### I N THE UNI TED S TATESCOU RT OFAPPEALS FORTHE FIFTH CIRCU IT

N o. 08- 10414

F L AHE RT Y& C RUMRI NE P RE F ER RE D I NCO M E F UND I N C O R P O R A T E D ; F L A H E R T Y& C R U MR I N E P R E F E R R E D I N C O ME OPP ORTUNI TYF UN D I NCORPORAT ED; F LA HERTY & CR UM RI NE/ CLAYM OR E P RE F ER RE D S EC URI T I ES I NCO M E F UND I NCO RP OR AT ED ; S T AN HAI DUK P l ai n t i f fs- A pp el l an t s v. TX U CORP. ; C. J OH N W I LDER D efen da n t s- A pp el l ees

A p p ea lf

rom the U n i ted S tates D i stri ct C ou rt f or t h e N ort h ern D i st ri ctof T exas
B ef ore K IN G , B E N AV ID E S , an d C L E M E N T , C i rcui tJu dg es . F O R T U N A T O P
. B E N AV ID E S , C i rcui tJu dg e: A p p ell a n ts, F l a h erty & C ru m ri n e P referre d In com e F u n d , In c. ; F l a h erty & C r um r i ne Pre fer r ed I nco m e O ppor t uni t y Fun d, I n c. ; F l aher t y & C ru m rin e /C la y m o r e P r e fe r r e dS e cu rities In co m e F u n d , In c. (collec tiv e ly, “F & C ”); and St an H ai duk ( “ H ai duk”) , f i l ed a se c uri t i es f

r aud c l as s ac t i on and i ndi vi dual f r a u d c l a i m s a g a i n s tAp p e l l e e s T XU Co r po r at i o n ( “ TX U” ) a n d i t s f o r m e rCEO Jo hn W i l de r( “ W i l de r” ) f o ra l l e ge dl y m ak i ng m at e r i alm i s r e pr e s e nt ati on s a nd
o m is s io n s o f fa c t in co n n e c tio n w ith a s e lf-t e n d e ro ffe rto p u r c h a s e ce r ta in United States Court of App eals

Fifth Circuit 

### F I L E D April 8, 2009 Cha rl es R. F ulb ru g e II I ClerkN o. 08- 10414

2 con ve rtib l e T X U secu ri ti es (the “t en d er offer”) i n 2 0 0 4
. S p ecif i ca l l y, A p p ell a n ts al l e ge d t hatAppe l l e e s f r aud ul e nt l y m i s r e pr e s e nt e d t he t i m i ng andm ag ni t ude of a pl an n ed st ock repu rchase program a n d di vi den d i n crease i n order t o i n du ce t h e A pp el l an t s t o pa rt i ci pa t e i n t h e t en der of f er. T h e di st ri ct co u rt d ism i ssed A pp el l an t s’f

rau d cl ai m s all eged u n der S ect i on s 10 (b) a n d 14(e) of t h e Secu ri t i es Exc hang e Act and SEC Rul e 10 b- 5, as w e l l as Appe l l ant s ’ c o m m on l aw f r aud
c l ai m s , f

o rfai l ur e t o s t at e a c l ai m und e rt he he i ght e n ed pl ead i ng s t and ar ds ap pl i cabl e t o sec u ri t i es f rau d cl ai m s. W e af f i rm t h e j u dg m en tof t h e distr i ct
c o u r t. I. A p p e ll a n ts a re th re e in v e stm e n t fu n d s (F & C ) an d a n in d ivid u a l pla in tiff (H a i d u k ), allof w h om ow n ed con ve rtib l e T X U secu ri ti es ca l l ed T X U C orp ora te U n i ts (th e “C orp ora te U n i ts”) a n d T X U In com e P R ID E S (th e “P R ID E S ”)

. B oth cl asses of

sec u ri t i es w ere t raded on the N ew Y o rk S t ock E xcha n ge an d w ere c o n v e r tib le in to T X U co m m o n s to c k
. Pr i o rt o the t e nde ro f fe r , W i l de r , TXU ’ s CE O , ha d i m pl e m e nt e d a t h r e e - p h a s e r e s t r u c t u r i n gp r o g r a m ai me d a ti mp r o v i n gT X U’ s b u s i n e s s . O n M ay 18 , 200 4, app roxi m atel y f ou r m on t h s b e fore t h e t en der of fer, T X U i ssued
a pr e s s rel ease o ut l i ni ng i t s v i e w o f t he c o m pa ny’ s f

i nanc i alr e s t r uc t ur i ng pr o gr am . The pr e s s r e l e as e i ndi c at e d t hatTXU di d no ta nt i c i pa t e a divi de nd i n crease u n t i l2 006 , w h en cert ai n fi n an ci alben chm arks w ere r each ed, bu tnoted t h at TX U ’ s B oard of

D i rect ors (t h e “ B oard”) m i ghtc o ns i de ro t he rr el evan tfact ors i n deter m i n i n g w h en or i f t o au t h ori ze a di vi den d i n crease: U pon r eac hi ng t he t ar get ed ba l ance s heets t r engt h and f i nanci al f l exibi l i t y, m an agem en tw ou l d recom m en d that t h e B oard of D i rect ors reeval u ate t h e current d ivid en d p ol i cy. A tt h at t i m e, m an agem en texpects itw ou l d re co m m e n d ta rg e tin ga n n u a l com m on st ock di vi den ds equ al t o a pa y ou t of 100 percent of t h e earni n gs of TX U ’ s e l e c t r i c de l ive r y bus i ne s s . O f t he f r e e c as h f

l o w , m ana ge m e nt w o ul d e xp e c tt o r e t ur n r o ugh l y 80 pe r c e ntt o s har e ho l de r s i n t heN o. 08- 10414

3 f or m of di st r ibut i ons orr epur c hase s and to r et ai n ro ughl y 20 percent f

or l on g t erm grow t h ini t i atives. A ssum i n g t h e ex ecuti on of t he b us i ne s s i ni t i at ive s and t r ans ac t i o ns de s c r ibe d a bo ve , a nd de pe ndi ng o n m ar ke tt r e nds i n c o m m o di t y pri ce s , m ana ge m e nt e xp e c t s t hatt hi s c ap i t ala l l o c at i on program w i l lena bl e m an agem e nt to reco m m en d an i n crea se o f th e d iv i d en d i n 20 0 6
. In ad d i ti on to m anagem ent ’ s r ec om m endat i on, t he B oa r d of D i r ec t or s m ay c o ns i de ro t he rr e l e va ntfac t o r s i n det e r m i ni ng i f and w he n t o m ak e a ch a n g e in th e d iv id e n d p o lic y . O n S eptem ber 1 5, 2 004 , T X U a n n ou n ced t h at i tw as off eri n g t o pu rchase up t o 1 1, 43 3, 28 5 o ut s t and i ng Cor po r at e U ni t s and up t o 8 , 70 0, 00 0 o ut s t and i ng PR I D E S. App el l ant s coll ec t ivel y hel d 530, 000 Corpo r at e U ni t s and 5, 000 P R ID E S pri or t o t h e t en der of fer. Investor s h ol di n g t h e outst an di n g securi t i es h a d the op ti on to t en d er th eir secu ri ti es to T X U or reta i n th em , an d A p p ell a n ts
w e r e a m o n gth e ro u g h ly6 5 % o f in v e s to r s w h o a c c e p te d th e te n d e ro ffe ra n d s o ld t h ei r s ecuri t i es back to T X U
. Th e pri ce of fered f or t h e sec u ri t i es i n t h e t en der
o f fe rw as $ 52. 28 f

o re ac h Cor po r at e U ni ta nd $ 52
. 39 f o re ac h PRI D E. The t e nde ro f

fe rpur c has e pr i c e w as det erm i n e d b y ap pl yi ng a fac t o rt o t he t w en t y- da y w ei gh t ed av erag e p rice of T X U com m on st ock betw een Sep t em ber 20, 200 4, an d O ct ober 8, 200 4. Th e t en der pri ce w a s h igh e r t h an t h e m arket pri c e f or t he se c uri t i es at t he t i m e of t he t enderof fer . The of

feri t se l f

( as w el las f o r m s f i l e d wi t h t he SEC a nd t he a s s o c i at ed pr e s s r e l e as e ) c o nt ai ne d t he f ol l ow i ng l anguage c onc er ni ng t he divi dend pol i c y: T X U C orp . ’ s d eb t an d cap i tal m a n a ge m en t p rog ra m i s i n ten d ed to s t r e n g t h e n T XU Co r p . ’ s b a l a n c e s h e e t a n d f i n a n c i a l f

l e x ib i l i t y . As a pa r t o f i t s c ap i t al m ana ge m e nt and r e s t r uc t ur i ng pr o gram and c o n s id e r in gc u r r e n tb u s in e s s a n d m a r k e tc o n d it io n s , T X U C o r p .’s m ana gem en t i s e va l uat i ng w he t he ri ts ho ul d r e c o m m e nd t o t he T X U C o r p . B o a r d o f D ir e c t o r s th a tth e yr e e v a lu a t e T X U C o r p .’s current c om m on st ock di vi den d p ol i cy . T X U C orp. cann otpredi ct th e o u tc o m e o f m a n a g e m e n t’s e v a l u a tio n , w h e n , if a t a ll, m an agem en tw ou ld m ak e a rec om m en da t i on t o t h e B oard of D ire cto rs t o chan ge t h e current com m on st ock di vi den d p ol i cy, orN o. 08- 10414

4 w hatm ana ge m e nt ’ s r e c o m m e nda t i o n m i ghtbe
. I n a ddi t i o n t o a ny r ec om m endat i on from m anagem ent , t he B oar d of D i r ec t or s m ay c o ns i de ro t he rr e l e va ntfac t o r s i n de t e r m i ni ng i f and w he n t o m ak e a ch a n g e in T X U C o r p .’ s co m m o n s to c k d iv id e n d p o lic y . T X U also a n n ou n ced i ts i n ten t t o rep u rch a se u p t o 1 0 m i l l i on sh a res o f i ts
c om m on s t oc k, subj ec tto m ar ketc ondi t i ons and ot herfac t or s. O n Sept em ber28, 20 04 , CE O W i l de rm ad e a pr e s e nt at i o n i n whi c h h e rei t e r at e d p r e vi o us r e p r e s e n t a t io n s t h a t t h e d iv id e n d p o li c yw a s u n d e rr e v ie w a n d d is c u s s e d T X U ’s
c a p ita l a llo c a tio n a n d g r o w th s tr a te g y . On Oc t o b e r1 2 , 2 0 0 4 , j u s to n e da yb e f o r e t h e e x p i r a t i o n o f

t h e o f fe r , T XU
m an agem en tgave a d et ai l ed f i n an ci alp l an to cert ai n cr edi trat i n g agen ci es f or t h e pu rpose of

faci l i t ati n g t h e agen ci es’deter m i n ati on s of w h et h er an i n crease i n T X U ’ s annu aldivi dend w oul d advers el y af fec tthe c or por at i on’ s c r edi tr at i ng. O n O ct ober 13, 200 4, t h e f i n al da y of

t h e t en der of

fer, F & C t en dered 4 25, 000 of i t s 5 25 , 00 0 Cor po r at e U ni t s t o TXU f ort o t alpr o c e e ds o f $ 22 , 21 9, 00 0, a nd H ai duk t e nde r e d 5 , 00 0 Cor po r at e U ni t s f o rt o t alpro c e e ds o f

$ 26 0, 09 3. 89 a nd 5 ,0 0 0 P R ID E S fo rto ta l p r o c e e d s o f $ 2 6 1 ,1 0 3 .8 8
. On Oc t o b e r1 9 , 2 0 0 4 , s i xda y s a f t e rt h e e n d o f

t h e t e n d e ro f

fe rp e r i o d , T XU
m ana ge m en t pr o vi de d m at e r i al s t o t he Boa r d p r o po s i ng a c hang e i n divi de nd pol i cy, an d on O ct ober 2 1, 2 004 , m an agem en trecom m en ded a 3 50% increase of t h e an n u aldi vi den d on com m on st ock a n d a 40 0% i n crease i n t h e st ock
r e purc has e pr o gr am . I n t he i nt e r i m b e t w e e n m ana ge m e nt ’ s pr o vi s i o n o f t he
m at e r i al s t o t he Boa r d a nd the f i n alr e c o m m e nda t i o n, TXU m ana ge m e nt received f

i n alreport s f

rom t h e cr edi trat i n g agen ci es i n f orm i n g t h e cor porati on t hatan i ncr eas e i n di vi dend p ayout s w oul d n otadver se l y af fec ti t s c r edi tr at i ng. O n O ct ober 22, 200 4, t h e B oard ap p ro v ed the di vi den d i n crease an d the st ock rep u rch a se p rog ra m . O n O ctob er 2 5 , 2 0 0 4 , T X U p u b l i cl y a n n ou n ced its p l a n to i n crease t h e c o m m on st ock di vi den d f rom $0. 50 to $2. 25 a n d to repu rchaseN o. 08- 10414

Section14 (e) of th e Securities Exchange Act makes it unl awful: 1 for anyper son to make anyuntru e statement of a materi al fact or o mit tostat e anymaterialfact necessary in order to make the statements made , inth e light of th e c irc ums tanc esund er which they are m ade , notmis leading, orto engage in anyfraudulent, dec eptive, or manipul ative a c t sor practices, in connectio n with anyten der offer or requ est or invitationfor tenders, or anysolicit atio n of security hol ders ino p p os itio n to or in favor of any such offer, requ est, or invit ation . 1 5U .S .C

. § 7 8 n (e). S ection1 0 (b) of

th e E xch an ge Actp rovides : 2 Itshall be unl awful f orany person , directlyor indirectly, byth e u se of any mean s or instru mentalityof interstate commerce or of th e mails, or of any facilityof anyn atio nals ec ur it ies exchange . . . (b) To u se oremploy , in connectio n with the purch ase or sale of anyse curity registere d ona nation al securities exchange or anysecuritynot soregistere d, . . . any manipulative or deceptive device or contrivanc e in contravention of such rul es and regulation s as the [Securities and Exchange] C ommissionmaypr es c ribeas nece ssaryor app ropriateinth e pub lic intere stor for th e prot ectionof inves tors . 5 ap pr o xi m at e l y 50 m i l l i o n s har e s o f TXU c o m m o n s t o c k. I m m e di at e l y f o l l o w i ng th e a n n o u n c e m e n t, th e p e r -s h a r e v a l u e o f T X U co m m o n s to c k ju m p e d n e a r ly 2 0 %
. T h e C o r p o r a te U n its a n d th e P R ID E S e x p e r ie n c e d co r r e la te d in c r e a s e s in
v a lu e .O n , Sep t em ber 6, 200 5, A p p e ll an t s f i l ed thei r or i gi n alcl ass act i on c om pl ai nti n t he di st r i c tc our t , al l egi ng t hatt he A ppel l ee s violat ed f ede r al
s e c u r itie s la w s a n d in te n tio n a llyd e fr a u d e d A p p e l l a n ts a n d o th e rs im ila r ly
s itu a te d h o ld e r s o f T X U s e c u r itie s b y fa ilin g to in fo r m th o s e w h o p a r tic ip a te d in t he t enderof

fert hata divi dend i ncr eas e a nd i ncr eas ed s t oc k r epur c hase w as i m m i n en t
. A pp el l an t s’ess en t i alt h eory i s t h at TX U an d W i l der fai l ed to i n f orm th em of th e im p en d i n gd iv id e n d i n crea se in o rd er to i n d u ce A p p ell a n ts t o pa r t i c i pa t e i n t he t e nde ro f fe rb e f o r e t he v al ue o f

t he i r secur i t i e s i nc r e as e d. A pp el l an t s al l eged t h ree c au ses of act i on f

or f rau d u n der t h e Secu ri t i es E xc hange A c t : ( 1) a v i ol at i on o f Sec t i on 14( e) ; ( 2) a v i ol at i on o f S ecti on 10(b) 1 2N o. 08- 10414

1 5U .S .C

. § 7 8j (b).

SE CRule1 0b -5 , promulgate d purs u ant toS ection1 0 (b), p rovides : 3 Its hall be unl awful for anyper son, directlyor indirectly, byth e u se of any mean s or instru mentalityof interstate commerce, or of th e mails or of any facilityof anyn atio nalsecuriti es exchange, (a) To e mploy any device, scheme, or artifice to defrau d, (b) To make anyuntru e statement of a material fact or to omit to state a materi al fact nece ssaryinorder to make th e statements made , in light of the circu mstance s un der whichth eywere made, not mislea ding , or (c) To e ngage in any act, practice, or cour se of business which operates or would op er atea s af

rau d ordec eit upo nanyper so n , inconn ectionwithth e purch a se or sale of any se curity. 17 C.F .R. § 2 40.1 0b-5
.

UnderSection20 ( a) , aperson who exerts co ntrol over aper son who viol ates any 4 provisionof the Securiti es E xch ange Act can be hel d j ointlyan d several lyl iabl e with the primaryactor of the underlying securities law violation
. 15 U.S.C. § 7 8t(a). Li abilityunder §20 (a) requires the primaryactor to be liablefor the underlying viol atio n, and hereis premised onth e Sectio n1 0 (b) or1 4 (e) violation . 6 an d R u l e 10b

- 5 ; a nd ( 3) c o nt rol l i n g person l i abil i t y aga i n stW i l der un der S ect i on 3 20(a)

. A pp el l ees f

i l ed a m ot i on t o di sm i ss al lof t h e A p p e l l an t s’cl ai m s on 4 D ece m b er 1 6 , 20 0 5 , w h i ch w a s gra n ted bythe distri ct cou rt. A p p ell a n ts ap pea l ed to t h i s c ou rt , bu tw h i l e t h e app ealw as pen di n g, t h e U n i t ed S t ates Supr e m e Cour ti s s ue d i t s de c i s i o n i n T e lla b s , I n c . v . Ma k o rIs s u e s & R ig h ts , L td ., 551 U
. S

. 308 , 127 S. C t
. 249 9 ( 200 7) , w h i ch cl ari f i ed t h e p l ead i n g st an da rd f or sc ien te r u n d e r th e P riv a te S e cu rities L iti g a tion R e for m A ct o f 19 9 5 (“P S L R A”). In response to t h e T e l labs de c i s i o n, a nd wi t ho uta ddr e s s i ng t he m eri t s of t he ap pea l , t h i s cou rtv acated the di st ri ctcourt ’ s j u dg m en tan d rem an ded t h e case forfu rth e r c o n sid e ra tion in li g h t of T e l labs

. Flah erty & C rum ri n e P refer red Incom e Fu n dI

n c. v. T X U Corp ., 2 4 2 F . A p p ’ x2 5 3 (5 th C ir . 2 0 0 7 ). A ppel l ant s f

i l ed a s ec ond am ended c om pl ai nton N ove m ber26, 2007, rest ati n g t h ei r or i gi n alcl ai m s an d s u pp l em en t i n g t h e com pl ai n tw i t h t h e expert reportof

P rof essorL i n da A l l en , P rof essorof F i n an ce at th e C i t y U n iversi t y of N ew Y ork, an d a d d it i on ali n st an ces of al l eged f

rau du l en tm i srepresentat i on s.N o. 08- 10414

7 A pp el l an t s al so add ed i n di vi du a l n o n -cl ass c om m on l aw f rau d cl ai m s un der T exas st ate l aw . A p p el l ees agai n f i l ed a m ot i on t o di sm i ss A pp el l an t s’cl ai m s. T h e di st ri ctcourtdi sm i ssed t h e A pp el l an t s’federalsec u ri t i es f rau d cl ai m s on t h e pl ead i n gs un der R u l e 12(b) ( 6) becau se t h e pl ead i n gs fai l ed to gi ve ri se t o a s t r o ng i nfe r e nc e o f

s c i e nt e ru n der t he s t and ar d a r t i c ul at e d i n T e l labs a nd d i sm i sse d the i r com m on l a w f ra u d cl a i m f

or fail u re to p le a d fr a u d w i th p a r tic u la r itya s re q u ir e d b yR u le 9 (b ). T h e in s ta n t a p p e a l fo llo w e d
. II. A d i stri ct cou rt’ s d i sm i ssa l of fede ra l secu ri ti es l a w cl a i m s u n d er R u le 1 2 (b )(6 ) is re v ie w e d d e n o v o . Herr m an n Hol d i ngs, L t d

. v. L u centT ech. I n c. , 302 F .3 d 5 5 2 , 5 5 7

– 5 8 (5 th C ir . 2 0 0 2 ); Cent

. Lab o r e r s ’ Pe ns i o n Fund v

. I

nt egr ate d El e c . Se r v s . , I

n c. , 4 9 7 F
. 3 d 54 6 , 55 0 ( 5 th C i r. 20 0 7 ). Adism i ssa lf or fail u re to
s t at e f r audw i t h pa r t i c ul ar i t y as requi red by R ul e 9 (b) i s a di s m i s s alo n t he p le a d in g s fo rfa ilu r e to s ta te a cla im , a n d is a ls o re v ie w e d d e n o v o . Shus hany
v . Al l w as t e , I

nc ., 9 9 2 F .2 d 5 1 7 , 5 2 0 (5 th C ir . 1 9 9 3 ). R u le 1 2 (b )( 6) au t h ori zes di sm i ssalof a com pl ai n tf

or “fai l u re t o st ate a cl ai m up on w h i ch rel i ef can be gran t ed. ” Fed
. R
. C iv. P
. 12(b) ( 6)

. “ T o survi ve a R u l e 1 2 (b)( 6 ) m oti on , the plain ti ff m u st plea d ‘ en ou gh fa cts to s ta te a claim to reli ef t h a t i s p l a u sibl e on i ts fa ce.’” In re K atr i n a Can al B reaches Lit iga t i on , 495 F. 3d 191, 205 ( 5t h C i r . 2007) ( quot i ng B ell A tla n tic Co rp . v . Tw o m b ly , 55 0 U
. S. 5 4 4 , 5 7 0 (2 0 0 7 )). R u l e 9 (b) states tha t “ i n all eg i n g f ra u d or m i stak e, a p a rty m u st state w i th p a r t i c ul a r i t yt he c i r c um s t a nc e s c o ns t i t ut i ngf r a udo rm i s t a ke
. ” Fe d
. R. Civ . P. 9 (b ). T h is C ircu it’ s p re ce d e n t in te rp re ts R u le 9(b ) str ictly , re q u irin g th e p la in tiff to “spe ci fy the statem en ts con ten d ed to b e frau d u l en t, ide n ti fy the sp ea k er, state
w h en a n d w her e t he s t at em ent s w er e m ade, and ex pl ai n w hy t he s t at em en ts
w e r e f ra u d u l en t. ” Wi l l i am s v . W M X Tec hs

. , I

nc . , 11 2 F. 3d 17 5, 17 7 ( 5t h C i r. 1 9 9 7 ); Nat he ns o n v . Zo nage n, I nc ., 2 6 7 F .3d 4 0 0 , 4 1 2 (5t h C ir. 2 0 0 1 ).N o. 08- 10414

8 In order t o s ta t e a cl ai m f or f rau d u n der S ect i on 10(b) an d R u l e 10b

- 5 of t he Sec u r i t i e s Ex c h a n g e Ac t , a p l a i n t i f f mus ta l l e g e , i n c o n n e c t i o n wi t h t he purc hase ors al e o f

s ec uri t i es , ( 1) a m i ss t at em entoran om i ss i on ( 2) of a m at er i al fa c t (3 ) m a d e w ith s c ie n te r(4 ) o n w h ic h th e p la in tiffs r e lie d (5 ) th a t p r o x im a te ly
c a u s e d th e p la in tiff

’s inju r y . R 2 I

nv s . LD C v. Phi l l i

ps , 40 1 F
. 3 d 63 8 , 64 1 ( 5 th C i r. 200 5)

. Th e el em en t s of a cl ai m un der S ect i on 1 4( e) , w h i ch ap pl i es t o t en der
o ffe r s , a r e id e n tic a l to t h e S e c tio n 1 0 (b )/R u le 1 0 b -5 e le m e n ts
. Sm al l w oo d v. PearlB rew i ng Co. , 4 8 9 F .2 d 5 7 9 , 6 0 5 (5 th C ir . 1 9 7 4 ). The Pr iva t e Se c ur i t i e s Li t i ga t i o n Ref o r m Ac t( “ PSLR A” ) , w hi c h g o ve r ns federalsec u ri t i es f

rau d cl ai m s, requ i res t h at a pl ai n t i f f in a secu ri t i es f

rau d case
m u st, f or “ea ch act or om is s io n a lle g ed ” t o b e false or m i slead i n g, “ state w i th p a rti cu l a ri ty facts giving ri se t o a stron g i n feren ce t h a t t h e d efen d a n t acted w i th th e re q u ir e d s ta te o f m in d .” 1 5 U .S .C . § 7 8 u -4 (b )(2 ); seealso I n d

. E lec. W

orkers ’ Pe ns i o n Tr us tFund I BE W v . Shaw G r o up, I

nc . , 537 F
. 3d 527 , 533 ( 5th C i r. 2 0 0 8 ); Zon ag en , 2 6 7 F .3d a t 4 0 7 (“[A ] p la in tiff a ll e g in ga s e ctio n 1 0 (b )/R u le 1 0 b -5
c la im m u s t n o w p le a d s p e c ific fa c ts g iv in gr is e t o a s tr o n gin fe r e n c e o f s c ie n te r .” (ci tati on s om i tted)). T h e P S L R Aalso i n co r p ora tes th e R u l e 9 (b) req u i rem en ts in to th e p le a d in gs ta n d a r d fo rfe d e r a l s e c u r itie s fr a u d cla im s . A bram s v. B ak er H ugh e s I

nc . , 292 F
. 3 d 4 2 4 , 4 3 1 ( 5th C i r. 200 2)

. U n der t h e P S L R A , t h e court
con sider s w h eth er a l lthe fa cts an d cir c u m stan ces, t a k en toge th er, give ri se to
a s tr o n gin fe r e n c e o f s c ie n te r . Id .; Z on ag en , 267 F. 3d at425
. S ci en ter, i n the con tex t of secu ri ti es frau d , i s d efi n ed as “a n i n ten t t o decei ve, m an i pu l ate, or defr au d or t h at s evere rec kles sness i n w h i ch the da n ger o f m i s l e ad i ng buy e r s o rs e l l e r s i s e i t he rkno w n t o t he de fe nda nt o r i s s o o bv i o us th a t th e d efen d a n t m u st h a ve be en aw a re of i t. ” R 2 I nvs ., 4 0 1 F .3 d a t 6 4 3 ; see a ls o Plo t k i n v . I

P Ax e s s Inc ., 4 07 F
. 3d 690 , 697 ( 5th C i r. 200 5) ( “ [A ] sec u ri t i es fr a u d p la in tiff

m u s t p r o v e th a t t h e d e fe n d a n t e ith e rco n s c io u s ly
m i s be hav e d .
. . o rw as s o s e ve r e l y r e c kl e s s t hati tdem on st r at e s t hatt heN o. 08- 10414

9 de fe nda ntm us tha ve b e e n a w ar e of the dang e ro f m i s l e ad i ng t he i nve s t i ng pub l i c . ” )

. “ Se ve r e r e c kl e s s ne s s i s l i m i t e d t o t ho s e hi ghl y unr e as o nab l e o m i s s i o ns o r m is r e p r e s e n ta tio n s th a t in v o lv e n o t m e r e ly s im p le o r e v e n in e x c u s a b le
n eg l i ge n ce, b u t a n e xtre m e d ep a rtu re from th e stan d a rd s of o rd i n a ryca re.” R2 I nvs . , 4 01 F. 3da t6 43 ( quo t at i on om i t t e d)

. I n T e l labs , t h e Su prem e C ou rt
c la r ifie d th e s ta n d a r d fo rp le a d in ga “s tr o n gin fe r e n c e ” o f s c ie n te r . T e l labs , 127 S. Ct

. a t2 50 9– 10
. Thi s Ci r c ui tha s re c e nt l y i nt e r pr e t e d Te l lab s as r equi r i ng a

“ t h ree s t ep ap proach t o revi ew i n g sci en t er all egati on s on a m ot i on t o di sm i ss a fede ra lsecu ri ti es frau d cas e p u rsu a n t t o th e P S L R A”: Fi r st , th e a l l egat i ons m ust , as i n fede r alpl eadi ngs gener al l y, be t ak en as t rue. S econd , courts m ay con si der docu m en t s i n corporat ed i n t h e com pl ai n t by r eference an d m att ers sub j ectt o j u di ci alnoti ce. T h e facts m u st be ev a l u a ted coll ectively , n ot i n i solation , to de t e r m i ne w he t he ra s t r o ng i nfe r e nc e o f s c i e nt er has b e e n pl e d. Thi r d, a c o ur tm us t t ak e i nt o ac c o unt pl aus ibl e i nfe r e nc e s o ppo s i ng as w el las supp ort i n g a st rong i n ference of sci en t er. T h e i n ference o f s c ie n te r m u s t u ltim a te ly b e “c o g e n t a n d co m p e llin g ,” n o t m e r e ly “r e a s o n a b le ” o r“p e r m is s ib le .” Ind

. E lec. , 537 F. 3d at533 ( c i t i ng T e l labs , 127 S. C t
. at2 50 9– 10 )

. I n a ddi t i o n,

“ om i ssi on s and am bi gu i t i es c ou n t aga i n st i n f erri n g sci en t er, f

or pl ai n t i f

fs m u st

‘ s t at e w i t h pa r t i c ul ar i t y fac t s g ivi ng r i s e t o a s t r o ng i nfe r e nc e t hatt he de fe nda nt
a cted w i th th e requ i red state of m in d
. ’” T e l labs , 127 S. C t
. at 251 1 ( ci t ati on o m itt e d ). A l th ou gh w e h a ve stated tha t all eg a ti on s of m otive an d op p ortu n i ty
s t and i ng al o ne w i l lno ts uf f i c e t o m e e tt he s c i e nt e rr equ i r e m e nt , m o t ive a nd opp ort u n i t y al l egati on s m ay m ean i n gf u l l y en h an ce the st rength of t h e i n ference o f s c ie n te r . In d . E le c ., 53 7 F. 3da t5 33 (c i t i ngS ou t h lan dS ec. Corp. v. I NS pir e I ns . So l ut i o ns , I

nc . , 3 65 F
. 3d 3 53 , 3 68 ( 5t h Ci r . 2 00 4) )

. W e ha ve r ej e c t e d t he gr o up p l e ad i ng ap pr o ac h t o s c i e nt e r andi ns t e adl o o k t o t he s t at e o f m i nd o f t he i n di vi du alcor porate o ffi ci alor of f i ci al s “ w h o m ak e or i ssue t h e st atem en t( orN o. 08- 10414

10 order orapp rove i tor i t s m ak i n g o r iss u an ce, or w h o f u rni sh i n f

orm ati on or l anguage f

ori ncl usi on t her ei n, ort he l i ke) r at her t han gener al l y t o t he c ol l ec t ive kn ow l edg e of

a l lthe corporat i on ’ s of f i cers a n d em pl oyees acqu i red i n t h e course of t h eir em p l oy m en t. ” Id

. III. A pp el l an t s poi n tto s e veralst atem en t s m ad e by ei t h er TX U or W i l der
w h i ch they assertvi ol ate f ederalsec u ri t i es l aw s. For each of t h ese s t atem en t s, w e m us te va l uat e t he s c i e nt e ra l l e ga t i o ns pe r t i ne ntt o ea ch andde t e r m i ne w het her t he fac t s, eval uat ed c ol l ec t ivel y, suppor t a “ c oge nt an d c om pel l i ng” i n ference t h at A pp el l ees act ed w i t h i n t en tto d eceive, m an i pu l ate, or defr au d or
a c te d w ith s e v e r e re c k l e s s n e s s . S ee Ind

. E lec. , 53 7 F
. 3 d at 53 3

– 3 4
. In
e va l uat i ng w he t he rs c i e nt e r has b e e n e s t ab l i s he d, w e w i l lc o ns i de rt he
com pl ai n t , docum en t s i n corporat ed i n the com pl ai n tby reference, an d m att ers s u b je c t t o ju d ic ia l n o tic e . Id

. T h is e v a lu a tio n m u s t t a k e in to a c c o u n t p la u s ib le in fe r e n c e s o p p o s in ga s w e ll a s s u p p o r tin ga s tr o n gin fe r e n c e o f s c ie n te r . Id

. Appe l l ant s ur ge t hat , i n a c c e pt i ng t he t e nde r of fe r , t he y r e l i e d o n t he
r epr es ent at i on o r i gi nal l y s t a t e d i n T X U ’ s M ay 200 4 pr es s r el eas e i ndi c at i ng t hat T X U di d notant i c i pat e adivi dend i ncr eas e unt i l2006, w hen c er t ai n f i nanci al ben chm arks w ere r each ed. A pp el l an t s do not c l earl y del i n eate bet w een w h et h er t hey al l ege an af

f i r m at ive m i s r e pr e s e nt at i o n o ra n o m i s s i o n. I n t he i rs e c o nd
am e nde d c o m pl ai nt , Appel l ant s po i nt e d t o v ar i o us s t at e m e nt s m ad e a f t e rt he M ay 20 04 press rel ease w h i ch t h ey al l ege d o n otcon t ai n a su f f i ci en tdi scl osure o f t he i m pe ndi ng divi de nd i nc r e as e o ra f f i r m ati vel y m i s s t at e t hatno divi de nd in c r e a s e w ill o c c u ru n til a fte rce r ta in fin a n c ia l b e n c h m a r k s a r e re a c h e d
. T h e f i rstof t h ese s t atem e n ts, is su ed i n t h e t en der of fer m ater i al s on Se pt e m be r1 5, 2 00 4, s t at e d: As apa r to f

i t s c ap i t alm ana ge m e nta nd r e s t r uc t ur i ng pr o gr am a nd c o n s id e r in gc u r r e n tb u s in e s s a n d m a r k e tc o n d it io n s , T X U C o r p .’sN o. 08- 10414

This presentation was incorpor ated intoa For m 8-K file d with the SEConSep tember 5 2 8 , 2 0 0 4
. 11 m ana ge m e nti s e va l uat i ng w he t he ritsh o ul d r e c o m m e nd t o t he T X U C o r p . B o a r d o f D ir e c t o r s th a tth e yr e e v a lu a t e T X U C o r p .’s current c om m on st ock di vi den d p ol i cy. TX U C orp. cann otp re d i ct th e o u tc o m e o f m a n a g e m e n t’s e v a lu a tio n , w h e n , if a t a l l, m an agem en tw ou l d m ak e a rec om m en da t ion t o t h e B oard of D i rect ors t o chan ge t h e current co m m on st ock di vi den d p ol i cy, or w hatm ana ge m e nt ’ s r e c o m m e nda t i o n m i ghtbe
. I n a ddi t i o n t o a ny r ec om m endat i on f

r om m anagem ent , t he B oa r d of D i r ec t or s m ay c o ns i de ro t he rr e l e va ntfac t o r s i n det e r m i ni ng i f and when t o m ak e a ch a n g e in T X U C o r p .’ s co m m o n s to c k d iv id e n d p o lic y . A pp el l an t s c on t en d that thi s stat em en ti s m i sl ead i n g becau se, al t h ou gh i tdoes
s t at e t hatt he divi de nd p o l i c y i s und e rr e vi e w , i tdoe s notsuf f i c i e nt l y di s c l o s e t he al l e ge d “ s t e ps t ak e n t o i nc r e as e t he TXU divi de nd” upo n c o m pl e t i o n of t he te n d e ro ffe r . The s e c o nd s t at e m e ntt hatAppe l l ant s po i ntt o w as m ad e b y W i l de ra tt he M er r i l lLynch G l obalPow er& G as Leader s C onfer enc e on Sept em ber 28, 2004, dur i ng t h e t e nde ro f fe rpe r i o d. W i l de rpr e s e nt e d apo w e rpo i ntpr e s e nt at i o n,

5
w hi c h i nc l ude d as l i de t hatde s c r ibe d TXU ’ s c ap i t al al l o c at i o n po l i c y. The s l i de
s t at e d t hatt he “ divi de nd p a y o u t” wa s “u n d e rr e vi e w . ” The s t at e m e ntc o nc e r ni ng t he divi dend p a yo u t w a s c ont ai ned i n a f l ow c hartand w as pr ec ede d by a st at em e ntt hat“ debtr educ t i on” w as t o c ont i nue unti lc er t ai n f i nanci algo al s had been m et
. A n arrow poi n t i n g t ow ard t h e “ di vi den d payou t” sect i on f l ow ed f rom t h e “ deb treducti on ” sec t i on of t h e chart. A pp el l an t s c on t en d that t h i s f l ow chart i ndi c at ed t hatt he “ di vi dend payo ut ” s t ep w oul d nott ake pl ac e unt i lt he “ debt
r e duc t i o n” go al s had be e n m e t
. Appe l l ant s c o nt e nd t hata tt he t i m e W i l de rm ad e t h i s s t atem en t , he k n ew (1 ) that t h e f i n an ci alben chm arks w ou l d n otbe m et bef ore t h e di vi den d w as i n creased an d ( 2) t h at si gn i f i can tst eps h ad been t ak en t o i nc r e as e t he divi de nd whi c h wer e no tc o m m uni c at e d s uf f i ci e nt l y byt heN o. 08- 10414

Appell ant s contend that th e statements inth e Pooleletter should not b e co nsidered 6 when evalu atin g opposin g inferenc es. Appellants fail to acknowledge th at because they attached the letter toth eir c om p la in t(not to me ntio n refere nced the letter in the reportof th eir ownexpert), it isrelevant for th e purp os esof evalu atin gamotio n t o di smi ss. See Tellabs , 12 7 S . C t. at 2 509(statingth at, int hec on t ext of a motionto dismiss, courts may consi der docume nts incorporat ed in the compl aint b y refere nce when evalu atin g wheth er scie nter h a s b ee ne st ab li sh ed). 12 s t at e m e ntt hatt he divi de nd p o l i c y w as “ unde rr e vi e w . ” Appe l l ant s a l s o c o nt e nd t hatAppe l l e e s ’fai l ur e t o “ r e t r ac t” t he M ay2 00 4 s t at e m e ntc o nc e r ni ng t he d iv id e n d p o lic yv io la te d fe d e r a l s e c u r itie s ’la w s . In ad d i ti on to t h e facts p l ea d ed i n the the i r com p l a i n t, A p p ell a n ts
r e fe r e n c e s ta te m e n ts m a d e in a J a n u a r y1 8 , 2 0 0 5 le tt e r( a p p e n d e d to th e ir
c o m pl ai nt) w r i t t e n b y t he n TXU Ass o c i at e G e ne r alCouns e lD av i d Po o l e (t he

“ Poo l e l e t t e r” ) a nd c o nc l us i o ns i n a n e xp e r tr e po r tpr e pa r e d b y Pr o fe s s o rLi nda 6 Al l e n (t he “Al l e n Rep o r t” ) w hi c h Appe l l ant s c l ai m pr o vi de s e vi de nc e t hata tt he t i m e o f t he t e nde ro f

fe r , Appe l l e e s w e r e f ul l y awar e of

t he i m pe ndi ng divi de nd in c r e a s e . In t h e P ool e l et t er, T X U ’ s c ou n selst ated t h at m an agem en tha d been
c o nt e m pl at i ng a c hang e i n di vi de nd po l i c y s i nc e A ugu s t200 4, butdi d no tm ak e a fin a l d e c is io n u n til a fte rt h e c lo s e o f th e t e n d e ro ffe ro n O c to b e r1 3
. T h e P o o le l et t er al so asser t ed that TX U ’ s m an agem en tw ou l d n otm ak e a deci si on c o n c e r n in gth e d iv id e n d p o lic yu n til th e y h a d r e c e iv e d in fo r m a tio n fr o m ce r ta in
c r e di tr at i ng ag e nc i e s , e va l uat i ng t he i m pa c to f c hang e s i n divi de nd p o l i c y and
ca p i tali za ti on o n the cred i t rati n gs of d eb t secu ri ti es o f T X U C orp . an d i ts
s ubs i di ar i e s . Appe l l ant s c o nt e nd t hatt hi s e xp l ana t i o n, a dv anc e d he r e b y t he Ap p e l l e e s , i s i m p l a u s ib l e , p o i n t i n gt o c o n c l u s i o n s m a d e i n t h e Al l e n Re p o r t
. By
com pa ri n g t h e T X U res t ructuri n g an d d ividend pol i cy chan ges w i t h t h ose of ot h er c om pa n i es and eval u ati n g t h e dates put f ort h i n t h e P ool e l et t er, t h e A l l en Repo r tc o nc l ude s t hat

— de s pi t e t he fac tt hatt he a ge nc i e s ha d n ot give n a ny o ffic ia l e v a lu a tio n o f th e d iv id e n d i n c r e a s e — T X U s e n io rm a n a g e m e n t lik e lyN o. 08- 10414

13 al readykn ew du ri n g t h e t en der of fer peri od that t h e c red i trat i n g agen ci es w o ul d no tdo w ngr ad e i t s i s s ue rr at i ng ba s e d o n t he c o m m o n s har e divi de nd i nc r e a s e . Th e Al l e n Re p o r t a l s o c o n c l u d e s , b a s e d o n Al l e n ’ s e v a l u a t i o n o f t he g e n e r a l cr e d it r a tin gp r o c e s s o f m ajo rcr e d it r a tin ga g e n c ie s , th a t t h e cr e d it agen cy revi ew coul d n otbe co m p l et ed betw een O ct ober 12, 200 4 (t h e date on
w hi c h Appe l l e e s f

ur ni s he d t he c r e di ta ge nc i e s w i t h pa pe r w o r k c o nc e r ni ng t he pr o po s e d divi de nd i nc r e as e ) andOct o be r1 9, 2 00 4, t w o da ys b e f o r e m ana ge m e nt
r e c o m m e n d e d th e in c r e a s e . A l t hough t he ti m i ng of t he divi dend i ncr eas e, w hi c h w as r ec om m ended by T X U m a n a ge m en t just eigh t d a ys a ft er th e cl ose o f th e ten d er offer, i s su sp ect, Appe l l ant s ha ve no tpr o vi de d fac t s s uf f i c i e ntt o s upp o r ta “ c o ge nta nd
com pel l i n g” i n ference t h at A pp el l ees m ad e an y st atem en t s i n t en t i on al l y or reckl essl y t o m i sl ead T X U ’ s i n vest ors. In fact , i ti s not cl ear t h at A pp el l ees ever i s s ue d am at e r i al l y m i s l e ad i ng s t at e m e nto ro m i s s i o n o f fac tc o nc e r ni ng t he divi de nd p o l i c y. The c l o s e pr o xi m i t y of t he divi de nd i nc r e as e t o t he e nd o f t he t en der of

fer, t h ou gh i t provi des som e sup port f or an i n ference of sci en t er, i s not
su ff i ci en t, w i th ou t m ore , to estab l i sh a stron g in feren ce of th e req u i sit e inten t. S ee In re D ig ita l Isla n dS ec . L itig ., 2 2 3 F
. S u p p . 2 d 5 4 6 , 5 5 5

– 5 6 (D

. D e l. 2 0 0 2 ), af f ’ d, 3 57 F. 3d3 22 ( 3dCi r . 2 00 4) (ho l di ng t hat t he fac t t hatt he o f fe r o rc o m pa ny di sc l os ed t w o s ucc es sf ult r ansac t i ons w i th i n w eeks af t ert enderof

ferw as c o m pl e t e d d o e s no tes t ab l i s h t hatco m pa ny hadkno w l e dg e o f t he s e t r ans ac t i o ns a t t im e te n d e ro ffe rw a s m a d e ). A pp el l an t s con t en d t h at they rel i ed on the M ay 20 04 p ress rel ease w h i ch st at ed t hata divi dend i ncr eas e w as not l i kel y unt i l2006 w hen c er t ai n f i nanci al b en ch m a rk s h a d be en m a d e, b u t reserv e d t h e r i gh t of the m a n a ge m en t t o c ons i derot herfac t or s i n det er m i ni ng i f and w hen t o c hange t he divi dend pol i c y. A p p e lla n ts h a v e n o t p r e s e n te d a n y e v id e n c e o f s c ie n te r w ith r e g a r d t o t h is
s ta te m e n t. T h e r e i s n o e v id e n c e th a t a t t h e tim e th is s ta te m e n t w a s m a d e inN o. 08- 10414

14 M ay 200 4, TX U m anagem ent , s pec i f i c al l y W i l der , w as aw ar e o rs houl d have bee n aw ar e t hatTX U p l a n n ed t o i ncr eas e t he divi dend pr i ort o t he f i nanci al b e n c h m a r k s b e in gre a c h e d
. The s e c o nd s t at e m e ntpo i nt e d t o b y Appe l l ant s , m ad e a tt he st art of t he ten d er offer pe ri od , w a s th a t th e d ivid en d p oli cyw a s “u n d er rev i ew . ” A p p ell a n ts
c o n t e n d t h a t t h i s s t a t e me n tw a s ma d e t o mi s l e a d i n v e s t o r s b e c a u s e a tt h e t i me i tw as m ad e, sub st an t i al st eps h ad been t ak en t ow ard a di vi den d i n crease w h i ch
w arran t ed a m ore s u bstanti al di scl osure or a “ ret ract i on ” of t h e M ay 20 04 p ress
r e l e as e s t at e m e nt s . Ag ai n, Appe l l ant s ’e vi de nc e do e s no ts upp o r ta s t r o ng i n ference t h at, on the da t e t h i s s t atem en t w as i ssued , A pp el l ees kn ew an d w ere atl e as tr e c kl e s s i n fai l i n g t o di s c l o s e t hatt he r e w as a n i m pe ndi ng divi de nd i ncr eas e. Al t hough t he A l l en R epo r tprovi des som e suppor tfort he not i on t hat T X U ’ s m an agem en tl i kely m ad e prepa rat i on s f or t h e di vi den d i n crease bef ore t he c l o s e o f

t he t e nde ro f

fe r , s uc h pr e par at i o ns do no ts upp o r ta c o ge nta nd
c o m p e llin gin fe r e n c e th a t W ild e r o ro th e rT X U m a n a g e m e n t w e r e in te n tio n a lly
o r r e c k l e s s l ymi s l e a d i n gi n v e s t o r s . I n fa c t , t h e s t a t e m e n tt h a tt h e di vi de nd p o lic yw a s “u n d e rre v ie w ” c o n v e y e d th a t T X U h a d ta k e n s o m e s te p s in eval uat i ng a c hange i n t he divi dend pol i c y. T h e p r e c e d e n to f t h is c o u r td o e s n o ts u p p o r tth e n o t io n th a tT X U ’s di s c l o s ur e t hati t s po l i c y w as “ unde rr e vi e w ” w as i ns uf f i c i e nt , l e ta l o ne f r aud ul e nt , und e rfe de r als e c ur i t i e s l aws. TX U had di s c l o s e d t hati t s divi de nd po l i c y w as “ unde rre vi e w , ” butt hati tc o ul d no tpr e di c ti f, o rw he n, m ana ge m e nt
w ou l d u l t i m atel y recom m en d a d ivi den d i n crease . T X U m an agem en tdi d n ot
r e c o m m e nd t he divi de nd i nc r e as e unt i l s o m e t i m e af t e r O c t o be r 19 , 20 04 a nd t he B oa rd didn ot actu a l l y a p p rov e a divide n d i n crea se u n ti lO ctob er 2 2 , 20 0 4
. B oth
o f th e s e d a te s fe ll a fte rth e e x p ir a tio n o f te n d e ro ffe ro n O c to b e r1 3 , 2 0 0 4
. T h is
c o ur t ’ s pr e c e de nta dv i s e s t hata “ m i ddl e cou rse ” i s p r o pe rw he n m ak i ng di s c l o s ur e s c o nc e r ni ng f ut ur e pl ans w hi c h hav e no tb e e n f ul l y de t e r m i ne d i n t heN o. 08- 10414

15 c o n te x t o f a te n d e ro ffe r . S u squ eha n n a Corp. v. Pan A m . S u l ph u r Co. , 423 F. 2d 1 0 7 5 , 10 8 5

– 8 6 ( 5 th C i r. 1 9 7 0 ) (ho l d i n g t h a t a ten d er of feror “i s n ot req u i red to
m ake pr edi c t i ons of

f ut ure be havi or , how eve rt ent at ivel y phr as ed, w hi c h m ay c a u s e t h e o f

fe r e e o rt h e p u b l i c i n v e s t o r t o r e l yo n t h e m u nj u s t i f i a b l y” )

. T XU
co ul d no tha ve di s c l o s e d t hata divi de nd i nc r e as e w as l i ke l y dur i ng t he t en der
o ffer w i t h ou trun n i n g a ri sk of l i abil i t y i f

t h e di vi den d i n crease w as not ul t i m at e l y ap pr o ve d. S e eid

. T h e st atem en t t h at t h e di vi den d pol i cy w as “ u n der
rev i ew ” ap p ea rs to b e a statem en t th a t, altho u gh va gu e, a ccu ra tel y re p rese n ts t h e st ate of

t h e di vi den d p ol i cy du ri n g t h e t en der of fer peri od. Fu rt h erm ore, gi ven t h at t h e M ay 20 04 p ress rel ease st ated t h at t h e B oard could consi der fact ors ot h er t h an t h e outl i n e d f i nanc i alb e nc hm ar ks w h en deter m i n i n g w h et h er t o change t he di vi dend p ol i c y, the s t at em enti n t he t enderof ferm at er i al s t hat th e d ivid en d po l i cyw a s cu rren tl y “u n d er re view ” w a s en ti rely con sist en t w i th t he p ress rel eas e, and obv i at ed t he nee d t o r et r ac tt he M ay 200 4
r e p r e s e n ta tio n s . T h e st atem en t m ad e by W i l der du ri n g h i s presentat i on provi des a cl oser q u estion as to w h e th e r t h e A p p ell a n ts h a ve esta b l i sh ed sci en ter. A p p ell a n ts
c ont end t hatW i l der ’ s pre se nt at i on r ei t er at ed t he s t r uct ure s t at ed i n t he M ay 20 04 pr e s s r e l e as e , co nve yi ng t hata divi de nd i nc r e as e w as c o nt i nge ntupo n t he
com pl et i on of

cer t ai n f

i n an ci alben chm arks. I n order t o sat i sf y t h e sc i en t er requ i rem en t , A pp el l an t s m u stest abli sh that W i l der m ad e t h i s r epresentati on k n o w in g lyo rre c k le s s lyin o r d e rto m is le a d in v e s to r s . I n th e fi r s tin s t a n c e , t h e r e is a q u e s t io n a s to w h e t h e rW il d e r ’s p r e s e n t a tio n w a s a m is s ta te m e n t. A lth o u g h th e p h r a s e “d iv id e n d p a y o u t” is
c o nt ai ne d i n a f

l o w c har tw hi c h i s pr e c e de d by the “ de btr e duc t i o n” s t e p, t he d iv id e n d p a y o u t s te p d o e s a ffir m a tiv e lys ta te th a t itis p r e s e n tly“u n d e rre v ie w ,”N o. 08- 10414

I n addition, the chart do es not e ver explicitlystat e th at the variou s steps are 7 depen dent uponone another such that th e divi d en dp olicy coul d not b e evaluated untilth e oth erc apital alloc ationgoalsh a d b ee nachieved
. 16 consi st en tw i t h T X U ’ s pri or di scl osures. E ven assum i n g t h at t h e presentat i on 7
w as a m i sl ead i n g st atem en tconcerni n g t h e d ivi den d pol i cy, A pp el l an t s hav e not p r o v id ed ev i d en ce to su p p ort a stro n g in feren ce of sci en ter. A p p ell a n ts ag a in poi ntt o t he A l l en r epo r t , w hi ch p rov i des s om e c i r c um st ant i alev i denc e t hat W i l der m ay h ave k n ow n at t h e t i m e of t h e presentat i on t h at a divi den d i n crease w as i m m i n en t . A p p e ll a n t s al so poi n tt o W i l der’ s posi t i on i n T X U , an d assert th a t a s C E O h e m u s t h a v e b e e n p r e s e n t d u r in g B o a r d d is c u s s io n s o f a p o s s ib le d iv i d e n d i n c r e a s e . Ap p e l l a n t s a l s o c o n t e n d t h a tb e c a u s e W i l d e rwa s a T XU st oc khol der , he s t oo d t o benef i t f r om t he r epur c hase of A ppel l ant s’s ec uri t i es at a l ow pr i c e. Thi s c our t , i n appl yi ng T e l labs a nd t he pl e ad i ng s t an da r ds o f t he PS LR A , has di sc ount ed si m i l ar t ypes of evi denc e agai nstc om pany exe c ut ives as in s u ffic ie n t t o e s ta b lis h s c ie n te r . Ind

. E lec . , 537 F. 3d at535 (hol di ng t hat

“ pl eadi ng[ s] of

sc i ent erm ay notr es ton t he i nfer enc e t hatdef endant s m usthave b e e n a w a r e o f th e m is s ta te m e n t b a s e d o n th e irp o s itio n s w ith th e co m p a n y”); see als o id

. a t5 43 –4 4 (ho l di ng t hatm o ne t aryr e w ar ds f o re xe c ut ive s t i e d t o c o m pa ny perf orm an ce are st an da rd an d “c an ha rdl y be the basi s on w h i ch an al l egati on o f fr a u d is p r e d ic a te d ”). Eve n a ssum i ng W i l de rw as a w ar e t hatt he Boa r d was c o nt e m pl at i ng a divi dend i ncr ease, t hi s know l edge al one w oul d nots uf f i c e t o e st abl i sh t hat W i l de ri nt e nde d t o de c e ive i nve s t o r s o r w as r e c kl e s s i n r e ve al i ng o nl y t hatt he d iv id e n d p o lic yw a s u n d e rre v ie w a t t h e tim e o f th e te n d e ro ffe r . Sh i vangiv. D ean Wi t t e rRey no l ds , I nc . , 8 2 5 F. 2 d 8 8 5 , 8 8 9 ( 5 t h Ci r . 1 9 8 7 ) (ho l d i ngt hat

“ know l edge of

om i t t ed fac t s doe s noti t se l f es t abl i sh s c i ent er”)

. These m ot ive al l e ga t i o ns, in conj unc t i o n wi t h t he c o nc l us i o ns o f t he Al l e n r e po r ta nd t he t i m i ng o f

t he divi de nd i nc r e as e , pr o vi de a bas i s fo rso m e i nfe r e nc e of f r aud , b utN o. 08- 10414

Ap p e ll ant s ’ cl ai m a gain s t Wil d e r a s a c o ntro llin g p e r s o n u n d e r S e ctio n 2 0 (a) of th e 8 SecuritiesE xch an ge Actof 1 9 3 4“issecondaryo nlyan d cannotexis t inth e ab se nceof a 17 t hi s i nfe r e nc e i s m e r e l y pe r m i s s ibl e , a nd d o e s no tr i s e t o t he “ c o ge nta nd
c o m p e l l i ng” l e v e lr e q ui r e d b y Tell a bs

. E v e n if W ild e rw a s n e g lig e n t in representi n g t h at t h e di vi den d p ayou tw as conti n gen tup on t h e com pl et i on of cert ai n deb t redu ct i on goals , n egl i gen ce does n ot suff i ce f or sci en te r p u rp oses. Ind

. E lec . , 537 F
. 3d at 533 ( n ot i n g t h at “ si m pl e or even i n excusa bl e neg l i gen ce” d o e s n o t c o n s tit u te th e re q u is ite s ta te o f m in d fo ra fe d e r a l s e c u r itie s ca s e ). Fur t he r m o r e , a s t hi s c o ur ts t at e d i n In d ia n a E lec tric , un der T e l labs , we a r e o b lig a te d to co n s id e rin fe r e n c e s o p p o s in gt h e a lle g a tio n s o f fr a u d
. Id

. H ere, i tc an be i nfer r ed t hatA ppel l ee s had notm ade af i naldec i si on c oncern i n g a c h a n g e i n t h e d iv i d e n d p o l i c yd u r i n gt h e t e n d e ro f fe rp e r i o d , a n d we r e t hus tr u th fu llys ta tin gth a t th e p o lic y w a s u n d e r r e v ie w . T h is co n s tit u te s a p la u s ib le
n on cul pa ble e x p la n ati on of A pp el l ees’act i on s. Th e cr edi trat i n g agen ci es’
e v a lu a tio n o f th e p r o p o s e d d iv id e n d in c r e a s e — a c c o r d in g to th e d a tes i n th e P o o le l et t er, w h i ch w as app en ded t o A pp el l an t s c om pl a in t, an d the da t es r eferenced i n Appe l l ant s ’e xp e r tr e po r t

— w as notf ur ni s he d t o T XU unt i laf t e rt he e nd o f

t he t e nde ro f

fe rpe r i o d. I n a dd i t i on, TXU m ana ge m e ntdi d no tr e c o m m e nd a divi de nd i nc r e as e , no rdi d t he Boa r d a ppr o ve o ne , unt i la f t er t he c l o s e o f

t he t en der of

fer. G ive n th a t T X U an d W i l der di d d i scl ose t h at t h e di vi den d p ol i cy w as “ unde r r e vi e w ” dur i ng t he t e nde r o f fe r pe r i o d, t he i nfe r e nce of no nf rau du l en ti n t en tw ei gh s i n favor of t h e A pp el l ees. A l t h o u g h it is a cl ose qu est i on , t h e fact s al l eged s u pp ortat m ostonl y a perm i ssibl e i n ference of
sc i ent er . Taki ng i nt o a c c ountal lof t he fac t s i n t he agg r egat e, as w el las i nfe r e nc e s o ppo s i ng f r aud ul e nt i nt e nt , Appe l l ant s hav e fai l e d t o r ai s e a s t r o ng i n ference tha tT X U , an d speci f i cal l y W i l der, act ed w i t h t h e i n t en tt o deceive,
m a n i p u l a te, or d efrau d or a cted w i th sev ere reck l ess n ess i n m a k i n g sta tem en ts
c onc er ni ng t he divi dend pol i c y. 8N o. 08- 10414

prim aryviolation .”Southland, 36 5 F .3d at 3 83. Bec ausewe h ave foun dt hepleadin gs of Sections 14(e), 10 (b), and Rule 10b -5 liab ility ina dequ ate, it must b e di smissed.
18 I V. A p p e lla n ts a ls o a lle g e d a cla im fo rc o m m o n la w fr a u d u n d e rT e x a s la w in t h e i ra me n d e d c o mp l a i n t
. T h e c o mmo n l a w f r a u d c l a i m w a s b a s e d o n t h e s a me al l ege d r epr es ent at i ons and/orom i ss i ons underl yi ng A ppel l an ts ’fede r al
se c uri t i es c l ai m s. The el em ent s of c om m on l aw f

ra u d u nderTexas l aw ar e ( 1)
a m a te r i a lm i srep rese n tati on ; ( 2 ) th a t i s fa l se; (3) m a d e w i th k n ow l ed ge of i ts fa ls ityo rre c k le s s n e s s a s to it s t r u th ; (4 ) m a d e w ith th e in te n tio n th a t its h o u ld be ac t ed upon byanot herpar t y; ( 5) r el i ed upon byt he o th erpar t y, and ( 6)
c a u s in ginju r y . Jag Me d i a Ho l d i ngs I n c . v . A. G. Ed wa r d s & S o n s Inc . , 3 8 7 F. S u p p . 2 d 6 9 1 , 7 0 9 (S .D
. T e x . 2 0 0 4 ); E rnst& Y ou ng, L
. L
. P
. v. Pac. Mu t
. L if e I n s. Co. , 5 1 S .W .3 d 5 7 3 , 5 7 7 (T e x . 2 0 0 1 ). A pp e ll a n t s c on t en d that t h e cl ai m shou l d n otha ve been di sm i ssed b e c a u s e th e d is tr ic t co u r t fo u n d th a t t h e s e c o n d a m e n d e d co m p la in t a d e q u a te ly speci f i es w ith p a rticu la rity w h ich s ta te m e n ts c on t ai n t h e al l eged
m isre p re se n ta tion a n d om iss ion s, w h e n a n d w h e re th o se sta te m e n ts w ere m ad e, w h y t h e A pp el l an t s bel i eve t h em to b e m i sl ead i n g, an d that t h e al l eged
m i s s t at e m e nt s and om i s s i o ns w e r e m at e r i alt o t he de c i s i o n t o pa r t i c i pa t e i n t he t en der of

fer. A pp el l an t s c on t en d that b ecau se com m on law fr au d cl ai m s are n ot
s ubj ectt o t h e P S L R Asc i en t er r equ i rem en t s, t h ey h ave ade qua t e ly pl e ad e d f r aud
e v e n if t h e irp le a d in gw a s d e fic ie n t w ith r e g a r d to s c ie n te ru n d e rth e P S L R A

. Iti s t rue that com m on law fr au d cl ai m s are n otsu bj ectto the h ei gh t en ed

“ s tr o n gin fe r e n c e ” o f s c ie n te rs ta n d a r d im p o s e d b yth e P S L R A

. Dors ey v . Portf ol i o E qu i t i es, I

n c. , 5 4 0 F
. 3 d 3 3 3 , 3 4 1 ( 5 t h C i r . 2 0 0 8 )

. H o w e v e r , t h e c l a i ms a r e s till s u b je c t t o th e p le a d in gs ta n d a r d o f R u le 9 (b ). Id

. ( “Al t ho ugh t he P S L R A ’ s s t ri ct er s ci en t er requ i rem en td oes n ota pp l y t o stat e- l aw f rau d cl ai m s,N o. 08- 10414

19 R ul e 9 (b) neve r t hel es s i nco r por at es an el em entof s c i ent er . ” )

. Thi s c our thas
s ta te d , in th e co n te x t o f a s ta te la w s e c u r itie s fr a u d cla im , th a t:

In or d e r to a d e q u a te ly p lea d fra u d u len t in te n t, ‘ a p la in tiff m u s t s e t fo r th s p e c ific fa c ts t o s u p p o r t a n in fe r e n c e o f fr a u d .’
‘A l l eged fact s are suff i ci e n t to supp ortsuch a n i n ference i f t h ey ei t h er ( 1) show a defen d a n t’ s m ot ive t o com m i tsec u ri t i es f rau d or ( 2) i de nt i f

y c i r c um s t an ce s t hati ndi c at e c o ns c i o us b e hav i o ro n t he p a r t o f th e d e fe n d a n t.’ Herr m an n Hol d i ngs, 302 F. 3d at565 ( 5t h C i r . 2002) ( quot i ng L ov elac ev. Sof t w ar eSpe c t r um I

nc ., 7 8 F .3 d 1 0 1 5 , 1 0 1 8 (5 th C ir . 1 9 9 6 )). A p p ell a n ts con ten d tha t T X U an d W i l d er h a d su ffici en t m otive to f r aud ul e nt l y i nduc e i nve s t o r s t o pa r t i ci pa t e i n t he t e nde ro f fe rb y w i t hho l di ng i n f orm ati on abou tt h e di vi den d i n crease— n am el y t o com pl et e t h e t en der of fer an d i n crease t h e val u e of W i l der’ s personalst ock h ol di n gs. H ow ever, t h i s c ou rt has he l d t hatc e r t ai n m o t ive s a l l e ge d, e s pe c i al l y t ho s e uni ve r s alt o c o r po r at i o ns a n d th e iro ffic e r s , d o n o t s u ffic e to e s ta b lis h a n in fe r e n c e o f f r a u d u n d e rR u le 9 (b ). He r r m ann Hol di ngs , 302 F. 3d at 565–66 (hol di ng t hat al l egat i ons of del ay in o r d e rto b e n e fit th e r e fr o m w e r e in s u ffic ie n t); Meld erv. Mo rr is , 27 F. 3d 1097, 110 2 ( 5th C i r. 199 4) (h ol di n g t h at al l eged m ot ive t o success f u l l y bri n g t o f

rui t i on offerin gs a n d en h a n ce th e v a l u e of the secu ri ti es a t i ssu e w a s i n su ff i ci en t t o e s ta b lis h in fe r e n c e o f fr a u d ); Tu chm an v. D S CCom m c’ n s Corp . , 14 F. 3d 1061, 106 8 ( 5th C i r. 199 4) (h ol di n g t h at m ot ive t o i n f l ate s t ock p rice a n d va l u e of d e fen d a n ts in v e stm e n ts w a s in su ffi cie n t to e sta b li sh sc ien te r u n d e r R u le 9 (b )). I n l i ghtof

t hi s c our t ’ s pre c ede nt , t he m ot ive at t ri b ut ed t o Appel l ee s by A p p e lla n ts

— th e d e s ir e to co m p le te a fin a n c ia llys u c c e s s fu l te n d e ro ffe r— is in su ffi cie n t to es ta b li sh a n in fer e n ce of fra u d u n d e r R u le 9 (b ). In the altern a tive , the com p l a i n t also fa i l ed to plea d sp ecif i c fa cts dem ons t r at i ng “ c ons c i ous be havi or , ” w hi c h ac c or di ng t o our pre c ede ntem pl oys a n e v e n “m o r e s tr in g e n t s ta n d a r d ” t h a n th e m o tiv e re q u ir e m e n t. L ovelace, 78N o. 08- 10414

20 F. 3d at1018–1 9 & n . 2. App el l ant s c ont end t hatW i l derw as i n a pos i t i on t hat d em on st r at ed c l os e pe r so nali nvolvem entw i t h t he al l ege d f r aud suf

f i c i entto
s h o w th a t W ild e r m a d e a n y m is r e p r e s e n ta tio n c o n s c io u s ly
. A p p e lla n ts cit e th is
c o ur t ’ s o pi ni o n i n D orsey , in w h ic h w e h e ld th a t t h e d e fe n d a n ts , b yv ir tu e o f th e ir pl ac es as pre si dent and di r ec t or of t w o ver y sm al lbusi nes se s em pl oyi ng a t ot al of ei gh tw orkers i n w h i ch they ran al lday

- t o- da y operati on s, coul d be i m pu t ed
w i t h know l edge o f th e com pany’ s fai l ure t o m ake s ec ure d l oans . 540 F. 3d at 34 2– 43
. The fac t ualsi t uat i o n her e doe s no ta ppr o xi m at e t hati n D orsey . T h ere ar e no s pe c i alc i r c um s t anc e s t hatre qui r e an a s s um pt i o n o f W i l de r ’ s f

r aud ul e nt i n t e n t b ecau se of

hi s pl ace as C E O of T X U , a l arge com pa n y w i t h a com pl ex s ys t e m o f

m ana ge m e nta nd d e c i s i o n- m ak i ng. The fac t s pl e adb y Appe l l ant s do
no t de m o ns t r at e t hat W i l de r m ad e a ny c o ns c i o us m i s r e pr e s e nt at i o n c o nc e r ni ng t he divi de nd p o l i c y. Bec aus e Appe l l ant s fai l e d t o a de qua t e l y al l e ge f r aud ul e nt i nt e nta s r e qui r e d b y Rul e 9 (b) , t he d i st ri ctc o ur tdi d no te r ri n di s m i s s i ng t he
c la im fo rco m m o n la w fr a u d
. F o rth e fo r e g o in gre a s o n s , th e ju d g m e n t o f th e d is tr ic t c o u r t is A F F IR M E D
.