Opinion ID: 3025920
Heading Depth: 3
Heading Rank: 1

Heading: Tabor Facility Claims

Text: Winer contends new information alleged in the proposed amendments establishes scienter for Queen’s February 20, 2002 optimistic statements about the renovation of the Tabor Facility and Pennexx’s March 29 and April 17, 2002 SEC filings estimating the cost of the Tabor Facility. Winer’s proffered new information comes from: (1) the July 20, 2004 deposition of Mike Timmons, a Smithfield Foods engineer and a project leader for the renovations who stated the Tabor Facility was in “relatively poor shape”; (2) Queen’s comments during a walking tour of the Tabor Facility on July 23, 2004; and (3) a budget estimate prepared by Robert McClain, a Smithfield Foods engineer and a project leader for the Tabor Facility renovations. Winer contends these sources portray the Tabor Facility as being in disarray prior to renovations and that Pennexx understated the magnitude of the renovations required. Winer challenges Queen’s assertion on February 20, 2002, that the Tabor Facility required “minimal improvement.” Winer cites Queen’s statements in 2004 that there had been a problem with the lighting in one area of the Tabor Facility and a “major issue[] in the plant that started to happen right away was that the floor was coming up.” The District Court found the proposed amendments futile because Winer did not plead that any defendant knew any statement was false or misleading when 24 made. In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002) (“To be actionable, a statement or omission must have been misleading at the time it was made; liability cannot be imposed on the basis of subsequent events.”); Cal. Pub. Employees, 394 F.3d at 158 (“We have long rejected attempts to plead fraud by hindsight.”); see also Tellabs, 127 S. Ct. at 2508 (“The ‘strong inference’ formulation was appropriate, the Second Circuit said, to ward off allegations of ‘fraud by hindsight.’”) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994) (quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.))). Queen’s February 20, 2002 statements were made in the early stages of a complex, evolving real estate transaction. Within weeks of announcing its decision to purchase the Tabor Facility and before the acquisition was final, Pennexx released preliminary estimates that purchasing, renovating, and equipping the new facility would require substantial expenditures. The District Court noted the most plausible inference was that Pennexx revised its cost estimates in response to new information and to negotiations during the intervening time period. In this context, the District Court noted, the pleaded facts failed to support the requisite strong inference of reckless conduct, much less intentional conduct. Stated differently, Winer’s purported inference, that the statements regarding the Tabor Facility were knowingly false, was not as compelling or as strong as the opposing inference cited by the District Court. Thus, Winer’s inference is neither cogent, nor compelling, nor strong in light of competing inferences. A reasonable person would not deem 25 the inference of scienter cogent and at least as compelling as any non-culpable inference. See Tellabs, 127 S. Ct. at 2509–10. Winer also relies on Timmons’s deposition and McClain’s preliminary budget estimate to contradict Queen’s February 20, 2002 statement. As the District Court noted, Timmons had not begun working at the Tabor Facility until weeks after Queen’s challenged statements. Accordingly, the District Court found this was an impermissible attempt to prove fraud by hindsight. We agree. McClain’s higher estimate for purchasing, repairing and equipping the Tabor Facility was dated January 29, 2002. But the District Court noted that the version of McClain’s preliminary budget estimate cited in the proposed amendments was attached to an email sent to Queen on March 1, a week after Queen made the challenged statements. But even assuming Queen had seen the McClain estimate prior to his February 20, 2002 statement, the District Court held that it failed to correct the scienter deficiencies. As noted, Queen’s statement was made in the early stages of a “complex, evolving real estate transaction.” In subsequent filings, Pennexx disclosed the Tabor Facility project would cost more than originally expected. The District Court found “the collective allegations of the [second amended complaint]” failed to give rise to a strong inference that Queen made the February 20, 2002 statement with scienter. We agree. A reasonable person would not deem the inference of scienter cogent and at least as compelling as any non-culpable inference. See Tellabs, 127 S. Ct. at 2509–10. 26 The District Court also found the McClain estimate did not cure the scienter deficiencies for allegations based on the March 29 and April 17 SEC filings. The District Court noted that McClain’s estimate was “based on the information currently in hand” as of March 1, 2002, only nine days after Pennexx had entered into a preliminary agreement to purchase the Tabor Facility and over one month before Pennexx finalized the acquisition of the Tabor Facility. The District Court found the lower-end cost estimates contained in the challenged SEC filings corresponded to the limited principal advances permitted by Smithfield Foods under the parties’ credit agreement as of March 29, 2002. McClain’s higher cost estimates did not appear to consider the significant constraints on Pennexx’s ability to finance the Tabor Facility project. The District Court found the most plausible inference was that Pennexx revised its cost estimates in response to new information and ongoing financial negotiations. Stated differently, Winer’s purported inference was not as compelling or as strong as the opposing interest cited by the District Court. Thus, the inference is neither cogent, nor compelling, nor strong in light of competing inferences. A reasonable person would not deem the inference of scienter cogent and at least as compelling as any non-culpable inference. See Tellabs, 127 S. Ct. at 2509–10. Moreover, the District Court found that Timmons’s opinion could not give rise to a strong inference that Queen acted with scienter. Winer did not allege that Timmons conveyed his opinions on renovation and budgeting to Queen prior to his February 2002 statement or that Queen adopted 27 Timmons’s opinions. As the District Court noted, the proposed amendments never alleged that Timmons informed Queen of the poor condition of the Tabor Facility. Winer failed to adequately plead scienter by failing to link the declarant of the challenged statement with facts that might contradict his statement. See 15 U.S.C. § 78u-4(b)(2) (requiring plaintiffs to plead facts giving rise to a “strong inference” that “the defendant . . . acted with the required state of mind”); see also Alpharma, 372 F.3d at 150 (“[A]llegations that Williams, [a] subordinate [of an individual defendant], knew of the irregularities occurring in Brazil provide an insufficient basis upon which to impute knowledge to [that individual defendant].”); Nolte v. Capital One Fin. Corp., 390 F.3d 311, 316 (4th Cir. 2004) (affirming dismissal where plaintiffs failed to plead that the speaking defendants “adopted [an employee’s] opinion [that Capital One was undercapitalized] but then publicly declared that Capital One was maintaining sufficient capital”). Citing Nursing Home Pension Fund Local 144 v. Oracle Corp., 380 F.3d 1226, 1233 (9th Cir. 2004), Winer contends Timmons’s testimony provides a “substantial window” into the state of the Tabor facility at the time of Queen’s February 20 statement.4 But Oracle Corp. is easily distinguishable on the 4 In Oracle, the Court found the statements of a former vicepresident of finance and other employees in conjunction with large stock sales by the CEO and CFO, the loss of a large number of deals, and improper revenue accounting records as critical in finding a strong inference of scienter. See Oracle 28 facts. Winer also contends Timmons’s statements prove scienter for prior optimistic statements. But Winer relies on statements made at the beginning of the renovation of the Tabor Facility. Timmons had not even started working at the Tabor Facility at the time of Queen’s February 20, 2002 statement. The underlying facts, when viewed in the context of the complex renovation, fail to support a strong inference of scienter. A reasonable person would not deem the inference of scienter cogent and at least as compelling as any non-culpable inference. The District Court did not abuse its discretion in finding that the proffered amendments failed to cure the scienter deficiencies of the original complaint.