Opinion ID: 622296
Heading Depth: 3
Heading Rank: 3

Heading: Motive Allegations

Text: Plaintiff argues that the circumstantial evidence of scienter we have just discussed is bolstered by the fact that defendants had strong motives to engage in reckless or deliberate fraud. Specifically, plaintiff alleges that defendants were motivated to mislead investors regarding the integration progress: (1) to allow Level 3 to complete the Broadwing acquisition on more favorable terms, i.e., using less stock than it would have had the truth about the integration status been known to investors, JA, Vol. 1 at A138; (2) to enable Level 3 to refinance existing debt at more favorable interest rates, id.; (3) to enhance certain defendants' compensation, which allegedly hinged on the successful integration of WilTel, id. at A139-40; and (4) to permit certain defendants to sell their Level 3 shares at inflated prices, id. at A142-45. [M]otive can be a relevant consideration in making the scienter determination, and personal financial gain may weigh heavily in favor of a scienter inference. Tellabs, 551 U.S. at 325, 127 S.Ct. 2499. Nonetheless, the asserted motives, taken with plaintiff's other allegations, fail to contribute to any inference of scienter. We look first at the Broadwing acquisition. Level 3 announced a definitive deal to purchase Broadwing in October 2006 and then acquired the company using a combination of cash and stock on January 3, 2007. JA, Vol. 1 at A138-39. Yet plaintiff alleges that defendants continued to make false or misleading statements regarding integration progress long after the acquisition. In February, for instance, O'Hara reiterated that [m]ost of the physical integration of WilTel is now complete. Id. at A62-63. In late July, he said Level 3 had made significant progress on the integration of all acquisitions. Id. at A72. And, most strikingly, in the October 23, 2007, statements that plaintiff alleges revealed defendants' fraud, O'Hara was still insistent that the physical network integration, the real estate integration, all of the people side of things are all progressing well. Id. at A81. As the Broadwing acquisition preceded these statements, that event did not motivate them. Plaintiff notes the existence of a motive to refinance Level 3's debt. But general motives for management to further the interests of the corporation fail to raise an inference of scienter. Corporate officers always have an incentive to improve the lot of their companies, but this is not, absent unusual circumstances, a motive to commit fraud. Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 278-79 (3d Cir.2009). Defendants' refinancing of Level 3's existing debt at more favorable interest rates most plausibly reflected nothing more than a general desire to further the corporation's interests. See id. at 279. Nor does plaintiff's assertion that defendants' compensation hinged on the performance of Level 3's stock price and the successful integration of WilTel lead us to infer scienter. First, plaintiff alleges that defendants received cash bonuses for the successful integration of WilTel and other acquired businesses. JA, Vol. 1 at A140. But it appears that bonuses were awarded based on actual integration progress, not merely defendants' representations that the integration was successful. Id., Vol. 3 at A807 (listing as one bonus calculation factor [e]ffectiv[e] manage[ment] [of] Wil-Tel acquisition integration activities . . . measured by an assessment of progress against integration project milestones and objectives). Second, plaintiff states that defendants received stock options and restricted stock as compensation based on the performance of Level 3's stock. See id., Vol. 1 at A141-42. This type of incentive-based compensation, however, is common among executives at publicly traded companies and does not ordinarily indicate scienter. Cf. Green Tree, 270 F.3d at 661 (defendant, who was the highest paid business executive in the entire United States in 1995 and 1996, had a legally significant motive because the amount of his compensation was based on a percentage of Green Tree's pre-tax earnings, and his contract was set to expire at the end of 1996, making it urgent for [him] to maximize Green Tree's earnings for that year). Finally, plaintiff's allegations concerning defendants' stock sales do not point to scienter. Plaintiff alleges that certain defendants engaged in sales of their personal holdings of Level 3 stock and that these defendants had not traded any Level 3 shares in the prior two years. The defendants engaging in these sales, however, retained a substantial percentage of their Level 3 holdings. Aplee. Br. at 56; see also JA, Vol. 1 at A188. Further, the sales were made pursuant to automatic transactions set up prior to the class period to pay withholding taxes that became due. Aplee. Br. at 56; see also JA, Vol. 1 at A187-88. These considerations rebut any inference of scienter we might otherwise draw regarding these sales. See Elam v. Neidorff, 544 F.3d 921, 928 (8th Cir.2008) (stock sales pursuant to automatic trading plans that represent only a small portion of each seller's holdings do not suggest scienter). In sum, plaintiff produces no convincing allegations of a motive for defendants to engage in fraud. The absence of a motive allegation . . . is not dispositive, Tellabs, 551 U.S. at 325, 127 S.Ct. 2499, but it is relevant, id., and in this case it counts against scienter, see Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1069 (5th Cir.1994) (Where a defendant's motive is not apparent, a plaintiff may adequately plead scienter by identifying circumstances that indicate conscious behavior on the part of the defendant, though the strength of the circumstantial allegations must be correspondingly greater.).