## Facts

- Boeing developed the 787-8 Dreamliner, accepted orders before the first flight, and publicly scheduled the first flight for June 30, 2009.
- On April 21, 2009, the 787’s wings failed a stress test.
- On May 3, 2009, Boeing stated the stress-test results were “positive,” while noting the data had not been fully analyzed.
- Later in May, after additional wing-related problems, CEO W. James McNerney, Jr. expressed that the plane would still fly on June 30, and division head Scott E. Carson told a news outlet it “definitely” would fly that month.
- On June 23, 2009, Boeing announced an indefinite delay of the first flight due to a wing “anomaly,” and Boeing’s stock fell more than 10%.
- Investors who bought Boeing stock between May 4 and June 22, 2009 alleged material misstatements and omissions regarding test results and the flight schedule under Exchange Act § 10(b) and SEC Rule 10b-5.
- The amended complaint relied heavily on a confidential witness, engineer Bishnujee Singh, to support the claim that senior management knew the optimistic schedule was impossible.
- Boeing asserted, after investigating, that the complaint’s allegations attributed to Singh were false or exaggerated and that Singh lacked the claimed knowledge about test results and communications to top management.

## Issues

1. Whether the complaint pleaded scienter with the particularity required by the PSLRA for § 10(b) and Rule 10b-5 claims, given the asserted unreliability of the confidential witness allegations.
2. Whether plaintiffs’ counsel violated Rule 11 by failing to conduct a reasonable pre-filing and pre-amendment inquiry into the confidential witness’s knowledge before presenting key factual contentions.

## Decision

- The Seventh Circuit affirmed dismissal with prejudice of the § 10(b)/Rule 10b-5 complaint for failure to plead scienter.
- The court concluded that, without reliable allegations from the confidential witness, the complaint did not support a strong inference that Boeing’s senior executives knew their optimistic statements were false when made.
- The court vacated the denial of Rule 11 sanctions and remanded for the district court to determine whether sanctions against plaintiffs’ counsel were warranted.
- The court emphasized that counsel did not personally meet or speak with the confidential witness until months after the amended complaint relied on him for central allegations.

## Legal Principles

- Under the PSLRA, a securities-fraud complaint must plead with particularity facts giving rise to a strong inference of scienter.
- Confidential-witness allegations must rest on a reliable factual basis showing the witness actually possessed the knowledge attributed to the witness and supporting the asserted inference of scienter.
- When key scienter allegations depend on a confidential witness who lacks the pleaded knowledge, the complaint may fail even if misstatements are otherwise plausibly alleged.
- Rule 11 requires attorneys to conduct a reasonable inquiry ensuring factual contentions have evidentiary support (or will likely have support after further investigation); heavy reliance on unverified confidential-source accounts may justify sanctions scrutiny.

## Conclusion

The Seventh Circuit held that the investors’ Dreamliner-delay claims were properly dismissed because the complaint, once the confidential-witness allegations were discounted, did not plead a strong inference that Boeing’s top management knowingly misled the market, and it sent the case back for a focused determination of whether plaintiffs’ counsel should face Rule 11 sanctions for inadequate investigation and mischaracterization of the confidential witness’s claimed knowledge.


City of Livonia Emps.' Ret. Sys. v. Boeing Co., 711 F.3d 754 (7th Cir. 2013)