Opinion ID: 657170
Heading Depth: 2
Heading Rank: 1

Heading: Existence of an actionable misrepresentation or omission

Text: 13
14 We first consider whether the District Court properly concluded that Rule 9(b) required dismissal of allegations of fraudulent statements when the complaint failed to identify the speaker. The complaint contains excerpts from a variety of newspaper stories and security analyst reports. Some of these accounts contain anonymous quotes or paraphrases of statements from alleged Time Warner insiders. Others merely report upon Time Warner's activities. In both cases, plaintiffs allege that some as yet unknown agents of Time Warner made misleading statements (or omitted to disclose material information) in discussions with the reporter or analyst. These reports and stories, excerpted in the complaint at pp 42, 44-47, 49, 54, 58-62, 65, 69, 72, generally confirm that negotiations concerning strategic alliances are ongoing and add little to the statements for which Time Warner is concededly responsible. But some of the statements implied in the reports and stories would bolster plaintiffs' case considerably. We have included the relevant excerpts in the margin. 2 15 Rule 9(b) requires that [i]n all averments of fraud or mistake, the circumstances constituting fraud or malice shall be stated with particularity. Judge Lasker understood Rule 9(b) to require, at a minimum, that the plaintiff identify the speaker of the allegedly fraudulent statements. We believe that he was correct. Plaintiffs rely on several district court decisions that they claim apply a less strict rule for statements attributed to corporate spokespersons, see In re AnnTaylor Stores Securities Litigation, 807 F.Supp. 990, 1004 (S.D.N.Y.1992); Cytryn v. Cook, Fed.Sec.L.Rep. (CCH) p 95,409, 1990 WL 128233 (N.D.Cal. July 2, 1990), and for statements by newspapers and analysts allegedly caused by corporate employees, see Alfus v. Pyramid Technology Corp., 764 F.Supp. 598, 603 (N.D.Cal.1991); In re Columbia Securities Litigation, 747 F.Supp. 237, 245 (S.D.N.Y.1990). These cases are distinguishable on their facts, in that they involve official press releases, see AnnTaylor, 807 F.Supp. at 1004-05; see also DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir.1987) (offering statement), statements by named individuals to analysts or reporters, see Columbia, 747 F.Supp. at 245; Cytryn, Fed.Sec.L.Rep. (CCH) at 97,016, or the defendant's placing its imprimatur on analyst's reports, see Alfus, 764 F.Supp. at 603; see also Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163-64 (2d Cir.1980). None of these cases sanctions the pleading of fraud through completely unattributed statements, even when the plaintiff alleges on information and belief that the unattributed statement was made by an agent of the defendant. 16 Just as 10b-5 litigation, however resolved, risks adverse consequences, as we have noted, a strict application of Rule 9(b) in the context of unattributed statements also risks unfortunate effects. A scheming corporation could inflate its stock price through fraudulent statements whispered to reporters or analysts. If the reporters or analysts refused to reveal their sources and if no one inside the corporation leaked to the stockholders or to regulators the identity of the speakers, the corporation would have perpetuated a fraud that could not be remedied by a private civil action under the federal securities laws. For several reasons, however, we have some confidence that this is not a sufficiently likely scenario to justify a rule that would permit a suit alleging unattributed statements to survive a motion to dismiss. 17 As an initial matter, the function of financial reporters and security analysts is to determine the truth about the affairs of publicly traded companies. Few reporters or analysts would knowingly abet a fraud, and many will detect and reveal a corporation's efforts to use them as a channel for fraudulent statements. Additionally, investors tend to discount information in newspaper articles and analyst reports when the author is unable to cite specific, attributable information from the company. Thus, the opportunity to manipulate stock prices through the planting of false stories is somewhat limited. Finally, the effect of a less strict construction of Rule 9(b) would be only to allow discovery on the issue of the linkage between the corporation and the newspaper stories or analyst reports. Sometimes, of course, plaintiff's counsel would be able to use discovery to determine the identity of the speaker, and would find that this speaker was a person for whom the corporation was responsible. But far more often, we suspect, this would not be the case. Either the corporation is not responsible for the statements, in which case it has been unnecessarily burdened either by the expense of discovery or by a settlement extracted under threat of such discovery, or it is responsible, and having exhibited sufficient devotion to a fraudulent scheme so as to prevent attribution of statements in advance of discovery, it will often attempt and sometimes succeed in stonewalling discovery. 18 Alternatively, the District Court found that the unattributed statements, even if attributable to Time Warner, were not actionable. We do not reach this issue, since we find that dismissal with prejudice under Fed.R.Civ.P. 9(b) was proper as to these statements. It is true that dismissal under Rule 9(b) is usually without prejudice, see Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir.1986), but plaintiffs, though offered the opportunity by the District Court, have presented nothing to suggest that they could amend the complaint to adequately plead a link between the defendants and the unattributed statements. 19
20 We next focus on those statements as to which there is no issue of attribution. While plaintiffs claim that these statements were misleading, in that they exaggerated the likelihood that strategic alliances would be made, plaintiffs primarily fault these statements for what they did not disclose. The nondisclosure is of two types: failure to disclose problems in the strategic alliance negotiations, and failure to disclose the active consideration of an alternative method of raising capital. We have listed excerpts of the relevant statements in the margin. 3 21 1. Affirmative misrepresentations. We agree with the District Court that none of the statements constitutes an affirmative misrepresentation. Most of the statements reflect merely that talks are ongoing, and that Time Warner hopes that the talks will be successful. There is no suggestion that the factual assertions contained in any of these statements were false when the statements were made. As to the expressions of opinion and the projections contained in the statements, while not beyond the reach of the securities laws, see Virginia Bankshares, Inc. v. Sandberg, --- U.S. ----, ---- - ----, 111 S.Ct. 2749, 2756-61, 115 L.Ed.2d 929 (1991) (proxy statements actionable under section 14(a)); Goldman v. Belden, 754 F.2d 1059, 1068-69 (2d Cir.1985) (positive predictions actionable under section 10(b)), the complaint contains no allegations to support the inference that the defendants either did not have these favorable opinions on future prospects when they made the statements or that the favorable opinions were without a basis in fact. 22 2. Nondisclosure of problems in the strategic alliance negotiations. The allegations of nondisclosure are more serious. Plaintiffs' first theory of nondisclosure is that the defendants' statements hyping strategic alliances gave rise to a duty to disclose problems in the alliance negotiations as those problems developed. We agree that a duty to update opinions and projections may arise if the original opinions or projections have become misleading as the result of intervening events. See In re Gulf Oil/Cities Service Tender Offer Litigation, 725 F.Supp. 712, 745-49 (S.D.N.Y.1989) (material misstatements or omissions adequately set forth alleging that defendants had expressed a strong interest in consummating a merger and had not disclosed a later change of heart); In re Warner Communications Securities Litigation, 618 F.Supp. 735, 752 (S.D.N.Y.1985) (approving settlement), aff'd, 798 F.2d 35 (2d Cir.1986). But, in this case, the attributed public statements lack the sort of definite positive projections that might require later correction. The statements suggest only the hope of any company, embarking on talks with multiple partners, that the talks would go well. No identified defendant stated that he thought deals would be struck by a certain date, or even that it was likely that deals would be struck at all. Cf. In re Apple Computer Securities Litigation, 886 F.2d 1109, 1118-19 (9th Cir.1989) (Chairman of the Board stated that new computer product would be phenomenally successful the first year out of the chute, etc.), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990). These statements did not become materially misleading when the talks did not proceed well. 4 23 3. Nondisclosure of alternative methods of raising capital. Still more serious is the allegation of a failure to disclose the simultaneous consideration of the rights offering as an alternative method of raising capital. As an initial matter, of course, a reasonable investor would probably have wanted to know of consideration of the rights offering. Though both the rights offering and strategic alliances would have brought capital into the corporation, the two acts would have directly opposite effects on the price of Time Warner stock. A successful strategic alliance, simultaneously opening new markets and reducing debt, would have improved the corporation's expected profit stream, and should have served to drive up the share price. An offering of new shares, in contrast, would dilute the ownership rights of existing shareholders, likely decrease dividends, and drive down the price of the stock. 24 But a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts. See Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194 (1988); Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir.1992). As Time Warner pointedly reminds us, we have not only emphasized the importance of ascertaining a duty to disclose when omissions are at issue but have also drawn a distinction between the concepts of a duty to disclose and materiality. See Glazer, 964 F.2d at 157. It appears, however, that the distinction has meaning only in certain contexts. For example, where the issue is whether an individual's relationship to information imposed upon him a duty to disclose, the inquiry as to his duty is quite distinct from the inquiry as to the information's materiality. See Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). On the other hand, where the disclosure duty arises from the combination of a prior statement and a subsequent event, which, if not disclosed, renders the prior statement false or misleading, the inquiries as to duty and materiality coalesce. The undisclosed information is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information available. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). If a reasonable investor would so regard the omitted fact, it is difficult to imagine a circumstance where the prior statement would not be rendered misleading in the absence of the disclosure. As Glazer makes clear, one circumstance creating a duty to disclose arises when disclosure is necessary to make prior statements not misleading. Glazer, 964 F.2d at 157 (citing Roeder v. Alpha Industries, Inc., 814 F.2d 22, 26 (1st Cir.1987)). 25 We have previously considered whether disclosure of one business plan required disclosure of considered alternatives in Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726 (2d Cir.1987), cert. denied, 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 700 (1988). In Kronfeld, the defendant, TWA's parent corporation, failed to disclose in the prospectus for a new issue of TWA stock that it was contemplating termination of its relationship with TWA. Because the prospectus discussed in some detail the relationship between TWA and the parent, id. at 735, we held that a fact question was presented as to whether it was materially misleading not to disclose the possibility of termination, id. at 736-37. In effect, the alternative, if disclosed, would have suggested to investors that the various guarantees extended from the parent to TWA might be meaningless. In the pending case, the District Court understood the obligation to disclose alternate business plans to be limited to the context of mutually exclusive alternatives. It is true that Kronfeld involved such alternatives--the TWA parent could not both maintain and terminate its relations with TWA--and that this case does not. Time Warner potentially could have raised all its needed capital from either strategic alliances or a rights offering, or it could have raised some part of the necessary capital using each approach. 26 We believe, however, that a disclosure duty limited to mutually exclusive alternatives is too narrow. A duty to disclose arises whenever secret information renders prior public statements materially misleading, not merely when that information completely negates the public statements. Time Warner's public statements could have been understood by reasonable investors to mean that the company hoped to solve the entire debt problem through strategic alliances. Having publicly hyped strategic alliances, Time Warner may have come under a duty to disclose facts that would place the statements concerning strategic alliances in a materially different light. 27 It is important to appreciate the limits of our disagreement with the District Court. We do not hold that whenever a corporation speaks, it must disclose every piece of information in its possession that could affect the price of its stock. Rather, we hold that when a corporation is pursuing a specific business goal and announces that goal as well as an intended approach for reaching it, it may come under an obligation to disclose other approaches to reaching the goal when those approaches are under active and serious consideration. Whether consideration of the alternate approach constitutes material information, and whether nondisclosure of the alternate approach renders the original disclosure misleading, remain questions for the trier of fact, and may be resolved by summary judgment when there is no disputed issue of material fact. We conclude here only that the allegations in this complaint of nondisclosure of the rights offering are sufficient to survive a motion to dismiss.