a timely basis.
132. Although the picture painted by defendants’ false and misleading statements
continued to mislead analysts and investors regarding the pervasive problems plaguing Spirit’s
Gulfstream programs and Tulsa facility, the hint at the truth caused the Company’s stock to drop
$1.06, or 4.24%, on September 13, 2012, and ultimately down $3.51, or 14% by October 10, 2012,
as the market absorbed defendants’ partial disclosure of the truth.
133. Despite the disclosure regarding the Gulfstream development program, analysts
continued to respond favorably to defendants’ misstatements. On September 27, 2012, Topeka
Capital Markets initiated coverage of Spirit with a “BUY” rating and a price target of $33 (stock
closed at $22.25 on previous trading day), stating: “We believe Spirit has turned a corner in 2012
and is in the early innings of a multi-year expansion phase . . . high gear, and developing programs
ramp to full production. Write-offs are decelerating and cash flow is expected to turn positive.”
VII. THE TRUTH ABOUT DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS EMERGES
134. Despite defendants’ repeated assurance that they were “ seeing improvement across
all of our products on 787 ” and that they were “ screaming down the cost curves on both
[Gulfstream] programs ,” on October 25, 2012, defendants shocked the market when they were no
longer able to hide massive cost overruns that forced the Company to record “ combined forward
loss charges total[ing] approximately $590 million .” The Company’s October 25, 2012, release
stated, in part:
WICHITA, Kan., October 25, 2012 – Spirit AeroSystems Holdings, Inc. (NYSE: SPR) today announced that it expects to record pre-tax charges of - 68 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 72 of 144
approximately $184 million on the 787 program; $163 million on the G650 Wing program; $151 million on the BR725 (Engine Nacelle Package for the G650); $88 million on the G280 Wing program; and $4 million on other combined programs. These combined forward loss charges total approximately $590 million, and will be included in the company’s third quarter 2012 financial results.
“The execution of our diversification and growth strategy has proven very complex,” said Jeff Turner, President and Chief Executive Officer, “as we rapidly expanded our customer-base, manufacturing sites, and product design capabilities, while managing multiple development programs with significant design changes and schedule delays. It is unfortunate that we have struggled on these development efforts. As we move forward our focus is on applying our lessons learned in strong program management, change control, and shop floor disciplines to drive performance on these programs and continue the solid performance on our core production programs,” Turner concluded.
During the third quarter, the company continued to increase production rates and progress to full-rate production on a number of newly type-certified programs. The company no longer expects to achieve cost targets sufficient to maintain zero- profit margin contracts due to increasing supply chain, factory support, and labor costs. The cash use associated with the additional contract costs will occur over the majority of remaining contract deliveries. The current contract accounting shipments are expected to be delivered by 2018.
135. Following their “bombshell” announcement, defendants hosted a contentious conference call on October 25, 2012, during which they scrambled to explain the unexpected charges. During his opening remarks, Turner admitted that the Company’s “ progress [wa]sn’t fast enough to achieve . . . cost targets ,” and blamed the charge on Spirit’s “[r]apidly expanding . . . customer base, manufacturing sites and product design capabilities.” Turner claimed that it was just too difficult to “manag[e] multiple development programs with significant design change and schedule delays.” Turner then confirmed that the Company was “ experiencing higher than forecast costs, particularly in supply chain ,” and explained that issues at the Tulsa plant led to the cost overruns and production problems:
So let me take a moment to discuss how the complexity and rapid growth in our Tulsa plant increased the cost risk on these programs.
This complexity revolves around the transition of a traditionally build-to-print location to a design/build operation. Over the last seven years, we took a plant that
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was skilled operationally and added design/build programs and new customers, including resourcing the development of the 787 wing components.
Subsequently, we have grown that facility from less than 1000 employees in 2005 to over 3000 today. Along with the change in program delays on new programs, this complexity in growth has contributed significantly to the cost growth on these programs .
As we have consistently described, the biggest risk for Spirit has been and continues to be the 787. While we have discussed the overall condition of the 787 program as making progress towards challenging costdown targets, the wing components have been the most challenged program element for Spirit.
As we work with our customer on schedule challenges on the 787, we have delayed implementing some planned cost improvements . The financial impact in the quarter represents the cost in the wing segment for some schedule recovery activity and these delayed cost improvements .
Turning to the business jet programs, as we have consistently described over the last 12 months, our focus on these programs has been on improving the factory condition and securing supply chain contracts. We have made improvements and reduced costs, just not enough and not fast enough to meet our projections . As the design settled and the planes achieved type certification this quarter, the opportunity to drive value-engineering cost improvements is now reduced.
In connection with the Gulfstream G650, the BR725, which is the nacelle package we’ve produced for Rolls-Royce, has experienced a similar type development cost growth and design evolution. And the focus in the last 12 months has been to reduce the supply chain costs on this program as well. Clearly, our focus now is on driving operational gains on these programs as they transition to full-rate production and turning them cash positive. Our teams are acutely focused on supporting our customers as we drive cost and productivity improvements into these next generation products.
*
These charges are indicative of the challenges we faced managing multiple new programs in a complex high-growth environment and one highly disrupted by multiple new program schedule slides .
I am extremely disappointed in how we have managed this complexity. I’ve shared with many of you the lessons we have learned over the past seven years and would say categorically that I underestimated the organizational learning required to manage what became an unplanned concurrency of a number of new programs .
136. Pressured to identify the source of the charges and what defendants planned to do to solve the underlying problems, Turner admitted “as I think I have said in other meetings, we are - 70 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 74 of 144
coming down the curves , but not on the curves and that is particularly true on these programs that
are in Tulsa.” Furthermore, Turner admitted that “[w]e did get behind on the wing components on
the 787 recently and have had to spend some additional cost and delay some movement that would
have saved us cost earlier because of that. . . . So again, we continue to come down our cost curves, but are off the curves and this charge reflects that as we look forward and in our ability to get it to
the cost curve we have been forecasting.” Responding to whether defendants were “making
assumptions in this charge that you will make some additional improvements with [suppliers] and
getting those costs down,” Turner responded that “[w]e absolutely have improvement from where
we are planned into it,” then admitted “in our analysis of it in this quarter where we are . . . these
estimates say we will not hit that curve as soon as we had projected. And in some cases, we don’t
think we can hit the curve that was being projected.”
137. Cowen & Company analyst Cai von Rumohr confronted defendants, inquiring:
So I guess a two-part question. I think you had mentioned recently that you still had supplier agreements to be reached on the G280 and 650 and kind of that was all delayed by the certification process. Could you tell us where you are in achieving those and kind of what your assumptions have been?
And secondly, the broader question, when you look at the size of this writeoff, which is considerably larger than most of us had estimated, it looks like it is something like 18% to 19% of the contractual revenues in these accounting blocks. How could you have made a miss quite that big and not seen it earlier ?
138. As to the 280 and 650 supply agreements, Turner explained:
I think, again, I alluded to this in the conversation earlier where we had forecasted costs that we thought we could get from our supply base and frankly, the fact that we had ran into difficulty because of the supply base being quite full with Boeing and Airbus work and the relative size of these packages, the difficulty placing them. We have delayed placing them, working harder to get the price that we had forecast and believe that we could get. So there is an element of that.
We are working hard to place all the contracts. I think by the end of -- or the middle of next year, we think we will have them all placed on long-term contracts and a big piece of the size of this writeoff question is the realization that we were not going to be able to get the level of improvement that we had planned in . We
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knew we were coming off of high number one units and disruption and we had forecast a substantial improvement and we are getting significant improvement, but not to the level that we had forecasted .
139. But as to how defendants “ha[d] made a miss quite that big and not seen it earlier ,”
Turner had no substantive response.
140. When asked to allocate the charge to specific sources, defendant Anderson admitted
that “the largest area of cost improvement we are actually struggling with is the supply chain ,” and
that “[w]e have, as a factory, cost growth here too, as well as factory support, but the biggest piece
is clearly in the supply chain and some of the scheduling issues on the 78[7] that really have been
internal to us and . . . delayed some level of cost improvements for us as well .”
141. Barclays Capital analyst Carter Copeland focused on two items defendants admitted
caused the 787 charge, “the schedule recovery activity and delayed cost improvements,” and asked
which of the two “may have been larger?” In response, Anderson admitted that “the schedule delay
was one in which we were ramping up production and I think we even got a little bit behind the
resource curve. And so we have had to apply a lot of resources to that recovery .” As to which was
larger, defendant Anderson stated, “there is probably equal balance there between the recovery plan
and the pushing out of the cost improvements that we had planned.”
142. RBC Capital Markets analyst Robert Stallard, in light of the “scale of this charge . . .
and what’s happened to the share price here today,” questioned whether “it’s time for Spirit to
maybe have a strategic reassessment of this expansion into other areas and perhaps you would be better off sticking to historical areas where you have done well like fuselages?” Defendant Turner
candidly admitted “that is a very valid question.”
143. Analysts who covered Spirit during the Class Period reacted swiftly and negatively to
the disclosure of the Company’s massive “bombshell” charge, immediately questioning defendants’
credibility, focusing on the alarming “magnitude of the charge”: - 72 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 76 of 144
“An announcement like this is doubly bad, because it both undermines the integrity and accuracy of the accounting assumptions that underpin GAAP earnings as well as indicates the cash flow will continue to be pressured for years to come.” (J.P. Morgan, October 25, 2012)
“The largest component of the loss Spirit announced this morning is $184 mn for the 787. We were surprised to see that since the company has made significant progress reducing 787 unit costs in recent quarters and has appeared to tout that progress on multiple occasions, including at its analyst meeting in March .” (J.P. Morgan, October 25, 2012.)
“[W]e were surprised by magnitude of the aggregate charges which were driven by higher than expected cost overruns . . . . Today’s announcement reignites our concerns that despite having taken charges in nearly every quarter since 2009, management does not yet have a handle on cost issues in the development programs.” (Morgan Stanley, October 25, 2012)
“Expecting a rock – not an asteroid : We had expected a charge from Spirit this quarter, but the hit was 10 times larger than our modest $50m placeholder . We’ve seen Spirit missteps in the past, but with the stock down 33% today (-33% vs S&P500), we think Spirit has probably consigned itself to the sidelines for some time.” (RBC Capital Markets, October 25, 2012)
“While SPR was expected to record a charge for Gulfstream programs in either 3Q12 or 4Q12, they have instead ‘ kitchen-sinked ’ all of the issues related to design changes, supply chain costs and execution.” (Sterne, Agee & Leach, Inc., October 25, 2012.)
“SPR: Charge a Blow To Credibility . . . . Spirit dropped a bombshell on investors by announcing a $590M combined forward-loss charge for the 787, G650, and G280 programs. The sheer magnitude of the charge . . . left investors with little choice but to assume the worst and head for the exits.” (BB&T Capital Markets, October 26, 2012)
“Massive Q3 Charge Radically Changes Story. . . . SPR’s inability to recognize severity of the issue earlier raises questions re SPR’s control . . . . Beyond the direct financial impact, the fact that management didn’t appear to comprehend the magnitude of the problem until very late in the Q raises questions about (1) the credibility of SPR’s controls . . . .” (Cowen and Company, October 26, 2012)
“Thus, today’s much larger cash charge caught everyone by surprise and erased any recently-found confidence in SPR’s program assumptions . . . .” (Credit Suisse, October 26, 2012)
“[H]ow could such a large charge not have been better anticipated? . . . A charge had been expected by the Street, but we believe the actual amount was
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10x greater than investors had been anticipating.” (Imperial Capital, LLC, October 26, 2012)
“Last Thursday Spirit AeroSystems Holdings, Inc. (SPR-NYSE) management dropped a bomb on investors unveiling that it would be taking charges across its various development programs . . . totaling $590 million. . . . With regards to the 787 program, management noted that it had realized it was going to be facing some scheduling challenges on the wing portion, which is manufactured at the Company’s Tulsa facility. In order to make up lost time, SPR needed to assign additional resources and incur the related overages, which amounted to part of the charge.” (KeyBanc Capital Markets, October 29, 2012)
“The charge damages the credibility of the accounting assumptions behind GAAP earnings , without which it is very difficult to value SPR. The charge is equivalent to nearly one third of the EBIT the company has ever generated since its creation in 2005. All of the assumptions underlying accounting profit are now likely to be viewed with skepticism by the market .” (J.P. Morgan, October 31, 2012)
144. On October 25, 2012, Moody’s Investors Service lowered its Rating Outlook on
Spirit to negative, explaining that the “weaker rating outlook follows Spirit’s announced $590
million forward loss charge that reduces inventoried costs on several commercial aircraft
development programs. . . . The magnitude of the forward loss charge, over 80% of reported
operating profit across 2010-2011 and about 60% of Spirit’s deferred production cost asset at
June 30th, reflects operational complexity of managing multiple aircraft development projects simultaneously and cost pressures to come from an already-strained supply chain .”
145. Within days of defendants’ announcement of the massive forward-loss charge, the
SEC advised Spirit that they initiated an inquiry focused on the timing of forward losses recognized
in the third quarter of 2012. As of February 19, 2014, the SEC’s inquiry is still ongoing.
146. On March 1, 2013, defendants filed Spirit’s Annual Report with the SEC on Form 10-
K for 4Q 2012 and fiscal year 2012. The Form 10-K provided further information regarding the
massive forward-loss charges defendants reported on October 25, 2012, specifically citing
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“performance issues” plaguing the Company’s Tulsa facility which were “magnified” in the third
quarter of 2012. The Annual Report stated in part:
Performance Issues-Tulsa Facility
The Company’s Tulsa facility has significant work content on three of the development programs (B787, G280, and G650). The multiple complex development programs at this facility have created various performance issues that have resulted in previous changes to our contract estimates on these development programs.
The performance issues at the Tulsa facility were magnified in the third quarter of 2012 when the Company implemented a recovery plan which would bring the Company current on the delivery schedule for its B787 wing components. The Company began implementing the recovery plan during late July 2012 which resulted in the addition of significant additional resources to meet delivery schedules. As the Company was implementing the recovery plan, it became clear during the third quarter estimation process that the remediation would have a significant impact on the future cost curves due to significant amounts of additional headcount and disruption.
147. The comments in Spirit’s Annual Report indicate that the Tulsa facility, where
components for the 787, 280, and 650 were being manufactured, was suffering from significant performance and efficiency problems during the Class Period, which were magnified when the
Company implemented a recovery plan in July 2012 to bring the 787 wing program back on track
after it had apparently fallen behind schedule. As confirmed in the Annual Report, the performance problems at the Tulsa facility, coupled with the remediation effort, exacerbated the already crippling
cost overruns that led to the forward loss-charges reported in October 2012. Defendants knew or
recklessly disregarded that prior to the third quarter and prior to implementing the recovery plan, the
Company had, and would continue to, incur substantial excess costs, which defendants should have
disclosed prior to the third quarter of 2012.
148. In addition, in the wake of the massive charge, Spirit admitted that it was unable to
and did in fact fail to: (i) provide accurate accounting estimates and “a sound basis for estimating
future costs”; (ii) ensure that “the bills of materials used in the accounting estimate were complete
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and provided a sound basis for estimating future costs”; (iii) ensure that “the evaluation of current actual trends impacting prior estimates of supply chain and labor costs [were] identified and incorporated into the accounting estimate on a timely basis”; and (iv) ensure that “the estimation of the number of production units used in the accounting estimates was accurate.” These failures resulted in audit adjustments to the cost of sales and inventory accounts and related financial disclosures within the Company’s consolidated financial statement, consisting of a $10.0 million increase in cost of sales related to a bill of material error in the first quarter of 2012 and a $10.0 million increase in cost of sales related to revised estimates of supply chain and labor costs in the fourth quarter of 2012 on the 280 program.
VIII. SPIRIT’S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD
149. In furtherance of their scheme to artificially inflate Spirit’s stock price, and in connection with defendants’ false and misleading statements regarding the Company’s 787 and
Gulfstream programs discussed infra, defendants violated their own accounting rules to avoid reporting a forward loss and caused the Company to falsely report its financial results in violation of
GAAP. 13 Despite the fact that Spirit was plagued by serious and pervasive production problems that were causing the company to incur and project severe cost overruns, defendants failed to timely
13 GAAP are those principles recognized by the accounting profession as the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC that are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnotes and other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure that would be duplicative of disclosures accompanying annual disclosures, per 17 C.F.R. §210.10- 01(a).
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record forward losses, 14 and improperly reported its 787 program at an artificial zero margin (break-
even profit) during the Class Period. As a result of Spirit’s improper accounting, the Company
overstated its operating income, net income and its assets, in Spirit’s publicly issued financial
statements and related earnings releases during the Class Period. 15 These financial results were
materially false and misleading and in violation of GAAP, SEC rules and Spirit’s own stated
accounting policy.
150. Defendants’ accounting violations were not the result of a simple mistake or error in judgment. The failure to record a forward loss on its 787 and Gulfstream development programs,
and artificially maintaining the 787 program at “zero margin” are pervasive and measured violations.
It involved improperly reduced cost forecasts mandated by Spirit’s senior management and a
deliberate, reckless disregard for cost overruns – all of which were designed specifically to avoid
recording forward losses and inflate the Company’s reported earnings and assets.
151. Contract accounting, and in particular, the percentage-of-completion method, was the
accounting method used by Spirit in reporting its financial statements issued during the Class Period.
In the notes to Spirit’s financial statements, defendants assert that the Company was properly
accounting for its supply contracts in accordance with GAAP as prescribed by ASC 605-35,
14 When the current estimates of total contract revenue and total contract cost indicate a loss, a provision for the entire loss on the contract, known as a forward-loss charge, is recorded to cost of sales in the period in which it becomes evident.
15 Spirit’s Class Period financial statements and earnings releases issued to the public and filed with the SEC include: an SEC Form 10-K for the fiscal year ended December 31, 2011; SEC Form 10-Qs for periods ended September 30, 2011, March 31, 2012 and June 30, 2012; and SEC Form 8-Ks issued on November 3, 2011, February 9, 2012, May 3, 2012 and August 2, 2012.
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Revenue Recognition Construction-Type and Production-Type Contract. 16 Defendants represented, in pertinent part:
We follow the requirements of FASB authoritative guidance on accounting for the performance of construction-type and certain production-type contracts (the contract method of accounting), using the cumulative catch-up method in accounting for revisions in estimates. Under the cumulative catch-up method, the impacts of revisions in estimates are recognized immediately when changes in estimated contract profitability become known.
A profit rate is estimated based on the difference between total revenues and total costs over a contract block. Total revenues at any given time include actual historical revenues up to that time plus future estimated revenues. Total costs at any given time include actual historical costs up to that time plus future estimated costs. Estimated revenues include negotiated or expected values for units delivered, estimates of probable recoveries asserted against the customer for changes in specifications, price adjustments for contract and volume changes, and escalation. Costs include the estimated cost of certain pre-production effort (including non- recurring engineering and planning subsequent to completion of final design) plus the estimated cost of manufacturing a specified number of production units. Estimates take into account assumptions relative to future labor performance and rates, and projections relative to material and overhead costs including expected “learning curve” cost reductions over the term of the contract. Estimated revenues and costs also take into account the expected impact of specific contingencies that we believe are probable.
Estimates of revenues and costs for our contract blocks span a period of multiple years and are based on a substantial number of underlying assumptions. We believe that the underlying assumptions are sufficiently reliable to provide a reasonable estimate of the profit to be generated. However, due to the significant length of time over which revenue streams will be generated, the variability of the revenue and cost streams can be significant if the assumptions change. Estimates of profit margins for contract accounting blocks are typically reviewed on a quarterly basis. Assuming the initial estimates of sales and costs under the contract block are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract block. Changes in these underlying estimates due to revisions in sales and cost estimates may result in profit margins being recognized unevenly over a contract block as such changes are
16 On June 30, 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification TM (“ASC”), which became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC, effective for financial statements issued for reporting periods that end after September 15, 2009. The codification did not change existing U.S. GAAP. These allegations largely use the historical references to U.S. GAAP, as such references existed during the Class Period.
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accounted for on a cumulative basis in the period estimates are revised, which we refer to as cumulative catch-up adjustments. When the current estimates of total contract revenue and total contract cost indicate a loss, a provision for the entire loss on the contract, known as a forward-loss charge, is recorded to cost of sales in the period in which it becomes evident .
152. These statements that Spirit was following GAAP and the percentage of completion
method of accounting during the Class Period were false when made because, as pled herein, Spirit:
(i) failed to record incurred and projected increased production costs resulting from production problems, inefficiencies, delays and supply cost overruns that were occurring during the Class
Period; and (ii) improperly maintained the 787 program at zero profit margin throughout the Class
Period when there was no assurance that no loss would be incurred. Accordingly, the Company’s
financial statements contained in their Forms 10-Q and 10-K, filed with the SEC during the Class
Period were materially false and misleading because they overstated Spirit’s earnings and assets.
A. Description of Contract Accounting
153. Spirit utilized contract accounting – specifically the units of delivery method of
accounting (a modification of the percentage-of-completion method) for reporting revenue and costs
of its long term production contracts. Under this method, revenue and allocable costs are recognized
in the period that the units of production are delivered. The costs allocated to undelivered units are
deferred and reported as inventory. Deferring production costs is only allowed, however, if those
inventoried costs are reasonably recoverable from future revenues on a particular contract. If,
however, total production costs to date plus estimated future costs exceed total estimated revenue on
a contract, the contract is considered to be in a “forward loss” position and that loss must be
recognized immediately. Contract Accounting Rules dictate:
A contracting entity shall apply the following general principles in accounting for costs of construction-type and those production-type contracts covered by this Subtopic. . . . Inventoriable costs shall not be carried at amounts that, when added to the estimated cost to complete, are greater than the estimated realizable value of the related contracts . (ASC 605-35-25, ¶37g) - 79 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 83 of 144
For a contract on which a loss is anticipated, GAAP requires recognition of the entire anticipated loss as soon as the loss becomes evident . An entity without the ability to update and revise estimates continually with a degree of confidence could not meet that essential requirement of GAAP. (ASC 605-35-25, ¶45)
When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract shall be made . Provisions for losses shall be made in the period in which they become evident under either the percentage-of-completion method or the completed-contract method. (ASC 605-35-25, ¶46)
154. In some circumstances, the contracting entity is allowed to use a “zero profit
estimate,” if it’s impractical to estimate the final outcome of a particular contract. However, this is
only allowed if there is assurance that no loss will be incurred . The percentage-of-completion
standard states, in pertinent part:
However, in some circumstances, estimating the final outcome may be impractical except to assure that no loss will be incurred. In those circumstances, a contractor shall use a zero estimate of profit; equal amounts of revenue and cost shall be recognized until results can be estimated more precisely. (ASC 605-35-25, ¶60.c)
155. Accounting and auditing literature make clear, the percentage-of-completion method
is an area of accounting that has historically been known to be prone to fraud and manipulation. The percentage-of-completion method relies heavily on estimates, and requires adherence to a very
stringent set of rules. Spirit and the individual defendants, however, knew that if they properly
complied with GAAP, Spirit would have to immediately record forward losses on several of its
contracts due to production problems and cost overruns that were occurring during the Class Period.
Instead, defendants, in violation of GAAP, deliberately and improperly continued to defer
unrealizable production costs, failed to record forward losses and artificially maintained the 787 program at a zero profit margin in the face of these severe production problems and massive cost
overruns on its 787 and Gulfstream programs, as alleged herein.
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B. Increased Costs Were Known and Improperly Deferred
156. Spirit had a sophisticated reporting system in place to track and estimate production costs and inefficiencies and used the system to monitor ongoing cost trends and make interim and long term profitability forecasts. Spirit represented as much to investors: “We believe that the underlying assumptions are sufficiently reliable to provide a reasonable estimate of the profit generated.”
157. In fact, the percentage-of-completion method required Spirit to appropriately identify and accumulate all contract costs with a relatively high degree of precision.
Contract costs shall be identified, estimated, and accumulated with a reasonable degree of accuracy in determining income earned. At any time during the life of a contract, total estimated contract cost consists of both of the following components:
a. Costs incurred to date. b. Estimated cost to complete the contract.
An entity should be able to determine costs incurred on a contract with a relatively high degree of precision, depending on the adequacy and effectiveness of its cost accounting system. . . . [The objective] should be to accumulate costs properly and consistently by contract with a sufficient degree of accuracy to assure a basis for the satisfactory measurement of earnings. (ASC 605-35-25, ¶¶32, 33)
The use of the percentage-of-completion method depends on the ability to make reasonably dependable estimates, which, for purposes of this Subtopic, relates to estimates of the extent of progress toward completion, contract revenues, and contract costs. (ASC 605-35-25, ¶56)
For entities engaged on a continuing basis in the production and delivery of goods or services under contractual arrangements and for whom contracting represents a significant part of their operations, the presumption is that they have the ability to make estimates that are sufficiently dependable to justify the use of the percentage-of-completion method of accounting. Persuasive evidence to the contrary is necessary to overcome that presumption. The ability to produce reasonably dependable estimates is an essential element of the contracting business. Accordingly, entities with significant contracting operations generally have the ability to produce reasonably dependable estimates and for such entities the percentage-of-completion method of accounting is preferable in most circumstances. (ASC 605-35-25, ¶58)
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158. As alleged herein, Spirit was plagued with severe production problems and
inefficiencies, which were brought to the attention of senior management. These production problems were adversely impacting contract performance and profitability. As pled herein, those problems had several sources and were causing the Company to incur and project significant
increased costs as a result of its inability to cope with various aircraft and aircraft development programs – mostly the Boeing and Gulfstream programs. Defendants knew or were deliberately
reckless in failing to estimate the increased costs associated with these production problems as
required by GAAP. Accordingly, defendants failed to record forward losses caused by those cost
overruns and failure to meet projected cost targets on Spirit’s 787 and Gulfstream programs. As a
result, Spirit materially understated its earnings and assets as reported in its public financial
statements issued during the Class Period.
C. Boeing 787 Program
159. As alleged herein, Spirit management knew that the 787 program was plagued by pervasive production problems, delays, significant cost overruns and was projecting unplanned cost
increases going forward. Spirit’s senior management improperly reduced projected cost estimates
for the 787 program in order to keep the program from slipping into a forward loss position. For
example, as set forth in ¶195(b)-(d), the projected cost estimates to produce the 787 were artificially
suppressed by defendant George, Program Manager for the 787 program. George mandated that
estimated cost levels for manufactured parts for the 787 could not be increased. Despite the fact that
Functional Managers, who were responsible for cost estimates associated with the fabrication, purchasing and assembly of the 787, projected an increase in production costs, George mandated that
Managers would have to meet the lower cost forecast or risk termination. Even after being told by
Functional Managers that the mandated cost levels for the 787, as directed by George, could not be
achieved, George stated that no increase to the forecasts was authorized. - 82 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 86 of 144
160. As alleged at ¶146, defendants were also aware that Spirit was incurring increased
unplanned costs associated with disruption in the 787 Wing production in the Tulsa facility. No later
than 2Q 2012, Spirit needed to deploy significant resources to the Tulsa facility in order to correct production problems and anticipated delays to Boeing. Spirit admittedly had to apply “a lot of
resources” in an attempt to get back on schedule. ¶141. Defendants either knew or were
deliberately reckless in not knowing that these additional resources and unplanned costs would
significantly increase the average unit costs on the 787.
161. Defendants deliberately manipulated and recklessly disregarded known increased production costs and projected cost overruns associated with the 787 production problems, cost
occurring disruptions and delays. This manipulation was, at a minimum, deliberately reckless, and
caused Spirit to improperly maintain the 787 program at zero margin and avoid recording a forward
loss on the program during the Class Period in violation of GAAP.
D. Gulfstream Programs and Bogus Cost Savings
162. As alleged herein, the Gulfstream programs were a logistical and financial disaster for
Spirit. Spirit management knew the 280 and 650 programs were under-bid and over-budget and
would not be profitable for Spirit. As such, Spirit was unable to reasonably estimate future cost
savings which were driven by internal business targets, instead of legitimate cost savings as required by GAAP. According to CW5, all personnel on all three of the major Tulsa programs – the
Gulfstream projects and the 787 – were told by Spirit “management” in Tulsa in 2011 that they
needed to derive a “high dollar amount of cost-downs.” ¶197(c). These “cost-downs” – which are
attempts to reduce material costs to compensate for losses being incurred due to changes and/or
delays – were first imposed by the Tulsa management in early 2011, and possibly a little earlier than
that. According to CW5, the “cost-downs” for materials that were being sought for the two
Gulfstream projects and the 787 were upwards of $300 million. Id. According to CW5, “it got to - 83 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 87 of 144
the point” that the “cost-downs” being sought for the Gulfstream 280 and 650 programs required a so-called “learning curve” of 70% - 80%. ¶197(d). As explained by CW5, “learning curve” is a term used to refer to virtually any aspect of Spirit’s business, and in this context it meant that the materials costs for the Gulfstream projects basically needed to be reduced by 70-80% over the lives of the projects. Id. According to CW5, this was definitely a “very steep and maybe unrealistic” goal to achieve. Id. In the November 1, 2012 earnings call, commenting on the Gulfstream projects,
Turner admitted: “we took probably obviously too risky a curve. We had forecast the ability to come down a cost curve and we have not been able to achieve that, the aggressive curve we had set.”
163. In fact, Spirit admitted in its 2012 Form 10-K that, in at least one instance, they violated GAAP by excluding $10 million in known material costs for the G280 program. This understated the forward loss on the G280 program in the first quarter of 2012:
This control deficiency resulted in audit adjustments to the cost of sales and inventory accounts and related financial disclosures within the Company’s consolidated financial statements. These adjustments consisted of a $10.0 million increase in cost of sales related to a bill of material error in the first quarter of 2012 on the G280 program and a $10.0 million increase in cost of sales related to revised estimates of supply chain and labor costs in the fourth quarter of 2012, also on the G280 program .
164. Ultimately, on October 25, 2012, the extent of defendants’ GAAP violations was revealed when Spirit announced that due to its production problems and inefficiencies, and resulting overruns, it was forced to:
. . . [R]ecord pre-tax charges of approximately $184 million on the 787 program; $163 million on the G650 Wing program; $151 million on the BR725 (Engine Nacelle Package for the G650); $88 million on the G280 Wing program; and $4 million on other combined programs. These combined forward loss charges total approximately $590 million . . . . The company no longer expects to achieve cost targets sufficient to maintain zero-profit margin contracts due to increasing supply chain, factory support, and labor costs.
165. As highlighted in Table 1 below, the sheer magnitude of Spirit’s $590 million forward-loss charge compared to charges taken in prior quarters during the Class Period further - 84 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 88 of 144
demonstrate that it was impossible that defendants did not know that the serious and pervasive production problems and resulting incurred and projected costs overruns required Spirit to record
forward-loss charges in the periods preceding 3Q 2012, as mandated by GAAP and the Company’s
accounting rules:
TABLE 1
Forward Loss Charges ($ in millions)
4Q 2011 – 3Q 2012
$600
$550
$500
$450 • Other Forward Loss
Charges $400
$350 • Gulfstream/BR725
Forward Loss Charges $300
$250 • B787 Forward Loss
Charges
$200
$150
$100
$50
$0
40 11 10 12 20 12 30 12
166. Indeed, the magnitude of these cost overruns underlying the $590 million charge were
over twice the average cost required to maintain the 787 at zero margin. See, e.g. , ¶165.
E. Spirit’s Financial Results Violated Fundamental Accounting Policies
167. In addition to the above-referenced departures from GAAP and SEC guidance, as a
result of the defendants’ accounting improprieties, Spirit presented its financial results in a manner
that violated the following fundamental accounting principles: - 85 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 89 of 144
(a) The principle that “[f]inancial reporting should provide information that is
useful to present and potential investors and creditors and other users [of the financial reports] in
making rational investment, credit, and similar decisions.” (FASB Statement of Concepts No. 1,
¶34);
(b) The principle that “[f]inancial reporting should provide information about the
economic resources of an enterprise, the claims to those resources . . . and the effects of transactions,
events, and circumstances that change resources and claims to those resources.” ( Id., ¶40);
(c) The principle that “[f]inancial reporting should provide information about an
enterprise’s financial performance during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise. Thus, although investment and
credit decisions reflect investors’ and creditors’ expectations about future enterprise performance,
those expectations are commonly based at least partly on evaluations of past enterprise performance.” (Id. , ¶42);
(d) The principle that “[f]inancial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it. . . . To the extent that management offers securities
of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general.” ( Id. , ¶50);
(e) The principle that financial reporting should be reliable in that “it represents
what it purports to represent.” That information should be reliable as well as relevant is a notion that
is central to accounting. (FASB Statement of Concepts No. 2, ¶¶58-59);
(f) The principle of completeness, which means that “nothing material is left out
of the information that may be necessary to insure that it validly represents the underlying events and
conditions.” (Id. , ¶79); - 86 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 90 of 144
(g) The principle that conservatism be used as a “prudent reaction to uncertainty
to try to ensure that uncertainties and risks inherent in business situations are adequately
considered.” (Id. , ¶95);
(h) The principle that that revenues and gains should not be recognized until they
are both earned and realizable. (ASC 605-10-25, ¶1);
(i) The principle that financial statements shall contain all data necessary for a
fair presentation of financial position and results of operations as set forth in GAAP, including
compliance with the requirements of the SEC’s rules and regulations by SEC registrants. (ASC 205-
10);
(j) The principle that interim financial reporting should be based upon the same
accounting principles and practices used to prepare annual financial statements. (ASC 270-10-45,
¶2); and
(k) The principle that interim financial information provides investors and others
with timely information as to the progress of the entity (ASC 270-10-45, ¶1).
IX. ADDITIONAL INDICIA OF DEFENDANTS’ SCIENTER
168. As alleged herein, defendants acted with scienter in that they knew, or recklessly
disregarded, that the public documents and statements issued or disseminated in the name of the
Company, or their own name, were materially false and misleading; knew or recklessly disregarded
that such false and misleading statements or documents would be issued or disseminated to the
investing public; and knowingly and substantially participated or acquiesced in the issuance of such
false and misleading statements or documents as primary violations of the federal securities laws.
169. The Fraud Alleged Herein Relates to Spirit’s Core Business . Defendants held
high-ranking positions, as described in ¶¶19-22, and made numerous Class Period statements on the
topic of Spirit’s development programs, including defendants’ ability to, and success in, - 87 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 91 of 144
implementing cost improvements and achieving efficiencies therein. Spirit’s sole source of business
is the design and manufacture of aerostructures. The fraud alleged herein concerns Spirit’s ability to
successfully execute the design and manufacture of aerostructures for the 787, 250 and 650 programs. The 787 was Spirit’s largest development program and was critical to the Company’s
long-term success. Additionally, the Gulfstream programs were Spirit’s first foray into business jets
and represented a critical and necessary step toward diversifying away from Boeing. Demonstrating
the core nature of these development programs, and the individual defendants’ involvement in and
knowledge thereof, is the frequency and extent to which defendants Turner, Anderson, Kummant
and George spoke on the topic. See e.g., §VI. Further, defendants repeatedly assured investors that
they were “intensely focused on productivity and efficiency improvements” (¶¶75, 92, 107), there
was a “strong push on a Lean maturity focus in the whole Company” (¶81), “I’ve [Anderson] spent
a lot of time [in Tulsa], so is Jeff [Turner], making sure the changes are taking hold ” (¶69), “cost
reduction [is] our top priority on [the 787] program” (¶54), they were “working diligently on” “the business jet programs,” (¶70) and the “supply chain initiatives,” and “I assure you we’re focused on
the productivity and the efficiencies which we always are.” ¶76. Further, defendants made repeated
assurances that “we try to look far enough ahead that we can do something about” supply chain
constraints. ¶65(e). Given the core nature of Spirit’s operations underlying the fraud alleged herein,
and defendants’ frequent assurance of their personal involvement in those operations, knowledge of
the fraud may be imputed to defendants.
170. The Sheer Magnitude by Which Spirit Understated Its Estimate of Future
Expenses Evidences Defendants’ Knowing or Reckless Conduct. Throughout the Class Period,
defendants repeatedly assured investors that Spirit would “break-even” on the first contract block of
the 787 program. In doing so, defendants represented that Spirit’s average production cost to build
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the 500 shipsets in the first block would be equal to the amount of revenue it would recognize on
each shipset delivery – approximately $10 million per shipset. 17
171. Defendants have acknowledged that during the Class Period, while the 787 program
was in its early stages, the average cost to produce a 787 shipset was nowhere near the $10 million
necessary to break-even. In fact, as shown in the chart below, the average cost to produce the 787
shipsets during the class period was as high as $21 million – over twice the $10 million average cost
required to break-even. These excess production costs were referred to as “excess over average”
costs. As defendants disclosed in Spirit’s Class Period financial statements, in order to break-even
for the entire contact block, these excess costs would need to be recovered later in the contact block by producing shipsets at a cost well below $10 million per unit. As shown in the chart below, the pool of these excess costs grew throughout the Class Period as Spirit continued to experience production costs that exceeded the $10 million average cost necessary to break-even. As the total
“excess over average” costs increased, Spirit moved further and further away from break-even on the
contract block.
172. Spirit’s accounting rules dictate that the Company recognize a forward loss at the point when future ship set production costs could no longer be “reasonably expected to fully offset”
the growing pool of “excess over average” costs that were being generated by shipset deliveries
during the Class Period. 18 Instead of timely recording a forward loss, however, defendants continued
assuring investors throughout the Class Period that the 787 program remained on track to break-
17 According to analyst estimates as well as the 787 shipset value range provided by Spirit during March 7, 2012, analyst presentation.
18 In addition to the pool of “excess over average” costs, there were other significant costs that needed to be recovered over future shipset deliveries in order to break-even for the entire contact block. These costs, depicted in the chart above, included hundreds of millions of dollars of pre- production costs and non-recurring production costs.
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even. As shown in the chart below, the average production cost for all future 787 shipset deliveries required for Spirit to make up for all the excess costs generated during the Class Period and break- even for the entire contract block would have needed to be just over $8 million per shipset. This represented an over 50% reduction in average production costs from the actual average production costs to date during the Class Period.
173. As defendants have since acknowledged, this is not possible. Using updated cost information, the actual average production cost of post-Class Period shipset deliveries was at least
$9.5 million.19 Therefore, defendants’ Class Period representations of production costs for remaining deliveries understated actual production costs by as much as 17.6%. See Table 2. The sheer magnitude by which Spirit understated its estimate of future expenses on the 787 program demonstrates that defendants knew, or were reckless in not knowing, that the first contract block of the 787 program was never anywhere near “break-even” during the Class Period, nor did it have
“management reserve to cushion it” against future forward losses. Indeed, as defendants have since confessed, Spirit will lose an average of $1.2 million on each of the 500 787 shipsets delivered during the first contract block.
19 Includes forward-loss charges recorded to date ($606 million).
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TABLE 2
2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012
Cumulative 787 deliveries 44 49 56 64 75
Remaining deliveries in contract block 456 451 444 436 425
Total revenue to be recorded in contract block $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Total production costs to be recorded in contract block* $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
"Average" production costs on units delivered to date $ 440 $ 490 $ 560 $ 640 $ 750
"Excess over avg." production costs on units delivered to date $ 468 $ 506 $ 533 $ 550 $ 568
Pre-production costs recorded to date $ 214 $ 214 $ 211 $ 206 $ 202
Non-recurring production costs recorded to date $ 6 $ 15 $ 17 $ 27 $ 37
Total production costs recorded to date $ 1,129 $ 1,224 $ 1,321 $ 1,424 $ 1,556
Remaining production costs to be recorded in contract block* $ 3,872 $ 3,776 $ 3,679 $ 3,577 $ 3,444
Avg. cost per unit over contract block required* $ 10.0 $ 10.0 $ 10.0 $ 10.0 $ 10.0
"Excess over average" cost per unit to date $ 10.6 $ 10.3 $ 9.5 $ 8.6 $ 7.6
Actual avg. cost per unit to date $ 20.6 $ 20.3 $ 19.5 $ 18.6 $ 17.6
Avg. cost per unit over remaining deliveries necessary* $ 8.5 $ 8.4 $ 8.3 $ 8.2 $ 8.1 Actual avg. cost per unit for remaining deliveries (incl. forward losses through 12/31/13) $ 9.8 $ 9.7 $ 9.7 $ 9.6 $ 9.5
% by which Spirit understated 787 costs ** 15.7% 16.0% 16.5% 16.9% 17.6%
* To achieve break-even.
** Spirit's per unit cost for remaining deliveries to reach break-even vs. actual cost per unit for remaining deliveries.
(all $ figures in millions)
174. The magnitude by which defendants understated the estimate of future expenses on the Gulfstream 280 and 650 programs is even more severe than their understatement of 787 program expenses and further demonstrates that defendants knew, or were reckless in not knowing, that they were required to take massive, additional forward losses on the 280 program and even larger charges on the 650 long before 3Q 2012, and that the Gulfstream programs were never anywhere near “thinly margined,” or “break-even” during the Class Period. See Tables 3 and 4.
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TABLE 3 4Q2011 1Q2012 2Q2012 Cumulative 650 deliveries 13 17 24 Remaining deliveries in contract block 337 333 326 Total revenue to be recorded in contract block $ 2,100 $ 2,100 $ 2,100 total production costs to be recorded in contract block* $ 2,100 $ -- 2,100 $ 2,100 "average" production costs on units delivered to date $ 78 $ 102 $ 144 'excess over avg." production costs on units delivered to date $ 167 $ 176 $ 232 pre-production costs recorded to date $ 241 $ 238 $ 230 total production costs recorded to date $ 486 $ 516 $ 606 Remaining production costs to be recorded in contract block* $ 1,614 $ 1,584 $ 1,494 Avg. cost per unit over contract block required* $ 6.0 $ 6.0 $ 6.0 "Excess over average" cost per unit to date $ 12.9 $ 10.4 $ 9.7 Actual avg. cost per unit to date $ 18.9 S 16.4 $ 15.7
Avg. cost per unit over remaining deliveries necessar y* $ 4.8 S 4.8 $ 4.6 Actual avg. cost per unit for remaining deliveries (mci, forward losses through 12131/13) $ 7.6 $ 7.7 $ 7.8
% by which Spirit understated 650 costs** 58.0% 61.1% 70.8%
* To achieve break-even. ** Spirit's per unit cost for remaining deliveries to reach break-even vs. actual Cost per unit for remaining deliveries. (all $ figures in millions)
TABLE 4 3Q2011 4Q2011 1Q2012 2Q2012 Total 280 deliveries in contract block 250 250 250 250 Total revenue to be recorded in contract block $ 375 $ 375 $ 375 5 375 Forecasted loss $ (149) $ (178) $ (188) $ (188) Total production costs to be recorded over contract block* $ 524 $ 553 $ 563 5 563
Implied avg. production cost per unit over contract block* $ 2.1 $ 2.2 $ 2.3 $ 2.3 Actual avg. production cost per unit over contract block (incl. forward losses through 12/31/13) 1 $ 3.6 $ 3.6 $ 3.6 5 3.6 % by which Spirit understated 280 costs** 74.1% 65.1% 62.0% 62.0%
* To achieve forecasted loss. Spirit's per unit cost for remaining deliveries to reach break-even vs. actual cost per unit for remaining deliveries. (all $ figures in millions)
175. Defendants’ Fraudulent Conduct Allowed Them to Preserve Spirit’s Positive
Credit Ratings and Avoid Default of Its Senior Secured Credit Facility . Defendants violated
GAAP, SEC rules and Spirit’s own accounting policies, and made false and misleading statements to artificially preserve Spirit’s investment grade credit and debt ratings and avoid triggering Spirit’s
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loan covenants. As disclosed in the Company’s 2012 Form 10-K, filed with the SEC on March 1,
2013, “Any reduction in our credit ratings could materially and adversely affect our business or financial condition . ” Indeed, the “estimated fair value of [Spirit’s] debt obligations is based on the
quoted market prices for such obligations or the historical default rate for debt with similar credit
ratings.” As a result, “a downgrade in [Spirit’s] fixed or revolving long-term debt rating could result
in an increase in borrowing costs under [Spirit’s] senior secured credit facility.” Indeed,
immediately following defendants announcement of $590 million in forward-loss charges, revealing
the true state of affairs at Spirit, Moody’s Investor Services placed Spirit on negative outlook.
176. Defendants further concealed the pervasive production problems that led to
skyrocking cost overruns and hid their inability to implement cost reduction initiatives on its
development programs because the Company’s senior secured credit facility contained certain
covenants. Spirit entered into a $1.2 billion senior secured credit agreement on April 18, 2012. That
agreement included the following covenants: (i) senior secured leverage ratio shall not exceed
2.75:1; (ii) interest coverage ratio shall not be less than 4:1; and (iii) total leverage ratio shall not
exceed 4:1. Had defendants not concealed the truth and, instead, accurately and timely recorded
forward-loss charges on the Company’s struggling development programs prior to the third quarter
of 2012, as they were required to, Spirit would not have secured the credit facility and/or would have been in default. In the weeks leading up to the massive charge, Spirit was forced to renegotiate the
aforementioned covenants and ratios.
177. Defendants’ Fraudulent Conduct Allowed Them to Retain Their Executive
Positions and Collect Millions in Compensation and Bonus Awards . The individual defendants
were motivated to make the alleged false and misleading statements in order to preserve their
executive positions and personally collect millions of dollars in compensation and bonuses. Indeed,
Spirit’s 2012 Proxy Statement, dated March 27, 2012, stated: - 93 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 97 of 144
. . . [A] significant portion of our executive officers’ target annual compensation (base salary plus annual cash and stock incentive awards, excluding discretionary bonus awards) is at-risk as it is based on Company and/or individual performance. The actual value realized from annual performance-based incentive awards could be zero if minimum performance levels for payouts are not met. For example, none of our Named Executive Officers earned an incentive award for 2009 performance under our Second Amended and Restated Short-Term Incentive Plan (STIP). The portion of target annual compensation at-risk generally increases with the executive officer’s position level and impact on our performance. This provides significantly more upside potential and downside risk for more senior positions because these executives have a greater influence on our performance as a whole .
178. As an example, for 2011, 87.7% and 74.7% of defendants Turner’s and Anderson’s
target annual compensation was “at risk,” i.e., based on the Company’s and or the individual’s performance. For 2012, “at risk” compensation amounted to 86% and 77% of defendants Turner’s
and Anderson’s respective compensation. For instance, in 2011, Turner received a base salary of
$558,456 and over $4 million in incentive-based “at risk” compensation. Defendant Anderson, with
a base salary of $248,620, received over $650,000 in incentive-based compensation in 2011.
179. Given the high percentage of compensation they received based on their individual
and the Company’s reported performance, and their significant Company stock holdings, defendants
Turner and Anderson were highly motivated to commit the fraud alleged herein, whereas it inflated
the Company’s reported results from operations and stock price and, therefore, directly increased
their personal financial gain.
180. On September 6, 2012, just over a month before the Company announced $590
million in charges, defendants announced certain personnel changes within its leadership. Notably,
Coleal, General Manager of the Fuselage Segment, was now tasked with overseeing the Oklahoma
operations. segment. Kummant, formerly SVP, General Manager – Oklahoma Operations, did not
remain with the Company.
181. On November 19, 2012, in the wake of the $590 million charge announced just over
two weeks prior, Spirit issued a press release announcing Turner’s “intention to retire in early 2013, - 94 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 98 of 144
after the Board has had an opportunity to conduct a search for and hire a new CEO.” As reported by
the Wichita Business Journal on November 23, 2012, the announcement “took the Wichita business
community by surprise and left more than its share of questions.” A separate Wichita Business
Journal article on November 19, 2012, questioned whether Turner’s “sudden departure” did indeed
“have anything to do with that third-quarter report that included $590 million in charges?” Turner
would later admit that: “My self-assessment was that we needed a fresh set of eyes running the
company.”
182. Defendants Turner’s and Anderson’s Certifications Pursuant to §302 of the
Sarbanes-Oxley Act Further Demonstrate They Acted with the Requisite Level of Scienter. In
conjunction with Spirit’s public financial statements filed with the SEC during the Class Period,
defendants Turner and Anderson issued certifications pursuant to §302 of the Sarbanes-Oxley Act,
attesting that they reviewed the contents of the filings to confirm the “report does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading,” and
that “the financial statements, and other financial information included in [each] report, fairly present
in all material respects the financial condition, results of operations, and cash flows of the registrant
as of, and for, the periods presented in [each] report.” To assure each certification was not simply a
hollow gesture, Turner and Anderson were required to and did further confirm that they were
responsible for “establishing and maintaining [Spirit’s] disclosure controls and procedures and
[Spirit’s] internal control over financial reporting.” Further, they had designed such controls to
assure “the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with [GAAP],” and that material information relating to the Company’s business was promptly made known to Spirit’s senior executives, and had routinely evaluated the
effectiveness of the Company’s policies to assure that they and other executives were made aware of - 95 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 99 of 144
material information. At no time during the Class Period did Turner or Anderson assert that they were not aware of material aspects of Spirit’s internal controls.
183. There Is A Strong Inference that Spirit Acted with the Requisite Scienter .
Spirit’s corporate liability derives from the actions of its agents. The allegations herein establish a strong inference that Spirit, as an entity, acted with corporate scienter throughout the Class Period, as its officers, management and agents had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth, because they failed to disclose the truth about Spirit’s development programs, including Spirit’s inability to achieve cost targets within production, supply chain and labor, and failed to prevent Spirit from violating GAAP, even though such facts were available to them. Taken collectively, these facts create a strong inference that Spirit acted with the requisite scienter.
184. In addition to Spirit’s liability as a result of the fraudulent actions of the individual defendants, the false and misleading statements alleged herein make clear that knowledge of the fraud went beyond the individual defendants. Defendants repeatedly made clear that “ we’ve got teams together driving the productivity, the producibility, the supply chain, all the things – all the elements to drive a cost curve,” made repeated references to the “joint Boeing and Spirit teams ,” and represented during the March Investor Conference that: “We at Spirit have refocused program management .” With regard to rate increases on the 787, defendants stated: “Clearly, we’re very, very focused on this, spending a lot of management time and energy doing everything we can to anticipate issues that we’ll have.” Likewise, when Spirit SVP David Coleal spoke at Spirit’s 2012
Investor Day, he emphasized that the “ leadership team ” is involved in daily meetings with lower- level employees, delving into any cost issues they may be experiencing. And, defendants’ mantra throughout the Class Period was that “ cost reduction [is] our top priority ” and “we are intensely
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focused on productivity and efficiency improvements.” Indeed, Anderson definitively stated: “ I
assure you we’re focused on the productivity and the efficiencies which we always are. ”
185. The corroborating witnesses, identified in ¶¶193-202, further support and demonstrate
that defendants’ Class Period statements were false and misleading when made and made with
scienter. For example, CW3 recalled that during the Class Period, George mandated that CW3, a
Cost Management Manager, forecast costs at certain levels for the 787 program in Wichita, which
were invariably lower than what CW3 had determined by analyzing data provided by the Company’s
Functional Managers. CW3 was told by the Functional Managers that “there was no way” the
mandated cost levels as directed by George could be achieved. Responding to concerns over
achieving forecasted cost levels, George instructed CW3 and the Functional Managers that they were
not authorized to change the forecasts, resulting in the forecasted cost levels being inconsistent with
the Functional Manager’s analysis. ¶195.
186. In addition, CW4 described regularly scheduled weekly teleconference meetings between Spirit and Boeing officials to discuss the current schedule and the ultimate completion date
of the 787 wing structures. These meetings were attended by Spirit management from the Wichita
and Tulsa facilities. CW4 stated certain information portrayed to Boeing officials during these
meetings, for example, estimated completion dates, were, based on CW4’s knowledge, unachievable.
CW4 stated it was common knowledge that deadlines at Spirit’s Tulsa facility were frequently
missed. CW4 further recounted an instance in which CW4 made Manager Cynthia Isaacon aware of
a part shortage, and that a Spirit Buyer had informed CW4 it would take 20 days to replenish the part
to desired levels. Although CW4, through CW4’s own efforts, determined that the parts were
available the next day through a different vendor, Isaacson instructed CW4 to not order the parts
from the alternate vendor. ¶196
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187. CW4 also recounted both daily and weekly upper management meetings – the weekly
meetings took place every Monday morning at 9:00 a.m. – in which the issue of the high rate of
scrap being produced by the “Bond Room” was discussed. Senior Manager Tim Pounds was
involved in both sets of meetings and, thus, aware of the high rate of scrap. CW5 similarly
recounted daily meetings regarding project status on the Gulfstream 280 and 650 programs. In some
instances, there were two to three meetings a day regarding the “problem areas” of the programs.
¶196.
188. In addition, CW5 recounted working on the Business Management Team, formed in
2011 to oversee the EAC process whereby material needs were forecasted every quarter, out to the
date of completion, for the two Gulfstream projects. As part of this process, Spirit “management”
instructed CW5 and the Business Management Team to derive a “high dollar amount of cost-downs”
– for both Gulfstream programs and the 787 program – in attempts to reduce material costs to
compensate for losses being incurred due to changes and/or delays on the programs. CW5
conducted a cost-study on the Gulfstream programs at the end of 2011. The cost-study demonstrated
that Spirit had not achieved the “cost-down” results that were wanted for 2011. According to CW5,
a big portion of the October 2012 charge involved Spirit’s failure to achieve cost-down goals for
2012 on the Gulfstream programs. Because of the cost-study, CW5, a Supply Chain Analyst in the
Tulsa facility, knew “early in 2012” that it was very likely the Gulfstream projects would have to
“take a hit” in 2012. CW5 also recounted that risks and opportunities were discussed during weekly
engineering change board meetings. ¶197.
189. According to CW5, Don Harris, Director of Supply Chain Management, Tulsa
Contracts and Sourcing, and Spirit’s “strategy group” apparently derived these cost-downs, which in
certain instances called for a reduction of 70-80% of materials costs. Further, the losses being
incurred on the 650 and 280 projects were frankly and openly discussed every quarter by the - 98 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 102 of 144
Business Management Group and the group “reported exactly what we saw” to Don Harris’s group,
which then reported to Brian Keeling, who oversaw operations and was a step below Chris Collins.
¶197.
190. Furthermore, CW8 recounted a manager meeting in mid-2011, which was led by
Turner and Anderson. During this meeting, Turner and Anderson emphasized to the managers present that the 650 program remained behind schedule and over budget. CW8 recalled that Turner
and Anderson used charts, which displayed the financial condition of the Gulfstream 650 program,
as well as the schedule and demonstrated that the 650 program remained behind schedule and over budget. ¶200.
191. Finally, CW10, a former Procurement Manager in Supply Chain, was responsible for
compiling all of the external, procurement costs for each quarter for all projects in Tulsa, and these
costs were reported to Spirit’s Supply Chain Management and Finance Groups, so that they could
create the Estimate at Completion (“EAC”) report for each quarter. The EAC reports reflected costs
incurred (actual costs) versus forecasted costs (internal costs) and showed the extent to which actual
costs exceeded forecasted costs for a particular quarter. The EAC reports were ultimately approved
and signed off by the financial officers of the company. CW10 stated that these reports were
“thoroughly vetted” by management and distributed to the CEO and CFO each quarter. ¶202.
192. CW10 also recounted internal discussions suggesting that the learning curve set by
management was unrealistic with regard to the 787 or Gulfstream programs. Id.
X. CORROBORATING WITNESSES
193. Corroborating Witness 1 (“CW1”) served as a Lean Manager in the Tulsa facility
throughout the Class Period. CW1 reported directly to Chris Collins, the VP of Operations for the
Tulsa facility, who in turn reported to defendant Turner. As a Lean Manager, CW1 was responsible
for a team of 12 Lean Consultants or Coaches who individually consulted or coached on various - 99 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 103 of 144
“value streams” – the process by which a given “product,” e.g. , a wing system, undergoes the design process, the building process, and ultimate delivery to the customer. During CW1’s tenure as a Lean
Manager, the Tulsa facility had numerous projects in process and all had an assigned Lean
Consultant/Coach. According to CW1, the overall purpose of Lean Management was to “help the product” or improve the product by streamlining processes and procedures. In an effort to
streamline processes, the Lean Consultant sought to find ways to help the project become efficient
with time and costs. According to CW1, the “value stream leader” for the various projects tracked
the key areas such as costs, delivery dates and quality control metrics. During CW1’s tenure at the
Tulsa location, the Gulfstream and 787 projects experienced various problems, including the lack of
a cohesive team environment, consistent quality control standards and updated technology.
(a) According to CW1, contractors on the Gulfstream 280 and 650 projects who
had agreements to work at the facility for three months or possibly up to six months would routinely
take or “steal” tools from the facility at the end of their tenure. According to CW1, the loss of the
tools was apparently not insignificant and created tool shortages, which affected the Spirit
employees and other workers who were working on various projects. The equipment and tools used
at the Tulsa facility were considered outdated compared to Spirit’s Wichita location, and personnel
training for various elements of the Gulfstream projects was severely lacking. For example,
according to CW1, contractors and employees were provided with “planning papers” but not with blueprints – “it took an act of Congress” to provide blueprints to the contractors and employees.
While the blueprints provided specific information, the planning papers lacked such specificity. As
such, CW1 recalled that items were installed incorrectly because the employees and contractors did
not have access to the blueprints. According to CW1, these issues created delays, which resulted in
additional costs to the projects. For instance, CW1 stated that if Spirit had been able to manufacture
its finished parts on time, those parts could have been shipped by overland freight to the customer. - 100 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 104 of 144
(b) Because the Gulfstream program became so delayed, Spirit had to use a
special Russian aircraft to fly the parts to the customer’s destination at a cost of almost $1 million
each time – significantly more than if alternative shipping methods could have been used.
According to CW1, these special delivery flights took place when CW1 arrived at the Tulsa facility before the start of the Class Period and were ongoing when CW1 departed after the Class Period, because Spirit’s problems with being able to deliver Gulfstream parts on time and on schedule had
not been rectified.
194. Corroborating Witness 2 (“CW2”) was a Master Lean Coach on the 787 fuselage program in Wichita throughout the Class Period. CW2 reported to Lean Manager Phil Fletcher, who
reported to second-level Manager Tom Stout, who in turn reported to Vic McMillian, Vice President
of Production.
(a) CW2’s job responsibilities included observing personnel in the various
sections of the Wichita facility and identifying ways to improve efficiency, which included
evaluating the working habits of the personnel and addressing any issues that were observed in the
various training classes that CW2 held. CW2 was primarily assigned to observe the
structure/assembly group, however, CW2 observed all three of the departments that worked on the
787 fuselage program, including: (i) the composite fabrication group; (ii) the structure/assembly
group; and (iii) the wiring group, which included wiring the cockpit. As a Lean Coach, CW2 also
was responsible for training Managers and personnel on Lean Management concepts. 20
20 Lean concepts emphasize efficiency by eliminating waste through coordinated actions by each team member. For example, CW2 held workshops on Lean Manufacturing’s “5S’s” which taught participants how to organize the workplace for efficiency and effectiveness. The “5S’s” stand for sort, simplify, straighten, shine and standardize. Additionally, CW2 also taught classes on safety procedures.
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(b) During the Class Period, CW2 viewed a lack of synchronization between the personnel and lack of accountability provided by the Managers. For instance, CW2 observed
mistakes made by personnel that occurred because the personnel failed to check the work of the previous personnel and determine the next area that needed work. According to CW2, this lack of
“paying attention” or lack of synchronization was a recurring problem, which resulted in wasted
labor hours by having to rework the affected area of the structure or in some cases having to scrap
the structure and begin the fabrication process from the beginning.
(c) According to CW2, there was an observable lack of managerial oversight of
the personnel, in that the Managers of the various groups did not hold the personnel accountable for
the various errors CW2 observed. And, when mistakes occurred, Managers did not stop the
assembly or fabrication process but rather moved the personnel who had made the errors from one
area of the assembly to another area of the assembly, exacerbating the lack of synchronization
among personnel. As Lean Manager, CW2 explained that the most effective response to correcting
errors/mistakes on the assembly line or in the fabrication process requires the stoppage of work and
an analysis of the cause for the error and the needed corrective action. In meetings with various
Managers, the Managers solely focused on “getting out” fuselages and ignored issues pertaining to
the quality of the work. In fact, CW2 stated that the “topic never changed” from one Manager to
another Manager, or from one group to another group, but there was no concern for correcting
mistakes on the assembly line or reducing the volume of scrap that resulted from the mistakes.
Managers did not require accountability from the personnel on important issues, such as errors made
on the structures and they did not accept responsibility for the lack of communication on the weekly
design changes.
(d) Engineering design changes on the fuselage program occurred on a weekly basis which adversely impacted productivity. In many instances, personnel had not been informed - 102 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 106 of 144
of the latest engineering design changes and, as a result, incorrectly drilled a hole or installed a
fastener, contributing to delays and in some cases requiring materials to be scrapped. CW2 recalled
that two to three complete fuselages were scrapped. Fuselages, which were partially or completely
scrapped, could not be reused or salvaged.
(e) Based on CW2’s observations of the mistakes/errors made on a weekly, if not
daily basis and the lack of accountability when mistakes occurred, it was unsurprising and seemed
inevitable to CW2 that Spirit would realize the $590 million October 2012 loss or charge.
195. Corroborating Witness 3 (“CW3”) was a Cost Management Manager and New
Program Implementation Manager in the Wichita facility throughout the Class Period. As a Cost
Management Manager, CW3 was a member of Spirit’s Finance Department and discussed matters
relating to cost forecasts with defendant George, the Program Manager with responsibility for the
entire 787 program. CW3’s job duties included creating forecasts of the costs associated with
various parts that were machined internally at Spirit for use on the Boeing 787 program.
(a) According to CW3, there were near-term, mid-term and long-term forecasts,
the latter looking out as much as 12 months. In preparing forecasts, CW3 would work with
“Functional Managers” who were responsible for different elements of the 787 program, including
Fabrication, Purchasing and Assembly. The Functional Managers, who ultimately reported to
George, would provide estimates to CW3 of what they thought it would cost to produce the particular items or elements of the 787 program for which they were responsible.
(b) During the Class Period, George mandated that CW3 forecast costs at certain
levels for the 787 Wichita program, which were invariably lower than what CW3 had determined by
analyzing the data provided by the Functional Managers, who emphatically expressed to CW3 that
“there was no way” the mandated cost levels as directed by George could be achieved. When
questioned by CW3 regarding the Functional Managers’ expressed concerns, George instructed that - 103 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 107 of 144
CW3 and the Functional Managers were not authorized to change the forecasts. In fact, in all instances, when CW3 expressed the Functional Managers’ concerns, George provided the same response – that “no increase has been authorized” – which essentially brought the discussions to a close. According to CW3, various Functional Managers including Adam Gomez approached George with concerns of not being able to meet the cost forecasts. As work on the programs progressed
CW3 “asked questions” of George about how to achieve the lower forecasts, to which George responded to CW3 that if the Managers could not achieve the lower forecasts, then Managers who could achieve the forecasts would be found.
(c) CW3 explained the mandated cost levels by providing a hypothetical example of total fabrication costs of a vehicle, stating that the actual costs were expected to be $20,000, but the mandated costs were not allowed to exceed $12,000 per vehicle. In this scenario, therefore,
Senior Management required the Cost Management Manager to report the forecast of $12,000 as opposed to the anticipated actual costs of $20,000 per vehicle. According to CW3, this hypothetical was representative of CW3’s experience as a Cost Manager throughout 2012.
(d) According to CW3, included in the forecasting process was the review of actual costs to the costs that had been forecasted. In that regard, CW3 indicated that the near-term forecasted costs had been jibing with the actual costs, but that it was the mid and long-term forecasts where the actual costs were likely to be much higher. And as the mid-to-long term forecasted costs were becoming short-term and the costs were actually being incurred, the variance analysis was showing that the forecasts were “ready to fall flat.” This led, in CW3’s estimation to Spirit’s efforts to try and off-load some of the work to an offshore vendor.
196. Corroborating Witness 4 (“CW4”) was Materials Analyst in the Tulsa facility throughout the Class Period, during which CW4 worked on the 787 Wing project. CW4 initially reported to Manager Bill Felber, who was replaced by Cynthia Isaacson. Felber and Isaacson - 104 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 108 of 144
reported to Level II Manager Craig Dickinson, who reported to Senior Manager Tim Pounds.
During CW4’s tenure, Felber, Isaacson, Dickinson and Pounds were assigned to the Boeing 787
Wing project during her tenure. During the Class Period, CW4 oversaw the supply of parts utilized by the manufacturing personnel and worked to make sure the manufacturing personnel had all of the parts needed for the various projects underway. For example, CW4 would go out on the assembly
line with the manufacturing personnel who were working on various aspects of the wing structures to
ascertain what parts were needed to ensure that production timelines could be met. Once CW4
located a requested part, which included nuts, bolts, rivets, screws, and kits, which included panels, brackets and the tools necessary to put the parts together, CW4 notified an employee to transport the part (or parts) to the manufacturing personnel. When it was discovered that the supplies of parts
were low, out-of-stock or missing, CW4 contacted the Spirit Buyers to order the needed parts.
(a) According to CW4, during the Class Period, there were a number of problematic issues that occurred while working on the Boeing 787 project, involving the fabrication
and assembly of the leading and movable edges of the wing, and which led to numerous delays and
missed deadlines. According to CW4, deadlines were missed frequently and were common
knowledge.
(b) CW4 often attended the regularly scheduled weekly teleconference meetings
with Boeing officials to discuss the current schedule and the ultimate completion date of the wing
structures, i.e. , the fixed and moveable leading edges. These weekly meetings were held on Monday
mornings at 9:00 a.m. and were attended by Spirit management from the Wichita and Tulsa
facilities, including Craig Dickinson, various Level I Managers, 21 including Jeff Rupert, Brandon
Jackson and Rex Hoak, various engineers and Boeing representatives. CW4 recalled that Spirit
21 According to CW4, Level I Managers, such as Jeff Rupert, Brandon Jackson and Rex Hoak, oversaw the manufacturing personnel on the floor.
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management used PowerPoint presentations during these meetings to detail the progress and
expected completion dates of the project, and made misrepresentations to Boeing officials and the project’s timelines. According to CW4, timelines provided to Boeing representatives during the
calls by Spirit management were not based on the reality of the existing inventory of parts needed to
complete the wing structures, because in many cases CW4 knew that certain parts were not in stock
and/or were on order and therefore the wing structures could not be expected to be delivered within
the timeframes given to Boeing by the Spirit managers. In CW4’s estimation, the Spirit managers
lied to Boeing representatives concerning the completion dates of the wing structures. For example,
CW4 recalled that Dickinson or another Spirit Manager often stated during these meetings to Boeing
representatives that various wing structures would be completed in seven days or in some cases 14
days. However, based on CW4’s knowledge of the inventory of parts utilized in the fabrication and
assembly of the wing structures, the timelines provided could not be met. Additionally, according to
CW4, the wing structures typically took at least 30 days to complete compared to the 7 or 14 days
claimed by Spirit management during the meetings. CW4 knew this to be incorrect because of
CW4’s observations in the computer system of the expected delivery dates and the original
anticipated completion date and that in all cases the date had long since passed.
(c) CW4 experienced daily shortages of parts, which were attributed to issues
with manufacturing personnel and various Level I Managers scrapping items without following the proper procedures for recording that additional parts were being used to replace the parts that had been scrapped. Therefore, parts which should have been in stock were missing. For example, CW4
recalled an specific incident in which ribs were missing from inventory. Because of the missing ribs
inventory, which are typically purchased from an outside vendor for $2,000-$3,000, and the need to
complete a wing and get it delivered to Boeing without falling further behind schedule, Spirit paid
$25,000 to the vendor to expedite delivery of the ribs. According to CW4, this was by no means the - 106 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 110 of 144
only time that inventory that was supposed to be on hand per the inventory records could not actually be located because parts were being used to replace parts that had ended up being scrapped.
(d) In another incident while working under the management of Cynthia Isaacson,
CW4 detected a shortage of “nut plates” used in the 787 wings. The Spirit Buyer informed CW4
that it would take the vender 20 days to deliver the parts. In an effort to replenish the shortage and
assist the manufacturing personnel who relied upon CW4, CW4 “googled” the part and the
companies that supplied the part, discovering that the parts could be delivered to the Tulsa facility by
the next day. However, Isaacson rebuffed these efforts and directed CW4 to refrain from ordering
any parts.
(e) According to CW4, the “Bond Room” (with which CW4 did not directly
work) also produced an especially high amount of scrap because of problems with the fiberglass
materials used for the wings. The issue of scrap rates produced by the Bond Rooms and by other
teams became a topic of conversation in a separate “upper management” meeting held every
Monday morning at 9:00 a.m. According to CW4, Senior Manager Tim Pounds was among the participants of the meeting in which the tone was “mean and nasty.” During the two meetings in
which CW4 participated, the participants discussed the issue of “scrap” and the “bonding” problems
with the fiberglass materials.
197. Corroborating Witness 5 (“CW5”) was a Supply Chain Analyst in the Tulsa facility
throughout the Class Period. As a Supply Chain Analyst, CW5 created and verified the material
forecasts for the Gulfstream 280 and 650 projects and then reconciled the actual material usage
against the forecasts. These forecasts and reconciliations were undertaken quarterly, but extended
for the entire life of the project contracts. According to CW5, analysts for the Gulfstream and 787 projects all worked together in the same room and also attended the same meetings in which supply
chain and cost-down matters were discussed. - 107 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 111 of 144
(a) According to CW5, Spirit’s projects, including the Gulfstream 280 and 650 projects were color-coded to reflect the status of the projects in terms of cost and scheduling. Before
the Gulfstream programs entered the manufacturing phase, the 280 and 650 projects had been pretty
much on schedule. For the first two or three years when the projects went into manufacturing,
however, most areas and groups working on the projects had upwards of two to three meetings a day
“on the shop floor” regarding “problem areas” and whether those areas should be coded “red or
green.” According to CW5, by 2011 and 2012, there was “a lot” of reporting of project status taking place and a great deal of project status information being tracked.
(b) According to CW5, every quarter the forecast of the material needs for the
two Gulfstream projects was updated in a process known as the EAC process. Up until 2011, this
EAC process had been the responsibility of Spirit’s procurement group, which included updating the parts numbers and pricing. Beginning in 2011, Spirit formed a so-called Business Management
Team, of which CW5 was a member, which took over the materials forecast. Once the Business
Management Team took over, the materials forecast was reviewed and updated quarterly. Part of
this process included pulling the BOM for all projects being undertaken at the Tulsa facility
(apparently, not just the BOMs for the two Gulfstream projects). Then, the parts delineated in the
BOMs were matched “part by part” to current Purchase Order pricing, in addition to calculating any
discounts for the parts for which Spirit was eligible. The Business Management Team then assigned
a price for the materials needed to fulfill the projects all the way to the completion of the contract –
in essence, deriving an updated estimate every quarter of what the material costs were expected to be
for the projects based on updating the pricing of the materials. This way, changes to the BOM could be captured on a quarterly basis.
- 108 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 112 of 144
(c) According to CW5, the biggest impacts on the EAC process were so-called
“cost downs” that were first imposed on the Gulfstream and 787 programs. 22 According to CW5, all personnel on all three of the major Tulsa programs – the Gulfstream projects and the 787 – were told by Spirit “management” in Tulsa in 2011 that they needed to derive a “high dollar amount of cost-
downs.” According to CW5, the “cost-downs” for materials that were being sought for the two
Gulfstream projects and the 787 were upwards of $300 million.
(d) According to CW5, “it got to the point” that the “cost-downs” being sought
for the Gulfstream 280 and 650 programs required a so-called “learning curve” of 70%-80%. In
CW5’s words, “learning curve” is a term used to refer to virtually any aspect of Spirit’s business,
and in this context it meant that the materials costs for the Gulfstream projects basically needed to be
reduced by 70-80% over the lives of the projects. The cost-down goals were definitely a “very steep
and maybe unrealistic” goal to achieve, and had apparently been derived by Don Harris and Spirit’s
“strategy group.” According to CW5, regardless of any savings being achieved on materials, they
were being offset because of ongoing engineering and “other factors” that continued to affect the programs and continued “to drive more cost” into the programs. As such, it was hard to “find
additional savings” for the programs by way of cost-downs because of the additional costs that
continued to be incurred. This resulted in the Gulfstream programs taking “a small hit” at the end of
2011 for failing to achieve the cost-down goals that had been set. In essence, the Gulfstream projects “showed a loss” for 2011.
22 As explained by CW5, “cost-downs” are attempts to reduce material costs to compensate for losses being incurred due to changes and/or delays.
- 109 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 113 of 144
(e) While the cost-down goals that had not been achieved in 2011 did not carry
over into 2012, there were nonetheless cost-down goals in effect for 2012. CW5 23 did a cost-study
on the Gulfstream program at the end of 2011 which demonstrated that Spirit had not gotten the
results that were wanted for 2011. More specifically, the study showed that Spirit had only been
able to find 30% of the parts at the average prices that were needed for the cost-down goals – in
essence, only 30% of the BOM parts could be found at the prices needed for the cost-down goals.
According to CW5, this meant that Spirit needed to leverage volume-based discounts from its
suppliers and to develop additional suppliers. According to CW5, however, no matter how much
Spirit was able to bring down its costs for the two Gulfstream projects, increasing engineering costs
were offsetting whatever materials savings were being achieved. And, according to CW5, a big portion of the October 2012 charge involved the cost-down goals for 2012 associated with the
Gulfstream projects that were not achieved, and because of the study conducted at the end of 2011,
CW5 knew “early in 2012” that it was very likely the Gulfstream projects – and by extension, Spirit
– would have “to take a hit.”
(f) According to CW5, the losses being incurred on the 650 and 280 projects
were frankly and openly discussed every quarter by the Business Management Group and the group
“reported exactly what we saw” to Don Harris’s group, which then reported to Brian Keeling, who
oversaw operations and was a step below Chris Collins.
(g) According to CW5, there were weekly engineering change board meetings to
discuss the risks and opportunities presented by changes in price. According to CW5, Spirit was at a
disadvantage in having to absorb the costs of such changes to the two Gulfstream projects because of
23 Corroborating Witness 5 (“CW5”) was a Supply Chain Analyst in the Tulsa facility throughout the Class Period. As a Supply Chain Analyst, CW5 created and verified the material forecasts for the Gulfstream 280 and 650 projects and then reconciled the actual material usage against the forecasts. See ¶197.
- 110 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 114 of 144
the way in which Spirit had negotiated the contracts with the customers at the start of the projects because the contracts were “not thought through” and there were “a lot of gray areas” that were left
open to interpretation and by which the customers took advantage of Spirit.
(h) According to CW5, who always tried to listen to the investor conference calls,
the tenor of the calls prior to the October 25, 2012 charges had sounded “a little optimistic” and
“very optimistic” when it came to supply chain matters and claims of starting to get costs down, because “while we were getting some” of the costs to go down, other costs were increasing, so
whatever cost reductions had been achieved “didn’t make a difference.”
198. Corroborating Witness 6 (“CW6”) was a Level II Buyer/Procurement Agent at
Spirit’s Tulsa facility throughout the Class Period. CW6 handled various procurement functions
related to the Gulfstream 280 program. CW6 initially reported to first-level Manager Allen Hunter,
who reported to second-level Manager Rob Hiatt. Hiatt reported to Senior Manager Don Johnson.
Hunter was later replaced by Chuck Pernu. CW6 noted that Hiatt left Spirit and was possibly
replaced by Josh Obermeir. Pernu reported to Johnson or Josh Obermeir. CW6 worked mostly on
the procurement of certain parts for the Gulfstream 280 wing project, but was involved to a lesser
degree in ordering parts for other programs, including the Boeing 747 and Gulfstream 650. This role
entailed negotiating purchase contracts with various vendors for parts, ordering the parts, and
overseeing the delivery of the parts. CW6 recalled that about 12 Buyers or Procurement Agents were
dedicated to the Gulfstream 280 wing project and noted that the Gulfstream 650 program had about
15 Buyers.
(a) According to CW6, the Buyers were supported by “surveillance” personnel
who tracked the usage of parts by the Mechanics and recorded the usage into an internal online
system. CW6 believed that four to five surveillance personnel were assigned to the Gulfstream 280 program. One of CW6’s role was ensuring that the “floor” or mechanics had parts that were needed - 111 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 115 of 144
for the project. During CW6’s employment, CW6 ordered from 600 to 1000 parts from three to
seven suppliers for various programs, including the 280, 650 and 747 programs. However, CW6
mainly ordered about 600 parts – including ribs, skins and tubes, which carried liquids such as fuel,
anti-freeze and hydraulic fluid – for the 280 wing program and did not order parts for other programs
until about 2013. Most of the parts that CW6 ordered were “internal system parts,” such as the
tubes. CW6 recalled dealing with supplier, Globe Engineering, for many of the parts ordered for the
Gulfstream 280 program.
(b) CW6 also negotiated contracts for parts with the various suppliers, and
explained that each contract listed the part number, quantity of parts that Spirit required, and a
schedule of shipments by when the parts were to be delivered. CW6’s primary responsibility
centered on ensuring that each element of the project had the needed parts according to a particular
schedule. For example, each wing required certain parts to be on hand for the mechanics to perform
different steps in the assembly. CW6 recalled that the Tulsa facility typically completed between
one and two 280 wings per month. By the end of CW6’s employment, Tulsa Management had set a
goal to complete four wings for the 280 program per month. CW6 did not believe that the production team achieved that goal prior to leaving the Company in 2013. CW6 indicated that between 2011 and 2013, the production rate for the 280 wings was still one to two per month,
indicating that the program had been suffering from financial losses and delays.
(c) CW6 stated that the Gulfstream 280 was “depressing” to work on because the program lost money for Spirit. CW6 noted that the program was “hemorrhaging money” throughout
CW6’s employment. CW6 believed that all of the personnel in the Procurement Department at
Tulsa knew that the Gulfstream 280 program did not make money for Spirit. According to CW6, a
good financial quarter for the Gulfstream 280 program meant not losing as much money as in the previous quarter even though losses were still being incurred. CW6 stated that this common - 112 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 116 of 144
knowledge within the procurement department regarding the losses being suffered on the 280 program included knowing that the Boeing 787 program was a supposed “cash cow” for Spirit and
the losses on the Gulfstream 280 program were somehow being made up by the Boeing 787 program. CW6 recalled receiving updates from Procurement Managers including Pernu on the
overall progress of the Gulfstream 280 program, in which the Managers acknowledged that the program was performing very poorly.
(d) According to CW6, there were multiple reasons for the poor financial performance of the Gulfstream 280 program. CW6 learned of the problems surrounding the 280 program from Managers and coworkers, as well as internal public announcements. In CW6’s view,
one of the main reasons for the poor performance could be attributed to “underbidding” of the 280 program by Spirit management. CW6 learned that Spirit management had bid each wing structure at
approximately $1.9 million, while the parts and material for each new wing structure typically cost
Spirit $1.3 million, excluding labor costs. According to CW6, those numbers alone demonstrated
the poor financial performance of the 280 program. In addition, CW6 noted that the program
constantly remained behind schedule and therefore incurred additional costs, which it would not
have otherwise occurred.
(e) According to CW6, the 280 program incurred additional costs as a result of
having to routinely make expedited shipments of the wing structures to IAI for assembly of the
wings to the fuselage. CW6 stated that the normal protocol for the shipment of completed wing
structures involved sea transport, which, according to CW6, cost $40,000 per wing. According to
CW6’s understanding, a completed wing structure requiring sea transport would first be transported by truck from the Tulsa, Oklahoma facility to a port and then transported by ship to IAI. CW6 stated
that IAI fabricated the fuselages for the Gulfstream 280 and completed the final assembly of the 280 jet. However, during CW6’s employment, every completed wing structure had to be shipped to IAI - 113 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 117 of 144
using expedited and much costlier transport. CW6 explained that the Gulfstream 280 program
remained behind schedule throughout CW6’s employment and therefore all completed wing
structures had to be shipped by an expedited method, which involved transport of completed wing
structures, perhaps one to two at a time, in a large Russian cargo aircraft called the Antanov.
According to CW6, the cost to transport the completed wing structures utilizing the cargo aircraft to
IAI was approximately $900,000 per flight. In some instances, wing structures became further
delayed even after the Antanov arrived at Tulsa, causing additional costs of $40,000 each day the
aircraft waited on the Tulsa tarmac. CW6 noted that once IAI completed the assembly of the
Gulfstream 280, IAI shipped the completed plane to Gulfstream in Dallas, Texas.
(f) CW6 further explained that constant engineering design changes in the wing program also caused delays. CW6 routinely received “stop work” directives from the Engineering
Department. Stop work directives meant that CW6 had to review all parts orders because the
changes often meant that certain parts were no longer going to be used. In those instances, it was
necessary to stop those part orders that could be stopped. For parts orders that could not be stopped,
CW6 requested that suppliers modify parts that had not been shipped if this was possible, which
represented an additional cost. CW6 further explained that when engineering design changes
occurred, the sizes of various parts changed, therefore, the design changes resulted in unusable parts
on part orders already shipped and received from the suppliers. In some instances, completed wing
structures had to be “retro fitted” with new parts due to design changes, which resulted in additional
costs for those wings. According to CW6, it was only when Spirit received “certification” for the
280 wings at some point towards the end of CW6’s employment in 2013 that engineering design
changes discontinued, but prior to that the changes had been frequent and constant. CW6 explained
that certification meant that the engineering design changes were finalized and that no further design
changes were authorized. - 114 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 118 of 144
(g) CW6 said that the scrapping of parts was an additional cost that seemed to
occur frequently. Scrapping of items occurred due to various reasons, which included engineering
design changes as previously detailed and errors made by mechanics. Additionally, CW6 discovered
that parts, which had been ordered and stocked in the supply rooms, were somehow missing. For
example, CW6 recalled scenarios in which CW6 had ordered parts in quantities that should have been sufficient to cover three wing structures, only to find that the quantities actually on-hand only
covered one wing structure. CW6 explained that this occurred because mechanics often took parts
without properly recording the usage. According to CW6, in 2013, Spirit management hired an
outside company to store all of the ordered parts, which CW6 believed helped to reduce the
unauthorized use of parts. Additionally, CW6 recalled that Spirit often hired mechanics who were
new to the Gulfstream program. These new personnel made errors that also resulted in scrapping of
the parts. CW6 noted that the tracking of parts and scrap was handled by the Production Control
Department.
199. Corroborating Witness 7 (“CW7”) was employed as a Manufacturing Engineer at
Spirit from 2006, right after the Company was formed, until August 2012. CW7 was in meetings
with people in high-level positions at Spirit, and therefore, had insight into the problems the
Company was experiencing – especially problems related to the Gulfstream programs. CW7 said
that Spirit’s development programs were “going downhill fast.” According to CW7, “what started
the whole damn thing” was when Spirit first started to bid on these new projects. “They wanted to
go out and show the world, ‘We don’t need Boeing.’”
(a) According to CW7, Spirit bid on projects for Sikorsky, Boeing, Cessna (for
the Citation Columbus), and several other “black box” (military) projects. When Spirit first started bidding, Don Carlisle was the General Manager of Spirit Tulsa. CW7 explained that: “They [Spirit]
did a bid on a cocktail napkin for the G280,” which was a smaller business jet to replace the G200. - 115 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 119 of 144
CW7 explained that Spirit came up with a rough estimate for what it would cost the Company to
complete the proposed projects – including startup, mechanics, training, etc., with some losses
figured in. According to CW7, this estimate was the starting point. CW7 explained that after more
research, Spirit would come up with a firm price. According to CW7, the G280 project was
supposed to be for 10 aircraft. CW7 stated that Spirit took on the project because they wanted the
G650 (a larger jet, replacing the 550). Based on CW7’s understanding, Gulfstream told Spirit that
“to even think about the 650,” Spirit would have to give Gulfstream the 280. CW7 noted that for the
650, Spirit settled on bid of three times the amount for the 280. CW7 stated “of course, they
underbid [for the G280]. They didn’t know what they were doing.”
(b) CW7 explained that since Spirit significantly underestimated the cost of the job, “of course when they started making them, it got out of hand.” According to CW7 there were
huge cost overruns, noting: “The biggest problem is that the program is 100% neg buy, [meaning]
every stinking part on it is purchased.” CW7 explained that Spirit makes only about 100 parts in-
house. CW7 noted that outside vendors generally charged less for bulk purchases, so this was at
least one opportunity for Spirit to shave costs. According to CW7, however, Spirit did not opt for buying parts in bulk. This led to cost overruns, which according to CW7, “just kept getting bigger
and bigger.” CW7 noted, “It was just a madhouse; it really was.” According to CW7, this was the
“biggest thing” – cost overruns with vendors.
(c) CW7 stated that with Gulfstream, Spirit owned the engineering, so if there
was an engineering error and “we screwed up, we ate it” – meaning, Spirit “ate” the cost overruns.
CW7 stated that even though Spirit owned the engineering – the Company developed and made it,
and did so strictly based on Gulfstream’s requests – Gulfstream had to approve the engineering.
(d) According to CW7, the Gulfstream program “kept slipping and slipping.”
CW7 explained that the majority of Gulfstream costs stemmed from tooling, repair work on tooling, - 116 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 120 of 144
and engineering design changes at the last minute. CW7 further explained that the 280 was sent to
Tel Aviv to get the fuselage assembled. CW7 stated that IAI was the company there that handled the fuselage work and the interiors. CW7 and others from Spirit traveled to Israel in connection with this. Thereafter, the aircraft were sent back to Savannah or Dallas to be delivered to the customers.
CW7 explained that the “biggest cost” in this whole process was for the Antanov, the cargo plane they used to transport cargo. According to CW7, it cost $900,000 per wing set (left and right) for the
G280 to fly from Oklahoma to Tel Aviv. CW7 heard from “a high-up source” that Spirit only charged IAI (the Gulfstream vendor hired to build the wings), $1.4 million per wing set: “We only charged $1.4 million to build the whole thing. It takes about $5.6 million per wing set to get it done.”
According to CW7, Spirit did nothing to change its arrangement with Gulfstream after realizing the huge cost disparity for the G280.
200. Corroborating Witness 8 (“CW8”) served as Production Manager on Spirit’s
Gulfstream 650 program throughout the Class Period. As Production Manager, CW8 was responsible for approximately 20 to 40 Assembly Mechanics who assembled various elements of the
Gulfstream 650 wing, and ensured that Mechanics accurately installed the parts and completed the installations in a timely fashion. CW8 reported to numerous Second-level Managers, including Tim
Fisher, Barry Cathey, Tony Dunn, Doug Jack and Bob Alsup, who in turn reported to the Director of the Gulfstream 650 Program David Fillmore. Fillmore was later replaced by Van McMillan.
Fillmore and McMillan reported to the Director of Operations for Tulsa and McAlester, Oklahoma,
Chris Collins. CW8 understood that Collins reported to Turner.
(a) CW8 explained that the Gulfstream 650 program suffered numerous issues ranging from constant part shortages, lack of clear planning by the Mechanical Engineering
Department and numerous design changes, all of which affected the profitability and the overall schedule of the Gulfstream 650 program. - 117 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 121 of 144
(b) The Gulfstream 650 assembly process involved five stages, numbered 0 through IV, during which the Mechanics assembled a portion of the wing. CW8 oversaw stage II for approximately half of CW8’s tenure as a Production Manager. In stage II, Mechanics installed the
“cove angle” at the backside of the wing. CW8 encountered daily shortages of parts, which greatly affected CW8’s team’s ability to complete the installations on schedule. As a result of the part shortages, mechanics in CW8’s section had to wait to complete the installation tasks. However, according to CW8, Senior Management directed that a wing that was still waiting for the arrival of necessary parts be moved to the next sections for “visual” purposes. CW8 believed that moving a wing to the next section in this manner, cost the program time and contributed to the errors made by
Mechanics.
(c) As explained by CW8, prior to the fabrication of the wings, the Mechanical
Engineering Department devised a comprehensive detailed plan on how to fabricate each element of the wing, including how to fabricate each part. Additionally, the Mechanical Engineering
Department created a plan on how to install the parts that the Mechanics had to follow, which included the tooling required for use in the installation of the parts and hardware. For instance, when the plan required the use of a particular fastener, Mechanics were required to use the fastener as written in the plan by the Mechanical Engineering Department. CW8 noted that, on a regular basis, the Mechanical Engineering plans required the wrong fasteners and other incorrect hardware, and in some cases, fasteners were required in the plans even when those fasteners were not approved by
FAA guidelines. Additionally, the space in which Mechanics needed to install the various parts and hardware should have been included in the overall fabrication plan for the parts. CW8 routinely observed that the Mechanical Engineering plans inaccurately accounted for the spacing needed by the Mechanics. According to CW8, the part shortages largely resulted from inaccurate planning by the Mechanical Engineering Department. CW8 believed that the main contributing factor for the - 118 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 122 of 144
errors made by the Mechanical Engineering Department involved a lack of time given to the
Mechanical Engineering Department to devise the plans. According to CW8, mechanical engineers
reviewed the areas of concern and in many cases had to rework the specifications of the parts, which
sometimes necessitated procuring new parts.
(d) Additionally, CW8 believed that the tooling – i.e. , drills and cutting
machinery – used at the Tulsa facility was not optimal for the fabrication of wings and hindered the
Mechanics in their efforts to timely install parts. For instance, some drills did not fit in certain
spaces on the wing and created additional problems regardless of the sequence in which the different
stages of the wings were completed.
(e) CW8 explained that when problems occurred, such as Mechanics’ errors or being unable to get tooling to fit, a “rejection tag” was created which denoted the area of concern.
Assembly Mechanics also made errors that generated rejection tags, even when the plans themselves
were not at issue. According to CW8, each wing had an average of 700 rejection tags, and the cost
to repair the item noted in the rejection tag averaged $1,000.
(f) CW8 learned from the Director of the Gulfstream Program David Fillmore
that Spirit management had underbid the Gulfstream 650 program. Also, according to CW8, Spirit
sells. After attending various Manager meetings, CW8 learned about the price of the wing, as well
some of the costs to fabricate the wing. For example, each wing in the program sells for $5 million
and labor costs for each wing averaged $1 million.
(g) Throughout CW8’s tenure, the Gulfstream 650 program remained behind
schedule and failed to make a profit for Spirit. CW8 recalled attending Manager meetings, where
various charts were displayed showing that the 650 program had failed to break even by hundreds of
thousands of dollars per wing. These Manager meetings took place in 2011 and continued through
CW8’s departure from the Company in 2013. - 119 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 123 of 144
(h) CW8 recalled one Manager meeting in mid- 2011 held at the Park Inn at the
Tulsa, Oklahoma International Airport, which was led by defendant Turner and defendant Anderson.
According to CW8, during this meeting, Turner and Anderson emphasized that the Gulfstream 650 program remained behind schedule and over budget and recalled that Turner and Anderson used
charts, which displayed the financial condition and schedule of the Gulfstream 650 program,
demonstrating that the 650 program remained behind schedule and over budget.
(i) With respect to the Gulfstream 280 program, CW8 heard from other Managers
working on that program that Spirit charged Gulfstream $1.2 million for each 280 wing. Because of
delays in the 280 program, however, Spirit management shipped each wing via expedited method
using a Russian aircraft, the Antanov, at a cost of $900,000 for each flight delivery.
201. Corroborating Witness 9 (“CW9”) started working at Spirit’s Tulsa facility as a
Materials & Process Engineer on the Gulfstream 650 Wing project in May 2009, and became a
Senior Engineer and Liaison with the Materials Review Board for the 650 wing project around the
start of the Class Period. CW9 reported to Manager of Materials & Process Engineering John Vogt,
who in turn reported to the Program Manager for the Gulfstream 650 project David Fillmore.
(a) In CW9’s initial position as a Materials & Process Engineer on the Gulfstream
650 project, CW9 reviewed designs created by Spirit’s Contract Engineer Designers. The focus of
this role was to ensure that the designs created by the Designers complied with Gulfstream’s
specifications. In CW9’s subsequent position as a Senior Engineer Liaison with the Materials
Review Board on the Gulfstream 650 wing project, CW9 reviewed items, such as component parts,
that were inspected by Spirit’s Inspectors and had been tagged as deficient in some manner. CW9
explained that Inspectors reviewed the work of the Mechanics working on the wing structures and
tagged areas that did not meet specifications according to the approved designs. For instance,
Mechanics made errors such as drilling holes in the wrong place. - 120 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 124 of 144
(b) CW9 further explained that the ribs (which are the basic structure of the wing)
are attached to two spars that run the length of the wing structure. In the process of attaching the ribs
to the spars, Mechanics routinely made errors. When the inspectors observed the errors, they notated
and tagged the errors for review by CW9’s group. CW9 reviewed the errors and sought ways to
remedy the mistakes according to the approved designs, ( i.e. , the designs which adhered to
Gulfstream’s specifications). When an item could not be corrected, CW9 recommended the item be
scrapped.
(c) Throughout CW9’s employment, CW9 recalled hearing from coworkers and
at various “all hands meetings” that the 650 project was consistently behind schedule and was not a profitable endeavor for Spirit. Additionally, CW9 recalled hearing from coworkers that the
Gulfstream contract had been negotiated to the detriment of the Gulfstream 650 group. CW9 heard
that the contract did not specify critical elements of the design and verification process, and
understood that Spirit had “committed to things that were not feasible” and “ate the cost” of any
redesigns and remakes. In many cases when Gulfstream complained about the design or fabrication
of wing structures or parts of structures, CW9 understood that Spirit had to remake the item or items
that Gulfstream notated; whatever Gulfstream wanted from Spirit, Gulfstream received. For
example, CW9 recalled that the Gulfstream 650 group shipped out a completed wing structure,
which CW9 believed cost $500,000. When the wing structure arrived at the Gulfstream facility in
South Carolina, Gulfstream quality inspectors rejected the wing and returned the wing to Spirit’s
Tulsa facility. According to CW9, the Gulfstream quality inspectors found an issue with the so-
called “gap tolerances,” the space between the parts of the wing structure. CW9 learned of
Gulfstream’s rejection of the wing at an “all hands meeting” and recalled that many of the participants were frustrated.
- 121 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 125 of 144
(d) CW9 was not surprised by Spirit’s announcement of the $590 million charge
in October 2012, although CW9 had not been aware ahead of time that the charge was going to be
taken. CW9 was not surprised based upon the general consensus that CW9 heard from coworkers
that Spirit had to comply with whatever Gulfstream dictated.
202. Corroborating Witness 10 (“CW10”) worked at Spirit’s Tulsa facility throughout the
Class Period, first as a Cost Analyst in the Procurement Cost Support (“PCS”) Department and later,
in 2012, as a Procurement Manager in Supply Chain. As a PCS, CW10 reported to Director Don
Harris and analyzed bid packages from various suppliers to determine whether the suppliers’ quoted
labor hours, materials, and processes were a good fit for the particular item Spirit was bidding on. In
this role, CW10 dealt with costs that were bid at the beginning of projects, as well as costs involved
in re-bidding. According to CW10, Spirit was “constantly” moving new programs and projects because suppliers could not meet the requirements and Spirit would have to re-bid the project.
Sometimes a supplier would complete one portion of a contract and then engage subcontractors to
get the processing done, “muddying up the supply chain” in the process.
(a) Then, as Procurement Manager, CW10 was responsible for monitoring and
compiling all of the actual external procurement costs for each quarter that were incurred on the
development projects, including the Boeing 787 and Gulfstream 280 and 650. This process involved
looking at all the costs the Company had incurred for a particular quarter – i.e. , involved everything paid to outside sources for a particular project – and conveying that information to the Supply Chain
and Finance Groups, so that an EAC report could be created for each quarter. The EAC reports
reflected costs incurred versus forecasted costs and showed the extent to which actual costs exceeded
forecasted costs. CW10 was responsible for the EAC reports for every product delivered out of
Tulsa, including the Boeing legacy programs and the 787. There were two analysts who worked on
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the legacy programs, one analyst for the 787, and one analyst for the Gulfstream 280 and 650, all of whom reported to CW10.
(b) With the development programs, Spirit was just entering the “design/build” realm, so it didn’t have prior experience managing projects from design to completion. CW10 said:
“It’s a big difference when you start trying to design something from a drawing on a board and go through testing. . . . They bit off more than they could chew and they underbid a product tremendously, to their ultimate customer [Boeing].”
(c) According to CW10, the EAC reports had to be approved by various individuals. CW10’s group was responsible for preparing the procurement costs (“PAC”) and reported those costs to Supply Chain Management (“SCM”), after which the Supply Chain Director
(“SC Director”) would approve or disapprove the report. Procurement would have to “dig up the numbers” to support their reports whenever they were challenged by the SC Director. Thereafter, the report would be turned over to the Controller in Tulsa and then reviewed by the Vice Presidents in Tulsa. Next, the report went to the Finance Group in Tulsa, which handled reporting of internal finance data (e.g. , labor, processing, etc.), or “internal costs.” CW10 stated that the reports were
“thoroughly vetted by management” and distributed to the CFO and CEO. Darrell Pulliam in the
Finance Group would “marry” the internal (forecasted) and external (procurement) numbers to show a “full picture” of the costs. The “married” report would then be approved by VP Chris Collins and then, Controller Andy Yacenda would send the report to his counterpart in Wichita. Wichita management would review it and look and the numbers and “agree or disagree.” According to
CW10, the “agree or disagree” part always seemed bizarre, noting, “To me, it was always ridiculous.
It’s not a question of “do you like it or not; you have to look at what it says.” Ultimately, the reports were approved and signed off by the financial officers and the President of the company and then incorporated into a report to shareholders. - 123 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 127 of 144
(d) According to CW10, there were some circumstances in which Wichita management would provide feedback after reviewing Tulsa’s reports. When Wichita management did not want to sign off on or accept something because they felt the cost was too high, CW10’s group would have to pull up the EAC and purchase orders to show evidence for those costs. CW10 stated: “That’s the kind of thing they’d challenge you on.” “Nobody wanted to accept that that was the cost we were paying for this stuff.” CW10 noted that at that time, the PriceWaterhouseCoopers auditors were essentially “living with” them in Tulsa.
(e) CW10 acknowledged there were cost overruns for the 787 program during
2011 and 2012 and explained that “basically all the new programs were overrunning” at that time.
“Besides the fact that costs were much higher than expected, they were also having to pay a lot of expedite fees and extra costs to suppliers to bring stuff in.” CW10 noted that Boeing was making
“changes after changes” on the 787, and between Spirit’s engineering team and Boeing’s engineering team, “they were spending a lot of time making changes that were pretty costly.” CW10 further noted that composite panels from Europe were an issue and that “those things were costing an awful lot of money.” CW10 explained that there were movable leading edges (and fixed leading edges), which were components of the 787 wing. These panels were to go on the fixed leading edges. CW10 stated that there were design changes for these composite panels, and “every time there was a design change, there was an increase in costs.”
(f) CW10 explained that the cost increases for the 787 had to do with the “rate factor.” Spirit was not producing very many of these parts, and suppliers were less inclined to commit to the small-scale project. CW10 stated: “It’s hard to get a supplier to bid on it when you’re only making one or one-and-a-half a month.” Suppliers often have to invest in expensive setups to accommodate the projects, and of course they have an interest in cost efficiency. CW10 noted that especially “with all the design changes” involved with the 787, suppliers did not want to do it: - 124 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 128 of 144
“Nobody in their right mind would. One-offs cost ten times as much as a product you’re making in
an economic way.”
(g) CW10 described the design changes for the 787 by saying: “Oh, they were
crazy.” CW10 noted that whenever there was a design change, Spirit had to restart the bidding process and reach out to current and new suppliers. CW10 explained that Spirit would go back to
the current supplier first and get a quote for the new design, and “it’s always an increase.” CW10
added that Spirit would then have to pay the supplier to rework the stock on hand, if possible. If that
was not possible, then everything would have to be scrapped and replaced, which would mean
additional costs. CW10 stated: “They would lose time and, sometimes, materials that went into it.”
CW10 added that another factor is that the 787 is a “green wing,” so the cost of raw materials was
“really high.”
(h) Elaborating on the cost-related issues that stuck out during the 2011-2012
time period, CW10 said, “That whole period of time, I was amazed that Spirit was staying open, as badly run as they are. It was just phenomenal to me that they could keep the doors open and keep
managing it. [Disorder] was everywhere, like they forgot how to do business.” According to CW10,
it really boiled down to underestimating costs, “horribly underbidding” projects, and “not knowing
the scope” of the projects fully.
(i) Addressing how far in advance bid packages were approved, CW10 explained
the way a project is typically bid: They would have a product designed and “put out” for bids. Spirit
“usually” wanted to sign two- or three-year (or longer) contracts. So if they sign something in 2008,
they might be held to that price for three to five years. This was true “with the 787 program
especially, because when they went in and bid those projects, they wanted long-term contracts.”
And for the 787, they had five- to seven-year contracts, which held Spirit to “anything bid at that
time.” However, some of the 787 suppliers started producing parts and then design changes came - 125 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 129 of 144
up. “Then you start running into more costs.” According to CW10, one issue that led to design
changes was that “engineering wasn’t far enough along” at the time they were bidding. “They were bidding to Power Point [presentations] instead of to true engineering.”
(j) According to CW10, the “cost-down” process went as follows: “You look at a program and say it’s running over X amount, so you have to come up with a cost-down initiative.
The first thing they’d do would be to send a letter to suppliers and ask for a reduction in pricing.”
They might ask for a fifteen percent reduction on their bid package in exchange for extending the
supplier’s contract another year.” “That’s how this kind of thing was approached.” CW10 affirmed
that there were cost-down efforts with regard to the 787 and the Gulfstream projects during 2011-
2012. “Those were almost constant,” but cost-down efforts were not generally successful.
“Sometimes the supplier just laughed at them. The supplier would say, ‘You’ve got to be kidding
me.’ At the same time, the supplier might actually be asking for a fee increase because they felt
engineering was inaccurate, for instance.” “There was no way [the supplier] would give [Spirit] an
additional cost break – or a cost break at all.”
(k) CW10 also described the concept of “learning curve” or “cost curve,”
explaining, “If you’ve built x-number of ship sets, you’re supposed to have worked out the problems, and the people building them should be more familiar, so you don’t have the same errors
in production. You would have achieved ‘learning.’” “You never achieve total learning, really. But
the point is: Your learning curve is supposed to be achieved within x-number of ship sets within the production period.” CW10 confirmed that there was internal discussions suggesting that the learning
curve management set was unrealistic with regard to the 787 or the Gulfstream programs, stating,
“Yes. The fact of the matter is that changes were constant. If you apply a certain learning curve, it
looks good but is not physically possible.” CW10 noted that this was true especially with the 280 because they had a low build rate, there were so few being built and each one was a custom project, - 126 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 130 of 144
but “really it was the same with the 787.” A project that required them to complete ten parts per
month would keep a plant full of people busy. “But if you’re doing something once a month – it
may not even be the same person doing it, because it’s not one person’s [dedicated] job; they’d be
working on other programs and products – you’re not building that thing constantly, so people don’t
remember. Anytime something is a low build rate, you have problems achieving a good learning
curve.”
XI. LOSS CAUSATION/ECONOMIC LOSS
203. During the Class Period, as detailed herein, defendants engaged in a scheme to
deceive investors and the market and a course of conduct that artificially inflated and maintained
Spirit’s stock price and operated as a fraud or deceit on Class Period purchasers of Spirit publicly
traded securities by misrepresenting and omitting material information about the Company’s business and prospects, including the existing and forecasted costs attributed to Spirit’s development programs. When defendants’ misrepresentations and omissions were revealed, as detailed in §VII,
Spirit’s stock price fell precipitously as the prior artificial inflation came out of the price. As a result
of their purchases of Spirit stock during the Class Period, Lead Plaintiffs and other members of the
Class suffered significant economic loss, i.e. , damages, under the federal securities laws.
204. As highlighted in the chart below, defendants’ false statements and omissions,
identified herein at §VI, had the intended effect and caused Spirit stock to trade at artificially inflated
levels up to and above $25.85 per share during the Class Period. As a direct result of the disclosures before the market opened on October 25, 2012, however, Spirit’s stock price suffered material,
statistically significant declines.
- 127 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 131 of 144
$27
Oct. 25, 2012 -Defendsnlr "dropped a bombshell on $24 investors by sr1ourndr1g a $590 million forward-loss charge." "The charge damages ft credbility ofthe accounting assumptions behind Nov. 3,2011- Defendants: Feb. 9, 2412 - Defendants: GUP earnings." cost reduction" efforts on made '"good progress on 787 SPR down 32.24% the 787 program "going coal reduction initiatives" and verywell" and "on plan" "overall we are seeing the kind $21 '1 like the momertunithat of improvement that we need 0 I'm seeing." on" the GuIfsteem programs. SPR up 1242% SPR up 4.68% a.I-
I-
(0 $18 Nov. 30. 2011 . Defendants: cost Improvements are 'tracking per plan'", there is a "healthy management reserve" to "cushion" the 787s "zero margin" and Spirit is experiencing increasing "tailwinds." SPR up 433% $15 Class Period: November 3, 2011 -October 24, 2012
$12 I I I I 0811012011 12/1412011 04123)2012 08/27/2012 01104/2013 10112/2011 02/1712012 06/25/2012 10131/2012
205. The decline in Spirit’s stock price at the end of the Class Period was a direct result of
the nature and extent of defendants’ prior false statements and omissions being revealed to investors
and the market. The timing and magnitude of Spirit’s stock price declines negate any inference that
the loss suffered by Lead Plaintiffs and other Class members was caused by changed market
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conditions, macroeconomic or industry factors, or Company-specific facts unrelated to defendants’
fraudulent conduct. Indeed, on October 25, 2012, the day on which Spirit stock suffered a material price decline of 30% as a result of the “bombshell” disclosure of Spirit’s $590 million charge, both
the Dow Jones Industrial Average and the S&P 500 indices remained flat, recording increases of
0.2% and 0.3%, respectively. The economic loss – damages – suffered by Lead Plaintiffs and other
members of the Class was a direct result of defendants’ fraudulent scheme to artificially inflate Spirit
stock price and maintain the price at artificially inflated levels and the subsequent significant decline
in the value of Spirit stock when defendants’ prior misrepresentations and omissions were revealed.
XII. CLASS ACTION ALLEGATIONS
206. Before, during and after the Class Period, defendants regularly communicated with
the public and investors via established market communication mechanisms, including through
regular disseminations of press releases on the major news wire services and through other wide-
ranging public disclosures, such as communications with the financial press, securities analysts and
other similar reporting services.
207. As a result, the market for Spirit securities digested current information with respect
to the Company from publicly available sources and reflected such information in the price of Spirit
securities. Under these circumstances, all purchasers or acquirers of Spirit securities during the
Class Period suffered similar injury through their purchase of securities at artificially inflated prices
and a presumption of reliance applies.
208. Lead Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class consisting of purchasers and acquirers of Spirit
securities during the November 3, 2011 through October 24, 2012 Class Period who were damaged by defendants’ fraud. Excluded from the Class are defendants, present or former officers and
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directors of the Company, members of their immediate families, and their legal representatives,
heirs, successors or assigns, and any entity in which defendants have or had a controlling interest.
209. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Spirit securities were actively traded on the NYSE.
While the exact number of Class members is unknown to Lead Plaintiffs at this time and can only be
ascertained through appropriate discovery, according to Spirit’s 2012 Form 10-K, as of February 21,
2013, there were 119,612,407 shares of Spirit Class A common stock outstanding. Accordingly,
Lead Plaintiffs believe that there are thousands of members in the proposed Class. Record owners
and other members of the Class may be identified from records maintained by Spirit or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice similar to
that customarily used in securities class actions.
210. Lead Plaintiffs’ claims are typical of the claims of the members of the Class as all
members of the Class were similarly affected by defendants’ wrongful conduct in violation of
federal law that is complained of herein.
211. Lead Plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class and securities litigation.
212. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants’ acts and
omissions as alleged herein;
(b) Whether statements made by defendants to the investing public during the
Class Period misrepresented and omitted material facts about the business and operations of Spirit;
and - 130 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 134 of 144
(c) To what extent the members of the Class have sustained damages and the proper measure of damages.
213. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
214. Lead Plaintiffs are entitled to a presumption of reliance on defendants’ material
misrepresentations and omissions pursuant to the fraud-on-the-market doctrine, because, among
other reasons:
(a) Defendants made public misrepresentations and failed to disclose material
facts during the Class Period;
(b) Defendants’ misrepresentations and omissions were material;
(c) Defendants’ misrepresentations and omissions alleged would induce a
reasonable investor to misjudge the value of the Company’s securities; and
(d) Lead Plaintiffs and other members of the Class purchased Spirit securities between the time defendants misrepresented or failed to disclose material facts and the time the true
facts were disclosed, without knowledge of the misrepresented or omitted facts.
215. At all relevant times, the market for Spirit securities was open, efficient and well-
developed for the following reasons, among others:
(a) Spirit common stock met the requirements for listing, and was listed and
actively traded, on the NYSE, a presumptively efficient market;
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(b) Spirit common stock was regularly followed by numerous securities analysts
employed by major brokerage firms who wrote reports that were distributed to the sales force and
customers of their respective brokerage firms;
(c) Spirit was eligible to file registration statements with the SEC on Form S-3.
To be S-3 eligible, a company had to have $75 million in stock held by non-affiliates, and had to
have filed financial reports with the SEC for at least one year. The value of the shares held by non-
affiliates of Spirit greatly exceeded the $75 million threshold;
(d) As a public company, Spirit regularly filed annual, periodic and interim public
reports with the SEC;
(e) Spirit regularly communicated with public investors via established market
communication mechanisms, including via regular disseminations of press releases on major
newswire services and the Internet, as well as through presentations to investors and analysts, and
conference calls with analysts; and
(f) The price of Spirit common stock promptly reacted to the dissemination of
new information regarding the Company.
216. As a result of the foregoing, the market for Spirit common stock promptly digested
current information regarding Spirit from all publicly available sources and reflected such
information in the trading price for Spirit common stock. Under these circumstances, all purchasers
of Spirit common stock during the Class Period suffered similar injury through their purchase of
Spirit common stock at artificially inflated prices, and a presumption of reliance applies.
217. Without knowledge of the misrepresented or omitted material facts alleged herein,
Lead Plaintiffs and other members of the Class purchased or otherwise acquired Spirit securities between the time defendants misrepresented or failed to disclose material facts and the time the true
facts were disclosed. - 132 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 136 of 144
218. Accordingly, Lead Plaintiffs and the other members of the Class did rely and are
entitled to have relied on the integrity of the market price for Spirit securities, and a presumption of
reliance on defendants’ materially false and misleading statements and omissions during the Class
Period applies.
219. A Class-wide presumption of reliance is also appropriate in this action under the
Supreme Court’s holding in Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128 (1972), because the fraud claims asserted herein are grounded in defendants’ material omissions. As this
action involves defendants’ failure to disclose material adverse information regarding Spirit’s true business conditions – information defendants were obligated to disclose – positive proof of reliance
is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the
sense that a reasonable investor might have considered them important in the making of investment
decisions.
220. As a consequence, the market for Spirit securities digested current information with
respect to the Company from publicly available sources and reflected such information in the price
of Spirit securities. Under these circumstances, all purchasers or acquirers of Spirit securities during
the Class Period suffered similar injury through their purchase of securities at artificially inflated prices and, thus, a presumption of reliance applies.
XIV. NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS
221. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
Many of the specific statements pleaded herein were not identified as “forward-looking statements”
when made. To the extent there were any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the purportedly forward-looking statements. Alternatively, to the extent that the - 133 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 137 of 144
statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are
liable for those false forward-looking statements because at the time each of those forward-looking
statements was made, the particular speaker knew that the particular forward-looking statement was
false, or the forward-looking statement was authorized or approved by an executive officer of Spirit
who knew that those statements were false when made.
COUNT I
For Violation of §10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants
222. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
223. During the Class Period, Spirit and defendants Turner, Anderson, Kummant and
George carried out a plan, scheme and course of conduct which was intended to and, throughout the
Class Period, did: (a) deceive the investing public, including Lead Plaintiffs and other members of
the Class, regarding Spirit’s business, operations, financial prospects and the intrinsic value of Spirit publicly traded securities; (b) artificially inflate and maintain the market price of Spirit securities;
and (c) cause Lead Plaintiffs and other members of the Class to purchase Spirit securities at
artificially inflated prices and, as a result, suffer economic losses when the truth and impact about
defendants’ fraud was revealed. In furtherance of this unlawful scheme, plan and course of conduct,
defendants, and each of them, took the actions set forth herein.
224. Defendants: (a) employed devices, schemes and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
made not misleading; and (c) engaged in acts, practices and a course of business which operated as a
fraud and deceit upon the purchasers or acquirors of Spirit publicly traded securities in an effort to
maintain artificially high market prices for Spirit publicly traded securities in violation of §10(b) of
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the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below.
225. Defendants, individually and in concert, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business and its
operations as specified herein.
226. These defendants employed devices, schemes and artifices to defraud while in possession of material, adverse, non-public information, and engaged in acts, practices and a course
of conduct as alleged herein in an effort to assure investors of Spirit’s value and performance and
continued growth, which included the making of, or the participation in the making of, untrue
statements of material fact and omitting to state material facts necessary in order to make the
statements made about Spirit in light of the circumstances under which they were made, not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a course
of business which operated as a fraud and deceit upon the purchasers or acquirors of Spirit publicly
traded securities during the Class Period.
227. Each of defendants Turner’s and Anderson’s primary liability, and controlling person
liability, arises from the following facts: (a) these defendants were high level executives and, in
certain circumstances, directors at the Company during the Class Period and members of the
Company’s senior management team; (b) each of these defendants, by virtue of his responsibilities
and activities as a senior officer and director of the Company, was intimately familiar with and
received the analysis concerning Spirit’s development programs, specifically the 787 and Gulfstream
development programs, and the Company’s systemic production problems and resulting cost
overruns; (c) each of these defendants enjoyed significant personal contact and familiarity with the
other defendants and was advised of and had access to other members of the Company’s - 135 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 139 of 144
management team, internal reports, and other data and information about the Company’s business
and operations, at all relevant times; and (d) each of these defendants was aware of the Company’s
dissemination of information to the investing public which they knew or recklessly disregarded was
materially false and misleading and omitted material information.
228. In addition to the duties of full disclosure imposed on defendants as a result of their
making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, defendants had a duty to promptly disseminate truthful
information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X, 17 C.F.R. §210 et seq., and Regulation
S-K, 17 C.F.R. §229.10 et seq., and other SEC regulations, including accurate and truthful
information about the status of the Company’s business and operations so that the market price of
the Company’s securities would be based on truthful, complete and accurate information.
229. The defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. As such,
defendants’ material misrepresentations and/or omissions were made knowingly or with a reckless
disregard for the truth and for the purpose and effect of material information about the Company’s business and operations, thus supporting the artificially inflated prices of Spirit publicly traded
securities.
230. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Spirit publicly traded
securities was artificially inflated during the Class Period. In ignorance of the fact that the market price of Spirit’s publicly traded securities was artificially inflated, and relying directly or indirectly
on the false and misleading statements made by defendants, or upon the integrity of the markets in - 136 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 140 of 144
which the securities trade and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants, but not disclosed in public statements by defendants during the Class Period, Lead Plaintiffs and the other members of the Class acquired Spirit publicly traded securities during the Class Period at artificially inflated prices and were damaged when the artificial inflation came out of the securities.
231. At the time of said misrepresentations and omissions, Lead Plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true and complete. Had
Lead Plaintiffs, the other members of the Class and the marketplace known the truth regarding the
Spirit’s development program and the true condition of Spirit’s business operations and prospects, which were not disclosed by defendants, they would not have purchased or otherwise acquired their
Spirit publicly traded securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.
232. By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder.
233. As a direct and proximate result of defendants’ wrongful conduct, Lead Plaintiffs and the other members of the Class suffered damages in connection with their respective purchases and sales of Spirit publicly traded securities during the Class Period.
COUNT II
For Violation of §20(a) of the Exchange Act Against All Defendants
234. Lead Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.
235. Defendants Turner, Anderson, Kummant and George acted as controlling persons of
Spirit within the meaning of §20(a) of the Exchange Act as alleged herein. Spirit controlled all of its
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employees and each of the individual defendants. By virtue of their high level positions, and their
ownership and contractual rights, participation in and awareness of the Company’s operations, and
intimate knowledge of the false statements and omissions made by the Company and disseminated to
the investing public, defendants Turner, Anderson, Kummant and George had the power to influence
and control and did influence and control, directly or indirectly, the decisionmaking of the Company,
including the content and dissemination of the various statements which Lead Plaintiffs contend are
false and misleading. These defendants participated in conference calls with investors and/or were provided with or had unlimited access to copies of the Company’s reports, press releases, public
filings and other statements, alleged by Lead Plaintiffs to be misleading, prior to and/or shortly after
these statements were issued, and had the ability to prevent the issuance of the statements or cause
the statements to be corrected.
236. In particular, each of these defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to control
or influence the particular transactions giving rise to the securities violations as alleged herein, and
exercised the same.
237. As set forth above, Spirit and defendants Turner, Anderson, Kummant and George
each violated §10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By
virtue of their positions as controlling persons, each of the defendants is liable pursuant to §20(a) of
the Exchange Act. As a direct and proximate result of defendants’ wrongful conduct, Lead Plaintiffs
and other members of the Class suffered damages in connection with their purchases of Spirit publicly traded securities during the Class Period.
XV. PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs respectfully pray for relief and judgment as follows:
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A. Determining this action to be a proper class action, and certifying Lead Plaintiffs as
Class representatives and Lead Plaintiffs’ counsel as Class counsel under Rule 23 of the Federal
Rules of Civil Procedure;
B. Awarding compensatory damages in favor of Lead Plaintiffs and the other members of the Class against all defendants, jointly and severally, for all damages sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Lead Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including attorneys’ fees and expert fees; and
D. Awarding such equitable, injunctive, or other and further relief as the Court may deem just and proper.
XVI. JURY DEMAND
Plaintiffs demand a trial by jury.
Dated: April 7, 2014 STUEVE SIEGEL HANSON LLP
/s/ Steve Six Norman E. Siegel – D. Kan. #70354 Steve Six - KS Bar # 16151 460 Nichols Road, Suite 200 Kansas City, MO 64112 Telephone: 816/714-7190 816/714-7101 (fax) E-mail: [email protected] E-mail: [email protected]
Liaison Counsel
- 139 - 930043_1 Case 2:13-cv-02261-EFM-TJJ Document 49 Filed 04/07/14 Page 143 of 144
ROBBINS GELLER RUDMAN & DOWD LLP DARREN J. ROBBINS BRIAN O. O’MARA PHONG L. TRAN AUSTIN P. BRANE 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP BLAIR A. NICHOLAS BENJAMIN GALDSTON 12481 High Bluff Drive, Suite 300 San Diego, CA 92130 Telephone: 858/793-0070 858/793-0323 (fax) E-mail: [email protected] E-mail: [email protected]
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP GERALD H. SILK AVI JOSEFSON 1285 Avenue of the Americas New York, NY 10019 Telephone: 212/554 1400 212/554 1444 (fax) E-mail: [email protected] E-mail: [email protected]
Lead Counsel for Plaintiffs
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CERTIFICATE OF SERVICE
The undersigned hereby certifies that on April 8, 2014, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which sent notification of such filing to all counsel of record.
s/ Steve Six
930043_1