17-63 Brown v. Cerberus Capi tal Management, L.P.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT



### SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DA TABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CI TING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Seco nd Circuit, held at 1 the Thurgood Marshall United States Courthou se, 40 Foley Square, in the City of New York, 2 on the 11 th day of July, two thousand seventeen. 3 4 PRESENT: 5 ROBERT D. SACK, 6 SUSAN L. CARNEY, 7 CHRISTOPHER F. DRONEY, 8 Circuit Judges. 9

___________________ __________________ 10 11 T ONYA B ROWN , J OHN E LSTAD , E LIZABETH 12 H OMAN , A LBERT G OEKEN , J EFF S AMPERE , 13 14 Plaintiffs-Appellants

, 15 16 v. No. 17-63 17 18 C ERBERUS C APITAL M ANAGEMENT , L.P., 19 C ERBERUS C OVIS LLC, C OVIS H OLDINGS L.P., 20 C OVIS M ANAGEMENT I NVESTORS LLC, C OVIS 21 US H OLDINGS , LLC, C OVIS MANAGEMENT 22 I NVESTORS US LLC, C OVIS P HARMACEUTICALS , 23 I NC ., E THAN K LEMPERER , M ICHAEL K ELLY , 24 M ICHAEL W ELLS , P RINCETON B IOPHARMA 25 C OINVESTMENT I, L.P., P RINCETON B IOPHARMA 26 C APITAL P ARTNERS , LLC, A LEXANDER 27 B ENJAMIN , 28 292 Defendants-Appellees

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___________________ __________________ 2 3 4 FOR PLAINTIFFS-APPELLANTS: J OSHUA L. S EIFERT , New York, New York. 5 6 FOR DEFENDANTS-APPELLEES: S HEILA A. S ADIGHI (Gavin J. Rooney, on 7 the brief), Lowenstein Sandler LLP, New 8 York, New York. 9

Appeal from a judgment of the United States District Court for th e Southern District 10 of New York (Daniels, J. ). 11 UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, 12 ADJUDGED, AND DECREED that the December 13, 2016 judgment entered by the 13

District Court is AFFIRMED

. 14 Plaintiffs are former employees of Covi s Pharmaceuticals Inc. (“CPI”), whose 15 grievances arise out of Defendants’ purported misstatements, omissions, and other allegedly 16 fraudulent conduct surrounding a 2013 reorganizat ion of the “Covis enterprise” (a term we 17 use, as do the parties, to refer collectively to CPI and other Covis companies). As part of that 18 reorganization, CPI was separate d from its one-time parent, Covi s Holdings L.P. (“CLP”), and 19 became a subsidiary of Covis US Holdings, LLC (“C-US”). Plaintiffs allege that, before the 20 reorganization, they held valuable profits intere sts in CLP but, as part of the reorganization, 21 they exchanged those interests for less valuable profits interests in C-US, in reliance on 22 Defendants’ actions. On appeal, Plaintiffs challe nge the District Court’s dismissal under Rule 23 12(b)(6) of their federal securiti es fraud claims. They argue that the District Court improperly 24 relied on documents outside the complaint in ru ling on the adequacy of their allegations, and 25

assert that the District Court further erred in d eclining to grant them a second opportunity to 26 amend their complaint. We assume the parties’ familiarity with the underlying facts and the 27 procedural history of this case, to which we refer only as necessary to explain our decision to 28

affirm. 293 By their failure to pursue it in their opening brief, see LoSacco v. City of Middletown , 71 F.3d 1 88, 92 (2d Cir. 1995), Plaintiffs have abandoned th e theory of securities fraud that they pressed 2

before the District Court: that Defendants violated Rule 10b-5 by making material 3 misstatements about the value of the C-US pr ofits interests and a tax “gross up” to induce 4 Plaintiffs’ continued employment at CPI, Am. Co mpl. ¶ 23. In any event, the District Court 5 correctly determined that the amended complaint lacks sufficient allegations of scienter to 6 support Plaintiffs’ now-abandoned theory. Under th e Private Securities Litigation Reform Act 7 (“PSLRA”), a plaintiff must plead facts “giving rise to a strong inference” of scienter, 15 8 U.S.C. § 78u–4(b)(2)(A); see also In re Advanced Battery Techs., Inc. , 781 F.3d 638, 644 (2d Cir. 9 2015), and cannot rely on “motives possesse d by virtually all corporate insiders,” Novak v. 10

Kasaks , 216 F.3d 300, 307 (2d Cir. 2000), to support their claims. We conclude after de novo 11 review that the amended complaint did not meet this heightened pleading standard. 12 Plaintiffs now assert, for the first time, that Defendants engaged in “insider trading” by 13 inducing Plaintiffs—through material misrepre sentations and omission s—to swap their more 14 valuable profits interests in the pre-reorganizat ion CLP for less valuable profits interests the 15 post-reorganization C-US. Pls.’ Br. 33-34. Becaus e this theory was not raised before the 16 District Court, we decline to evaluate it here. Mago Int’l v. LHB AG , 833 F.3d 270, 274 (2d Cir. 17 2016) (“We have repeatedly held that if an ar gument has not been raised before the district 18 court, we will not consider it [on appeal].” (i nternal quotation marks and alteration omitted)). 19 Plaintiffs next argue that the District Co urt improperly relied on documents outside the 20 complaint in dismissing Plainti ff Albert Goeken’s securities fr aud claim based on Defendants’ 21 failure to inform him of Covis’s merger negoti ations with an unknown party when he decided 22 to retire. In particular, Plaintiffs argue that the District Court improperly relied on Defendants’ 23 November 10, 2015 letter to Plaintiffs, in whic h Defendants characterize the relevant merger 24 negotiations as “fruitless”—a te rm found nowhere in the amen ded complaint but quoted in 25 the District Court’s decision. Join t Appendix 551. Even if the Di strict Court did err in making 26 this reference, however, Plaint iffs’ securities fraud claim nonetheless fails because the 274 amended complaint fails to plead facts from whic h the materiality of those negotiations may be 1

inferred. 2 To determine whether a misrepresentation is material, we “look to whether there is ‘a 3

substantial likelihood that the disclosure of th e omitted fact would have been viewed by the 4 reasonable investor as having significantly al tered the “total mix” of information made 5

available.’” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC , 595 F.3d 86, 6 92–93 (2d Cir. 2010) (quoting Basic Inc. v. Levinson , 485 U.S. 224, 231–32 (1988)). The amended 7 complaint alleges that “in the early summer of 2014, Cerberus and Covis entered into 8 negotiations with a pharmaceutical company regar ding a potential merger,” that “Defendant 9 Kelly failed to disclose to Mr. Goeken that Cerberus and Covis were in on-going merger 10 negotiations with a pharmaceutical company, ” and that “when Mr. Goeken resigned his 11 position in August 2014, Defendan t Kelly failed to disclose that Covis had recently received a 12 merger proposal and that negotiations were ongoing.” Am. Compl. ¶¶ 232, 251, 344. Even 13 accepting that merger negotiations were ongoi ng, in the context described in the amended 14 complaint these allegations are insufficient to su pport an inference that the negotiations were 15

material. See Basic , 485 U.S. at 239 (noting, in summary judg ment setting, that the materiality of 16 merger negotiations might be evidenced by fact ors such as “board resolutions, instructions to 17 investment bankers, and actual ne gotiations between principals or their intermediaries”). The 18 amended complaint alleges that the business plan of the Covis enterprise (and familiar to 19 Plaintiffs) was that it would try to sell itself or its assets soon after developing a market in the 20 pharmaceuticals that it acquired. Merger discussions and negotiations were thus to be 21 expected, based on Plaintiffs’ ow n description. Plaintiffs do not allege that these pending 22 negotiations bore fruit and, in fact, the compla int alleges that the Covis enterprise did not 23 receive the merger bid that it ev entually accepted until some six months after Goeken retired. 24 This case is thus distinguishable from Castellano v. Young & Rubicam, Inc. , 257 F.3d 171 25 (2d Cir. 2001), on whic h Plaintiffs rely. In Castellano , the court concluded that a jury could find 26 that a closely held corporation should have di sclosed to an executive who was contemplating 27 selling shares back to the corporation upon his re tirement—the timing of which was within his 285 control—that merger negotiations (though failed) had been undertaken. Id . at 175, 182. The 1 court reasoned that the fact of even failed merger negotiations was material to the plaintiff and 2 could support a Rule 10b-5 claim because they “signaled a new willingn ess on behalf of [the 3 company’s] management to consider [a] sale of the company to a third party,” when the 4 company had a long history to the contrary an d parties in control ha d assured the executive 5 that no change was on the horizon. Id . at 176, 181. Here, the opposite is true: Plaintiffs allege 6 that, from the inception of their involvement in the Covis enterprise, Plai ntiffs knew that the 7

venture was “short term” and that Covis executives were interested in quickly selling corporate 8 assets once value could be realized. Am. Comp l. ¶¶ 4, 54, 89. The pendency of merger 9 negotiations thus signaled no more than the Covis enterprise’s continued adherence to its 10 announced corporate strategy. 11 Finally, Plaintiffs seek leave to amend their already once-amended complaint. This 12 Court reviews “a district court’s decision to pe rmit or deny leave to amend a complaint for 13

abuse of discretion.” Balintulo v. Ford Motor Co. , 796 F.3d 160, 164 (2d Cir. 2015). It is “within 14 the court’s discretion to deny leave to amend im plicitly by not addressing the request when 15 leave is requested informally in a brief f iled in opposition to a motion to dismiss.” In re 16 Tamoxifen Citrate Antitrust Litig. , 466 F.3d 187, 220 (2d Cir. 2006), abrogated on other grounds by 17 F.T.C. v. Actavis, Inc. , 133 S. Ct. 2223 (2013). We perceive no abuse of discretion here. Plaintiffs 18 enjoyed a full opportunity to amend, having been apprised of Defendants’ views of the original 19 complaint’s shortcomings, and have continued only to shift theories of recovery, as reflected 20 in their briefs, without identifying any way in which a further amendment of its factual 21 allegations would cure the amen ded complaint’s shortcomings. 22

We have considered all of Plaintiffs’ rema ining arguments and conclude that they are 23 without merit. Accordingly, we AFFIRM the December 13, 2016 judgment of the District 24

Court. 25

FOR THE COURT: 26 Catherine O’Hagan Wolfe, Clerk of Court 27