NEW YORK (Legal Newsline) - Investors who bought some $3 billion in senior notes from Norfolk Southern can sue over claims the railroad failed to disclose the risks behind a job-cutting performance improvement plan they say led to a disastrous 2023 derailment in East Palestine, Ohio.
A magistrate judge in federal court in New York recommended the plaintiffs have presented enough evidence – including statements by seven unnamed former employees – to proceed with securities-fraud claims against Norfolk Southern. The magistrate dismissed claims the railroad failed to disclose investigations into possible legal and regulatory violations that the government dropped without issuing penalties.
District Judge Lewis Kaplan will now decide whether to affirm Magistrate Judge Sarah Cave's report and recommendations.
Norfolk Southern in 2019 adopted a plan it called TOP21 (for Thoroughbred Operation Plan) to improve its financial performance by cutting operating costs and increasing the efficiency of its network. The company ultimately reduced employee headcount by 30%, while tying executive bonuses to reductions in operating expenses.
The securities plaintiffs claimed TOP21 led to “miles-long trains being run by a single hand-count’s worth of over-levered, exhausted employees.” They accused Norfolk Southern of violating Section 11 of federal securities law by failing to disclose the risks behind TOP21 in offering statements, including that it wasn’t sustainable without affecting rail safety.
One former employee said that after the operating cuts, “derailments occurred in the yard every day or every week.”
Norfolk Southern moved to dismiss, arguing it fully disclosed the risks of operating a railroad, including derailment. It also argued the unnamed former employees could only testify about what they observed in their jobs, not company wide practices.
Magistrate Judge Cave disagreed, finding the plaintiffs had raised enough fact questions for their cases to survive dismissal. The plaintiffs include the Ohio Carpenters’ Pension Fund and the City of Pontiac retirement system.
Securities issuers aren’t required “to disclose a fact merely because a reasonable investor would very much like to know that fact,” Cave noted. But the plaintiffs presented enough evidence to support claims Norfolk Southern failed to disclose the risk that TOP21 was likely to cause more accidents.
“While Defendants’ statements were not a `guarantee’ that no accidents would occur—a likely unobtainable standard of which `reasonable investors may be deemed to’ understand—these statements could still have misled investors if defendants’ implementation of the TOP Initiative was in fact making the company’s operations less safe and more risky,” Cave wrote.
It would be impermissible “hindsight pleading” to turn the derailment into a securities fraud claim, she said. But the “failure to disclose the then-ongoing and serious safety and operational deficiencies” could be a material misstatement, the magistrate concluded.
In the Second Circuit, she wrote, “a generic warning of risk” isn’t sufficient when undisclosed facts would “substantially affect a reasonable investor’s calculations of liability.”