Opinion ID: 655303
Heading Depth: 1
Heading Rank: 4

Heading: The Alleged Affirmative Material Misrepresentations in

Text: 22 the Prospectus 23 As we explained above, the plaintiffs assert that the Trump defendants had neither an honest nor a reasonable belief in their statement on page 28 of the prospectus that [t]he Partnership believes that funds generated from the operation of the Taj Mahal will be sufficient to cover all of its debt service (interest and principal). The plaintiffs contend that, in view of this allegation, they have stated a cause of action under the federal securities laws. We disagree. 9
24 At a minimum, each of the securities fraud provisions which the bondholders allege the Trump defendants violated requires proof that the defendants made untrue or misleading statements or omissions of material fact. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280, 286 (3d Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992). 10 We have squarely held that opinions, predictions and other forward-looking statements are not per se inactionable under the securities laws. Rather, such statements of soft information may be actionable misrepresentations if the speaker does not genuinely and reasonably believe them. 11 See, e.g., Herskowitz v. Nutri/System, Inc., 857 F.2d 179, 184 (3d Cir.1988), cert. denied, 489 U.S. 1054, 109 S.Ct. 1315, 103 L.Ed.2d 584 (1989); Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied sub nom. Wasserstrom v. Eisenberg, 474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985). Therefore, the plaintiffs' complaint does not falter just because it alleges that the defendants made a misrepresentation with their statement that they believed they would be able to repay the principal and interest on the bonds. Rather, the complaint cannot survive a motion to dismiss because ultimately it does not sufficiently allege that the defendants made a material misrepresentation. 25 The Supreme Court in TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976), defined materiality within the proxy-solicitation context of § 14(a) of the 1934 Act. Subsequently the Court expressly made the TSC standard applicable to actions under § 10 and Rule 10b-5, see Basic Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988), and we have made it applicable as well to claims under §§ 11 and 12(2) of the 1933 Act, see Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 641 & n. 18 (3d Cir.1989). TSC instructs that [a]n omitted fact is material if there is a substantial likelihood that a reasonable [investor] would consider it important in deciding how to [act]. 426 U.S. at 449, 96 S.Ct. at 2132. For an omission to be deemed material, there must be a substantial likelihood that [its disclosure] would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available. Id. 12 26 As the statement quoted immediately above implies, materiality is a relative concept, so that a court must appraise a misrepresentation or omission in the complete context in which the author conveys it. See I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 763 (2d Cir.1991). 13 In other words, a particular misrepresentation or omission significant to a reasonable investor in one document or circumstance may not influence a reasonable investor in another. We accordingly take into account not only the assertion that the Partnership believed the Taj Mahal could meet the obligations of the bonds, but also other relevant statements contained in the prospectus.
27 The prospectus at issue contained an abundance of warnings and cautionary language which bore directly on the prospective financial success of the Taj Mahal and on the Partnership's ability to repay the bonds. We believe that given this extensive yet specific cautionary language, a reasonable factfinder could not conclude that the inclusion of the statement [t]he Partnership believes that funds generated from the operation of the Taj Mahal will be sufficient to cover all of its debt service (interest and principal) would influence a reasonable investor's investment decision. More specifically, we believe that due to the disclaimers and warnings the prospectus contains, no reasonable investor could believe anything but that the Taj Mahal bonds represented a rather risky, speculative investment which might yield a high rate of return, but which alternatively might result in no return or even a loss. We hold that under this set of facts, the bondholders cannot prove that the alleged misrepresentation was material. 28 The statement the plaintiffs assail as misleading is contained in the MD & A section of the prospectus, which follows the sizable Special Considerations section, a section notable for its extensive and detailed disclaimers and cautionary statements. More precisely, the prospectus explained that, because of its status as a new venture of unprecedented size and scale, a variety of risks inhered in the Taj Mahal which could affect the Partnership's ability to repay the bondholders. For example, it stated: 29 The casino business in Atlantic City, New Jersey has a seasonal nature of which summer is the peak season.... Since the third interest payment date on the Bonds [ (which constitutes the first interest payment not paid out of the initial financing) ] occurs before the summer season, the Partnership will not have the benefit of receiving peak season cash flow prior to the third interest payment date, which could adversely affect its ability to pay interest on the Bonds. 30 ... The Taj Mahal has not been completed and, accordingly, has no operating history. The Partnership, therefore, has no history of earnings and its operations will be subject to all of the risks inherent in the establishment of a new business enterprise. Accordingly, the ability of the Partnership to service its debt to [Taj Mahal Funding Inc., which issued the bonds,] is completely dependent upon the success of that operation and such success will depend upon financial, business, competitive, regulatory and other factors affecting the Taj Mahal and the casino industry in general as well as prevailing economic conditions.... 31 The Taj Mahal will be the largest casino/hotel complex in Atlantic City, with approximately twice the room capacity and casino space of many of the existing casino/hotels in Atlantic City. [No] other casino/hotel operator has had experience operating a complex the size of the Taj Mahal in Atlantic City. Consequently, no assurance can be given that, once opened, the Taj Mahal will be profitable or that it will generate cash flow sufficient to provide for the payment of the debt service.... 32 Prospectus at 8. 33 The prospectus went on to relate, as part of its Security for the Bonds subsection, the potential effect of the Partnership's default on its mortgage payments. For example, this subsection unreservedly explained that if a default occurred prior to completion of the Taj Mahal, there would not be sufficient proceeds [from a foreclosure sale of the Taj Mahal] to pay the principal of, and accrued interest on, the Bonds. Prospectus at 9. 34 The Special Considerations section also detailed the high level of competition for customers the completed Taj Mahal would face once opened to the public: 35 Competition in the Atlantic City casino/hotel market is intense. At present, there are twelve casino/hotels in Atlantic City.... Some Atlantic City casino/hotels recently have completed renovations or are in the process of expanding and improving their facilities.... The Partnership believes that, based upon historical trends, casino win per square foot of casino space will decline in 1990 as a result of a projected increase in casino floor space, including the opening of the Taj Mahal. 36 Prospectus at 14 (emphasis added). In a section following the MD & A section, the prospectus reiterated its reference to the intense competition in the Atlantic City casino industry: 37 Growth in Atlantic City casino win is expected to be restrained until further improvements to the City's transportation system and infrastructure are undertaken and completed and the number of non-casino hotel rooms and existing convention space are increased. No assurance can be given with respect to either the future growth of the Atlantic City gaming market or the ability of the Taj Mahal to attract a representative share of that market. 38 Prospectus at 33. The prospectus additionally reported that there were risks of delay in the construction of the Taj Mahal and a risk that the casino might not receive the numerous essential licenses and permits from the state regulatory authorities. See Prospectus at 11-13, 15-16, 35-37. 39 In this case the Partnership did not bury the warnings about risks amidst the bulk of the prospectus. Indeed, it was the allegedly misleading statement which was buried amidst the cautionary language. At all events, in addition to reading the allegedly misleading statement setting forth the Partnership's belief that it could repay the principal and interest on the bonds, a prospective investor would have also read the dire warnings and cautionary statements a sampling of which we have just outlined. Moreover, an investor would have read the sentence immediately following the challenged statement, which cautioned: [n]o assurance can be given, however, that actual operating results will meet the Partnership's expectations. 40 As we explained above, we must consider an alleged misrepresentation within the context in which the speaker communicated it. Here the context clearly and precisely relayed to the bondholders the substantial uncertainties inherent in the completion and operation of the Taj Mahal. The prospectus contained both general warnings that the Partnership could not assure the repayment of the bonds as well as specific discussions detailing a variety of risk factors that rendered the completion and profitable operation of the Taj Mahal highly uncertain. Within this broad context the statement at issue was, at worst, harmless.
41 The district court applied what has come to be known as the bespeaks caution doctrine. In so doing it followed the lead of a number of courts of appeals which have dismissed securities fraud claims under Rule 12(b)(6) because cautionary language in the offering document negated the materiality of an alleged misrepresentation or omission. See Sinay v. Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir.1991); I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 763 (2d Cir.1991); Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 (1st Cir.1991); Polin v. Conductron Corp., 552 F.2d 797, 806 n. 28 (8th Cir.), cert. denied, 434 U.S. 857, 98 S.Ct. 178, 54 L.Ed.2d 129 (1977); cf. Huddleston v. Herman & MacLean, 640 F.2d 534, 543-44 (5th Cir.1981) (holding that a general warning was insufficient to render a known misrepresentation immaterial as a matter of law), modified, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); see also In re Convergent Technologies Sec. Litig., 948 F.2d 507, 515-16 (9th Cir.1991) (applying but not explicitly referencing the bespeaks caution doctrine to uphold a grant of summary judgment for the defendant). We are persuaded by the ratio decidendi of these cases and will apply bespeaks caution to the facts before us. 42 The application of bespeaks caution depends on the specific text of the offering document or other communication at issue, i.e., courts must assess the communication on a case-by-case basis. See Flynn v. Bass Bros. Enters., 744 F.2d 978, 988 (3d Cir.1984) (holding courts must determine the materiality of soft information on a case-by-case basis). Nevertheless, we can state as a general matter that, when an offering document's forecasts, opinions or projections are accompanied by meaningful cautionary statements, the forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect the total mix of information the document provided investors. In other words, cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law. 43 The bespeaks caution doctrine is, as an analytical matter, equally applicable to allegations of both affirmative misrepresentations and omissions concerning soft information. Whether the plaintiffs allege a document contains an affirmative prediction/opinion which is misleading or fails to include a forecast or prediction which failure is misleading, the cautionary statements included in the document may render the challenged predictive statements or opinions immaterial as a matter of law. Of course, a vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has risks will ordinarily be inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge. 44 Because of the abundant and meaningful cautionary language contained in the prospectus, we hold that the plaintiffs have failed to state an actionable claim regarding the statement that the Partnership believed it could repay the bonds. We can say that the prospectus here truly bespeaks caution because, not only does the prospectus generally convey the riskiness of the investment, but its warnings and cautionary language directly address the substance of the statement the plaintiffs challenge. That is to say, the cautionary statements were tailored precisely to address the uncertainty concerning the Partnership's prospective ability to repay the bondholders. 45 Moreover, contrary to the submission of the plaintiffs, the Supreme Court's reasoning in Virginia Bankshares, Inc. v. Sandberg, --- U.S. ----, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991) supports rather than undermines the application of the bespeaks caution doctrine in this case. In Virginia Bankshares, the Court considered the actionability of statements of reasons, opinions or beliefs in the proxy-solicitation context under § 14(a) of the 1934 Act, 15 U.S.C. § 78n(a). 14 The Court rejected the defendants' argument that a statement by corporate directors, made in the midst of an effort to effectuate a freeze-out merger, that in their opinion $42 a share was a fair price which would offer high value to the minority stockholders, was inactionable under the securities laws. Consistent with our decisions pre-dating Virginia Bankshares, see, e.g., Eisenberg v. Gagnon, 766 F.2d at 776, the Court held that statements of opinion or belief may be actionable when they expressly or impliedly assert something false or misleading about their subject matter. The Court further held that the specific statement at issue in the case was a proper basis for liability under § 14(a) because the minority shareholders reasonably understood it to rest on a factual basis. See --- U.S. at ----, 111 S.Ct. at 2758-60. 46 In addition, the Court in Virginia Bankshares reached two conclusions directly relevant to the case at bar. First, the Court held that a speaker's subjective disbelief or motivation, standing alone, would be inadequate to state a claim under § 14(a). 15 Second, and more importantly, by recognizing that an accompanying statement may neutralize the effect of a misleading statement, the Court impliedly accepted the logic of the bespeaks caution doctrine. Id. at ----, 111 S.Ct. at 2760. The Court explained: 47 While a misleading statement will not always lose its deceptive edge simply by joinder with others that are true, the true statements may discredit the other one so obviously that the risk of real deception drops to nil. Since liability under § 14(a) must rest not only on deceptiveness but materiality as well[,] ... publishing accurate facts in a proxy statement can render a misleading statement too unimportant to ground liability. 48 Id. 49 The Court then refined this general principle to take on the same contours as what we have denoted as the bespeaks caution doctrine. In particular, the Court acknowledged that not every mixture with the true will neutralize the deceptive. If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow. Id. at ----, 111 S.Ct. at 2760. In fact, this notion really comports with the general principle, because it merely underscores that when the subject of a misrepresentation or omission is such that the accompanying language does not diminish the importance of the misrepresentation or omission to the investor, the misrepresentation or omission remains actionable. In a word, a misrepresentation or omission is actionable when materially misleading. 50 This reading of Virginia Bankshares just restates what what we explained above, namely, that materiality involves a context-specific analysis such that warnings and cautionary language will sometimes suffice to render the allegedly misleading misrepresentations or omissions immaterial as a matter of law. We understand Virginia Bankshares to indicate that if the nature of the subject matter or the manner of presentation of an alleged misrepresentation or omission or its accompanying statements is such that for a reasonable investor the accompanying statements do not offset the misleading effect of the misrepresentation or omission, then bespeaks caution is unavailable as a defense. Therefore, contrary to the plaintiffs' assertion, we believe that our analysis comports with the Supreme Court's reasoning in Virginia Bankshares. 16
51 Returning to the instant case, we think it clear that the accompanying warnings and cautionary language served to negate any potentially misleading effect that the prospectus' statement about the Partnership's belief in its ability to repay the bonds would have on a reasonable investor. The prospectus clearly and precisely cautioned that the bonds represented an exceptionally risky, perhaps even speculative, venture and that the Partnership's ability to repay the bonds was uncertain. Given this context, we believe that no reasonable jury could conclude that the subject projection materially influenced a reasonable investor. 17 V. The Allegations Concerning Material Omissions 52 The complaint also includes allegations that the prospectus omitted material facts. More specifically, the plaintiffs contend that the prospectus was materially misleading due to its failure to disclose certain facts which, for purposes of this appeal, we assume are all true: 1) the precarious nature of Trump's personal finances; 2) the fact that the Taj Mahal would require an average daily casino win of $1.3 million in order to repay the bonds in full; 3) the thinly-capitalized nature of the Taj Mahal; 4) the expense necessary to attract customers from other casinos to the Taj Mahal and the improbability that the Taj Mahal would be successful in such an effort; and 5) the likely effect of the already weakened economy on the future success of the Taj Mahal. Analyzing each in turn, we reject the plaintiffs' contention that these allegations state actionable securities fraud claims. A. Trump's Personal Finances 53 We can readily dispose of the plaintiffs' allegation that the prospectus made a material omission in its failure to disclose that Trump's financial condition was precarious because he had made or was planning to make various financial guarantees on projects unrelated to the Taj Mahal. Complaint at p 34. 18 The prospectus made clear that Trump was only obligated to contribute $75 million of his own funds toward the completion of the Taj Mahal and that he had promised to lend the venture up to $25 million under specified circumstances. It did not even suggest that Trump would contribute more of his personal wealth to the venture in order to repay the bondholders or otherwise to ensure the Taj Mahal's successful completion and operation. Given the explicit limitations on Trump's financial obligations toward the Taj Mahal as well as the fact that he, in fact, contributed the amounts he had promised, we fail to see the materiality of his actions or intentions with respect to the balance of his personal assets. 19 B. Average Daily Casino Win 54 We also reject the plaintiffs' argument that they state an actionable claim through their allegation that the prospectus failed to disclose that, for the Partnership to repay all of its debts, the Taj Mahal would require a $1.3 million average daily casino win. See Complaint at p 33(a)-(b). As we discussed above, the prospectus went to great lengths to alert investors to many of the specific risks involved in the successful completion and operation of the Taj Mahal. It clearly conveyed the projected magnitude and enormity of the casino/hotel--the size of which was unprecedented in Atlantic City--and acknowledged that consequently the Taj Mahal's projected cash flow and profitability were highly uncertain. In addition, the prospectus directly related this uncertainty to the indefiniteness of the Partnership's ability to repay the bonds. With great detail, it also explained the intense competition the Taj Mahal would face in Atlantic City. The prospectus even predicted that, due to the projected increase in casino floor space, the average casino win per square foot would decrease in Atlantic City. 55 A reasonable investor, having read these cautionary explanations, would understand that the Taj Mahal carried substantial risks. He or she would further comprehend that, because of its size, the Taj Mahal would need to generate a particularly high daily casino win. In other words, an explicit statement in the prospectus that the Taj Mahal demanded an average daily casino win of $1.3 million to meet its debtload would have been superfluous. We therefore hold as a matter of law that this omission was immaterial and cannot form the basis for a claim under the federal securities laws. C. Debt/Equity Ratio 56 The plaintiffs furthermore allege that the prospectus failed to disclose that the construction and operation of the Taj Mahal involved an excessive, unwarranted, and unprecedented debt component relative to total capitalization. Out of the $805 million total projected ... costs, no more than $75 million (or only nine percent) represented capital contributions. Complaint at p 36. 57 The plaintiffs cannot successfully contend that the prospectus failed to disclose the specifics of the debt-equity ratio. The prospectus set forth the details of the venture's projected debt component with great clarity. It advised that the Partnership estimated a cost of approximately $805 million to fund the acquisition, completion and operation of the Taj Mahal and to repay the interest on the bonds for fifteen months. It then specifically delineated the several sources for this amount and the magnitude of each source. 20 Thus the prospectus adequately apprised the bondholders that capital contributions (rather than debt obligations) would supply only about nine percent of the Taj Mahal's funds. 58 In addition, the plaintiffs cannot successfully contend that the prospectus is actionable because it failed to describe its debt-equity ratio as either unwarranted or excessive. See Goldberg v. Meridor, 567 F.2d 209, 218 n. 8 (2d Cir.1977) (We do not mean to suggest that § 10(b) or Rule 10b-5 requires insiders to characterize conflict of interest transactions with pejorative nouns or adjectives.), cert. denied, 434 U.S. 1069, 98 S.Ct. 1249, 55 L.Ed.2d 771 (1978). The prospectus disclosed the relevant fact that capital contributions would provide only $75 million of the $805 million budget. And even assuming the Partnership had superior access to such information, the prospectus' failure to compare the Taj Mahal's debt-equity ratio with that of other casinos does not, by itself, create an actionable claim. 59 The federal securities laws do not ordain that the issuer of a security compare itself in myriad ways to its competitors, whether favorably or unfavorably, for at least three reasons. First, such a requirement would impose an onerous if not insurmountable obstacle on issuers of securities to ensure they obtain accurate information on all aspects of their competitors which a reasonable investor might find material. Second, were we to announce such a requirement, the likely result would be to inundate the investor with what the Supreme Court disparaged as an avalanche of trivial information. TSC, 426 U.S. at 448, 96 S.Ct. at 2132. Third--and of greatest consequence--it is precisely and uniquely the function of the prudent investor, not the issuer of securities, to make such comparisons among investments. See In re Donald J. Trump Sec. Litig., 793 F.Supp. at 559. 60 Similarly, to the extent that the plaintiffs simply challenge the Partnership's decision to obtain only $75 million in capital contributions in comparison to the approximately $700 million in debt obligations, they plainly do not state a claim under the securities laws. It is well-established that the securities laws do not create liability for breaches of fiduciary duty or mismanagement. See Santa Fe Indus. v. Green, 430 U.S. 462, 477, 97 S.Ct. 1292, 1303, 51 L.Ed.2d 480 (1977). We have held that [w]here the incremental value of disclosure is solely to place potential investors on notice that management is culpable of a breach of faith or incompetence, the failure to disclose does not violate the securities acts. Craftmatic, 890 F.2d at 640. Accordingly, we hold that the plaintiffs' challenges with respect to the Taj Mahal's debt-equity ratio fail as a matter of law to state a claim under the federal securities laws. D. Attracting Customers from Other Casinos 61 The plaintiffs also allege that the prospectus failed to disclose that the Taj Mahal would be unlikely to draw away enough customers from other casinos to generate sufficient income for the Partnership to repay its debts. Because the prospectus did in fact warn of the high level of competition for patrons that the Taj Mahal would face, we uphold the district court's decision to dismiss these claims. 21 62 The prospectus explicitly stressed the severity of competition the Taj Mahal would face. It twice stated that [c]ompetition in the Atlantic City casino/hotel market is intense. In addition, the prospectus specified with particularity the number of casinos in Atlantic City which would compete with the Taj Mahal, and their operators' ongoing and projected efforts to expand their capacity and/or renovate their facilities. The prospectus disclosed that the Atlantic City casino industry is currently experiencing a significant increase in capacity. It warned that [t]he Partnership believes that, based upon historical trends, casino win per square foot of casino space will decline in 1990 as a result of a projected increase in casino floor space, including the opening of the Taj Mahal. 63 The prospectus, moreover, stated flatly: Growth in Atlantic City casino win is expected to be restrained.... No assurance can be given with respect to either the future growth of the Atlantic City gaming market or the ability of the Taj Mahal to attract a representative share of that market. Furthermore, the prospectus underscored that the Taj Mahal would compete with other Trump-owned casinos in Atlantic City and with other forms of legalized gambling in the vicinity as well as casino and other gambling in other regions (e.g., Las Vegas). In short, the prospectus extensively and graphically disclosed the magnitude of the competition that the Taj Mahal would face. 64 The prospectus so bespoke caution with respect to the Taj Mahal's prospective competitive obstacles that we deem the challenged omission immaterial as a matter of law. Because the prospectus took substantial pains to convey to the bondholders the considerable competition that the Taj Mahal would face in the Atlantic City casino industry, we fail to see how the inclusion of the prediction that the Taj Mahal would have difficulty in surmounting this obstacle successfully would have materially altered the substance of the information provided by the prospectus. Cf. Craftmatic, 890 F.2d at 641-44 (dismissing complaint's allegations of material omissions of predictive statements about the likely success of the defendant's effort to enter new lines of business). We therefore conclude that the prospectus adequately cautioned potential investors that the Taj Mahal would face intense competition. These warnings undermine any claim that the prospectus made material omissions on this issue.
65 Finally we turn to the plaintiffs' allegation that the prospectus omitted to disclose the likely effect of the already weakened economy in the Northeast and the potential for competition from casinos located in Las Vegas, Nevada. Complaint at p 39. This allegation also fails to state an actionable claim. As mentioned above, see supra page 376, the prospectus did in fact divulge that the Taj Mahal would face competition from Las Vegas casinos. In addition, we hold that the defendants did not violate the securities fraud laws merely by failing to alert investors to the obvious implications of the already weakened economic conditions in the Northeast. As the reasonable investor should have known of the economic downturn in the Northeast at that time, the inclusion of this information would not have substantively altered the total mix of information the prospectus provided to investors. The federal securities laws, in a word, do not compel the Partnership to state the obvious.