1 TXU Corporation was purchased in September of 2007, and though the

company has since changed its name to Energy Future Holdings Corp., the court will

refer to the defendant corporation as “TXU” throughout.

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

FLAHERTY & CRUMRINE

PREFERRED INCOME FUND

INCORPORATED, ET AL.,

Plaintiffs,

VS.

TXU CORP. and C. JOHN WILDER,

Defendants.

)

)

)

) CIVIL ACTION NO.

)

) 3:05-CV-1784-G

)

) ECF

)

)

)

MEMORANDUM OPINION AND ORDER

Before the court are the following motions: (1) the motion of the defendants,

TXU Corporation (“TXU”)1 and C. John Wilder (“Wilder”) (collectively, “the

defendants”), to dismiss the plaintiffs’ second amended class action complaint;

(2) the motion of the defendants to strike the report of Linda Allen; (3) the motion

of the plaintiffs, Flaherty & Crumrine Preferred Income Fund, Inc., Flaherty &

Crumrine Preferred Income Opportunity Fund, Inc., Flaherty & Crumrine/Claymore

Preferred Securities Income Fund, Inc., and Stan Haiduk (collectively, “the
2 The plaintiffs seek a hearing on the defendants’ motion to dismiss

pursuant to local rule 7.1(g). See Docket Entry # 54. However, the court does not

find that an evidentiary hearing would be helpful. Therefore, the motion for hearing

is denied.

- 2 -

plaintiffs”), for a hearing;2 (4) the defendants’ motion to dismiss count 4 of the

plaintiffs’ second amended class action complaint; and (5) the plaintiffs’ motion to

strike the defendants’ motion to dismiss count 4 of the second amended complaint. 

For the reasons discussed below, the motion of the defendants to dismiss the

plaintiffs’ second amended complaint is granted, the motion to strike the report of

Linda Allen is denied, the motion for hearing is denied, the motion to dismiss count 4

of the plaintiffs’ complaint is granted, and the plaintiffs’ motion to strike is denied.

I. BACKGROUND

The plaintiffs originally filed this suit on September 6, 2005. Plaintiffs’

Original Class Action Complaint (“Original Complaint”); Docket Entry # 1. After

the plaintiffs amended their complaint on November 28, 2005, the defendants filed

their first motion to dismiss on December 16, 2005. See Docket Entry # 21. On

August 30, 2006, this court granted the defendants’ motion to dismiss, and the

plaintiffs appealed to the Fifth Circuit Court of Appeals. See Docket Entry #33;

Docket Entry # 35.

While the appeal was pending, the United States Supreme Court issued its

decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., U.S. , 127 S.Ct. 2499

(2007), which clarified the pleading standard for scienter under the Private Securities
3 The plaintiffs erroneously stated in their response that the Fifth Circuit

reversed this court’s prior decision. See Plaintiffs’ Opposition to Defendants’ Motion

to Dismiss Second Amended Complaint at 2.

- 3 -

Litigation Reform Act (“PSLRA”). In response to the Tellabs decision, and without

addressing the merits of the plaintiffs’ appeal, the Fifth Circuit vacated3

 this court’s

judgment and remanded the case for further consideration in light of Tellabs. See

generally Flaherty & Crumrine Preferred Income Fund Inc. v. TXU Corp., 242 Fed. Appx.

253 (5th Cir. 2007).

The plaintiffs then filed a second amended complaint on November 26, 2007,

for the most part restating the same facts they initially alleged, though supplementing

the complaint with the expert report of Linda Allen (“Allen report”) and additional

instances of alleged fraudulent misrepresentations. See generally Plaintiffs’ Second

Amended Complaint (“Second Amended Complaint”). On December 14, 2007, the

defendants filed a motion to dismiss, as well as a motion to strike the Allen report. 

See Defendants’ Motion to Dismiss Amended Complaint in Light of Tellabs and to

Strike Report of Linda Allen and Brief in Support (“Motion to Dismiss”). Over a

month later, on January 29, 2008, the defendants filed an additional motion to

dismiss the plaintiffs’ common law fraud claim. See Defendants’ Motion to Dismiss

Count Four of Plaintiff’s [sic] Amended Complaint (Common-Law Fraud) or for

Judgment on the Pleadings and Brief in Support (“Second Motion to Dismiss”). 

Finally, the plaintiffs moved to strike the defendants’ second motion to dismiss. See
4 Section 14(e), as amended by the Williams Act of 1968, makes it

unlawful 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.” Second Amended

Complaint ¶ 132 (quoting 15 U.S.C. § 78n(e)).

5 Rule 10b-5, promulgated to facilitate the enforcement of Section 10(b),

makes it illegal for any person “[t]o make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make the statements made, in

light of the circumstances under which they were made, not misleading . . .” Second

Amended Complaint ¶ 136 (quoting 17 C.F.R. § 240.10b-5).

6 A person who exerts control over a person who violates any provision of

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

violator. Second Amended Complaint ¶ 139; 15 U.S.C. § 78t(a). Controlling person

liability under Section 20(a) requires an underlying violation by the controlled

person; thus, if the case against the corporate defendant is dismissed, the case against

Wilder must also be dismissed. Southland Securities Corporation v. INSpire Insurance

Solutions Inc., 365 F.3d 353, 383-84 (5th Cir. 2004); In re Enron Corporation Securities,

Derivative & “ERISA” Litigation, 439 F. Supp. 2d 692, 695 (S.D. Tex. 2006).

- 4 -

Plaintiffs’ Amended Motion to Strike Defendants’ Second Motion to Dismiss, and

Alternative Motion for Enlargement of Time to Respond (“Plaintiffs’ Motion to

Strike”). 

In the second amended complaint, the plaintiffs once again allege three causes

of action under the Securities Exchange Act: (1) violation of Section 14(e);4

(2) violation of Section 10(b) and Rule 10b-5;5 and (3) controlling person liability

against Wilder, TXU’s chief executive officer, under Section 20(a).6 Second

Amended Complaint ¶¶ 131-141. These are all claims of fraud. Additionally, and in
7 Two types of convertible securities were involved in the underlying

transaction: (1) corporate units, which were slated for conversion to common stock

on November 16, 2004, and November 16, 2005, and (2) Income PRIDES, which

were slated for conversion on May 16, 2006. Second Amended Complaint ¶¶ 23-25. 

Because both types of securities would eventually convert to common stock, their

value on the secondary market was closely tied to the price of TXU’s common stock. 

Id. ¶ 26.

- 5 -

the alternative, the plaintiffs have alleged a fourth cause of action for common law

fraud. Id. ¶¶ 142-148. 

Specifically, the plaintiffs allege that the defendants fraudulently

misrepresented the temporal proximity and magnitude of a planned stock repurchase

program and dividend increase to induce the plaintiffs to participate in a voluntary

tender offer to purchase certain convertible securities.7

 Id. ¶ 1.

The concept and design of the tender offer emerged out of Wilder’s “Three

Phase Restructuring Program.” Id. ¶ 35. The goal of the program was to strengthen

TXU’s balance sheet and increase the corporation’s financial flexibility. Id. ¶ 38. One

prong of the program called for the removal of the convertible securities from the

market so as to allow TXU to avoid issuing approximately 36 million additional

shares of common stock on the securities’ conversion dates. Id. 

On May 18, 2004, months before the tender offer, TXU issued a press release

outlining its view of the company’s financial restructuring program. See Press Release,

attached to Second Amended Complaint as Exhibit E. TXU set forth certain financial

benchmarks and stated that:
- 6 -

“[u]pon reaching the targeted balance sheet strength and

financial flexibility, management would recommend that

the Board of Directors reevaluate the current dividend

policy. . . . 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.” 

Id. at 111.

The press release indicated that TXU did not anticipate a dividend increase in

2004 or 2005, but noted that the Board might consider other relevant factors. Id.

Not long after the May press release, TXU began discussions with a financial advisor

concerning the common stock dividend and scheduled a board meeting for October

2004 to discuss the possibility of altering the dividend policy. Id. ¶ 48. 

On September 15, 2004, TXU announced an issuer tender offer for up to

11,433,285 outstanding corporate units and 8,700,000 outstanding Income PRIDES. 

Id. ¶ 54. The corporation determined the offering price for each security by applying

a factor to the 20-day weighted average price of TXU common stock between

September 20, 2004 and October 8, 2004. Id. ¶ 56. This resulted in offering prices

that were greater than the securities’ market value. Id. ¶ 75. Those prices were

announced on October 11, 2004, and the offer was set to expire on October 13,

2004. Id. ¶ 75; Press Release, attached to Second Amended Complaint as Exhibit L.
8 On September 28, 2004, Wilder gave a presentation (the “Wilder

Representation”) at a conference where he indicated that TXU’s dividend policy was

under review. Id. ¶¶ 66-67; Merrill Lynch Global Power & Gas Leaders Conference:

 TXU at 219, attached to Second Amended Complaint as Exhibit K. The plaintiffs

allege that, like the language in the offer, Wilder’s presentation understated and

misrepresented the likelihood and scale of the dividend increase and stock repurchase. 

Second Amended Complaint ¶¶ 69-72. 

- 7 -

The offer itself (as well as forms filed with the SEC and the associated press

release) contained the following language: 

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

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. 

Id. ¶ 59 (emphasis in original). The plaintiffs allege that this language is misleading

because the defendants must have known at the time the statements were made that

a dividend increase was imminent.8

 Id. Furthermore, the plaintiffs allege that the

defendants intentionally released the misleading information into the market so as to

suppress prices during the offering period, which allowed them to reduce their

outstanding debt more cheaply than if the market had been aware of the “imminent”

dividend increase. Id. ¶ 114.
- 8 -

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. Id. ¶ 76. The

tender offer then closed on October 13, 2004, but not before the plaintiffs had

tendered approximately 430,000 corporate units and 5,000 PRIDES at the proposed

tender offer prices. Id. ¶¶ 77-79. However, approximately 35% of the tender offerees

declined to participate in the offer. See Poole Letter, attached to Second Amended

Complaint as Exhibit B, at 62. 

TXU experienced a strong third quarter in 2004. See generally TXU’s October

22, 2004 Form 8-K, attached to Motion to Dismiss as Exhibit 1. Additionally, TXU

completed several significant corporate transactions during the period from May to

October of 2004, including divestitures totaling $4.3 billion in cash proceeds. Id.;

Allen Report, attached to Second Amended Complaint as Exhibit A, at 19-20. On

October 19, 2004, TXU management provided materials to the Board of Directors

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. Second Amended Complaint ¶¶ 81, 83. 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
- 9 -

agencies informing the corporation that an increase in dividend payouts would not

adversely affect its credit rating. Id. ¶ 82. Accordingly, on October 22, 2004, the

board approved the dividend increase and the stock repurchase program. Id. ¶ 87. 

On October 25, 2004, TXU publicly announced its plan to increase the

common stock dividend from $0.50 to $2.25 and to repurchase approximately 50

million shares of TXU common stock. Id. ¶ 89. Immediately following the

announcement, the per-share value of TXU common stock jumped nearly 20%. Id.

¶ 90. The corporate units and the PRIDES experienced a lesser but similar increase

in value. Id. The plaintiffs allege that the defendants intentionally defrauded them

and other similarly situated holders of TXU securities by failing to inform those who

participated in the tender offer that a dividend increase and stock repurchase was

imminent. Id. ¶¶ 70-72.

II. ANALYSIS

A. Motion to Dismiss

1. 12(b)(6) Standard

“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, 

 U.S. , 127 S.Ct. 1955, 1974 (2007)). “While a complaint attacked by a Rule

12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s
- 10 -

obligation to provide the grounds of his entitlement to relief requires more than labels

and conclusions, and a formulaic recitation of the elements of a cause of action will

not do.” Bell Atlantic, 127 S.Ct. at 1964-65 (citations, quotations marks, and

brackets omitted). “Factual allegations must be enough to raise a right to relief above

the speculative level, on the assumption that all the allegations in the complaint are

true (even if doubtful in fact).” Katrina Canal, 495 F.3d at 205 (internal quotation

marks omitted) (quoting Bell Atlantic, 127 S.Ct. at 1965). “The court accepts all wellpleaded facts as true, viewing them in the light most favorable to the plaintiff.” Id.

(internal quotation marks omitted) (quoting Martin K. Eby Construction Company v.

Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)).

To avoid dismissal, fraud claims under Section 10(b) and 14(e) of the

Exchange Act must also satisfy the heightened pleading requirements imposed by

Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) states that “[i]n alleging

fraud or mistake, a party must state with particularity the circumstances constituting

fraud or mistake.” FED. R. CIV. P. 9(b). The Fifth Circuit 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 Technologies, Inc., 112 F.3d

175, 177 (5th Cir.), cert. denied, 522 U.S. 966 (1997); Nathenson v. Zonagen Inc., 267

F.3d 400, 412 (5th Cir. 2001). 
9 Scienter has been defined by the Supreme Court to be “a mental state

embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425

U.S. 185, 193 n. 12 (1976). The Fifth Circuit has held that scienter can be shown by

“either intent or severe recklessness.” See Financial Acquisition Partners LP v. Blackwell,

440 F.3d 278, 287 (5th Cir. 2006) (emphasis in original). 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, . . . present[ing] a danger of misleading buyers or sellers

which is either known to the defendant or is so obvious that the defendant must have

been aware of it.” Central Laborers’ Pension Fund v. Integrated Electrical Services Inc., 497

F.3d 546, 551 (5th Cir. 2007). 

- 11 -

Additionally, beyond the requirements of Rule 9(b), the PSLRA requires that a

plaintiff in a securities fraud case “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). The recent Supreme Court case of Tellabs, Inc. v. Makor Issues & Rights,

Ltd., U.S. , 127 S.Ct. 2499 (2007), articulated the proper pleading

requirements for establishing a strong inference of scienter.9

 In Tellabs, the Supreme

Court held that “[t]o qualify as ‘strong’ within the intendment of § 21D (b)(2), . . .

an inference of scienter must be more than merely plausible or reasonable -- it must

be cogent and at least as compelling as any opposing inference of non-fraudulent

intent.” Id. at 2504-05. The analysis is comparative in nature, and the court must

consider “competing inferences rationally drawn from the facts alleged.” Id. at 2504. 

2. The Plaintiffs’ Claims under the Securities Exchange Act

To state a section 10(b)/Rule 10b-5 claim, a plaintiff must allege, in connection

with the purchase or sale of securities, (1) a misstatement or an omission (2) of a
10 These misrepresentations and omissions are denominated in the second

amended complaint as “The Dividend Policy Statement,” the “Stock Repurchase

Statement,” the “Dividend Omission,” the “Buyback Omission,” the “Dividend

Representation” and/or the “Wilder Representation.” Second Amended Complaint

¶¶ 133, 137. 

- 12 -

material fact (3) made with scienter (4) on which the plaintiff relied (5) that

proximately caused the plaintiff injury. Abrams v. Baker Hughes Inc., 292 F.3d 424,

430 (5th Cir. 2002); R2 Investments LDC v. Phillips, 401 F.3d 638, 641 (5th Cir.

2005). The elements of a section 14(e) claim are “identical” to the section

10(b)/Rule 10b-5 elements. Smallwood v. Pearl Brewing Company, 489 F.2d 579, 605

(5th Cir.), cert. denied, 419 U.S. 873 (1974). The aforementioned heightened

pleading standards of Rule 9(b) and the PSLRA apply equally to both claims. See

Hollywood Casino Corporation v. Simmons, No. 3:02-CV-0325-M, 2002 WL 1610598 at

*2 (N.D. Tex. July 18, 2002). Accordingly, the court will address both claims

simultaneously.

In their second amended complaint, the plaintiffs allege a total of six specific

instances where the defendants either affirmatively misrepresented the status of the

dividend increase and repurchase program or made material omissions pertinent

thereto.10 The second amended complaint adequately specifies with particularity

which statements contain the alleged misrepresentation and omissions, when and

where those statements were made, and why the plaintiffs believe them to be

misleading. See Second Amended Complaint ¶¶ 35-73. Furthermore, the plaintiffs
11 The plaintiffs contend that the Allen report buttresses the argument that

the defendants acted with scienter. After reviewing the report, however, the court

finds that professor Allen’s assessment of the facts does little to establish a strong

inference of scienter. 

- 13 -

have adequately demonstrated that the alleged misstatements and omissions were

material to the plaintiffs’ decision to participate in the tender offer. Second Amended

Complaint ¶¶ 60-63. 

Additionally, the plaintiffs have offered the expert report of professor Linda

Allen. The defendants have moved to strike the report on the basis that it is

“insufficient” under the standard set forth in Financial Acquisition Partners LP v.

Blackwell, 440 F.3d 278, 285-86 (5th Cir. 2006), which held that “opinions cannot

substitute for facts under the PSLRA.” See Motion to Dismiss at 16. The court need

not address the motion to strike, however, because the content of the Allen report

does not affect the ultimate disposition of the case, and as a result the defendants’

motion to strike is denied as moot.11

The only real issue, once again, is whether the plaintiffs have “state[d] 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). The court now turns to the six

specific misrepresentations/omissions alleged by the plaintiffs to determine if TXU

acted with the requisite scienter. Each specific misrepresentation/omission will be

addressed, with the court considering, as Tellabs requires, opposing inferences of nonfraudulent intent. The court will then examine whether the entire quantum of facts
- 14 -

establishes scienter. See Central Laborers’, 497 F.3d at 555 (examining the “collective

impact” of the plaintiffs’ allegations); Abrams, 292 F.3d at 431 (recognizing that

Zonagen suggests all allegations should be read together to make a determination of

scienter). 

a. The Dividend Policy Statement

The plaintiffs claim that TXU made two misrepresentations in the May 2004

press release by stating that any increase in the TXU common dividend would likely

occur in 2006 after certain financial benchmarks had been met. See Second Amended

Complaint ¶ 45; Press Release, attached to Second Amended Complaint as Exhibit E. 

The plaintiffs claim that the truthfulness of TXU’s press release changed significantly

throughout the tender offer period, and that TXU failed to disclose the changes to the

interested parties, thus demonstrating scienter. However, cautionary language in the

May press release that the Board “may consider other relevant factors” when reaching

a decision on the dividend policy weighs against a finding of scienter. Though the

plaintiffs urge that “[n]o reasonable investor would disregard” the bulk of the May

press release, see Plaintiffs’ Opposition to Defendants’ Motion to Dismiss Second

Amended Complaint (“Plaintiffs’ Response”) at 13, the court notes that nearly 35%

of the potential class did pass on the tender offer. Poole Letter, attached to Second

Amended Complaint as Exhibit B, at 62. 
- 15 -

b. The Stock Repurchase Statement

The plaintiffs argue that TXU’s failure to follow the announced plan to

repurchase “up to 10 million share of its common stock” demonstrates scienter. 

Second Amended Complaint ¶ 50; TXU’s Form 8-K, attached to Second Amended

Complaint as Exhibit F, at 120. Ultimately, management recommended the

repurchase of nearly 50 million shares of TXU stock. See Second Amended

Complaint ¶ 83. The plaintiffs claim they relied on the estimate of 10 million shares

when deciding whether to sell their securities, id. ¶¶ 50-52, but it is unclear to the

court how the disparity between 10 and 50 million shares supports a strong inference

of scienter. The critical factor would appear to be the amount of the dividend, not

the number of shares TXU ultimately decided to repurchase.

c. The Dividend Representation and Wilder Representation

The plaintiffs argue that the “Dividend Representation” and the “Wilder

Representation” also show scienter on the part of TXU. See Second Amended

Complaint ¶¶ 59-60. The plaintiffs contend that when TXU made the tender offer,

TXU was “in a position to know when it would recommend a change in [the]

dividend policy to the Board.” Id. ¶ 59. Therefore, Flaherty & Crumrine asserts,

because TXU did not correct or retract the May 2004 “Dividend Policy Statement,”

the representations it made during the tender offer demonstrate TXU’s intent to

deceive the plaintiffs. Plaintiffs’ Response at 8-10.
12 See Merrill Lynch Global Power & Gas Leaders Conference: TXU,

attached to Second Amended Complaint as Exhibit K.

- 16 -

During the tender offer, TXU disclosed that the dividend policy was under

review, stating specifically that it “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.” Second Amended Complaint ¶ 59;

Motion to Dismiss at 7. The plaintiffs ignored the writing on the wall. The mere fact

that a board meeting had been scheduled to discuss the dividend policy did not make

the increase “imminent” -- TXU still needed to obtain information from the credit

agencies, and the board still needed to consider that information and make a

decision. 

The “Wilder Representation” also fails to support a strong inference of

scienter. The presentation,12 which Wilder gave on September 28, 2004, outlines

TXU’s financial restructuring program, and, consistent with TXU’s previous

disclosures, notes that TXU’s dividend policy was under review. The fact that Wilder

gave a presentation on the 3-phase restructuring program does not provide a strong

inference of scienter. Though ultimately the dividend was increased in advance of the

program’s projection, TXU was not bound to the benchmarks alone. As detailed

above, other factors were relevant to the board’s decision, and Wilder was not in a

position in September of 2004 to speculate as to what that decision might be. 
- 17 -

d. The Dividend Omission and Buyback Omission

The “Buyback” and “Dividend” omissions, as alleged by the plaintiffs, stem

from the lack of information in the tender offering documents about the “imminent

and dramatic increase” in TXU’s common stock dividend and the common stock

buyback program. Second Amended Complaint ¶ 62. The court finds little

difference between the “dividend representation” and the two omissions urged by the

plaintiffs. Flaherty & Crumrine’s insistence that a dividend increase was imminent

does not make that the case. For the same reasons articulated in Part II(A)(2)(c), the

court finds that the omissions highlighted by the plaintiffs do not established a strong

inference of scienter. 

e. The Quantum of Facts

The plaintiffs’ assertions rest solely on circumstantial evidence -- they have no

smoking gun to support their allegations; rather, their argument is based on a series of

inferences. As proof of the defendants’ knowledge that a dividend increase was a

foregone conclusion prior to the termination of the tender offer, the plaintiffs proffer

the following facts to supplement the specific instances discussed above: (1) TXU

(and Wilder specifically) developed the three-stage restructuring plan and stood to

benefit financially from a dividend increase; (2) TXU retained a financial advisor;

(3) TXU notified the Board of Directors in August of 2004 that a meeting was set for

October to discuss the dividend policy; and (4) TXU submitted a detailed financial
- 18 -

plan to credit rating agencies to support the dividend increase. Plaintiffs’ Response at

11-15.

However, when considering, as Tellabs requires, opposing inferences of nonfraudulent intent, the court finds that the plaintiffs have failed to establish a strong

inference of scienter. Looking at the contested disclosures from the defendants’

perspective, there is ample evidence to support non-fraudulent intent. It appears that

the plaintiffs expected TXU to state unequivocally that a dividend increase was on

the way. Even if TXU had explicitly stated that the May benchmarks were no longer

critical, and if the plaintiffs had declined the tender offer, the court could imagine a

suit by the plaintiffs complaining that TXU misled them into not participating in the

tender offer had a dividend increase not been approved by the board. 

The plaintiffs focus on the defendants’ failure to “retract” the May benchmarks

as evidence of scienter. Plaintiffs’ Response at 10. However, TXU’s disclosures make

it clear that the benchmarks were not the only factor that would be considered. The

May press release states that “[i]n addition to the management’s recommendation,

the Board . . . may consider other relevant factors in determining if and when to make

a change in the dividend policy.” See Second Amended Complaint ¶ 45. 

Furthermore, Wilder’s compensation and involvement in the restructuring plan

does not weigh for or against a strong inference of scienter. CEOs are expected to

develop strategies to improve a company’s financial situation, and in exchange for
- 19 -

getting results, CEOs expect to be compensated. For any inference of scienter one

could draw from Wilder’s role in TXU’s success, there exists an equally plausible,

non-fraudulent inference.

Though the plaintiffs have increased the number of alleged misrepresentations

and omissions they attribute to TXU, there is hardly more substance to their current

claims than in the initial complaint. There is a fine (but important) distinction

between planning for a possible dividend increase and concealing an imminent dividend

increase.

To further illustrate the plaintiffs’ failure to adequately allege a strong

inference of scienter, the court looks to Fifth Circuit PSLRA precedent. The Fifth

Circuit addressed the Tellabs standard for scienter in Central Laborers’ Pension Fund v.

Integrated Electrical Services, Inc., 497 F.3d 546 (5th Cir. 2007). In holding that a

securities fraud complaint failed to plead scienter with sufficient particularity, the

court “examine[d] the[] allegations in toto when determining whether [the plaintiff]

adequately pleaded scienter.” Id. at 552. The plaintiff alleged “insider trading,

GAAP violations, failure to fix an accounting error, the making of false statements

about internal controls, and pervasive knowledge of accounting problems” throughout

the defendant corporation. Id. Even after considering the plaintiff’s numerous

allegations, the court did not find a strong inference of scienter. Id. at 555. The
13 See also Zonagen, 267 F.3d at 424-26 (pre-Tellabs case finding a strong

inference of scienter where corporate executives affirmatively misrepresented the

patent status of the corporation’s only product in order to raise the corporation’s

stock price); Abrams, 292 F.3d at 431-32 (pre-Tellabs case refusing to find a strong

inference of scienter where company executives affirmatively represented that the

corporation had no internal accounting issues the day after two financial officers quit

even though it was later revealed that there were significant accounting irregularities

at the time -- the court noted the lack of internal or external documents revealing

scienter); R2 Investments, 401 F.3d at 644 (pre-Tellabs case refusing to find a strong

inference of scienter where the defendants made affirmative misrepresentations

regarding the corporation’s cash-on-hand situation even though the plaintiffs alleged

that specific officials knew that material information was omitted from public

disclosures). 

- 20 -

allegations in Central Laborers’ were far more serious than the disclosures/omissions

attributed to TXU in the instant case.13

A case in the Southern District of Texas, In re Cybertronics Inc. Securities

Litigation, 523 F. Supp.2d 547 (S.D. Tex. 2007), also interpreted the scienter

pleading requirements post-Tellabs and dismissed a shareholder suit under the

PSLRA. In Cybertronics, the purchasers of the defendant’s stock brought suit, alleging

that the “defendants made false and misleading statements” regarding the likelihood

that the defendant’s medical device would be approved for the treatment of

depression, the status of the FDA approval process, and the likelihood of payer

approval. Id. at 550. Holding that the shareholders did not plead facts giving rise to

a strong inference of scienter, the court found that “plausible non-culpable

alternative[]” inferences outweighed those in support of scienter. Id. at 554. 
14 Under the Securities Litigation Uniform Standards Act (“SLUSA”), 15

U.S.C. § 78bb(f)(1), claims for common law fraud may not be brought in a class

action suit. Consequently, the common law fraud claim may only be asserted on

behalf of the named plaintiffs.

- 21 -

Once again, taking all well-pleaded facts and evaluating them holistically, the

court does not find a strong inference of scienter attributable to the defendants. On

balance, when compared to the other post-Tellabs decisions, the facts set forth by the

plaintiffs do not demonstrate the sort of fraudulent intent the PSLRA aims to

enforce. Tellabs, 127 S.Ct. at 2504 (recognizing the “strict[] demand Congress sought

to convey in § 21D(b)(2).”). Therefore, counts one, two, and three of the second

amended complaint must be dismissed. 

3. Common Law Fraud - Count Four

The plaintiffs have also alleged, as an alternative to their PSLRA claims, a

claim for common law fraud.14 In a second motion to dismiss, filed forty-five days

after the initial motion to dismiss, TXU moves to dismiss the common law fraud

claims under Rule 12(b)(6). See generally Second Motion to Dismiss. In response, the

plaintiffs argue that the common law fraud claim is sufficient. In addition, the

plaintiffs oppose the motion to dismiss count four on procedural grounds, moving to

strike TXU’s motion as untimely pursuant to Rule 12(g)(2) of the Federal Rules of

Civil Procedure. See Plaintiff’s Motion to Strike ¶ 5. 

In the defendants’ initial motion to dismiss under the PSLRA, there was no

mention of dismissing count four of the second amended complaint. The defendants
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note, however, that the plaintiffs’ original complaint, before the Tellabs decision,

made no mention of common law fraud. Defendants’ Response to Plaintiffs’ Motion

to Strike at 3-4. The court finds that the plaintiffs will not be prejudiced by

consideration of the second motion to dismiss; addressing the issue now only serves

judicial economy -- the issue has been briefed and is ripe for determination. 

Therefore, the plaintiffs’ amended motion to strike the defendants’ second motion to

dismiss count four is denied.

Pleading fraud with particularity requires that a plaintiff 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,

112 F.3d at 177. 

In response to the defendants’ motion to dismiss, the plaintiffs argue that

because common law fraud claims are not subject to the PSLRA scienter

requirements, it necessarily follows that they have adequately alleged a cause of action

for fraud. See Plaintiffs’ Opposition to Defendants’ Motion to Dismiss Count Four of

Plaintiffs’ Amended Complaint (Common-Law Fraud) or for Judgment on the

Pleadings at 3. Regarding TXU’s alleged misrepresentations, the plaintiffs make the

conclusory statement that they have explained “precisely when they were made, by

whom made, why they were material, why they were misleading, and what the

Defendants obtained by making them.” Id. at 4. However, as discussed above,
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simply because the plaintiffs were misled, the court does not therefore find TXU’s

statements to be misleading; the plaintiffs fail to show how each statement was

fraudulent. Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994). Accordingly, the

court is compelled to dismiss the plaintiffs’ common law fraud claim.

III. CONCLUSION

For the reasons stated above, the defendants’ motions to dismiss are

GRANTED, the defendants’ motion to strike the report of Linda Allen is DENIED

as moot, the plaintiffs’ motion to strike the defendants’ second motion to dismiss is

DENIED, and the plaintiffs’ motion for a hearing is DENIED. The plaintiffs’ second

amended class action complaint is DISMISSED with prejudice for failure to state a

claim on which relief can be granted.

SO ORDERED.

April 4, 2008.

___________________________________

A. JOE FISH

Senior United States District Judge