Matt Blog

By Matthew Goldsmith

Matt Blog  [1]

1. Southwest Airlines’ Operational System Leaves Customers Stranded Over Christmas.

          Southwest Airlines (“Airline”) is facing shareholder backlash following an operational failure that resulted in thousands of delayed and canceled flights—leaving passengers stranded throughout the week of Christmas.[2] The Airline’s executives take pride in its routing system, which is unique among domestic airlines.[3] Unlike other airlines that operate through central hubs, Southwest Airlines utilizes a “point-to-point” routing structure that prioritizes one-stop flights over layovers that are required by the “hub-and-spoke” system.[4] However, this routing system was unable to account for the unexpected weather conditions that ultimately led to this disaster.[5] While it is undeniably dangerous to fly in bad weather, make no mistake—the weather is not to blame for the technological failures. In fact, not all domestic airlines encountered the same difficulties as Southwest Airlines, despite the same unanticipated weather conditions.[6] Southwest Airlines was one of only a few airlines to endure such a catastrophic collapse.[7] This was due in part to its use of the unique routing system along with antiquated technology.[8] Between December 21, 2022 and December 31, 2022, over 16,000 flights were cancelled.[9] As media outlets began criticizing the Airline, the truth about the outdated technology surfaced.[10] As a result, Southwest Airline’s stock price plummeted in the days leading up to the new year.[11] This prompted the shareholders of the Dallas, Texas based corporation to sue the carrier for fraudulently misrepresenting and omitting the known source of tribulation.[12]

          Shareholder Arthuer Teroganesian filed a class action lawsuit against former CEO Gary Kelly and other named defendants in the U.S. District Court for the Southern District of Texas. This suit alleges Southwest’s management made materially false and misleading disclosures about the Airline’s routing structure and failed to mention the negative impact of using outdated technology.[13] This action was filed on behalf of shareholders who acquired stock in the airline between June 3, 2020 and December 31, 2022.[14] Named defendants include Southwest Airlines, former Chief Executive Officer Gary Kelly, Executive Vice President and Chief Financial Officer Tammy Romo, and current Chief Executive Officer Robert Jordan (collectively “Defendants”).[15] The common question of law and fact among class members revolve around whether the Defendants violated the Securities Exchange Act of 1934 by knowingly or recklessly misrepresenting material facts on which investors reasonably relied during the class period, or by causing Southwest Airlines to issue such filings.[16]

2. The Securities Exchange Act of 1934

         The Securities Exchange Act of 1934 (“Act”) provides investors with security by requiring access to relevant information needed to make informed judgments about potential investments.[17] The Act regulates transactions on the market by ensuring financial transparency,[18] achieved through “registration of any securities listed on stock exchanges, disclosure, proxy, solicitations, and margin and audit requirements.”[19] Pertinent to this case, the Act allows the Securities and Exchange Commission (“SEC”) to investigate the manipulation of market prices.[20] The required periodic disclosures under Section 13(a) of the Act require a company to disclose material information that will assist an investor in deciding whether to invest.[21] Teroganesian claims that Defendants violated Section 10(b) and 20(a)[22] of the Act, and Rule 10(b)-5 as promulgated by the SEC, by failing to report the state of the Airline’s operating system technology and its proneness to failure.[23] Section 10(b) makes it illegal to “employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device . . . in contravention of such rules and regulations as the [SEC] may prescribe . . . for the protection of investors.”[24] Further, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading . . . in connection with the purchase or sale of any security” is unlawful.[25]

            To prevail on a 10(b) claim, plaintiffs must allege: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”[26]

          Materiality may be determined by whether a reasonable investor would consider the given fact to be an essential element when deciding to invest.[27] However, the materiality of the omitted or misrepresented fact also may depend on the “information that is readily available to the general public and facts known or reasonably available to shareholders.”[28] The Complaint detailed events within the Class Period that should have triggered mandatory disclosures by the Company, but nevertheless did not. Starting in June 2020, an article published by the Baltimore Sun cited computer system difficulties as a cause of hundreds of flight delays for Southwest Airlines.[29] Subsequently, in July 2020, the Airline filed its quarterly report with the SEC, with Defendants Kelly and Romo signing and attesting to its accuracy with relation to financial reporting and disclosure of fraud.[30] According to the certified quarterly report, the Company’s financial risks are:

Significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics such as COVID-19, extreme or severe weather and natural disasters, fear of terrorism or war, governmental actions, and other factors beyond the Company’s control.[31]

The report cited the aforementioned factors as causes of financial volatility without mentioning outdated technology as a potential pitfall.[32] Materiality of this omission is a factual inquiry based on the totality of the circumstances.

          A few months after filing the quarterly report, Southwest Airlines filed its annual report for 2020. In this report, the airline mentioned hypothetical situations that could impact the effective use of its operational technology but did not mention the risks associated with using antiquated software.[33]

The Company’s technologies and systems and functions could be damaged or interrupted by catastrophic events beyond its control such as fires, floods, earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of war or terrorism, computer viruses, security breaches, and similar events or disruptions. Any of these events could cause system interruptions, delays, and loss of critical data, and could prevent the Company from processing Customer transactions or providing services, which could make the Company’s business and services less attractive and subject the Company to liability.[34]

            The Airline downplayed its own role in subjecting the Company to liability by blaming potential pitfalls as “beyond its control.”[35] Additionally, the Airline touted its “point-to-point” routing system in the annual report:

Southwest has historically principally provided point-to-point service, rather than the “hub-and-spoke” service provided by most major U.S. airlines. The hub-and-spoke system concentrates most of an airline’s operations at a limited number of central hub cities and serves most other destinations in the system by providing one-stop or connecting service through a hub. By not concentrating operations through one or more central transfer points, Southwest’s point-to-point route structure has allowed for more direct nonstop routing than hub-and-spoke service.[36]

         Southwest Airlines’ business model revolves around low-cost flights for customers.[37] The “point-to-point” routing system achieves low fares through routes that “maximize the airtime of every aircraft in the fleet” while operating short routes at a high frequency.[38] While the report demonstrated the advantages of the unique routing system over the “hub-and-spoke” approach, it  neglected to mention the “point-to-point” system’s inability to account for extreme and unexpected weather conditions.[39] The Complaint noted that the Airline was warned about the dangers of using outdated technology with its unique routing system.[40] Nevertheless, those risks were not disclosed to shareholders. Similar problems with misrepresentations in required disclosures occurred throughout 2021 and 2022.[41] The risks associated with using outdated technology were consistently downplayed throughout multiple reports.[42]

          A false statement or omission under a Section 10(b) claim must be made with scienter, or culpability.[43]Regarding securities fraud, “Scienter is defined as ‘an intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers . . . is either known to the defendant or is so obvious that the defendant must have been aware of it.’”[44] An allegation of scienter will survive “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”[45]

          Teroganesian claimed that the Defendants acted with scienter in making these statements and omissions because they knew that the reports were materially misleading, and these “statements or documents would be issued or disseminated to the investing public.”[46] Moreover, the Defendants actively engaged in the fraudulent scheme through the receipt of information reflecting the facts, or their control of, or modification of materially misleading statements.[47] Teroganesian further argued the Defendants had actual knowledge of the omissions and intended to deceive, or, in the alternative, acted “with reckless disregard for the truth when they failed to ascertain and disclose true facts” made by Southwest Airlines to the investing public.[48] Under the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff must allege facts with particularity that “giv[e] rise to a ‘strong inference’ that the defendant acted with scienter.”[49] While motivation to misrepresent or omit a fact may be strong evidence of scienter, it is not fatal to not plead such motivation.[50] Where motive is absent, a plaintiff may show scienter by indicating the conscious behavior of the defendant.[51]

          Southwest Airlines’ low-cost model might indicate a motive to omit technology pitfalls. According to current CEO Bob Jordan, the recent meltdown triggered the need for upgrades that could cost $1.3 billion.[52] Whether this would have impacted Southwest Airline’s low-cost business model is mere conjecture but may give rise to an inference of scienter. In the alternative, the Defendants’ conscious disregard of the blatant technological pitfalls may suffice for a finding of scienter. The Airline’s employees were aware of the risks of outdated technology.[53] The operational system was doomed without a major update capable of handling the unique routing system. Given the frequency of technological errors, it seems as if Defendants turned a blind eye to the root of the issue.

          Teroganesian argues that “members of the Class relied on the statements [of Defendants] and/or the integrity of the market price . . . during the Class Period in purchasing Southwest Airlines securities at prices that were artificially inflated as a result of Defendants’ false and misleading statements.”[54] Had he been aware that Defendants artificially inflated the Airline’s securities, Teroganesian and other class members would not have purchased such shares.[55] Despite the fact it was not explicitly stated that there was no problem with the operational systems, Plaintiffs seek to rely on the “fraud-on-the-Market doctrine,” which establishes a presumption of reliance.[56] But it is not sufficient to allege that an inflated stock price has proximately caused the economic loss.[57] Rather, a plaintiff must “prove that when the ‘relevant truth’ about the fraud began to leak out or otherwise make its way into the marketplace it caused the price of the stock to depreciate and thereby proximately cause the plaintiff’s economic loss.”[58] Here, Teroganesian explained that simultaneously to the flight cancellations in December, the public learned the root cause was the outdated technology.[59] Multiple news outlets confirmed the information was previously omitted from the required disclosures.[60] Teroganesian alleged that, almost immediately after the release of this information, Southwest Airlines stock prices dropped.[61] Thus, the misrepresentation proximately caused the financial loss.

          Heading into 2023, Southwest Airlines plans to invest in upgrades for its technology and infrastructure to ensure this mishap does not happen again.[62] The Airline has offered effected customers additional reward points for good measures.[63] All things considered, the Company expects to have a profitable year ahead.[64] Nevertheless, this pending litigation might result in a significant loss for Southwest Airlines. The Securities Exchange Act of 1934 was established to safeguard investor trust.[65] Southwest Airlines breached the confidence and trust of its shareholders by omitting its faults. The forthcoming litigation will determine whether the omissions in this instance rise to the level of materiality, and whether the Defendants acted with sufficient scienter to hold them accountable.

About the Author

          Matthew Goldsmith is a third-year law student at Widener University Delaware Law School and serves as a Staff Editor on the Delaware Journal of Corporate Law. Matthew received his B.A. in Criminology from Penn State University in 2020. He is working towards a career post-graduation in personal injury and medical malpractice. He is expected to graduate from Widener in May 2023.

[1] Josh Sorenson, Airline Flight Schedules on Flat Screen Televisions (photograph), (Dec. 22, 2018)

[2] Law Offices of Timothy L. Miles, Southwest Airlines Co. Class Action Lawsuit,, (last visited Jan. 27, 2023).

[3] Complaint at 9, Teroganesian v. Sw. Airlines Co., No. 4:23-cv-00115, 2023 WL 181121 (S.D. Tex. Jan 12, 2023) (hereinafter “Complaint”).

[4] Complaint ¶ 29.

[5] Martina Barash, Southwest Shareholder Sues Carrier Over Computer System Meltdown, Bloomberg Law (Jan. 13, 2023),

[6] Id. See Complaint ¶ 57 (“Not all domestic airlines were affected equally. Southwest Airlines flight cancellations accounted for the vast majority of domestic flight cancellations, leaving travelers unable to visit loved ones over the holidays, and attracting the ire of the federal government.”).

[7] Barash, supra note 5.

[8] Daniella Genovese, Southwest Airlines Sued by Shareholders Following Operational Meltdown, (Jan. 13, 2023 2:15 p.m.),

[9] Barash, supra note 5.

[10] Complaint ¶ 58-59

[11] Complaint ¶ 67 (“Southwest Airlines stock fell from a closing price of $36.09 on December 23, 2022, . . . to $32.19 on December 28, 2022, a drop of over 12%.”).

[12] Jonathan Stempel, Shareholders Sue Southwest airlines over Flight Meltdown, (January 12, 2023 7:15 p.m.),

[13] Id.

[14] Complaint ¶ 1.

[15] Complaint ¶ 7–12.

[16] Complaint ¶ 76.

[17] Legal Information Institute, Securities Exchange Act of 1934, Cornell: Wex, (last visited Jan. 27, 2023) visited Jan. 27, 2023).

[18] Will Kenton, What is the Securities Exchange Act of 1934? Reach and History, (last updated Oct. 30, 2020),

[19] Id.

[20] Id.

[21] Legal Information Institute, supra note 17.

[22] “Every person who, directly or indirectly, controls any person liable under this chapter . . . shall also be liable jointly and severally . . .to any person to whom such controlled person is liable.” 15 U.S.C. § 78t(a).

[23] Complaint ¶¶ 2, 83–84.

[24] 15 U.S.C. § 78j(b).

[25] 17 C.F.R. § 240.10b-5.

[26] In re Plains All American Pipeline, L.P. Sec. Litig., 307 F. Supp. 3d 583, 613–14 (S.D. Tex. March 30, 2018) (citations omitted).

[27] Id. at 615; Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988).

[28] Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666, 687 (S.D. Tex. 2013) (citation omitted). Under the Private Securities Litigation Act, a plaintiff alleging that the defendant made an untrue statement of a material fact or omitted such must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and . . . shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).

[29] Complaint ¶ 17; see Kevin Rector & Tim Prudente, Southwest Glitch Delays BWI Flights, The Baltimore sun, (last visited Jan. 27, 2023).

[30] Complaint ¶ 19.

[31] Complaint ¶ 20.

[32] Id.

[33] Complaint ¶ 28.

[34] Id. (emphasis added).

[35] Id.

[36] Complaint ¶ 29.

[37]Joanna Bailey, How Southwest Pioneered the Low Cost Carrier Model, (Jul. 29, 2019),

[38] Id.

[39] Complaint ¶ 29.

[40] Complaint ¶ 69. A New York Times article pointed out that the outdated software caused previous meltdowns prior to the December 2022 incident. Zeynep Tufekci, The Shameful Open Secret Behind Southwest’s Failure, N.Y. Times (De. 31, 2022),

[41] See generally Complaint ¶19–21, 23–55.

[42] See generally Complaint ¶ 43–55.

[43] In re Plains All American Pipeline, L.P. Sec. Litig., 307 F. Supp. 3d 583, 615 (S.D. Tex. March 30, 2018); see Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308, 319 (2007) (explaining that a plaintiff must prove that a defendant acted with an intent to deceive, manipulate, or defraud to establish scienter necessary for liability) (citations omitted).

[44] Plains, 401 F.3d at 643 (citation omitted).

[45] Tellabs, Inc., 551 U.S. at 324 (explaining that a court must consider both plausible nonculpable reasons for a defendant’s conduct as well as inferences that support a plaintiff’s argument) (emphasis added).

[46] Complaint ¶ 85.

[47] Id.

[48] Complaint ¶ 86.

[49] Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666, 688 (S.D. Tex. 2013) (quoting 15 U.S.C. § 78u-4(b)(2)).

[50] Dawes, 975 F. Supp. 2d at 690.

[51] Id.

[52] In the aftermath of Southwest Airlines’ December meltdown, CEO Bob Jordan seeks to prevent another failure in the future, but such preventative measures will come at a cost. See Steve Huff, Southwest Airlines Develops Software Fix to Prevent Future Travel Meltdowns, (Jan. 28, 2023),

[53] “Casey Murray, president of the Southwest Airlines Pilots Association . . . said ‘Southwest is using outdated technology and processes, really from the ‘90s, that can’t keep up with the network complexity today.’” Complaint ¶ 62.

[54] Complaint ¶ 87.

[55] Complaint ¶ 88.

[56] Complaint ¶ 78. See Sonn Law Group, What is the “Fraud-on-the-Market” Doctrine of Securities Fraud? (Oct. 15, 2017), The “fraud-on-the-market” doctrine permits a theory of indirect reliance for a class of plaintiffs. Id. Where the public omissions or false statements of a company defraud the entire market, and the price at which a purchaser receives that stock is directly related to that misrepresentation, a plaintiff is granted a rebuttable presumption of reliance. Id.

[57] Lormand v. US Unwired, Inc., 565 F.3d 228, 255 (5th Cir. 2009) (quoting Broudo v. Dura Pharm., Inc., 544 U.S. 336, 338 (2005)).

[58] Lormand, 565 F.3d at 255 (quoting Dura Pharm, 544 U.S. at 342).

[59] Complaint ¶ 58–66.

[60] Id.

[61] Complaint ¶ 67.

[62] Rajesh Kumar Singh & Kannaki Deka, Southwest Airlines Warns of Quarterly Loss After Holiday Meltdown, Reuters (Jan. 26, 2023),

[63] Id.

[64] Id.

[65] Will Kenton, What is the Securities Exchange Act of 1934? Reach and History, (last updated Oct. 30, 2020),