Court Opinion

ID: 6947699
Source: CourtListenerOpinion
Date Created: 2022-07-24 01:27:32.427161+00
Date Added: 2024-06-11T16:07:57.921964
License: Public Domain

FLAUM, Circuit Judge,
concurring.
While I agree that the Chicago Tribune article is inadmissible hearsay for the reasons stated in the majority opinion and therefore join the decision, I write separately to express my concern with the potential ramifications of the alleged corporate conduct in this case. The court accepts that even if the representation as to the number of companies who had conducted due-diligence reviews of Centel’s books was materially misleading — and I believe that it was— no liability can result in this case. Left open is the question of whether a corporation has a duty to monitor the accuracy with which its oral statements are reported by the media. In my judgment, this is an area of inquiry warranting examination.
As Congress recognized in passing the Exchange Act, “[t]here cannot be honest markets without honest publicity.” See Basic Inc. v. Levinson, 485 U.S. 224, 230, 108 S.Ct. 978, 982, 99 L.Ed.2d 194 (1988) (quoting H.R.Rep. No. 1383, 73d Cong., 2d Sess. 11 (1934)). Some of the burden of ensuring the honesty of a company’s publicity is properly placed on the company. In the instant case, it would appear that Centel, at the very least, made vague, possibly even confusing, oral representations to the press concerning the state of the bidding process. In order to convey the desired impression that interest in the company was widespread, the company’s spokespersons would have had to walk a very thin line. Given that Centel had begun to suspect that it would not receive a large number of bids,1 any statement beyond a vague reassurance that many companies had expressed some level of interest would run the risk of misleading investors. In this situation, the decision to make oral, extemporaneous comments, which were likely to be taken out of context or paraphrased, was an imprudent one that the law should not rush to insulate. While the majority recognizes the possibility that Centel may have had an independent duty to correct any materially misleading statements under these circumstances, it reserves the question since it is not directly before the court. However, due to the potential significance of the issue to future litigation, I believe the general rule that a corporation has no duty to correct misstatements attributed to it by the press is deserving of reexamination in the context of this ease.
As the majority notes, underlying the general rule that a corporation has no duty to correct misinformation reported in the press that is not attributable to the corporation is the concern that persons outside a corporation, by planting misinformation in the press, could force the corporation to disclose prematurely information it would otherwise choose to keep secret, thereby foisting on the corporation a duty to correct the statement. See Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 949 (2d Cir.1969) (recognizing that misleading news report may have been effort by target company to obtain information regarding possible tender offer prior to time required by Exchange Act); see also In re Time Warner Inc. Securities Litig., 9 F.3d 259, 265 (2d Cir.1993) (holding that dismissal under FRCP 9(b) was proper when complaint failed to allege source of unattributed statements); State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 850 (2d Cir.1981) (stating that corporation has no duty to correct rumors in marketplace unless rumors can be attributed to corporation). This rule recognizes that there are often valid reasons a corporation would choose not to disclose certain information, such as in the context of pending merger negotiations. See In re Time Warner, 9 F.3d at 267 (“[A] corporation is not under a duty to disclose a fact merely because a reasonable investor would very much like to know that fact.”); Flamm v. Eberstadt, 814 F.2d 1169, 1177 (7th Cir.1987) (recognizing that *748corporation’s silence as to pending merger negotiations is beneficial to investors). This is a concern that is clearly not implicated in the present case. While a corporation has an interest in the timing of its disclosures, it has far less interest in remaining silent with respect to matters on which it has already chosen to comment. Apparently, Centel’s Chairman and its investment banker voluntarily commented on the level of interest in the company’s assets and they were undoubtedly aware that they might be quoted as having done so. It is therefore appropriate to ask whether Centel should bear some responsibility for the accuracy of the reported statements, which stemmed from its publicity efforts and which were attributed to named corporate insiders, not anonymous sources.
A factor weighing in favor of holding Centel accountable for the misinformation is that Centel chose the means by which it would convey information to the public. Companies speak to the public in a variety of ways: issuing press releases, holding press conferences, and granting interviews to analysts or member of the press, to name a few. Some of these methods are more likely than others to ensure that a corporation’s statements are accurately reported by the media. What makes the instant case difficult is that it is unclear whether the Tribune’s story is in fact an accurate account of Frazee’s and Paul-son’s statements. This type of ambiguity is most likely to arise in those cases in which corporate officers and agents make oral, extemporaneous statements in response to questions posed by the press. Because corporations and their attorneys are well aware that speaking to the press entails some risk that the company’s statements may be misquoted or taken out of context, corporations often wisely choose to speak through prepared press releases or to have company spokespersons read prepared statements that have been reviewed by the company’s attorneys. These methods of communication reduce the likelihood that there will be confusion as to what has been said and enable corporations to control the exact content of their disclosures. Because corporations that avail themselves of forms of publicity devoid of similar safeguards share some degree of responsibility for the accuracy of what is subsequently reported, it is appropriate to ask whether these corporations should bear the concomitant duty to correct any materially misleading information attributed to them. See John M. Sheffey, Securities Law Responsibilities of Issuers to Respond to Rumors and Other Publicity: Reexamination of a Continuing Problem, 57 Notre Dame Law. 755, 784 (1982) (arguing that oral and extemporaneous nature of interviews make it likely that company is contributing cause to inaccurate report and suggesting duty to correct is therefore appropriate).
Admittedly, any rule that imposes on corporations the duty to correct information attributed to them would cause corporations to be more cautious in dealing with the press. However, encouraging corporations to speak with precision when making oral statements to the press is hardly an undesirable result. As the majority recognizes, in the instant case we do not know what Frazee and Paul-son told the Tribune concerning the number of corporations that expressed interest in bidding on Centel and what form these indications of interest took. It seems likely that certain phrases, e.g. “due diligence,” “exploring submitting bids,” as well as certain numbers, “35 to 40,” were used. What is clear is that the article implies that the number “35 to 40” was the number confirmed by Centel’s Chairman as the number of companies that conducted due diligence review of Centel’s books.2 A rule that does not require a corpo*749ration to correct misleading statements that are to the corporation’s benefit creates an incentive for corporations to be vague in responding to inquiries by the press. For example, in the instant case, Centel was less than optimistic about the quantity of bids it would receive. Nevertheless, it was in Centel’s interest to convey the opposite impression — that it was a desirable company with many suitors — in the hopes of drumming up last-minute interest. One way to do this would be to throw out some high numbers, but to be vague as to what those numbers refer to. Paulson’s deposition testimony states that while he does not deny having given the number “35 to 40,” he cannot remember to what class of bidders he would have attached that number, and it does not appear that he had tallied this number in advance of the interview.3
The significance of the information imparted by the Tribune article only exacerbates my unease. Unlike the majority, I harbor little doubt as to the materiality of the statement at issue here, which included a concrete estimate of the number of potential bidders who had conducted “due-diligence reviews of the company’s books.” The exact wording of this statement is relevant: determinations of materiality depend on a “delicate assessment of the inferences a ‘reasonable shareholder’ would draw from a given set of facts and the significance of those inferences to him____” See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757 (1976). The inferences an investor would draw from the “35 to 40” statement are different than the inferences an investor would draw from the statement that a potential bidder “expressed interest” in the company or that it “had explored submitting a bid.” Statements that a company has “expressed interest” or “explored submitting a bid” tell the investor nothing about the extent of the acquiring company’s interest or how deeply it has explored submitting a bid. The instant case therefore provides a good example of why corporations should speak with specificity and choose their words carefully when providing factual information to the press.
An investor would understand conducting a due-diligence review of a target’s books to be a significant indication of interest, because, in order to have received access to Centel’s non-public information, a bidder would have had to sign a “confidentiality statement.” Such a commitment, in the words of Centel’s Chairman, was a “pain”: bidders had to agree to not use the information for any purpose other than submitting a bid, not to trade Centel’s stock for a certain period of time, and not to discuss the transaction with any other bidders. The willingness or unwillingness of a company to sign the confidentiality agreement was therefore some indication of where a potential bidder was in its decision process. As the majority correctly notes, there was a substantial amount of information available about Centel as a matter of public record from which a potential bidder could make an assessment of Centel’s attractiveness as a target. Because signing the confidentiality agreement was not without its own costs, it is unlikely that a company would sign the agreement unless its initial review of the publicly available information suggested that Centel might be a desirable target. The opposite is also true: an investor whose initial assessment was unfavorable would put a lower value on obtain*750ing additional information. In the context of a closed-bid auction, these actions would have spoken louder than the bidders’ words, which were unlikely to reveal much about their true intentions.4
What investors would have taken from the Tribune article then is not that many companies had expressed some interest in bidding, but that thirty-five to forty companies were actively pursuing the possibility of placing a bid for Centel’s assets. Although it is not clear from the record, it may very well be that this number represents a significant percentage of the total class of potential purchasers. One would assume that the list of telecommunications companies with a need for Centel’s assets and the resources to purchase them is not a long one. The reality, of course, was much different. As of April 14, 1992, twenty-three companies had signed confidentiality agreements, only nineteen of which had acted on the agreement and obtained any information from Centel,5 and at least two of these had publicly announced that they would not bid. While it is at least possible, as the majority observes, that a company would place a bid without having undertaken some review of Centel’s books, the point is that a company would be far less likely to do. The facts of this case illustrate this point: all seven of the bids received by Centel were made by companies that had signed confidentiality agreements and received some confidential information from the company. It may be true that a large number of bids does not guarantee an auction’s success, but a lack of interested bidders hardly bodes well. This is especially true given that it had become clear that it was unlikely Centel would be sold in its entirety; what the company was counting on (by its own admission) was “widespread interest” in the “various pieces” of the company. The fact that nineteen companies at most, not “35 to 40,” were actively considering bidding is a fact that would have been viewed by investors as significantly altering the mix of available information.
In short, I would not hesitate to conclude, had it been established by the plaintiffs that Centel’s officials directly made the statements attributed to them, that such statements could be actionable under Rule 10b-5. Given the capacity of statements attributed to named corporate insiders to mislead investors, it is also worth considering whether, under certain limited circumstances, the securities laws impose a duty to correct any materially misleading statements so attributed, even in the absence of proof as to whether the attributed statements were actually made. Of course, further exploration of this issue must await another day and ease.

. Frazee himself admitted that, by the latter part of March, he "began to suspect ... that maybe [the company] wouldn't get as many bids as we thought we were going to get____”

. I agree with plaintiffs that a fair reading of the article suggests that 35 to 40 was the number provided by Centel’s investment banker of the firms that had conducted due diligence reviews of the company’s books. Given that the number "35 to 40” is the only number mentioned in the article, the reporter's reference in the second sentence to “the number” would logically be understood to refer to the number "35 to 40” mentioned in the preceding sentence. Defendants, in their brief, admit that the article "suggests that this number of companies had conducted due diligence.”
Additionally, I do not believe that a reasonable investor would understand the number of parties who had conducted "due-diligence reviews of the company’s books” to include those companies who had done nothing more than examine the information about Centel that was available as a matter of public record. While I agree with the *749majority that the term due diligence is an amorphous concept, this is not to say that the term is without meaning in a given context. In the instant case, Centel placed itself on the auction block and opened its books to potential bidders. “Due diligence” in this context would therefore likely involve a review of these materials, in contrast to "due diligence” in connection with an unsolicited offer to acquire a company, which necessarily would be limited to a review of information in the public domain. The exercise of due care in the instant case would likely include some examination of Centel’s internal records to ensure that its public financial statements were an accurate reflection of its true earnings and assets and that there were no undisclosed liabilities lurking beneath the publicly available numbers. The majority acknowledges that this would be an "appropriate step” in conducting a due diligence review. In any event, even if the term “due diligence” could be understood to include an examination limited to the information available in the public domain, the modifier "of the company’s books” belies the reasonableness of such an interpretation in this case.

. In addition, Cody Smith, a partner at Goldman Sachs, testified that he spoke with Paulson after the article came out and that Paulson said that the number of parties who might bid was something that he would have liked to ask Smith before the interview.

. Frazee’s own testimony indicates that he considered the signing of a confidentiality agreement to be a significant indication of interest. In his deposition testimony before the SEC, Frazee states:
If you can get somebody to sign one of these things, you know they're really interested in doing it because it's a pain ... [Y]ou have to agree not to disclose anything. You have to agree not to trade the stock for ... two years.... And we also had a provision in our confidentiality agreement that they couldn’t team up and bid, you know.
Paul Taubman, one of Centel's investment bankers likewise testified:
If somebody says, I want lots of information, and how can I start due diligence, they're still not giving you a value, but on [a] continuum, they're going to be more likely to be interested.

. The majority correctly notes that the company's records suggest that sixteen companies visited the data room. In addition, the log kept by the Centel employee in charge of the data room suggests that materials were provided to nineteen companies.