Opinion ID: 3025920
Heading Depth: 2
Heading Rank: 3

Heading: Tabor Facility Statements

Text: Winer challenges Pennexx’s February 20, 2002 press release, in which the company announced it had agreed to purchase the Tabor Facility. In the press release, Queen, Pennexx’s President, was quoted as stating: [The Tabor Facility] is perfectly suited to our needs, as it is strategically located in the central Northeast corridor and close to our customers. Since the new facility requires minimal improvement, we will be able to renovate and automate quickly and plan to be operational in this pristine facility by the second quarter of 2002. Winer contends Queen’s statements were knowingly false and misleading because they failed to disclose the facility needed a major overhaul costing over $18 million and requiring expert supervision. Winer maintains defendants never disclosed that Smithfield Foods, not Pennexx, exclusively controlled the purchase and renovation of the Tabor Facility, which resulted in a facility not designed to meet Pennexx’s needs. Winer also contends Pennexx’s press releases and SEC filings between March 29 and May 22, 2002, were misleading because they failed to disclose that, during a walking tour of the Tabor 16 Facility on or about March 28, 2002, Joseph Luter III2 advised the Individual Defendants that Pennexx should spend whatever was necessary to make the Tabor Facility a high-quality operation. Pennexx acquired the Tabor Facility on April 2, 2002. On April 17, 2002, Pennexx disclosed that the total estimated cost for purchasing, renovating and equipping the Tabor Facility would be between $8 million and $16 million. Pennexx later revised this estimate in May 2002 to between $11.5 million and $16 million. The District Court found the most plausible inference from these events was that after the March 28, 2002 walking tour, Pennexx realized that the cost of renovations would be more extensive than previously estimated. This was disclosed to investors in the April 17 filing. Accordingly, the District Court held the amended complaint failed to allege facts giving rise to a strong inference that, as of February 20, 2002, Queen knew that the Tabor Facility would require anything more than minimal improvements. On appeal, Winer contends the District Court erred in dismissing these claims because the PSLRA’s “strong inference” pleading standard does not permit the resolution of 2 Joseph Luter III is President of Smithfield Foods and is not a defendant in this case. Joseph Luter IV is one of the individual defendants in this case and is referred to as “Luter” throughout the opinion. 17 disputed facts at summary judgment. The District Court accepted the facts alleged by Winer as true. It viewed those facts holistically in light of all additional facts alleged in the complaint. But the District Court found that the most plausible inference flowing from these facts was a non-culpable inference. A complaint will survive a motion to dismiss “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 127 S. Ct. at 2510. The District Court found the most plausible inference from Winer’s alleged sequence of facts was that Pennexx revised its preliminary cost estimates as it learned more about the costs of renovating the Tabor Facility. Stated differently, Winer’s purported inference, that the February statements regarding the Tabor Facility were knowingly false, was not as compelling or as strong as the opposing interest cited by the District Court. In considering these inferences, the District Court properly probed documents attached to defendants’ motion to dismiss. This was appropriate because these documents were integral to and/or were explicitly relied upon by the amended complaint. See Tellabs, 127 S. Ct. at 2509 (“[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.”); In re Burlington Coat Factory, 114 F.3d at 1426 (holding a “‘document integral to or explicitly relied upon 18 in the complaint’ may be considered ‘without converting the motion [to dismiss] into one for summary judgment’”) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996) (superseded on other grounds by the PSLRA, 15 U.S.C. § 78u-4(b)(1)–(2)); TMJ Implants, Inc. v. Aetna, Inc., Nos. 06-1020, 06-1146, 2007 WL 2372372, at  (10th Cir. Aug. 21, 2007) (“Although we ordinarily limit our review [on a motion to dismiss] to the allegations in the complaint, we consider documents ‘incorporated into the complaint by reference.’”) (quoting Tellabs, 127 S. Ct. at 2509); see also Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166–69 (3d Cir. 2001) (“In reviewing a motion for class certification, a preliminary inquiry into the merits is sometimes necessary to determine whether the alleged claims can be properly resolved as a class action.”). In considering competing inferences, courts may find it necessary to probe the documents integral to the complaint. Thus, Winer’s inference is neither cogent, nor compelling, nor strong in light of competing inferences.3 A reasonable person would not deem the inference of scienter cogent and at least as compelling as any non-culpable inference. 3 As the Court of Appeals for the Seventh Circuit held, the requirement that the inference be “at least as compelling” as any competing inference, Tellabs, 127 S. Ct. at 2510, dictates a more stringent standard than probable cause. Higginbotham v. Baxter Intern., Inc., 06-1312, 2007 WL 2142298, at  (7th Cir. July 27, 2007) (citing Illinois v. Gates, 462 U.S. 213 (1983)). 19 See Tellabs, 127 S. Ct. at 2509–10; see also Higginbotham v. Baxter Intern., Inc., 06-1312, 2007 WL 2142298, at –5 (7th Cir. July 27, 2007) (holding an inference of scienter was “neither compelling nor cogent”); Central Laborers' Pension Fund v. Integrated Electrical Services, Inc., No. 06-20135, 2007 WL 2367776, at  (5th Cir. Aug. 21, 2007) (holding that when examining officer trading as a factor suggesting a strong inference of scienter, courts must consider both culpable and nonculpable explanations) (citing Tellabs, 127 S. Ct. at 2510); ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 104 (2d Cir. 2007) (holding that where a “plausible nonculpable explanation[]” is more likely than any guilty inference, plaintiffs failed to establish scienter) (quoting Tellabs, 127 S. Ct. at 2510); Belizan v. Hershon, No. 06-7104, 2007 WL 2141954, at  (D.C. Cir. July 27, 2007) (remanding to allow District Court to determine whether the inference that defendants acted recklessly was “at least as compelling as any opposing inference of nonfraudulent intent”) (quoting Tellabs, 127 S. Ct. at 2505). Winer also contends the statements made between March 29, 2002 through May 22, 2002 were actionable because they failed to disclose that Smithfield Foods’s staff was performing the renovations of the Tabor Facility. The securities laws do not require a defendant “provide the public with all material information.” In re Burlington Coat Factory, 114 F.3d at 1432 (citing In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993)). To impose liability for non-disclosure, a defendant must be under a duty to disclose the omitted information. Oran v. Stafford, 226 F.3d 275, 285 (3d Cir. 2000) (“Even 20 non-disclosure of material information will not give rise to liability under Rule 10b-5 unless the defendant had an affirmative duty to disclose that information.”); see also Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”). As a general matter, an affirmative duty arises only when there is insider trading, a statute requiring disclosure, or an inaccurate, incomplete, or misleading prior disclosure. Oran, 226 F.3d at 285–86. Pennexx points to no duty to disclose that Smithfield Foods’s staff was renovating the Tabor Facility. The challenged statements—Pennexx’s press releases and SEC filings—purported only to provide an outline of Pennexx’s plans and objectives regarding future renovations. The District Court correctly held Pennexx had no duty to disclose that Smithfield Foods’s staff was renovating the Tabor Facility. Taking the facts pleaded as true and viewing them holistically, a reasonable person would not deem the inference of scienter as cogent and at least as compelling as any non-culpable inference based upon the omitted facts. See Tellabs, 127 S. Ct. at 2509–10.