IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-10414

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

INCORPORATED; FLAHERTY & CRUMRINE PREFERRED INCOME

OPPORTUNITY FUND INCORPORATED; FLAHERTY &

CRUMRINE/CLAYMORE PREFERRED SECURITIES INCOME FUND

INCORPORATED; STAN HAIDUK

Plaintiffs-Appellants

v.

TXU CORP.; C. JOHN WILDER

Defendants-Appellees

Appeal from the United States District Court 

for the Northern District of Texas

Before KING, BENAVIDES, and CLEMENT, Circuit Judges.

FORTUNATO P. BENAVIDES, Circuit Judge:

Appellants, Flaherty & Crumrine Preferred Income Fund, Inc.; Flaherty

& Crumrine Preferred Income Opportunity Fund, Inc.; Flaherty &

Crumrine/Claymore Preferred Securities Income Fund, Inc. (collectively, “F&C”);

and Stan Haiduk (“Haiduk”), filed a securities fraud class action and individual

fraud claims against Appellees TXU Corporation (“TXU”) and its former CEO

John Wilder (“Wilder”) for allegedly making material misrepresentations and

omissions of fact in connection with a self-tender offer to purchase certain

United States Court of Appeals

Fifth Circuit

F I L E D

April 8, 2009

Charles R. Fulbruge III

Clerk
No. 08-10414

2

convertible TXU securities (the “tender offer”) in 2004. Specifically, Appellants

alleged that Appellees fraudulently misrepresented the timing and magnitude

of a planned stock repurchase program and dividend increase in order to induce

the Appellants to participate in the tender offer. The district court dismissed

Appellants’ fraud claims alleged under Sections 10(b) and 14(e) of the Securities

Exchange Act and SEC Rule 10b-5, as well as Appellants’ common law fraud

claims, for failure to state a claim under the heightened pleading standards

applicable to securities fraud claims. We affirm the judgment of the district

court. 

I. 

Appellants are three investment funds (F&C) and an individual plaintiff

(Haiduk), all of whom owned convertible TXU securities called TXU Corporate

Units (the “Corporate Units”) and TXU Income PRIDES (the “PRIDES”). Both

classes of securities were traded on the New York Stock Exchange and were

convertible into TXU common stock. 

Prior to the tender offer, Wilder, TXU’s CEO, had implemented a

three-phase restructuring program aimed at improving TXU’s business. On

May 18, 2004, approximately four months before the tender offer, TXU issued

a press release outlining its view of the company’s financial restructuring

program. The press release indicated that TXU did not anticipate a dividend

increase until 2006, when certain financial benchmarks were reached, but noted

that TXU’s Board of Directors (the “Board”) might consider other relevant factors

in determining when or if to authorize a dividend increase:

Upon reaching the targeted balance sheet strength and financial

flexibility, management would recommend that the Board of

Directors reevaluate the current dividend policy. At that time,

management expects it would recommend targeting annual common

stock dividends equal to a pay out of 100 percent of the earnings of

TXU’s electric delivery business. Of the free cash flow, management

would expect to return roughly 80 percent to shareholders in the
No. 08-10414

3

form of distributions or repurchases and to retain roughly 20

percent for long term growth initiatives. Assuming the execution of

the business initiatives and transactions described above, and

depending on market trends in commodity prices, management

expects that this capital allocation program will enable management

to recommend an increase of the dividend in 2006. In addition to

management’s recommendation, the Board of Directors may

consider other relevant factors in determining if and when to make

a change in the dividend policy. 

 On September 15, 2004, TXU announced that it was offering to purchase

up to 11,433,285 outstanding Corporate Units and up to 8,700,000 outstanding

PRIDES. Appellants collectively held 530,000 Corporate Units and 5,000

PRIDES prior to the tender offer. Investors holding the outstanding securities

had the option to tender their securities to TXU or retain them, and Appellants

were among the roughly 65% of investors who accepted the tender offer and sold

their securities back to TXU. The price offered for the securities in the tender

offer was $52.28 for each Corporate Unit and $52.39 for each PRIDE. The

tender offer purchase price was determined by applying a factor to the

twenty-day weighted average price of TXU common stock between September

20, 2004, and October 8, 2004. The tender price was higher than the market

price for the securities at the time of the tender offer. The offer itself (as well as

forms filed with the SEC and the associated press release) contained the

following language concerning the dividend policy:

TXU Corp.’s debt and capital management program is intended to

strengthen TXU Corp.’s balance sheet and financial flexibility. As

a part of its capital management and restructuring program and

considering current business and market conditions, TXU Corp.’s

management is evaluating whether it should recommend to the

TXU Corp. Board of Directors that they reevaluate TXU Corp.’s

current common stock dividend policy. TXU Corp. cannot predict

the outcome of management’s evaluation, when, if at all,

management would make a recommendation to the Board of

Directors to change the current common stock dividend policy, or
No. 08-10414

4

what management’s recommendation might be. In addition to any

recommendation from management, the Board of Directors may

consider other relevant factors in determining if and when to make

a change in TXU Corp.’s common stock dividend policy. 

TXU also announced its intent to repurchase up to 10 million shares of its

common stock, subject to market conditions and other factors. On September 28,

2004, CEO Wilder made a presentation in which he reiterated previous

representations that the dividend policy was under review and discussed TXU’s

capital allocation and growth strategy. 

 On October 12, 2004, just one day before the expiration of the offer, TXU

management gave a detailed financial plan to certain credit rating agencies for

the purpose of facilitating the agencies’ determinations of whether an increase

in TXU’s annual dividend would adversely affect the corporation’s credit rating.

On October 13, 2004, the final day of the tender offer, F&C tendered 425,000 of

its 525,000 Corporate Units to TXU for total proceeds of $22,219,000, and

Haiduk tendered 5,000 Corporate Units for total proceeds of $260,093.89 and

5,000 PRIDES for total proceeds of $261,103.88. 

On October 19, 2004, six days after the end of the tender offer period, TXU

management provided materials to the Board proposing a change in dividend

policy, and on October 21, 2004, management recommended a 350% increase of

the annual dividend on common stock and a 400% increase in the stock

repurchase program. In the interim between management’s provision of the

materials to the Board and the final recommendation, TXU management

received final reports from the credit rating agencies informing the corporation

that an increase in dividend payouts would not adversely affect its credit rating.

On October 22, 2004, the Board approved the dividend increase and the stock

repurchase program. On October 25, 2004, TXU publicly announced its plan to

increase the common stock dividend from $0.50 to $2.25 and to repurchase
No. 08-10414

 Section 14(e) of the Securities Exchange Act makes it unlawful: 1

for any person to make any untrue statement of a material fact or omit to state

any material fact necessary in order to make the statements made, in the light

of the circumstances under which they are made, not misleading, or to engage

in any fraudulent, deceptive, or manipulative acts or practices, in connection

with any tender offer or request or invitation for tenders, or any solicitation of

security holders in opposition to or in favor of any such offer, request, or

invitation. 

15 U.S.C. § 78n(e).

 Section 10(b) of the Exchange Act provides:

2

It shall be unlawful for any person, directly or indirectly, by the use of any

means or instrumentality of interstate commerce or of the mails, or of any

facility of any national securities exchange . . . (b) To use or employ, in

connection with the purchase or sale of any security registered on a national

securities exchange or any security not so registered, . . . any manipulative or

deceptive device or contrivance in contravention of such rules and regulations

as the [Securities and Exchange] Commission may prescribe as necessary or

appropriate in the public interest or for the protection of investors. 

5

approximately 50 million shares of TXU common stock. Immediately following

the announcement, the per-share value of TXU common stock jumped nearly

20%. The Corporate Units and the PRIDES experienced correlated increases in

value. 

On, September 6, 2005, Appellants filed their original class action

complaint in the district court, alleging that the Appellees violated federal

securities laws and intentionally defrauded Appellants and other similarly

situated holders of TXU securities by failing to inform those who participated in

the tender offer that a dividend increase and increased stock repurchase was

imminent. Appellants’ essential theory is that TXU and Wilder failed to inform

them of the impending dividend increase in order to induce Appellants to

participate in the tender offer before the value of their securities increased.

Appellants alleged three causes of action for fraud under the Securities

Exchange Act: (1) a violation of Section 14(e) ; (2) a violation of Section 10(b) 1 2
No. 08-10414

15 U.S.C. § 78j(b).

 SEC Rule 10b-5, promulgated pursuant to Section 10(b), provides:

3

It shall be unlawful for any person, directly or indirectly, by the use of any

means or instrumentality of interstate commerce, or of the mails or of any

facility of any national securities exchange, (a) To employ any device, scheme,

or artifice to defraud, (b) 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 light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would

operate as a fraud or deceit upon any person, in connection with the purchase

or sale of any security.

17 C.F.R. § 240.10b-5.

 Under Section 20(a), a person who exerts control over a person who violates any 4

provision of the Securities Exchange Act can be held jointly and severally liable with the

primary actor of the underlying securities law violation. 15 U.S.C. § 78t(a). Liability under

§20(a) requires the primary actor to be liable for the underlying violation, and here is premised

on the Section 10(b) or 14(e) violation. 

6

and Rule 10b-5 ; and (3) controlling person liability against Wilder under Section 3

20(a). Appellees filed a motion to dismiss all of the Appellants’ claims on 4

December 16, 2005, which was granted by the district court. Appellants

appealed to this court, but while the appeal was pending, the United States

Supreme Court issued its decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

551 U.S. 308, 127 S. Ct. 2499 (2007), which clarified the pleading standard for

scienter under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

In response to the Tellabs decision, and without addressing the merits of the

appeal, this court vacated the district court’s judgment and remanded the case

for further consideration in light of Tellabs. Flaherty & Crumrine Preferred

Income Fund Inc. v. TXU Corp., 242 F. App’x 253 (5th Cir. 2007). 

Appellants filed a second amended complaint on November 26, 2007,

restating their original claims and supplementing the complaint with the expert

report of Professor Linda Allen, Professor of Finance at the City University of

New York, and additional instances of alleged fraudulent misrepresentations.
No. 08-10414

7

Appellants also added individual non-class common law fraud claims under

Texas state law. Appellees again filed a motion to dismiss Appellants’ claims.

The district court dismissed the Appellants’ federal securities fraud claims on

the pleadings under Rule 12(b)(6) because the pleadings failed to give rise to a

strong inference of scienter under the standard articulated in Tellabs and

dismissed their common law fraud claim for failure to plead fraud with

particularity as required by Rule 9(b). The instant appeal followed. 

II.

A district court’s dismissal of federal securities law claims under Rule

12(b)(6) is reviewed de novo. Herrmann Holdings, Ltd. v. Lucent Tech. Inc., 302

F.3d 552, 557–58 (5th Cir. 2002); Cent. Laborers’ Pension Fund v. Integrated

Elec. Servs., Inc., 497 F.3d 546, 550 (5th Cir. 2007). A dismissal for failure to

state fraud with particularity as required by Rule 9(b) is a dismissal on the

pleadings for failure to state a claim, and is also reviewed de novo. Shushany

v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir. 1993). 

Rule 12(b)(6) authorizes dismissal of a complaint for “failure to state a

claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a

Rule 12(b)(6) motion, the plaintiff must plead ‘enough facts to state a claim to

relief that is plausible on its face.’” In re Katrina Canal Breaches Litigation, 495

F.3d 191, 205 (5th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S.

544, 570 (2007)). 

Rule 9(b) states that “in alleging fraud or mistake, a party must state with

particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P.

9(b). This Circuit’s precedent interprets Rule 9(b) strictly, requiring the plaintiff

to “specify the statements contended to be fraudulent, identify the speaker, state

when and where the statements were made, and explain why the statements

were fraudulent.” Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.

1997); Nathenson v. Zonagen, Inc., 267 F.3d 400, 412 (5th Cir. 2001).
No. 08-10414

8

In order to state a claim for fraud under Section 10(b) and Rule 10b-5 of

the Securities Exchange Act, a plaintiff must allege, in connection with the

purchase or sale of securities, (1) a misstatement or an omission (2) of a material

fact (3) made with scienter (4) on which the plaintiffs relied (5) that proximately

caused the plaintiff’s injury. R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th

Cir. 2005). The elements of a claim under Section 14(e), which applies to tender

offers, are identical to the Section 10(b)/Rule 10b-5 elements. Smallwood v.

Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974). 

The Private Securities Litigation Reform Act (“PSLRA”), which governs

federal securities fraud claims, requires that a plaintiff in a securities fraud case

must, for “each act or omission alleged” to be false or misleading, “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); see also Ind. Elec. Workers’

Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.

2008); Zonagen, 267 F.3d at 407 (“[A] plaintiff alleging a section 10(b)/Rule 10b-5

claim must now plead specific facts giving rise to a strong inference of scienter.”

(citations omitted)). The PSLRA also incorporates the Rule 9(b) requirements

into the pleading standard for federal securities fraud claims. Abrams v. Baker

Hughes Inc., 292 F.3d 424, 431 (5th Cir. 2002). Under the PSLRA, the court

considers whether all the facts and circumstances, taken together, give rise to

a strong inference of scienter. Id.; Zonagen, 267 F.3d at 425.

Scienter, in the context of securities fraud, is defined as “an intent to

deceive, manipulate, or defraud or that severe recklessness in which the danger

of misleading buyers or sellers is either known to the defendant or is so obvious

that the defendant must have been aware of it.” R2 Invs., 401 F.3d at 643; see

also Plotkin v. IP Axess Inc., 407 F.3d 690, 697 (5th Cir. 2005) (“[A] securities

fraud plaintiff must prove that the defendant either consciously

misbehaved . . . or was so severely reckless that it demonstrates that the
No. 08-10414

9

defendant must have been aware of the danger of misleading the investing

public.”). “Severe recklessness is limited to those highly unreasonable omissions

or misrepresentations that involve not merely simple or even inexcusable

negligence, but an extreme departure from the standards of ordinary care.” R2

Invs., 401 F.3d at 643 (quotation omitted). In Tellabs, the Supreme Court

clarified the standard for pleading a “strong inference” of scienter. Tellabs, 127

S. Ct. at 2509–10. This Circuit has recently interpreted Tellabs as requiring a

“three step approach to reviewing scienter allegations on a motion to dismiss a

federal securities fraud case pursuant to the PSLRA”:

First, the allegations must, as in federal pleadings generally, be

taken as true. Second, courts may consider documents incorporated

in the complaint by reference and matters subject to judicial notice.

The facts must be evaluated collectively, not in isolation, to

determine whether a strong inference of scienter has been pled.

Third, a court must take into account plausible inferences opposing

as well as supporting a strong inference of scienter. The inference

of scienter must ultimately be “cogent and compelling,” not merely

“reasonable” or “permissible.”

Ind. Elec., 537 F.3d at 533 (citing Tellabs, 127 S. Ct. at 2509–10). In addition,

“omissions and ambiguities count against inferring scienter, for plaintiffs must

‘state with particularity facts giving rise to a strong inference that the defendant

acted with the required state of mind.’” Tellabs, 127 S. Ct. at 2511 (citation

omitted). 

 Although we have stated that allegations of motive and opportunity

standing alone will not suffice to meet the scienter requirement, motive and

opportunity allegations may meaningfully enhance the strength of the inference

of scienter. Ind. Elec., 537 F.3d at 533 (citing Southland Sec. Corp. v. INSpire

Ins. Solutions, Inc., 365 F.3d 353, 368 (5th Cir. 2004)). We have rejected the

group pleading approach to scienter and instead look to the state of mind of the

individual corporate official or officials “who make or issue the statement (or
No. 08-10414

10

order or approve it or its making or issuance, or who furnish information or

language for inclusion therein, or the like) rather than generally to the collective

knowledge of all the corporation’s officers and employees acquired in the course

of their employment.” Id. 

III.

Appellants point to several statements made by either TXU or Wilder

which they assert violate federal securities laws. For each of these statements,

we must evaluate the scienter allegations pertinent to each and determine

whether the facts, evaluated collectively, support a “cogent and compelling”

inference that Appellees acted with intent to deceive, manipulate, or defraud or

acted with severe recklessness. See Ind. Elec., 537 F.3d at 533–34. In

evaluating whether scienter has been established, we will consider the

complaint, documents incorporated in the complaint by reference, and matters

subject to judicial notice. Id. This evaluation must take into account plausible

inferences opposing as well as supporting a strong inference of scienter. Id.

Appellants urge that, in accepting the tender offer, they relied on the

representation originally stated in TXU’s May 2004 press release indicating that

TXU did not anticipate a dividend increase until 2006, when certain financial

benchmarks were reached. Appellants do not clearly delineate between whether

they allege an affirmative misrepresentation or an omission. In their second

amended complaint, Appellants pointed to various statements made after the

May 2004 press release which they allege do not contain a sufficient disclosure

of the impending dividend increase or affirmatively misstate that no dividend

increase will occur until after certain financial benchmarks are reached. 

The first of these statements, issued in the tender offer materials on

September 15, 2004, stated:

As a part of its capital management and restructuring program and

considering current business and market conditions, TXU Corp.’s
No. 08-10414

 This presentation was incorporated into a Form 8-K filed with the SEC on September 5

28, 2004. 

11

management is evaluating whether it should recommend to the

TXU Corp. Board of Directors that they reevaluate TXU Corp.’s

current common stock dividend policy. TXU Corp. cannot predict

the outcome of management’s evaluation, when, if at all,

management would make a recommendation to the Board of

Directors to change the current common stock dividend policy, or

what management’s recommendation might be. In addition to any

recommendation from management, the Board of Directors may

consider other relevant factors in determining if and when to make

a change in TXU Corp.’s common stock dividend policy. 

Appellants contend that this statement is misleading because, although it does

state that the dividend policy is under review, it does not sufficiently disclose the

alleged “steps taken to increase the TXU dividend” upon completion of the

tender offer. 

The second statement that Appellants point to was made by Wilder at the

Merrill Lynch Global Power & Gas Leaders Conference on September 28, 2004,

during the tender offer period. Wilder presented a power point presentation, 5

which included a slide that described TXU’s capital allocation policy. The slide

stated that the “dividend payout” was “under review.” The statement concerning

the dividend payout was contained in a flow chart and was preceded by a

statement that “debt reduction” was to continue until certain financial goals had

been met. An arrow pointing toward the “dividend payout” section flowed from

the “debt reduction” section of the chart. Appellants contend that this flow chart

indicated that the “dividend payout” step would not take place until the “debt

reduction” goals had been met. Appellants contend that at the time Wilder made

this statement, he knew (1) that the financial benchmarks would not be met

before the dividend was increased and (2) that significant steps had been taken

to increase the dividend which were not communicated sufficiently by the
No. 08-10414

 Appellants contend that the statements in the Poole letter should not be considered 6

when evaluating opposing inferences. Appellants fail to acknowledge that because they

attached the letter to their complaint (not to mention referenced the letter in the report of

their own expert), it is relevant for the purposes of evaluating a motion to dismiss. See

Tellabs, 127 S. Ct. at 2509 (stating that, in the context of a motion to dismiss, courts may

consider documents incorporated in the complaint by reference when evaluating whether

scienter has been established). 

12

statement that the dividend policy was “under review.” Appellants also contend

that Appellees’ failure to “retract” the May 2004 statement concerning the

dividend policy violated federal securities’ laws. 

In addition to the facts pleaded in the their complaint, Appellants

reference statements made in a January 18, 2005 letter (appended to their

complaint) written by then TXU Associate General Counsel David Poole (the

“Poole letter”) and conclusions in an expert report prepared by Professor Linda 6

Allen (the “Allen Report”) which Appellants claim provides evidence that at the

time of the tender offer, Appellees were fully aware of the impending dividend

increase. 

In the Poole letter, TXU’s counsel stated that management had been

contemplating a change in dividend policy since August 2004, but did not make

a final decision until after the close of the tender offer on October 13. The Poole

letter also asserted that TXU’s management would not make a decision

concerning the dividend policy until they had received information from certain

credit rating agencies, evaluating the impact of changes in dividend policy and

capitalization on the credit ratings of debt securities of TXU Corp. and its

subsidiaries. Appellants contend that this explanation, advanced here by the

Appellees, is implausible, pointing to conclusions made in the Allen Report. By

comparing the TXU restructuring and dividend policy changes with those of

other companies and evaluating the dates put forth in the Poole letter, the Allen

Report concludes that—despite the fact that the agencies had not given any

official evaluation of the dividend increase—TXU senior management likely
No. 08-10414

13

already knew during the tender offer period that the credit rating agencies

would not downgrade its issuer rating based on the common share dividend

increase. The Allen Report also concludes, based on Allen’s evaluation of the

general credit rating process of major credit rating agencies, that the credit

agency review could not be completed between October 12, 2004 (the date on

which Appellees furnished the credit agencies with paperwork concerning the

proposed dividend increase) and October 19, 2004, two days before management

recommended the increase. 

Although the timing of the dividend increase, which was recommended by

TXU management just eight days after the close of the tender offer, is suspect,

Appellants have not provided facts sufficient to support a “cogent and

compelling” inference that Appellees made any statements intentionally or

recklessly to mislead TXU’s investors. In fact, it is not clear that Appellees ever

issued a materially misleading statement or omission of fact concerning the

dividend policy. The close proximity of the dividend increase to the end of the

tender offer, though it provides some support for an inference of scienter, is not

sufficient, without more, to establish a strong inference of the requisite intent.

See In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 555–56 (D. Del. 2002),

aff’d, 357 F.3d 322 (3d Cir. 2004) (holding that the fact that the offeror company

disclosed two successful transactions within weeks after tender offer was

completed does not establish that company had knowledge of these transactions

at time tender offer was made). 

Appellants contend that they relied on the May 2004 press release which

stated that a dividend increase was not likely until 2006 when certain financial

benchmarks had been made, but reserved the right of the management to

consider other factors in determining if and when to change the dividend policy.

Appellants have not presented any evidence of scienter with regard to this

statement. There is no evidence that at the time this statement was made in
No. 08-10414

14

May 2004, TXU management, specifically Wilder, was aware or should have

been aware that TXU planned to increase the dividend prior to the financial

benchmarks being reached. 

The second statement pointed to by Appellants, made at the start of the

tender offer period, was that the dividend policy was “under review.” Appellants

contend that this statement was made to mislead investors because at the time

it was made, substantial steps had been taken toward a dividend increase which

warranted a more substantial disclosure or a “retraction” of the May 2004 press

release statements. Again, Appellants’ evidence does not support a strong

inference that, on the date this statement was issued, Appellees knew and were

at least reckless in failing to disclose that there was an impending dividend

increase. Although the Allen Report provides some support for the notion that

TXU’s management likely made preparations for the dividend increase before

the close of the tender offer, such preparations do not support a cogent and

compelling inference that Wilder or other TXU management were intentionally

or recklessly misleading investors. In fact, the statement that the dividend

policy was “under review” conveyed that TXU had taken some steps in

evaluating a change in the dividend policy.

The precedent of this court does not support the notion that TXU’s

disclosure that its policy was “under review” was insufficient, let alone

fraudulent, under federal securities laws. TXU had disclosed that its dividend

policy was “under review,” but that it could not predict if, or when, management

would ultimately recommend a dividend increase. TXU management did not

recommend the dividend increase until sometime after October 19, 2004 and the

Board did not actually approve a dividend increase until October 22, 2004. Both

of these dates fell after the expiration of tender offer on October 13, 2004. This

court’s precedent advises that a “middle course” is proper when making

disclosures concerning future plans which have not been fully determined in the
No. 08-10414

15

context of a tender offer. Susquehanna Corp. v. Pan Am. Sulphur Co., 423 F.2d

1075, 1085–86 (5th Cir. 1970) (holding that a tender offeror “is not required to

make predictions of future behavior, however tentatively phrased, which may

cause the offeree or the public investor to rely on them unjustifiably”). TXU

could not have disclosed that a dividend increase was likely during the tender

offer without running a risk of liability if the dividend increase was not

ultimately approved. See id. The statement that the dividend policy was “under

review” appears to be a statement that, although vague, accurately represents

the state of the dividend policy during the tender offer period. Furthermore,

given that the May 2004 press release stated that the Board could consider

factors other than the outlined financial benchmarks when determining whether

to change the dividend policy, the statement in the tender offer materials that

the dividend policy was currently “under review” was entirely consistent with

the press release, and obviated the need to retract the May 2004

representations. 

The statement made by Wilder during his presentation provides a closer

question as to whether the Appellants have established scienter. Appellants

contend that Wilder’s presentation reiterated the structure stated in the May

2004 press release, conveying that a dividend increase was contingent upon the

completion of certain financial benchmarks. In order to satisfy the scienter

requirement, Appellants must establish that Wilder made this representation

knowingly or recklessly in order to mislead investors. 

In the first instance, there is a question as to whether Wilder’s

presentation was a misstatement. Although the phrase “dividend payout” is

contained in a flow chart which is preceded by the “debt reduction” step, the

dividend payout step does affirmatively state that it is presently “under review,”
No. 08-10414

 In addition, the chart does not ever explicitly state that the various steps are 7

dependent upon one another such that the dividend policy could not be evaluated until the

other capital allocation goals had been achieved. 

16

consistent with TXU’s prior disclosures. Even assuming that the presentation 7

was a misleading statement concerning the dividend policy, Appellants have not

provided evidence to support a strong inference of scienter. Appellants again

point to the Allen report, which provides some circumstantial evidence that

Wilder may have known at the time of the presentation that a dividend increase

was imminent. Appellants also point to Wilder’s position in TXU, and assert

that as CEO he must have been present during Board discussions of a possible

dividend increase. Appellants also contend that because Wilder was a TXU

stockholder, he stood to benefit from the repurchase of Appellants’ securities at

a low price. This court, in applying Tellabs and the pleading standards of the

PSLRA, has discounted similar types of evidence against company executives as

insufficient to establish scienter. Ind. Elec., 537 F.3d at 535 (holding that

“pleading[s] of scienter may not rest on the inference that defendants must have

been aware of the misstatement based on their positions with the company”); see

also id. at 543–44 (holding that monetary rewards for executives tied to company

performance are standard and “can hardly be the basis on which an allegation

of fraud is predicated”). 

Even assuming Wilder was aware that the Board was contemplating a

dividend increase, this knowledge alone would not suffice to establish that

Wilder intended to deceive investors or was reckless in revealing only that the

dividend policy was under review at the time of the tender offer. Shivangi v.

Dean Witter Reynolds, Inc., 825 F.2d 885, 889 (5th Cir.1987) (holding that

“knowledge of omitted facts does not itself establish scienter”). These motive

allegations, in conjunction with the conclusions of the Allen report and the

timing of the dividend increase, provide a basis for some inference of fraud, but
No. 08-10414

 Appellants’ claim against Wilder as a controlling person under Section 20(a) of the

8

Securities Exchange Act of 1934 “is secondary only and cannot exist in the absence of a

17

this inference is merely permissible, and does not rise to the “cogent and

compelling” level required by Tellabs. Even if Wilder was negligent in

representing that the dividend payout was contingent upon the completion of

certain debt reduction goals, negligence does not suffice for scienter purposes.

Ind. Elec., 537 F.3d at 533 (noting that “simple or even inexcusable negligence”

does not constitute the requisite state of mind for a federal securities case). 

Furthermore, as this court stated in Indiana Electric, under Tellabs, we

are obligated to consider inferences opposing the allegations of fraud. Id. Here,

it can be inferred that Appellees had not made a final decision concerning a

change in the dividend policy during the tender offer period, and were thus

truthfully stating that the policy was under review. This constitutes a plausible

nonculpable explanation of Appellees’ actions. The credit rating agencies’

evaluation of the proposed dividend increase—according to the dates in the Poole

letter, which was appended to Appellants complaint, and the dates referenced

in Appellants’ expert report—was not furnished to TXU until after the end of the

tender offer period. In addition, TXU management did not recommend a

dividend increase, nor did the Board approve one, until after the close of the

tender offer. Given that TXU and Wilder did disclose that the dividend policy

was “under review” during the tender offer period, the inference of nonfraudulent intent weighs in favor of the Appellees. Although it is a close

question, the facts alleged support at most only a permissible inference of

scienter. Taking into account all of the facts in the aggregate, as well as

inferences opposing fraudulent intent, Appellants have failed to raise a strong

inference that TXU, and specifically Wilder, acted with the intent to deceive,

manipulate, or defraud or acted with severe recklessness in making statements

concerning the dividend policy.

8
No. 08-10414

primary violation.” Southland, 365 F.3d at 383. Because we have found the pleadings of

Sections 14(e), 10(b), and Rule 10b-5 liability inadequate, it must be dismissed.

18

IV.

Appellants also alleged a claim for common law fraud under Texas law in

their amended complaint. The common law fraud claim was based on the same

alleged representations and/or omissions underlying Appellants’ federal

securities claims. The elements of common law fraud under Texas law are (1)

a material misrepresentation; (2) that is false; (3) made with knowledge of its

falsity or recklessness as to its truth; (4) made with the intention that it should

be acted upon by another party; (5) relied upon by the other party, and (6)

causing injury. Jag Media Holdings Inc. v. A.G. Edwards & Sons Inc., 387 F.

Supp. 2d 691, 709 (S.D. Tex. 2004); Ernst & Young, L.L.P. v. Pac. Mut. Life Ins.

Co., 51 S.W.3d 573, 577 (Tex. 2001). 

Appellants contend that the claim should not have been dismissed

because the district court found that the second amended complaint adequately

specifies with particularity which statements contain the alleged

misrepresentation and omissions, when and where those statements were made,

why the Appellants believe them to be misleading, and that the alleged

misstatements and omissions were material to the decision to participate in the

tender offer. Appellants contend that because common law fraud claims are not

subject to the PSLRA scienter requirements, they have adequately pleaded fraud

even if their pleading was deficient with regard to scienter under the PSLRA. 

It is true that common law fraud claims are not subject to the heightened

“strong inference” of scienter standard imposed by the PSLRA. Dorsey v.

Portfolio Equities, Inc., 540 F.3d 333, 341 (5th Cir. 2008). However, the claims

are still subject to the pleading standard of Rule 9(b). Id. (“Although the

PSLRA’s stricter scienter requirement does not apply to state-law fraud claims,
No. 08-10414

19

Rule 9(b) nevertheless incorporates an element of scienter.”). This court has

stated, in the context of a state law securities fraud claim, that: 

In order to adequately plead fraudulent intent, ‘a plaintiff

must set forth specific facts to support an inference of fraud.’

‘Alleged facts are sufficient to support such an inference if they

either (1) show a defendant’s motive to commit securities fraud or

(2) identify circumstances that indicate conscious behavior on the

part of the defendant.’

Herrmann Holdings, 302 F.3d at 565 (5th Cir. 2002) (quoting Lovelace v.

Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996)). 

Appellants contend that TXU and Wilder had sufficient motive to

fraudulently induce investors to participate in the tender offer by withholding

information about the dividend increase—namely to complete the tender offer

and increase the value of Wilder’s personal stock holdings. However, this court

has held that certain motives alleged, especially those universal to corporations

and their officers, do not suffice to establish an inference of fraud under Rule

9(b). Herrmann Holdings, 302 F.3d at 565–66 (holding that allegations of delay

in order to benefit therefrom were insufficient); Melder v. Morris, 27 F.3d 1097,

1102 (5th Cir. 1994) (holding that alleged motive to successfully bring to fruition

offerings and enhance the value of the securities at issue was insufficient to

establish inference of fraud); Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061,

1068 (5th Cir. 1994) (holding that motive to inflate stock price and value of

defendants investments was insufficient to establish scienter under Rule 9(b)).

In light of this court’s precedent, the motive attributed to Appellees by

Appellants—the desire to complete a financially successful tender offer—is

insufficient to establish an inference of fraud under Rule 9(b).

In the alternative, the complaint also failed to plead specific facts

demonstrating “conscious behavior,” which according to our precedent employs

an even “more stringent standard” than the motive requirement. Lovelace, 78
No. 08-10414

20

F.3d at 1018–19 & n.2. Appellants contend that Wilder was in a position that

demonstrated close personal involvement with the alleged fraud sufficient to

show that Wilder made any misrepresentation consciously. Appellants cite this

court’s opinion in Dorsey, in which we held that the defendants, by virtue of their

places as president and director of two very small businesses employing a total

of eight workers in which they ran all day-to-day operations, could be imputed

with knowledge of the company’s failure to make secured loans. 540 F.3d at

342–43. The factual situation here does not approximate that in Dorsey. There

are no special circumstances that require an assumption of Wilder’s fraudulent

intent because of his place as CEO of TXU, a large company with a complex

system of management and decision-making. The facts plead by Appellants do

not demonstrate that Wilder made any conscious misrepresentation concerning

the dividend policy. Because Appellants failed to adequately allege fraudulent

intent as required by Rule 9(b), the district court did not err in dismissing the

claim for common law fraud. 

For the foregoing reasons, the judgment of the district court is

AFFIRMED.