Opinion
No. 00 Civ. 4115 (SAS).
November 28, 2000.
Ted Poretz, Esq., Douglas A. Kuber, Esq., Richard O'Neill, LLP, New York, New York, for plaintiffs.
Jeremy G. Epstein, Esq., Brian H. Polovoy, Esq., Shearman Sterling, New York, New York, for Covance Defendants.
Jeffery B. Rudman, Esq., Andrea J. Robinson, Esq., Hale and Dorr, LLP, Boston, Massachusetts, for Parexel Defendants.
Dyan Finguerra-DuCharme, Esq., Hale and Dorr, LLP, for Parexel Defendants.
OPINION AND ORDER
In this securities fraud case, plaintiffs Elliott Associates, L.P. ("Elliott") and Westgate International, L.P. ("Westgate") have sued defendants Covance, Inc. ("Covance"), Parexel International Corporation ("Parexel") and several of their officers and/or directors for allegedly having made material misrepresentations of fact in connection with a pending merger. Plaintiffs allege that defendants violated section 10(b) of the Securities and Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and section 20(a) of the 1934 Act, 15 U.S.C. § 78t (a). Defendants move to dismiss the Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (b)(3)(A) (the "PSLRA"). For the following reasons, defendants' motion is granted and the Complaint is dismissed with leave to amend.
Paragraph numbers are from the Complaint, a copy of which is attached as Exhibit A to the Affidavit of Jeremy G. Epstein, counsel for the Covance Defendants, sworn to August 1, 2000 ("Epstein Aff.").
A. The Parties
Elliott and Westgate are private investment companies which trade securities and engage in risk arbitrage. ¶¶ 5, 6, 40. Covance and Parexel are contract research organizations which provide "a wide range of product development services to the pharmaceutical, biotechnology and medical device industries" including contract research, medical marketing and consulting services. ¶¶ 7, 8. Defendants Christopher A. Kuebler, Charles Harwood, Robert M. Baylis, Van C. Campbell and William C. Ughetta (the "Individual Covance Defendants") are directors and/or officers of Covance. ¶¶ 9, 11, 13, 15, 17. Defendants Joseph H. Von Rickenbach, William T. Sobo, Jr., A. Dana Callow, Jr. and James A. Saalfield (the "Individual Parexel Defendants") are directors and/or officers of Parexel. ¶¶ 19, 21, 23, 25.
B. Risk Arbitrage
As explained in the Complaint,
[p]rivate investment companies, like Plaintiffs Elliott and Westgate, engage in various types of arbitrage transactions, holding both "long" and "short" positions in publicly traded securities. In a "short" sale, the investor makes an informed prediction, based upon the total mix of information available in the market, that the price of that security will fall by the settlement date, resulting in a profit. A "long" position is simply a purchase of shares, based on the investor's informed prediction that the price will rise over a period of time.
¶ 40. "When two companies announce a merger, their stock prices generally tend to follow a predictable pattern. Normally, the share price of the target will increase following the announcement of a plan to merge, while the acquiror's share price usually declines." ¶ 41. Based on this anticipated "spread" and the announcement of a merger agreement between Covance and Parexel, plaintiffs sold a large number of Covance shares short and took corresponding long positions in Parexel. ¶ 42. In so doing, plaintiffs contend that they reasonably relied on statements made by Covance and Parexel regarding their intention to consummate the merger. Id.
C. Statements Regarding the Proposed Merger
On April 28, 1999, Covance and Parexel entered into a Merger Agreement which provided that Parexel was to become a wholly-owned subsidiary of Covance. ¶ 31. This merger was to be effected by an exchange of stock whereby Parexel shareholders would receive 1.184 shares of Covance common stock for each share of Parexel common stock held. Id. Plaintiffs were aware that the Merger Agreement provided that the merger "could be terminated at any time by mutual written consent" duly authorized by the companies' respective boards of directors. ¶ 60 (emphasis added). The Merger Agreement was announced on April 29, 1999 and was well-received by the industry and analysts. ¶ 32.
Based on this announcement, plaintiffs sold a large number of Covance shares short and took corresponding long positions in Parexel during the period June 3 to June 24, 1999. ¶ 42. Before doing so, plaintiffs sought reassurances that the merger would indeed close. One way plaintiffs sought such reassurance was to call representatives of both Covance and Parexel and make further inquiry regarding the status of the merger. ¶ 45.
1. Individual Covance Defendants
Plaintiffs allege that the Individual Covance Defendants committed securities fraud by making the following five statements during this period.
Statement One — plaintiffs allege that Adam Stanislavsky, an analyst for plaintiffs, telephoned Parag Bhansali, a Covance investor representative, some time in late May 1999. Stanislavsky asked Bhansali whether "Parexel's checkered operating history posed a potential problem for the consummation of the Merger Agreement." ¶ 47. Paraphrasing what Bhansali said, plaintiffs allege that he reassured Stanislavsky "that the merger would not be affected, stating that Parexel's issues had been well documented for some time, and that the long-term strategic rationale for the combination, specifically the increased global presence that Parexel would provide, was compelling." Id.
Statement Two — on June 10, 1999, Stanislavsky again spoke with Bhansali who informed him that Form S-4, a form required for registration of securities to be issued in a merger, had been filed within the previous two weeks. ¶ 50. After asking whether the merger closing would occur, Bhansali reassured Stanislavsky that the merger "was on track to close in late August or early September." Id.
Statement Three — early in the week of June 14, 1999, Covance made a presentation at a Goldman, Sachs conference where a Covance representative "reiterated that the Merger Agreement remained on track to close by September." ¶ 51.
Statement Four — Charles Harwood, Covance's Chief Financial Officer and Senior Vice President, made a presentation at a conference sponsored by William Blair Company, L.L.C. ("Blair"), on June 22, 1999. ¶ 54. Blair analyst John Kreger prepared a First Call Note recording the statements made by Covance at the conference. Id. According to plaintiffs, this Note recorded comments made by Harwood to the effect that the merger is on track to close by September and that all regulatory filings had been made. Id. See Exhibit B to the Epstein Affidavit for the actual contents of the Note.
Statement Five — on June 24, 1999, plaintiffs learned that both Covance and Parexel had scheduled meetings of their full boards of directors for June 25, 1999. ¶ 58. The same day, Mark Brodsky, a portfolio manager, called Covance on behalf of plaintiffs and inquired into the reason for the scheduled meetings. ¶ 61. Brodsky was told that "the meetings being held the next day by Covance and Parexel were merely regularly scheduled board meetings for the two companies, and that the timing of these meetings was coincidental." Id.
Based on the first four statements, plaintiffs sold a significant number of Covance shares short and purchased a significant number of Parexel shares between June 3 and June 24, 1999. ¶¶ 48, 49, 52, 53, 56 and 57. However, the Complaint states that plaintiffs did not purchase or sell any new shares in reliance on the fifth statement but merely "maintained their previous positions in Covance and Parexel." ¶ 66. It was not until late in the day on June 24, 1999, after noticing unusual stock activity, that plaintiffs partially reversed their positions by purchasing Covance stock and selling Parexel stock. ¶ 69.
2. Individual Parexel Defendants
Plaintiffs allege that their initial positions were also taken in reliance on the following three statements made by Parexel.
Statement One — during the weeks of May 24 and May 31, 1999, Stanislavsky called Kate Morgans, Parexel's Vice President of Marketing, and inquired whether Parexel's "previous erratic operating results" would likely affect the merger. ¶ 46. "In response, Morgans reassured Stanislavsky that Parexel was comfortable with the adjusted expectations of analysts." Id.
Statement Two — when plaintiffs called Parexel on June 24, 1999 and asked about the timing of the upcoming board meetings, Ann Whittaker reported that the board meetings were regularly scheduled and that the timing was merely coincidental. ¶ 62.
Statement Three — on June 24, 1999, Brodsky placed a call to Whittaker and asked if the Merger Agreement was about to be terminated. ¶ 65. At first, Whittaker refused to comment but after further prodding by Brodsky replied that she was in the loop and that neither she nor Parexel's Chief Financial Officer, William T. Sobo, Jr., were aware of any problem with the merger. Id.
Referred to erroneously as Ann Winniker in the Complaint.
Plaintiffs allege that they invested to their detriment based on Parexel's first statement. ¶ 48. However, as with Covance's fifth statement, plaintiffs do not allege that they purchased or sold additional shares of either Covance or Parexel based on the second and third statements, but merely "maintained their previous positions in Covance and Parexel." ¶ 66.
D. Termination of the Merger
On June 25, 1999, Covance and Parexel held separate meetings of their full boards of directors wherein they authorized an agreement effecting the termination of the merger. In a four-page document, the Termination Agreement acknowledged the termination of certain stock option agreements and kept in place the confidentiality agreement. According to plaintiffs, the "detailed nature of the [T]ermination [A]greement indicates that it could not have been prepared at the June 25, 1999 board meetings, and constitutes further evidence that Defendants knew in advance of June 25 that the Merger Agreement was going to be terminated." ¶ 71.
A copy of this Termination Agreement is annexed as Exhibit 1 to Parexel's Memorandum of Law in Support of its Motion to Dismiss.
On June 25, 1999, Covance and Parexel issued a joint press release concluding that the mutual termination was "in the best interests of their respective shareholders." ¶ 72. While plaintiffs claim that it was Parexel's poor operating results which doomed the merger, ¶¶ 74, 77, defendants explained that high integration expenses and other issues discovered during due diligence were to blame. ¶ 73. Plaintiffs claim that the stated reasons for the merger's collapse were disingenuous and that "[d]efendants knew by at least the beginning of June, 1999 — when both parties were making positive statements about the merger — that Parexel would suffer a significant revenue shortfall in its fourth quarter, endangering the Merger Agreement." ¶¶ 74, 75. According to plaintiffs, defendants clearly knew well before June 25, 1999 that the merger was likely to fail" and "[a]t a minimum, by June 24, 1999, just one day prior to the Termination of the Merger, Defendants clearly knew the information that resulted in the Termination of the Merger." ¶¶ 79, 81.
II. DISCUSSION
A. Motion to Dismiss Standard
Dismissal of a complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim that would entitle [it] to relief." Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999). "[T]he issue is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test." Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998) (internal quotation marks and citation omitted); see also Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) ("The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.") (internal quotation marks and citation omitted). Nevertheless, "[a] complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck Co., 87 F.3d 65, 70 (2d Cir. 1996) (internal quotation marks and citations omitted).
To properly rule on a 12(b)(6) motion, the court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in the nonmoving party's favor. See Harris, 186 F.3d at 247. Moreover, the court must limit itself to facts stated in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference. See Dangler v. New York City off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999). However, the court may also consider documents, while not explicitly incorporated into the complaint, that are "integral" to plaintiff's claims. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 44 (2d Cir. 1991).
B. Rule 9(b) and the PSLRA's Pleading Requirements
To state a claim under section 10(b) and Rule 10b-5, plaintiffs must allege that in connection with the purchase or sale of securities: (1) defendants made a false material misrepresentation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiffs' reliance on the defendants' action caused the plaintiffs injury. See Koehler v. The Bank of Bermuda (New York) Ltd., 209 F.3d 130, 136 (2d Cir. 2000). "In order to curtail the filing of meritless lawsuits, the PSLRA imposes stringent procedural requirements on plaintiffs pursuing private securities fraud actions." Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) (internal quotation marks and citation omitted). First, with regard to scienter, the statute requires that,
Section 10(b) makes it unlawful
[t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j (b). Rule 10b-5 sets forth specific practices that are considered "manipulative or deceptive" including the following:
To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .17 C.F.R. § 240.10b-5.
[i]n any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.15 U.S.C. § 78u-4 (b)(2) (emphasis added). Second, with regard to material misstatements and omissions, the statute requires that,
[i]n any private action arising under this chapter in which the plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading:
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.15 U.S.C. § 78u-4 (b)(1).
Plaintiffs cannot plead scienter based on speculation and conclusory allegations — they "must allege facts that give rise to a strong inference of fraudulent intent." Acito v. IMCERA Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995); see also Novak, 216 F.3d at 311 (PSLRA adopted Second Circuit's "strong inference" standard). Plaintiffs may do this by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness, or by alleging facts to show that defendants had both motive and opportunity to commit fraud. See Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000). Accordingly, the required inference of fraudulent intent arises where the complaint sufficiently alleges that the defendants:
"The scienter needed in connection with securities fraud is intent to deceive, manipulate, or defraud, or knowing misconduct." Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 539 (2d Cir. 1999) (quoting SEC v. First Jersey Sec., Inc. 101 F.3d 1450, 1467 (2d Cir. 1996)).
To survive dismissal under the "conscious misbehavior" theory, plaintiffs must allege that the reckless conduct by the defendant is "at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000) (internal quotation marks and citation omitted).
"Motive would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994).
(1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.Novak, 216 F.3d at 311 (internal citations omitted).
In addition to the PSLRA pleading requirements, securities fraud actions are also subject to the pleading requirements of Rule 9(b). See Shields, 25 F.3d at 1127. Rule 9(b) requires that the facts and circumstances constituting the alleged fraud be stated with particularity. Accordingly, under Rule 9(b) a complaint alleging securities fraud must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
In short, under the heightened pleading requirements of Rule 9 (b) and the PSLRA, plaintiffs must allege the first two elements of a securities fraud claim — fraudulent acts and scienter — with particularity. See Gabriel Capital, L.P. v. NatWest Finance, Inc., 94 F. Supp.2d 491, 500 (S.D.N.Y. 2000). However, the Second Circuit has held that
[d]espite the generally rigid requirement that fraud be pleaded with particularity, allegations may be based on information and belief when the facts are peculiarly within the opposing party's knowledge. This exception to the general rule must not be mistaken for license to base claims of fraud on speculation and conclusory allegations. When pleading is permitted on information and belief, a complaint must adduce specific facts supporting a strong inference of fraud or it will not satisfy even a relaxed pleading standard.Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) (citations omitted). Thus, a complaint "which fails to adduce any specific facts supporting an inference of knowledgeable participation in the alleged fraud, will not satisfy even a relaxed standard." Devaney v. A.P. Chester, 813 F.2d 566, 569 (2d Cir. 1987).
Cited with approval in Vento Co. of New York v. Metromedia Fiber Network, Inc., No. 97 Civ. 7751, 1999 WL 147732, at *7 (S.D.N.Y. Mar. 18, 1999)). Although Wexner is a pre-PSLRA case, the Second Circuit has stated that its "prior case law may be helpful in providing guidance as to how the "strong inference standard may be met." Novak, 216 F.3d at 311.
C. Application to Defendants' Statements
1. Causation
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975), the Supreme Court adopted the " Birnbaum rule" that only persons who are actual purchasers or sellers of a security have standing to bring claims under section 10(b) and Rule 10b-5. "Under Blue Chip, plaintiffs suing under Section 10(b) of the Securities Exchange Act of 1934 may recover only for losses that result from decisions to buy or to sell, not from decisions to hold or refrain from trading." First Equity Corp. of Florida v. Standard Poor's Corp., 869 F.2d 175, 180 n. 2 (2d Cir. 1989). First Equity Corp. was recently cited for this proposition in Gurary v. Winehouse, 190 F.3d 37, 46 n. 9 (2d Cir. 1999) ("To whatever extent that [plaintiff] seeks compensation for the decline in the price of Nu-Tech shares caused by allegedly manipulative short sales in the period following his purchases, the loss was not the product of fraud in connection with the purchase or sale of securities by [plaintiff] and therefore is not recoverable.") (citing Blue Chip Stamps, 421 U.S. at 737-38); see also Abrahamason v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977) ("[R]equirement of fraud in connection with the purchase or sale of a security is not satisfied by an allegation that plaintiffs were induced fraudulently not to sell their securities.").
Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952).
Therefore, the fifth statement attributable to Covance and the second and third statements attributable to Parexel, all made on June 24, 1999, are simply not actionable because plaintiffs did not make any additional purchases or sales of stock but merely maintained their previous positions. Accordingly, any claims relating to these statements are dismissed as a matter of law.
Allegations regarding the close temporal proximity between the "board meeting" statements and the termination of the merger, see, e.g., ¶¶ 71, 79, and 81, may have otherwise provided some circumstantial evidence of the falsity of the June 24, 1999 statements. See In re Kidder Peabody Sec. Litig., 10 F. Supp.2d 398, 415 (S.D.N.Y. 1998) ("Plaintiffs may satisfy the scienter requirement . . . by facts constituting circumstantial evidence of either reckless or conscious misbehavior."). However, such allegations are of no legal significance given that these statements are inactionable as a matter of law.
2. Lack of Contradictory Information
The statements alleged by plaintiffs to be misleading can be divided into the following two categories: (1) statements regarding the status of the merger; and (2) statements regarding the timing of the board meetings. While the first category of statements are merely expressions of optimism, see infra, the director meeting statements are more factual in nature. With regard to both categories, however, the Complaint fails to explain how any of the statements at issue were false or misleading at the time made. This defect is fatal to plaintiffs' claims. See Acito, 47 F.3d at 53 (Rule 9(b) not satisfied where complaint failed to explain in what respects the statements were false or misleading).
As these statements neither induced plaintiffs to buy or sell Covance and/or Parexel shares, they have been dismissed as a matter of law. See supra Part II.C.1.
Rule 9(b)'s particularity requirement demands specific factual allegations demonstrating that a statement was false or misleading when made. See Shields, 25 F.3d at 1129 (court refused to draw inference of fraud where plaintiff failed to allege that defendant's disclosures expressing confidence in loan loss reserve were inconsistent with current data). The PSLRA has a similar particularity requirement. See 15 U.S.C. § 78u-4 (b)(1). In San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996), the Second Circuit held that to withstand a motion to dismiss plaintiffs must detail specific contemporaneous data or information known to the defendant that was inconsistent with the representation in question. See id. at 812-13 ("Plaintiffs' unsupported general claim of the existence of confidential company sales reports that revealed the larger decline in sales is insufficient to survive a motion to dismiss."); see also Novak, 216 F.3d at 309 ("Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information."). The mere disclosure of adverse information shortly after a positive statement does not support a finding that the prior statement was false at the time it was made. See San Leandro, 75 F.3d at 812 (plaintiffs had not sufficiently demonstrated falsity of representation that sales were strong by relying on contrary disclosure that occurred three weeks after representation was made).
Here, plaintiffs allege that because defendants knew of Parexel's fourth quarter revenue shortfall by the beginning of June 1999, they must have necessarily known that the merger was not "on track." This reasoning represents an unreasonable leap of logic. According to the Complaint, Covance was aware of Parexel's "checkered operating history" at the time of the Merger Agreement. Thus, Parexel's operating results were just one factor in the merger negotiations. Plaintiffs have not alleged anything that indicates otherwise. Accordingly, Parexel's poor fourth-quarter earnings did not seal the demise of the merger. Therefore, statements that the merger was "on track" were not false when made merely because of the poor fourth-quarter earnings.
Given that the Complaint fails to offer any information that demonstrates that these statements were false when made, even upon information and belief, the "on track" statements do not adequately plead fraud. Plaintiffs' reasoning, predicated on a faulty premise, cannot save conclusory allegations of fraud. See Shields, 25 F.3d at 1129 (plaintiff's "frequent conclusory allegations — that Defendants "knew but concealed' some things or "knew or were reckless in not knowing' other things — do not satisfy the requirements of Rule 9(b)."). Plaintiffs' allegations, unsupported by any facts, must therefore be dismissed for failure to meet the pleading requirements of Rule 9(b) and the PSLRA. See In re Time Warner Inc. Sec. Litig., 9 F.3d 259. 269 (2d Cir. 1993) ("There is no suggestion that the factual assertions contained in any of these statements were false when the statements were made. As to the expressions of opinion and the projections contained in the statements, while not beyond the reach of the securities laws, . . . the complaint contains no allegations to support the inference that the defendants either did not have these favorable opinions on future prospects when they made the statements or that the favorable opinions were without a basis of fact.").
3. Statements of Optimism
The Second Circuit has made clear that plaintiffs are not permitted to proceed with allegations of "fraud by hindsight." See Stevelman, 174 F.3d at 85. "Corporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them. Thus, allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud." Novak, 216 F.3d at 309.
These principles were applied in In re International Business Machs. Corporate Sec. Litig., 163 F.3d 102 (2d Cir. 1998). There, plaintiffs alleged that IBM "made various untrue statements when it announced that its dividend was secure and that it had no plans to cut it." See id. at 106. The court explained that
[t]he statements challenged by plaintiffs are expressions of optimism or projections about the future. Each statement plaintiffs challenge in this action concerns an uncertain future event — the payment of dividends. Statements that are opinions or predictions are not per se inactionable under the securities laws. Statements regarding projections of future performance may be actionable under Section 10(b) or Rule 10b-5 if they are worded as guarantees or are supported by specific statements of fact, or if the speaker does not genuinely or reasonably believe them. *** IBM's management lacked the actual or apparent authority to guarantee the dividend, and it would be unreasonable for the market to have interpreted the statements at issue as anything other than an individual's prediction about the future. Accordingly, we conclude that the challenged statements are, as a matter of law, opinions and not guarantees.Id. at 107. Because the statements reflected the speaker's opinion on the fate of the dividend in the short term, the court held that it "would be unreasonable, as a matter of law, for an investor to rely on these projections as long-term guarantees." Id. at 108. The court, noting that there was nothing in the record to suggest that the speakers were aware of any facts undermining the accuracy of their statements, held that plaintiffs failed to state a claim under section 10(b) or Rule 10b-5. See id. at 109.
Here, as in In re IBM, the statements made by representatives of Covance and Parexel regarding the expected completion of the merger were merely opinions. Given the usual level of uncertainty as to whether any proposed merger will actually be completed, these statements could not possibly be understood as anything but opinions. Plaintiffs were aware from the beginning that the merger could be terminated at any time. Accordingly, unless plaintiffs can sufficiently plead that the speakers were aware of contrary information at the time they expressed their opinions regarding the status of the merger, such statements are not actionable under section 10(b) or Rule 10b-5. See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090 (1991) (a statement of reasons, opinion or belief by a corporate director when recommending a course of action to stockholders can be actionable under the securities laws if the director knows the statement to be false).
Several lower courts considering the impact of statements made in connection with a merger have reached similar conclusions. For example, in Kas v. First Union Corp., 857 F. Supp. 481 (E.D. Va. 1994), plaintiff claimed that defendants made false representations when they represented that they would use their "best efforts" to "permit consummation of the Merger at the earliest practicable date" in the first quarter of 1993. Id. at 484. While the merger closed on March 1, 1993, it was too late for shareholders of the target corporation to receive dividends from the acquiror as the record date for such dividends was set for February 25, 1993. See id. at 486. In dismissing plaintiff's amended complaint, the court stated:
Those statements are, if anything, simply optimistic projections concerning future performance. Because of their inherently indefinite nature, "projections of future performance not worded as guarantees are generally not actionable under the federal securities laws . . . . Analysts and arbitragers rely on facts in determining the value of a security, not mere expressions of optimism from company spokesmen." Because defendants' statements were no more than "expressions of optimism" about the future consummation of the merger, they are not actionable under § 10(b) or Rule 10b-5.Id. at 490 (quoting Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993) (emphasis added).
The court also noted that the securities laws "`do not require that investors be treated like children . . . [i]nvestors know that the stock market is a risky business, and that when a company's officers make predictions . . . they are not issuing guarantees.'" 857 F. Supp. at 489 (quoting Kowal v. MCI Communications Corp., No. 90 Civ. 2862, 1992 WL 121378, at *7 (D.D.C. May 20, 1992), aff'd, 16 F.3d 1271 (D.C. Cir. 1994)).
A securities fraud complaint was also dismissed in In re Healthco Int'l, Inc. Sec. Litig., 777 F. Supp. 109 (D. Mass. 1991). In that case, on September 4, 1990, Healthco announced that it had entered into a merger with Hicks, Muse, contingent on Healthco reaching a $34.4 million earning mark for its 1990 fiscal year. See id. at 112. In the interim, a spokesperson from Healthco had stated that he was confident that the merger would close by late February, 1991. See id. On March 1, 1991, Healthco announced that it had terminated the merger agreement for failing to meet certain of its conditions. See id. The court found that plaintiffs had failed to plead a securities fraud claim with sufficient particularity, stating
[e]ven if Defendants were aware of some problems, no facts are alleged that would indicate Defendants knew the planned merger would not or might not take place because of potential problems in meeting the [earnings] condition. In short, Plaintiffs make only general allegations without any particularized specifics as to how or why Defendants might have known at this time that the [earnings] condition would not be met.Id. at 114. With regard to the spokesperson's statement, the court stated: "This is just the kind of optimistic, vague projection unaccompanied by any specific quantification or projected results implying certainty that falls short of qualifying as a material misrepresentation under Rule 10b-5." Id. at 115 (internal quotation marks and citations omitted).
Here, the statements made by the various Covance and Parexel employees that the merger was "on track" constitute the same type of optimism found to be inactionable in Kas and In re Healthco. As these statements were neither accompanied by specific quantification or otherwise implied certainty, they are not actionable unless plaintiffs can allege facts indicating that they were false when made.
Furthermore, contrary to plaintiffs' contention, there was no duty to update.
A duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event. However, there is no duty to update vague expressions of optimism or expressions of opinion.In re IBM, 163 F.3d at 110 (citations omitted). Here, plaintiffs challenge defendants' statements that the merger was "on track". If something is "on track" it is reasonable to assume that it could go "off track". Thus, the challenged statements are vague expressions of opinion which are not sufficiently concrete or specific to impose a duty to update. See In re Time Warner, 9 F.3d at 267 (statements that merely reflected that talks were ongoing and that Time Warner hoped they would be successful "lacked the sort of definite positive projections that might require later correction").
4. Failure to Plead Scienter
As stated earlier, a plaintiff can plead scienter in one of two ways: (1) by showing conscious misbehavior or recklessness on the part of the defendant, or (2) by showing a motive to commit fraud and a clear opportunity to do so. See In re MCI Worldcom, Inc. Sec. Litig., 93 F. Supp.2d 276, 283 (E.D.N.Y. 2000) (citing Press, 166 F.3d at 537-38). The motive and opportunity prong can be dispensed with summarily as plaintiffs do not argue that it has been met in this case.
Indeed, one would by hard pressed to find motive on the part of either Covance or Parexel as the exchange ratio was finalized in the Merger Agreement. As such, the vagaries of the market would have had no effect on the number of shares to be exchanged. Accordingly, plaintiffs cannot show "concrete benefits [to the defendants] that could be realized by one or more of the false statements and wrongful disclosures alleged." Chill v. General Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996) (internal quotation marks and citation omitted).
Plaintiffs also fail to satisfy the conscious misbehavior or recklessness prong. Here, plaintiffs are relying on the third Novak category (whether defendants knew of facts or had access to information that contradicted their public statements). In seeking to answer this question, the two examples provided by the court in Novak are instructive. The first case cited is Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989). There, plaintiffs alleged that the defendants "made or authorized statements that sales to China would be "an important new source of revenue' when they knew or should have known that Chinese import restrictions in place at the time would severely limit such sales." Novak, 216 F.3d at 308 (quoting Cosmas, 886 F.2d at 12). The second case cited in Novak is Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985). In that case, the plaintiffs alleged that "the defendants released to the investing public several highly positive predictions about the marketing prospects of a computer system to record hotel guests' long-distance calls when they knew or should have known several facts about the system and its consumers that revealed "grave uncertainties and problems concerning future sales of' the system." Novak, 216 F.3d at 308 (quoting Goldman, 754 F.2d at 1063, 1070). Obviously a corporate representative has a duty not to make statements that are obviously suspicious. The Novak court also noted that "[c]orporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them." Id. at 309. Finally, "[w]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information." Id. (citing San Leandro, 75 F.3d at 812).
The facts alleged in the instant Complaint are quite different. Plaintiffs do not point to any concrete contrary information that would establish the falsity of the statements in issue. Rather, plaintiffs state, in all too conclusory terms, that "Defendants clearly knew well before June 25, 1999 that the merger was likely to fail." ¶ 79. Thus, the Complaint simply fails to allege any of the circumstantial evidence that would indicate conscious fraudulent behavior or recklessness.
This is not a situation akin to that found in In re Columbia Sec. Litig., 747 F. Supp. 237, 241 (S.D.N.Y. 1990), where the defendant falsely denied in press accounts the existence of merger negotiations when, in fact, early-stage merger negotiations had been ongoing. Nor is the present case similar to In re MCI Worldcom where the Complaint alleged
that three days prior to the anouncement of the merger [between MCI and SkyTel], MCI's official corporate spokesperson falsely denied any "official company intention" regarding the registration of a domain name that was an obvious combination of MCI's and SkyTel's names. The market understood the denial to mean there would be no takeover.93 F. Supp.2d at 285 (internal citations omitted). Here, plaintiffs have not alleged any facts indicating that either the merger status or board meeting statements were made with intent to deceive, manipulate or defraud. Accordingly, plaintiffs have failed to plead scienter as required by the PSLRA and explained by the court in Novak.
D. Controlling Person Liability
Plaintiffs claim that the Individual Covance Defendants and the Individual Parexel Defendants are liable as controlling persons. To establish controlling person liability under section 20(a) of the 1934 Act, plaintiffs must allege
a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person. Control over a primary violator may be established by showing that the defendant possessed the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.First Jersey Sec. Inc., 101 F.3d at 1472 (citations and internal alterations omitted, emphasis added).
I need not decide whether the individual defendants exercised sufficient control over the representatives of Covance and Parexel as I have already found a failure to adequately allege a violation of section 10(b) or Rule 10b-5 by the primary violator. Because plaintiffs have not properly pled any primary violation of the federal securities laws, their derivative claim for controlling person liability under section 20(a) must be dismissed. See The High View Fund, L.P. v. Hall, 27 F. Supp.2d 420, 428 (S.D.N.Y. 1998).
"Officer or director status alone does not constitute control." In re Livent, Inc. Sec. Litig., 78 F. Supp.2d 194, 221 (S.D.N.Y. 1999).
If plaintiffs choose to amend their Complaint, they are cautioned that First Jersey clearly states that a prima facie case requires a showing of culpable and meaningful participation in addition to control status. See 101 F.3d at 1472.
E. Plaintiffs' Group Pleading Theory
Plaintiffs attempt to rely on a group pleading theory whereby they plead the actions of the group thereby avoiding the identification of individual sources of allegedly fraudulent statements. The group pleading doctrine
allows plaintiffs to rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company.In re Oxford Health Plans, Inc., 187 F.R.D. 133 (S.D.N.Y. 1999) (internal quotation marks and citation omitted, emphasis added).
The group pleading doctrine is an exception to the requirement that the fraudulent acts of each defendant be identified separately in the complaint. See Polar Int'l Brokerage Corp. v. Reeve, 108 F. Supp.2d 225, 237 (S.D.N.Y. 2000). As such, it is extremely limited in scope. Id. One such limitation is that it is limited to group-published documents, such as SEC filings and press releases. See In re Oxford Health Plans, 187 F.R.D. at 142. To allow group pleading in the context of oral statements would unduly expand its ambit beyond that contemplated by the Second Circuit when it adopted the theory. Accordingly, plaintiffs are barred from re-invoking this theory in any amended complaint.
The Second Circuit adopted the group pleading doctrine in DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987), a pre-PSLRA case.
F. Plaintiffs' State Law Claims
Plaintiffs bring state law claims for fraud and deceit and negligent misrepresentation. Furthermore, in plaintiffs' Memorandum of Law, they attempt to attribute the statements of the Individual Covance Defendants to the Individual Parexel Defendants, and vice versa, under a New York state law conspiracy theory. Conspiracy is not asserted as a cause of action in the existing Complaint, nor could it be as New York does not recognize an independent cause of action for conspiracy. However, because there is no viable federal claim at this time, I decline to exercise supplemental jurisdiction over plaintiffs' state law claims. See United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966) (where all federal claims are dismissed before trial, the state claims should be dismissed as well); see also Martinez v. Simonetti, 202 F.3d 625, 636 (2d Cir. 2000) (directing dismissal of supplemental state law claims where no federal claims remained).
Plaintiffs have since stipulated to dismissal of their negligent misrepresentation claim. See Letter from plaintiffs' counsel, Douglas A. Kuber, dated July 31, 2000, Ex. C to Epstein Aff.
See Logan Kanawha Coal Co., Inc. v. Banque Francaise Du Commerce Exterieur, CTC, 868 F. Supp. 63, 67 (S.D.N.Y. 1994) ("Although `civil conspiracy' is itself not a substantive tort in New York, a claim of conspiracy can rest upon an independent underlying claim of fraud.") (citing Demalco Ltd. v. Feltner, 588 F. Supp. 1277, 1278 (S.D.N.Y. 1984) ("[T]he gravamen of a claim of conspiracy is the underlying independent tort.")).
G. Leave to Amend
Federal Rule of Civil Procedure 15(a) provides that leave to amend "shall be freely given when justice so requires." "When a motion to dismiss is granted, `the usual practice is to grant leave to amend the complaint.'" Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir. 1990) (quoting Moore Lucas, 2A Moore's Federal Practice ¶ 12.14 at 12-99 (2d ed. 1989)). "Where the possibility exists that the defect can be cured, leave to amend at least once should normally be granted unless doing so would prejudice the defendant." Scone Invs., L.P. v. American Third Market Corp., No. 97 Civ. 3802, 1998 WL 205338, at *10 (S.D.N Y Apr. 28, 1998) (citing Oliver Schools, Inc. v. Foley, 930 F.2d 248, 253 (2d Cir. 1991)). Because defendants would be hard pressed to show that they would be prejudiced if leave to amend was granted at this early stage of the litigation, plaintiffs may amend their Complaint once if they are able to cure the defects in their pleadings. Plaintiffs are of course reminded of the PSLRA's mandatory sanctions provision. See 15 U.S.C. § 78u-4 (c).
III. CONCLUSION
The Complaint is hereby dismissed in its entirety with leave to amend in accordance with this Opinion and Order. Plaintiffs must serve and file a proposed amended complaint by December 22, 2000. In the event plaintiffs choose to amend, a status conference is scheduled for December 28, 2000 at 4:30 p.m.
SO ORDERED.