GSC Partners CDO Fund v. Washington , 368 F.3d 228 ( 2004 )

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
5-17-2004
GSC Partners CDO v. Washington
Precedential or Non-Precedential: Precedential
Docket No. 03-2347
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PRECEDENTIAL Before: ROTH, MCKEE and
UNITED STATES COURT OF CUDAHY* , Circuit Judges
APPEALS
FOR THE THIRD CIRCUIT (Opinion filed May 17, 2004)
______________
Howard J. Kaplan, Esquire (Argued)
No: 03-2347 Stanley S. Arkin, Esquire
_______________ 590 Madison Avenue
35 th Floor
GSC PARTNERS CDO FUND; New York, NY 10022
GSC PARTNERS CDO FUND II, LTD;
GSC RECOVERY II, L.P., Bruce H. Snyder, Esquire
Sheppard A. Guryan, Esquire
Appellants Lasser Hochman
75 Eisenhower Parkway
v. Roseland, NJ 07068
DENNIS R. WASHINGTON; Counsel for Appellants
STEVEN G. HANKS; THOMAS H.
ZARGES; Shannon M. Kasley, Esquire
ANTHONY S. CLEBERG; DAVID H. Beth Heiftz, Esquire (Argued)
BATCHELDER; Adrian Wager-Zito, Esquire
LEONARD R. JUDD; ROBERT S. Megyn M. Kendall, Esquire
MILLER, JR.; Jones Day
DORN PARKINSON; TERRY W. 51 Louisiana Avenue, N.W.
PAYNE; Washington, D.C. 20001
JOHN D. ROACH; CREDIT SUISSE
FIRST Robinson B. Lacy, Esquire (Argued)
BOSTON CORPORATION; JOHN Sullivan & Cromwell LLP
DOES I THROUGH X 125 Broad Street
New York, New York 10004
Appeal from the United States District Anthony J. Marchetta
Court Pitney, Hardin, Kipp & Szuch LLP
for the District of New Jersey P.O. Box 1945
(D.C. Civil Action No.01-CV-04905) Morristown, New Jersey 07962
District Judge: Honorable Anne E.
Thompson ___________________
_____________________ *The Hon.Richard D. Cudahy, Circuit
Judge for the United States Court of
Argued on December 19, 2003 Appeals for the Seventh Circuit, sitting
by designation.
Christopher J. Carey, Esquire Partners CDO Fund, Ltd., GSC Partners
David Blackwell, Esquire CDO Fund, Ltd. II, LTD., and GSC
Graham, Curtin & Sheridan Recovery II, L.P. (the plaintiffs) appeal the
Four Headquarters Plaza, P.O. Box 1991 district court’s dismissal of their action
Morristown, New Jersey 07962-1991 against individual officers and directors of
Washington Group International, Inc.
George T. Manning, Esquire (Washington) and Credit Suisse First
Jones Day Boston Corporation (CSFB). The
1420 Peachtree Street, N.E. plaintiffs filed this action under section
Atlanta, Georgia 30309-3053 10(b), Rule 10b-5 of the Securities
Exchange Act of 1934 (the Act), alleging
Counsel for Appellees that their purchase from CSFB of $48.8
million in notes, which Washington used
to finance its acquisition of Raytheon
Engineers & Constructors International,
Inc. (REC), was carried out pursuant to
OPINION defendants’ allegedly false and misleading
offering circular. Because the plaintiffs
failed to meet the heightened pleading
CUDAHY, Circuit Judge requirements of the Act, we affirm the
district court’s grant of defendants’ motion
The background of this case is the to dismiss.
classic corporate love story. Company A I.
meets Company B. They are attracted to Washington is an international
each other and after a brief courtship, they engineering and construction firm that, in
merge. Investor C, hoping that the two 2000, employed approximately 39,000
companies will be fruitful and multiply, workers and brought in approximately $5
agrees to pay $50 million for the wedding. billion in annual revenue.1 App. at 41, 77.
Nine months later, however, things begin Defendants Dennis R. Washington, Hanks,
to fall apart and the combined entity Zarges, Cleberg, Batchelder, Judd, Miller,
declares bankruptcy. Investor C feels Parkinson, Payne, and Roach were officers
misled. He believes that Company A and/or directors of Washington during the
knew that there were problems with acquisition process. App. at 38-9 (Cplt. ¶
Company B but that it made the oft 14-23).
repeated mistake of thinking that it would Washington r e pr e s e n t a ti v es
be able to change Company B for the
better. Investor C files suit in the district 1
Washington was known as Morrison
court and after his complaint is dismissed, Knudsen Corporation (sometimes referred to
we find ourselves here. It is an old story as MK) before the note offering. App. at 41.
but it never fails to elicit a tear. The company filed for bankruptcy
In this case, appellants GSC protection in May 2001, and was not named
as a defendant in this action.
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commenced negotiations during the Power Producer (IPP) market,” as well as
summer of 1999 for the acquisition of in the rail, power, chemicals, metals
REC, the engineering and construction pharmaceutical, pulp and paper, chemical
division of Raytheon Company. App. at demilitarization, refinery and heavy
42 (Cplt. ¶ 37). After conducting an initial maintenance markets. App. at 320. The
e x am i n a t io n o f RE C’s f inanc ial team also noted that the personnel it
information, Washington submitted a non- worked with had been “cooperative and
binding offer of between $775 and $875 forthcoming.” Id. at 317.
million for the business operations of
REC, subject to its findings in due The due diligence team expressed
diligence. App. at 42 (Cplt. ¶ 39). some concerns as well. It cited as among
Raytheon accepted this offer in September R E C ’s general w eakn esses it s
1999. Id. at ¶ 41. Before finalizing the “aggressive” and “optimistic” plans for
deal, Washington began its due diligence sales volume and profit growth in certain
process, which entailed thorough scrutiny businesses, the volatility of the company’s
of REC’s financial statements and working capital, the possible lack of
projections. Id. In this process, it received accounting integrity of its unaudited
assistance from Arthur Andersen, L.L.P. financial statements and its “[u]nderstated
Id. at ¶ 41. Meanwhile, the parties began or undisclosed liabilities.” Id. at 319. In
negotiating a definitive agreement for the particular, the team calculated that the
acquisition. Id. at ¶ 40. To augment this profit projections for some of the
process, Washington employed defendant construction projects were inaccurate. For
CSFB to act as its financial advisor for the example, the team revised estimated profit
REC purchase. Id. at ¶ 40. CSFB projections for the “Pine Bluff” project
conducted its own due diligence and had from $20.2 million to $3.1 million, for the
access to all of Washington’s due “SADAF” project from $4.2 million to
diligence findings as well. Id. at ¶ 43. $0.8 million and for the Hudson Bergen
Throughout the due diligence process, the project from $61.1 million to $46.9
two companies communicated their million. Id. at 326. At the same time,
findings and concerns to each other. Id. however, Washington noted, that “[w]ider
leverage of proprietary technology” could
On October 27, 1999, after one impr ove some of the pr o jects ’
month of interviews, document reviews deterio r a t in g m a r g i n s , a n d t h a t
and project site visits, Washington’s “[o]perational synergies offer [an] upside
management reported to the Washington to a combined new company.” Id. at 346.
Board its findings regarding the accuracy
of REC’s financial information. App. at On November 3, defendant Zarges
44 (Cplt. ¶ 46), 317. The team was sent a memorandum to other members of
impressed with the “[s]trong, capable the Washington management, elaborating
management team in place” and with on some of the perceived inaccuracies in
REC’s “solid position in [the] Independent the project profit estimates but projecting
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that if the acquisition went through, even bring them into compliance with Generally
taking into account the risks, the combined Accepted Accounting Principles (GAAP).
entity could perform well in the Id. Hanks stipulated that in order to
engineering and construction industry. remedy the discrepancies, it would be
App. at 362. Zarges first emphasized that necessary to arrange for an increase in
the findings in the October 27 Board liabilities assumed by Raytheon of up to
presentation were not conclusive. Id. He $100 million. Id.
wrote that, although the Umatilla and Pine
Bluff projects had been presented as The Washington Board met on
breakeven projects through 2001, they March 14, 2000 to consider the progress of
were at the time of the memo in “loss the due diligence team. App. at 548-88.
positions with deteriorating performance The team again reported some concerns
trends.” App. at 364. The memorandum about REC’s financial health, but also
reiterated concerns about Raytheon’s expressed confidence that a partnership
aggressive plans and optimistic positions with Washington would improve REC’s
on most projects, reporting inconsistencies position, “having actually experienced
and shaky performance history. Id. at 365- what it takes to turn a company around.”
66. Zarges concluded, however, that the App. at 420, 422. The team reported risks
projected operating fee (i.e. profit) in 2000 involved in the acquisition of REC, citing
could, taking into account Washington’s h i s to r i c a l pe r f or m a nc e t ha t w as
adjustments to REC’s calculations, characterized by large loss projects. Id. at
“provide an industry-leading margin of 554. The team revised the projected profit
3.8% on adjusted revenues.” App. at 362. for the Umatilla project downward to
He added, “This . . . represents quite an “22M loss, best case,” an adjustment of
improvement over recent performance $38 million from REC’s estimate. App. at
histories . . . [and] is no easy task.” Id. 559. It also adjusted the projected profit
for the Pine Bluff project from breakeven
A month later, on December 2, to a $20 million loss. Id. REC had
1 9 9 9 , d e f e ndan t Han ks sen t a “[p]oor financial controls/accounting
memorandum to the Board on the progress practices,” and the team suspected that
of the due diligence team. App. at 362. there may have been inadequate
He reported that in order to address restructuring reserves in The Hague and in
Washington’s concerns about the accuracy Houston. Id. at 554. The due diligence
of REC’s financial statements, Washington team also revised REC’s projected
had hired PricewaterhouseCoopers L.L.P., EBITDA (earnings before interest,
independent accountants, to audit the taxes, depreciation and amortization) for
financial statements for 1996, 1997, and the year 2000, from $143 million to $115
1998, and to “review” the financial million, assuming that the combined
statement for 1999. App. at 207, 367. company would be indemnified by
These audited financial statements Raytheon against any downside from
required $350 million of adjustments to Umatilla and Pine Bluff and that it “would
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incur 50% of the $60 million of Design and build services in the
vulnerabilities identified in the due infrastructure market today.” Id. at 422.
diligence report.” Id. at 420-21, 567. In addition, “[t]he combination of MK’s
industrial process unit with Raytheon’s
In addition, the due diligence team indu strial unit affords synerge tic
had encountered practical difficulties in opportunities … and a greatly improved
completing the due diligence. Defendant client base.” Id. at 422-23. He reported
Hanks recorded in his notes and reported that the due diligence team was not in
to the board that “the due diligence and complete agreement as to the value of
negotiation process has been a difficult REC. Id. at 423. He highlighted some
one- Raytheon’s procedural rules limited points on which they all agreed, however,
our opportunities for open and candid including that “[t]he strengths of MK –
discussions with management, limited our and the strengths of Raytheon are
ability to see company offices and projects complementary” and that “the Markets that
… and Raytheon has not been cooperative the combined MK/Raytheon will serve
with Washington Group’s attempts to going forward are the fastest growing
reconcile the [discrepancies between segments of the industry.” Id. at 424. His
financial and operational reports and other notes concluded by suggesting that
comparative data].” App. at 418, 552. Washington should pursue the acquisition.
These limitations led Hanks to suspect that Id.
Raytheon was “hiding serious business
issues and problems.” Id. The same Zarges’ April 3 memorandum was
concern had been recorded in the more positive about the team’s access to
November 3 memorandum, which noted data, reporting that the recent site visits
that the “team has been concerned about were “more informative.” App. at 433.
the abrupt limits of the due diligence Having been given more access to data,
process and data. With 2 ½ weeks to the team had been able to update its
evaluate data, the diligence was restricted calculations about profit from operations.
to selected high-impact projects and Its findings did confirm some losses. In
issues.” App. at 365. large part due to the lower profitability of
the Damshead Creek and San Roque
Hanks also recorded in his projects, the team reduced its estimate of
presentation notes some high points REC’s 2000 operating fee from $63
disclosed by the due diligence process. He million to $45 million. Id. at 433, 653,
wrote, “Raytheon’s Power Group is poised 655. A further memorandum dated July 6
to benefit greatly from the surge in disclosed that for certain projects, the
demand for new power,” and expressed “total MAC [material adverse changes]
confidence that “[t]he combination of e s t i m a t e – p r o j e c t
MK’s contractors unit with Raytheon’s deterioration/understated liabilities” was
Infrastructure business would create the $73.5 million. App. at 657.
most experienced and powerful provider of It appears that throughout the due
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diligence process, the due diligence team of $22 million. See Supp. App. (discussed
and the Washington Board communicated supra at n.1).
regularly and frankly about their
assessment of REC’s strengths and On July 7, 2000, Washington’s
weaknesses. At no point in this process acquisition of REC closed. App. at 52
did the Washington management express (Cplt. ¶ 82). The acquisition was primarily
the conviction that the acquisition would financed through the $300 million note
prove a failure. In fact, the management offering, sold pursuant to a confidential
team took steps to remedy the weaknesses offering circular dated June 28, 2000. Id.
it pinpointed by renegotiating the purchase at ¶¶ 86-7. The offering circular included
so as to avoid acquisition of liabilities and certain audited financial statements as well
risky projects. App. at 81. as unaudited financial statements for the
first quarter of 1999 and the first quarter of
On April 14, 2000, Washington 2000. App. 286-96. Defendant CSFB was
entered into a Stock Purchase Agreement one of the lead underwriters and initial
with Raytheon and REC. Id. The purchasers of the notes. App. at 53 (Cplt.
agreement specified that the purchase ¶ 88). It purchased $225 million in
price, which was to be based on the April principal amount of the notes, then offered
30, 2000 balance sheet, would be and resold some of those notes to the
approximately $510 million—between petitioners, who purchased $48.8 million
$265 and $365 million less than face amount of notes. Id. (Cplt. ¶ 93).
Washington’s initial of fer. Id.
W a s h i n g to n w o u l d a c q u i r e t h e On October 23, 2000, Washington’s
enginee r i ng, design, procurement, Form 10-Q filing announced that as a
construction, operation and maintenance result of “a comprehensive review” of
business of REC, as well as the capital REC’s existing contracts, Washington
stock of certain REC subsidiaries. App. at “reduced [REC’s] net assets relating to
51 (Cplt. ¶ 78). The purchase price long-term contracts in the preliminary
reflected the exclusion of the four most purchase price by approximately $325
significant REC loss projects, for which [million] . . . [and] had made reductions in
Raytheon had agreed to retain liability. Id. net contract assets in the preliminary
at 51 (Cplt. ¶ 77), 81. Raytheon also purchase price allocation of approximately
agreed to “retain specified assets” of REC $225 [million].” App. at 58-59 (Cplt. ¶
and to indemnify Washington for 105). Washington also disclosed that it
“specified liabilities of REC and its had to record approximately $1.2 billion in
subsidiaries.” App. at 81. Later, goodwill. Id. In a press release dated
Washington was able to get Raytheon to March 2, 2001, Washington disclosed that
retain partial liability for the Umatilla “[s]everal [REC] projects had serious
project as well, which Washington had undisclosed problems and were in trouble”
predicted was in a position to show a loss before it acquired REC. App. at 59 (Cplt.
¶ 110). It noted that as of September 1,
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2000, Washington had reduced REC’s Broselow v. Fisher, 319 F.3d 605, 607 (3d
assets and increased its liabilities by Cir. 2003). We also exercise plenary
approximately $700 million from the review over the district court’s
amounts originally estimated. App. at 60 interpretation of federal securities laws.
(Cplt. ¶ 111). On March 8, 2001, See Oran v. Stafford, 226 F.3d 275, 281
Washington’s Form 8-K filing indicated n.2 (3d Cir. 2000); In re Westinghouse
that REC’s financial statements referred to Sec. Litig., 90 F.3d 696, 706 (3d Cir.
in the circular should not be relied upon. 1996). We accept all allegations in the
Id. at ¶ 112. plaintiffs’ complaint as true and draw all
reasonable inferences in favor of the non-
On May 14, 2001, Washington and moving party. See Oran, 226 F.3d at 279.
some of its subsidiaries filed petitions in A court may look beyond the complaint to
bankruptcy in the Bankruptcy Court in extrinsic documents when the plaintiffs’
Nevada for relief pursuant to Chapter 11 of claims are based on those documents. See
the Bankruptcy Code. Id. at 61 (Cplt. ¶ In re Burlington Coat Factory Sec. Litig.,
117). Washington also filed a complaint 114 F.3d 1410, 1426 (3d Cir. 1997). A
in a Idaho state court against Raytheon court may not dismiss the complaint unless
alleging fraudulent inducement, fraud and it appears beyond doubt that the plaintiffs
misrepresentation, requesting rescission or can prove no set of facts in support of their
specific performance. App. at 455-81. claims that would entitle them to relief.
That suit was apparently settled in See In re Rockefeller Ctr. Props., Inc. Sec.
November 2001, and is under a Litig., 311 F.3d 198, 215-16 (3d Cir.
confidentiality restriction. Pl. Br. at 17 2002).
n.4. Plaintiffs commenced this action
alleging violation of federal and state The plaintiffs allege a violation
securities laws. Id. at 37-8. In January under Section 10(b) of the 1934 Securities
2002, the defendants filed a motion to Exchange Act and Rule 10b-5 under it. In
dismiss plaintiffs’ amended complaint. order to state a claim under Rule 10b-5,
Although no formal discovery had taken plaintiffs must allege “with particularity”
place in the civil action, the plaintiffs were that defendants (1) made a misstatement or
a b l e t o o b t a in a c c e s s t h ro u g h omission of material fact (2) with scienter
Washington’s bankruptcy to documents (3) in connection with the purchase or the
discussed in the instant opinion. The sale of a security (4) upon which the
district court granted the defendants’ plaintiffs reasonably relied and (5) the
motion, holding that the complaint failed plaintiffs’ reliance was the proximate
to state a cause of action for securities cause of their injury. Semerenko v. Cedant
fraud. App. at 1. This appeal followed. Corp., 223 F.3d 165, 174 (3d. Cir. 2000);
II. see also In re Westinghouse, 90 F.3d at
We exercise plenary review over 710.
the district court’s decision to grant the The plaintiffs’ securities fraud
defendants’ motions to dismiss. See claim is also subject to heightened
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pleading requirements. Under Federal Rule Advanta Corp. Sec. Litig., 180 F.3d 525,
of Civil Procedure 9(b), “[i]n all averments 531 n.5 (3d Cir. 1999)).
of fraud . . . , the circumstances
constituting fraud . . .shall be stated with The plaintiffs may establish a
particularity. Malice, intent, knowledge, “strong inference” that the defendants
and other condition of mind of a person acted with “scienter” “either (a) by
may be averred generally.” Fed. R. Civ. P. alleging facts to show that defendants had
9(b). This particularity requirement is both motive and opportunity to commit
“rigorously applied in securities fraud fraud, or (b) by alleging facts that
cases.” Burlington, 114 F.3d at 1417. The constitute strong circumstantial evidence
Private Securities Litigation Reform Act of conscious misbehavior or recklessness.”
(PSLRA), 15 U.S.C. § 78u, “imposes In re Burlington, 114 F.3d at 1418
another layer of factual particularity to (quoting Acito v. IMCERA Group, Inc., 47
allegations of securities fraud.” In re F.3d 47, 53 (2d Cir. 1995)); see also In re
Rockefeller, 311 F.3d at 217. If a Advanta, 180 F.3d at 534-35; Oran, 226
complaint fails to comply with the F.3d at 288-89.
PSLRA’s pleading requirements, dismissal A. Motive and opportunity
is mandatory. 15 U.S.C. § 78u-4(b)(3)(A). Motive must be supported by facts
The PSLRA requires the complaint to stated “with particularity,” and must give
specify “each statement alleged to have rise to a “strong inference” of scienter. In
been misleading, the reason or reasons re Advanta, 180 F.3d at 535; 15 U.S.C. §
why the statement is misleading, and, if an 78u-4(b)(2). “Blanket assertions of motive
allegation regarding the statement or and opportunity” will not suffice, and
omission is made on information and “catch-all allegations that defendants stood
belief, the complaint shall state with to benefit from wrongdoing and had the
particularity all facts on which that belief opportunity to implement a fraudulent
is formed.” 15 U.S.C. § 78u-4(b)(1). scheme are no longer sufficient, because
they do not state facts with particularity or
With regard to the “scienter” give rise to a strong inference of scienter.”
component of the 10b-5 claim, the critical In re Advanta, 180 F.3d at 535. Moreover,
issue before this Court, the PSLRA further “[m]otives that are generally possessed by
requires the plaintiffs, “with respect to most corporate directors and officers do
each act or omission,” to “state with not suffice; instead, plaintiffs must assert
particularity facts giving rise to a strong a concrete and personal benefit to the
inference that the defendant acted with the individual defendants resulting from this
required state of mind.” 15 U.S.C. § 78u- fraud.” Kalnit v. Eichler, 264 F.3d 131,
4(b)(2). This particularity requirement 139 (2d Cir. 2001) (citation omitted).
supersedes Rule 9(b)’s provision allowing
state of mind to be averred generally. See In their amended complaint, the
In re NAHC, Inc. Sec. Litig., 306 F.3d plaintiffs allege that the defendants’
1314, 1328 (3d Cir. 2002) (citing In re motive to commit fraud was that
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Washington “would not have been able to Morris Cos., 75 F.3d 801, 813-14 (2d Cir.
acquire REC without the successful 1996) (finding that a “company's desire to
issuance of the Notes,” and would not maintain a high bond or credit rating”
have been able to sell any of the notes at or insufficient motive for fraud because such
near the price sought “had the true motive could be imputed to any company);
financial condition of the REC been Tuchman v. DSC Communications Corp.,
revealed in the Circular.” Pl. Br. at 32; 14 F.3d 1061, 1068 (5th Cir. 1994)
App. at 37, 53 (Cplt. ¶¶ 7, 86, 89). (“[I]ncentive compensation can hardly be
Further, the complaint suggests that the basis on which an allegation of fraud is
because defendant Dennis Washington predicated.”) (citation omitted); Herzog v.
received stock options in 1999 after GT Interactive Software Corp., 98 Civ.
Washington acquired Westinghouse, it can 0085, 1999 WL 1072500, at *9 (S.D.N.Y.
be inferred that he would receive stock Nov. 29, 1999) (holding that a defendant's
options after the present merger. See App. “‘desire to consummate [a] corporate
at 41, (Cplt. ¶ 36). Plaintiffs argue that transaction does not constitute a motive for
these alleged stock options provided securities fraud’”); Leventhal v. Tow, 48
Washington with an additional motive to F. Supp. 2d 104, 115 (D. Conn. 1999)
commit fraud. These allegations are (“[T]he allegation that the defendants
insufficient. artificially inflated Citizens’ stock price in
order to ‘protect and enhance their
In every corporate transaction, the executive positions’ and ‘negotiate as
corporation and its officers have a desire to favorable a deal as possible’ on a pending
complete the transaction, and officers will employment contract also fail[s] to give
usually reap financial benefits from a rise to a strong inference of scienter. This
successful transaction. Such allegations motive has been rejected routinely.”);
alone cannot give rise to a “strong Thacker v. Medaphis Corp., 97 Civ. 2849,
inference” of fraudulent intent. See In re 1998 WL 684595, at *3 (S.D.N.Y . Sept.
Burlington, 114 F.3d at 1424; see also 30, 1998) (finding plaintiff’s claim that
Phillips v. LCI Int'l, Inc., 190 F.3d 609, defendant was motivated by a desire to
623 (4th Cir. 1999) (“Similar situations eliminate competitors and to acquire
arise in every merger; thus, allowing a related companies insufficient to plead
plaintiff to prove a motive to defraud by scienter because such motive could be
simply alleging a corporate defendant's imputed to any corporate officer).
desire to retain his position with its
attendant salary, or realize gains on Although the allegation is not
company stock, would force the directors apparent from the complaint, plaintiffs
of virtually every company to defend now argue that CSFB had a motive to
securities fraud actions every time that commit fraud because it stood to receive
c o m p a n y effected a m erger o r underwriting and financial advisory fees.
acquisition.”); San Leandro Emergency This allegation is undoubtedly true but
Med. Group Profit Sharing Plan v. Philip equally unavailing. See M elder v. Morris,
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27 F.3d 1097, 1104 (5th Cir. 1994) (quoting Beck v. Mfrs. Hanover Trust Co.,
(declining to find scienter where plaintiffs 820 F.2d 46, 50 (2d Cir. 1987)).
alleged that underwriters’ motive in
participating in fraud was to collect fees); A reckless statement is a material
Schnell v. Conseco, Inc., 43 F. Supp. 2d misrepresentation or omission “‘involving
438, 449 (S.D.N.Y. 1999) (“[A]n not merely simple, or even inexcusable
underwriter's alleged motive to earn its negligence, but an extreme departure from
underwriting fees is not alone sufficient to the standards of ordinary care, and which
sustain a strong inference of fraudulent presents a danger of misleading buyers or
intent. If it were, every underwriter, law sellers that is either known to the
firm, accountant, and investment advisor defendant or is so obvious that the actor
whose compensation or commission must have been aware of it.’” In re
depended on the completion of an initial Advanta, 180 F.3d at 535 (quoting McLean
public offering would have a motive to v. Alexander, 599 F.2d 1190, 1197 (3d Cir.
commit fraud, which would make Rule 1979)).
9(b) wholly meaningless.”) (quoting
Fisher v. Offerman & Co., Inc., No. 95 The plaintiffs argue that they
Civ. 2566, 1996 WL 563141 at *6 “alleged specific information transmitted
(S.D.N.Y. Oct. 2, 1996)). Therefore, to Defendants prior to issuance of the
plaintiffs have failed to meet the scienter Offering Circular and sale of the Notes
requirement by pleading motive and that contradicted representations made in
opportunity to commit fraud on the part of t h e C i r c u l a r , id e n t i f y i n g w h o
any of the defendants. communicated them to whom, when, and
how.” Pl. Br. at 23. In other words, it is
B. Recklessness or conscious the plaintiffs’ position that the defendants
misbehavior had actual knowledge of the falsity of their
statements in the circular at the time they
Because the plaintiffs have not were made. It is certainly true that “in a
adequately pleaded that the defendants had non-disclosure situation, any required
both motive and opportunity to commit element of scienter is satisfied where . . .
fraud, their complaint will survive the the defendant had actual knowledge of the
motion to dismiss only if they allege material information.” Fenstermacher v.
specific facts that constitute “strong Phila. Nat’l Bank, 493 F.2d 333, 340 (3d
circumstantial evidence of conscious Cir. 1974); see also In re Advanta, 180
misbehavior or recklessness.” Oran, 226 F.3d at 535.
F.3d at 288-289; Kalnit, 264 F.3d at 142
(“Where motive is not apparent, it is still Of course, it is not enough for
possible to plead scienter by identifying plaintiffs to merely allege that defendants
circumstances indicating conscious “knew” their statements were fraudulent or
behavior by the defendant, though the that defendants “must have known” their
strength of the circumstantial allegations statements were false. See In re Digital
must be correspondingly greater.”) Island Sec. Litig., 357 F.3d 322, 328-29
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(3d Cir. 2004); Rombach v. Chang, 355 The plaintiffs allege a number of
F.3d 164, 176 (2d Cir. 2004) (finding no different affirmative misstatements that
scienter where plaintiffs did “not allege form the basis of their 10b-5 claim. First,
facts and circumstances that would support the plaintiffs argue that the circular was
an inference that defendants knew of misleading in including REC’s financials
specific facts that are contrary to their for the 2000 stub period which indicated
public statements”); Bovee v. Coopers & “that as of April 2, 2000, REC had
Lybrand C.P.A., 272 F.3d 356, 361 (6th liabilities of $1,279,333.” Reply Br. at 6;
Cir. 2001) (“Plaintiffs may not simply rely Pl. Br. at 26-7; App. at 288. To establish
on the proposition that Defendants must that Washington had actual knowledge to
have known or should have known of, and the contrary, plaintiffs refer to a comment
participated in, the fraud.”). Plaintiffs in Washington’s October 27, 1999
must plead allegations of scienter with presentation which indicated that REC had
particularity. See 15 U.S.C. § 78u-4(b)(2). “understated or undisclosed liabilities.”
They must support their allegations with See App. at 44 (Cplt. ¶ 48), App. at 319.
the essential factual background that However, this comment could not have
would accompany “the first paragraph of been made in reference to the financial
any newspaper story”—that is, the “who, statements for the stub period between
what, when, where and how” of the events January and April 2000, since those
at issue. In re Burlington, 114 F.3d at statements would not have been available
1422 (citing DiLeo v. Ernst & Young, 901 in October of 1999. See App. at 47 (Cplt.
F.2d 624, 627 (7th Cir.1990)). ¶ 59-60) (noting that as of December 2,
1999 “Washington Group had ‘requested
Although the plaintiffs argue that “audited” financials for RE&C for years
they have demonstrated that the defendants 1996, 1997, and 1998 and “reviewed”
had “actual knowledge” that their public financial statements for the stub period
statements were false and misleading at from January 1 to September 30, 1999.’”).
the time in which they were made, the Moreo ver, in the Oc tobe r 27th
plaintiffs have failed to plead with presentation, Washington was referring to
particularity facts that so demonstrate. understated liabilities in REC’s unaudited
The plaintiffs point to many statements financial statements. App. at 319
that the individual defendants made during (referring to “[a]ccounting integrity of
the due diligence period as evidence that financial statements (unaudited) provided
they had actual knowledge that their to date”). These statements were later
circular statements were false and audited and adjusted to comply with
misleading. However, these statements GAAP before they were incorporated into
made during the due diligence period the circular. App. at 367. Plaintiffs
cannot be connected directly to any present no evidence that Washington had
misleading statement in the offering actual knowledge that the audited
circular. statements were inaccurate during the
1. Liabilities relevant time period.
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Plaintiffs also rely on their Washington indicated its belief that several
complaint allegation that “[a]s of January of REC’s many contracts were overvalued.
4, 2000, Wash ington Group and Id. (citing App. 45-51 (Cplt. ¶¶ 50, 54, 72-
Defendants knew that REC’s financial 76)). Again, in some of these documents,
statements of September 30, 1999 Washington was referring to REC's
overstated assets by approximately $275 unaudited statements which were later
million and understated liabilities by $145 audited before inclusion in the circular and
million.” Reply Br. at 6; App. at 47-48 the other documents focused on projects
(Cplt. ¶ 62). The plaintiffs, however, do for which Washington was later
not provide any source to connect this indemnified.2 Moreover, there is no
accusation to record evidence. In other
words, plaintiffs have failed to plead with 2
Appellees filed a Motion for Leave
particularity. See In re Party City Sec.
to File a Supplemental Appendix
Litig., 147 F. Supp. 2d 282, 300 (D.N.J.
containing an Ancillary Letter
2001) (“Simply referring to a series of
Agreement revealing that Washington
public statements and then alleging, in a
was partially indemnified against loss
general and conclusory manner, that those
regarding one of REC’s projects.
disclosures were false or misleading is
Appellants oppose this motion. “We
insufficient.”). Plaintiffs do not even
decide on a case-by-case basis whether
mention whether, in this paragraph, they
an appellate record should be
are referring to REC’s audited or
supplemented. Even when the added
unaudited statements. Moreover, any
material will not conclusively resolve an
knowledge Washington may have had
issue on appeal, we may allow
regarding the accuracy of the 1999
supplementation in the aid of making an
financial statements is of little relevance in
informed decision.” Schwartz v. Million
determining whether Washington had
Air, Inc., 341 F.3d 1220, 1225 n.4 (11th
actual knowledge that the statements from
Cir. 2003). The Ancillary Letter
the later stub period were inaccurate.
Agreement, while not crucial to the
instant decision, helps explain
2.Contracts in progress
Washington’s motive for not discussing
its concerns with respect to this particular
Similarly, the plaintiffs argue that
project in the circular. Therefore, we
the circular was misleading in that REC’s
find that the agreement will aid the Court
unaudited financials for the 2000 stub
in making an informed decision.
period indicated “that as of April 2, 2000,
Appellants do not question the validity or
REC’s ‘contracts in process’ had a value
authenticity of the agreement nor do they
of $638,881,000.” Reply Br. at 6; GSC
argue that they would be prejudiced in
Br. at 26; App. at 288. To show that
any way by our consideration of the
Washington knew this statement was
agreement. Appellants do not even argue
misleading, plaintiffs refer us to various
that they are unfamiliar with the
documents Washington produced during
agreement. See, e.g., Kalimian v. Liberty
its due diligence period, in which
Mutual Fire Ins. Co., 300 F.2d 547, 549
-12-
indication that any of Washington’s 3 .F o u r p r o j e c ts d evia te
documents referred to the April 2000 stub significantly
period or to any other value appearing in The plaintiffs also take issue with a
the circular, and in none of these statement in the circular indicating that
documents does Washington provide an four projects for which REC retained
estimate of the total value of REC’s liability “deviate significantly and are not
contracts in progress. For both of these representative of other contracts being
reasons, there is no way to know whether acquired.” Pl. Br. at 29, quoting App. at
Washington would have disagreed with 126. Plaintiffs argue that this statement
REC’s April valuation at the time the was misleading because defendants knew
circular was issued. “that numerous other projects were also
misestimated, likely to incur costly
In any case, Washington made it overruns that were uncollectible and were
plain in the circular that REC’s accounting losing money.” Id. First, a fair reading of
for these contracts was aggressive, when it this excerpt from the circular is that these
warned that “REC revenue recognition four projects deviated significantly
policies are significantly different from because of (a) the extent of loss already
those used by MK on certain contracts incurred on each project; (b) “the reversal
where significant components are procured of previously-recognized profit”; and (c)
in advance of installation. . . . REC’s “the establishment of reserves for future
revenue recognition policy on such losses.” Id.; In re Burlington, 114 F.3d at
contracts generally result in more revenue 1426 (noting that if plaintiffs rely on
recognition in the early stages of a extrinsic documents in their complaint, the
contract.” App. at 126. It also suggested documents must be understood in their
that this difference could be critical when entirety). Plaintiffs have failed to identify
it noted that "[t]he loss of one or more any evidence suggesting that Washington
major contracts, or our inability to perform believed that other contracts equally met
profitably under one or more major these three criteria. To the contrary,
contracts . . . could have a material adverse plaintiffs concede in their complaint that
effect on our businesses, financial these projects are distinguishable, referring
condition, results of operation and cash to them as “the four most significant loss
flows." App. at 94. projects.” App. at 51 (Cplt. ¶ 77). Finally,
because Raytheon ultimately retained
liability for at least one additional project
that plaintiffs alle ge “ de via te[d]
(2d Cir. 1962) (“[T]his court is free to
significantly,” any misleading statements
consider facts which have been admitted
based on that project is immaterial as a
in argument and in the briefs on appeal . .
matter of law. See In re NAHC, Inc. Sec.
. .”). To the contrary, appellants argue
Litig., 306 F.3d 1314, 1330 (3d Cir. 2002)
that the agreement actually supports their
(“If the disclosure of certain information
case. Reply Br. at 5-6. For these
has no effect on stock prices, it follows
reasons, we grant appellees’ motion to
file their supplemental appendix.
-13-
that the information disclosed was difficult to predict the extent of the loss”).
immaterial as a matter of law.”).
On top of this, the circular
4.Collection is probable statement was qualified through the use of
the word “probable” and was accompanied
The plaintiffs also argue that the by cautionary language, which indicated
circular was misleading in stating that that “[t]he settlement of these amounts
“[u]napproved change orders and claims . depends on individual circumstances and
. . are included in contracts in process at negotiations with the coun terparty;
their estimated realizable value. [REC] accordingly, the timing of the collection
has a contractual or legal basis for will vary and approximately $235 million
pursuing recovery of these unapproved of collections are expected to extend
change orders and claims and has beyond one year.” App. at 277. Any
determined that collection is probable.” reasonable reading of this statement,
Pl. Br. at 28 (quoting App. at 277, 293); would make one skeptical about the
see also Pl. Br. at 7. Plaintiffs suggests recovery of the full $235 million.
that Washington knew this statement was Similarly, as noted supra, the circular
false, because in a March 27, 2000 emphasized that REC took an aggressive
memorandum it indicated that it believed approach to revenue recognition. App. at
the recovery percentage for one particular 126. When viewed in this context, we do
project would be “poor” and that not believe that the plaintiffs have
attempted recovery could result in a loss of adequately alleged that any knowing
between $22 and $60 million. App. at misstatement Washington may have made
429. It should be noted, however, that the in print here was material. This is
circular refers to a total of $581 million especially true given that Washington was
worth of change orders and claims. App. at least partially indemnified by Raytheon
at 276. Therefore, plaintiffs’ argument for losses associated with the very project
comes down to the fact that Washington discussed in the March 27th memorandum.
actually believed that between 3.8 and 10 See Supp. App.
percent of these contracts were not In any case, because the statement
recoverable. As far as we know, about collectability is a prediction of the
Washington believed collection was likelihood of collection on change orders
probable for at least 90-96 percent of these and claims, it is a classic forward-looking
change orders. Moreover, far from having statement. See 15 U .S.C . 78u-
actual knowledge that between $22 and 5c(4)(I)(1)(A) (defining a forward-looking
$60 million of change orders would be statement, in part, as “a statement
u n c o l l ec t i b le , t h e M a r c h 2 7 t h containing a projection of revenues,
memorandum suggests a lack of certainty income (including income loss), earnings
or confidence in W ashington’s predictions. (including earnings loss) per share, capital
App. at 428 (“[P]rojects results are expenditures, dividends, capital structure,
difficult to quantify”); Id. at 429 (“[I]t is or other financial items”); see also In re
Kindred Healthcare, Inc. Sec. Litig., No.
-14-
02CV-600-H, 2004 WL 77850 at *9 (W.D. Therefore, this statement is
Ky. 2004) (“The amount Kindred keeps in
reserves to cover liability claims is protected by the statutory safe-
necessarily a prediction about its future harbor. See 15 U.S.C. 78u-5c.
claims experience . . . [which] could only
be verified when liability claims were 5.Goodwill
actually filed, litigated to conclusion, or
settled. It would seem rather beyond Plaintiffs also raise the statement in
argument that such projections . . . are the circular that: “[a]djustments to the
forward-looking within the meaning of the purchase price . . . are expected to have no
PSLRA.”); In re Smith-Gardner Sec. effect on goodwill.” Pl. Br. at 28; App. at
Litig., 214 F. Supp. 2d 1291, 1296 (S.D. 111. Plaintiffs argue that this statement is
Fla. 2002) (finding that defendant’s false because “[d]efendants already knew
statement was protected as forward- that the true value of REC was
looking where “[p]laintiffs . . . allege[d] significantly lower than the purchase price,
that Defendants either knew or were which would require further allocation of
severely reckless in disregarding that goodwill.” Id. Regardless of this alleged
Smith Gardner would not receive full knowledge, howe ver, the circula r
payment from [a customer], based on the statement would only be false or
unpaid receivable balance of $1.5 misleading if Washington knew at the time
million.”). Moreover, we find the
accompanying cautionary language to be
the safe harbor provision, protects
sufficient in this case. See EP
forward-looking statements that are
Medsystems, Inc. v. EchoCath, Inc., 235
accompanied by meaningful cautionary
F.3d 865 , 873 (3d Cir . 2000)
statements from liability). Cautionary
("[C]autionary language, if sufficient,
language must be “extensive and
renders the alleged omissions or
specific.” Semerenko v. Cendant Corp.,
misrepresentations immaterial as a matter
223 F.3d 165, 182 (3d Cir. 2000)
of law.") (quoting In re Donald J. Trump
(quoting In re Trump, 7 F.3d at 369.
Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir.
This Court in In re Trump explained:
1993)). 3
“[A] vague or blanket (boilerplate)
3
The PSLRA requires forward-looking disclaimer which merely warns the
statements to be accompanied by reader that the investment has risks will
“meaningful cautionary statements” in ordinarily be inadequate to prevent
order for safe harbor protection to apply. misinformation. To suffice, the
The cautionary language should be cautionary statements must be
“directly related to the alleged substantive and tailored to the specific
misrepresentations,” but it does not have future projections, estimates or opinions
to “actually accompany the alleged in the prospectus which the plaintiffs
misrepresentation.” EP Medsystems, Inc., challenge.” Id. at 182 (quoting In re
235 F.3d at 874 (referring to the Trump, 7 F.3d at 371-72).
“bespeaks caution” doctrine which, like
-15-
it made the statement (a) that it was going “[d]efendants had already discovered
to make adjustments to the purchase price significant additional liabilities.” Pl. Br. at
in the future and (b) that those adjustments 28-29; App. at 93. This argument is
would not track the value of REC. frivolous. First, this statement in the
Plaintiffs have neither alleged nor have circular is included in a long discussion of
they presented any evidence of such risks associated with the company, and in
knowledge. Moreover, none of the that context, it is true and not misleading.
documents relied upon by plaintiffs Moreover, none of the documents upon
suggests that Washington even had actual which the plaintiffs rely suggests that
knowledge that additional goodwill would Washington had actual knowledge that
ultimately have to be recorded.4 The mere there were significant additional liabilities
fact that the amount of additional goodwill which were not already reflected in the
that later had to be recorded was circular, or for which Washington had not
substantial is not enough, on its own, to been indemnified. App. at 93 (noting in
infer either actual knowledge or the circular that Washington “generally
recklessness. See Kushner v. Beverly seek[s] to minimize the impact of . . .
Enters., 317 F.3d 820, 829 (8th Cir. 2003). liabilities by obtaining indemnities and
Additionally, this is another forward- warranties from the seller.”)
looking statement accompanied by
meaningful cautionary language, and is 7.Due diligence
therefore protected by the statutory safe-
harbor. See, e.g., App. at 93 (warning that Finally, plaintiffs raise various
acquisitions “may involve risk of omissions wh ich fa ll within two
undisclosed liabilities”). categories. First, plaintiffs allege that
Washington failed to disclose that its due
6.Undiscovered liabilities diligence had been obstructed. While it is
clear that REC initially obstructed
The plaintiffs argue that the circular Washington’s due diligence, it seems that
was misleading in stating that “[t]here may by the issuance of the circular, Washington
be liabilities of acquired companies, believed, perhaps mistakenly, that it had
including REC, that we fail or are unable been given adequate access. See, e.g., Due
to discover during our due diligence Diligence Memorandum of April 3, 2000,
investigation” because as plaintiffs allege, App. at 653 (noting that “[i]n most cases
the first visits were not conclusive because
4
site performance info rmatio n was
Similarly, none of the documents relied restricted. The recent update visits were
upon by plaintiffs suggest that more informative.”). Although we do not
Washington had actual knowledge mean to suggest approval of the practice,
contradicting its statement that “[t]he we note that it is not uncommon for a
acquisition of REC will double target to be somewhat uncooperative with
[Washington’s] size in terms of revenues respect to due diligence requests from a
and backlog.” Pl. Br. at 27; App. at 117. potential acquirer. See, e.g., Larry
-16-
Schnapf, Cost Effective Due Diligence In unaudited financial statements for the first
Corporate Mergers and Acquisitions, 15 quarter of 2000 should not be relied on.”
Nat. Resources & Env't 80 at 83 (2000) Reply Br. at 7. First, we reiterate our
(noting that even in a friendly takeover, earlier finding that plaintiffs have
the target company may be reluctant to presented no evidence that Washington
share information that may cause a party to had actual knowledge that the unaudited
back out of a deal, renegotiate the price or financial statements for the 2000 stub
that may end up having repercussions if period were unreliable. The plaintiffs’
the transaction collapses). Often this argument appears to be, however, that
tendency towards secrecy relates to a Washington was reckless in disclosing
concern, that if the deal falls through, the REC’s unaudited financial statements
acquirer might use the target’s secrets to knowing that its earlier unaudited
better compete with it, or that the target statements evidenced poor accounting.
will be otherwise disadvantaged. Id. In This argument is not without some
such situations, as here, the target will support.
often become more cooperative and candid
the closer the deal gets to becoming a In In re Lucent Tech., Inc. Sec.
reality. We see no evidence in this case, Litig., 217 F. Supp. 2d 529 (D.N.J. 2002),
however, that Washington believed its due the court found recklessness under similar
diligence had been materially obstructed at circumstances. In Lucent, plaintiffs argued
the time of the circular, nor do we believe that “Lucent management was already
that Washington would have gone through aware that revenues had been inflated in
with this acquisition had it believed this to previous quarters, and that they learned of
be the case.5 There is simply nothing to these earlier accounting improprieties, at
suggest that Washington was on a suicide the latest, during the third quarter.” Id. at
mission in this acquisition. 554 (citations omitted). As here, plaintiffs
in Lucent claimed that “Defendants would
8.Poor financial accounting have been at least reckless in reporting
financial results for the third quarter
Plaintiffs allege that Washington without first determining whether those
“knew, but did not disclose, that Raytheon results were also inflated.” Id. The
and REC had poor financial accounting, district court agreed, finding that “[i]f
which necessarily entailed that the Defendants were aware that accounting
manipulations occurred during the first
5 two quarters of 2000, then, conceivably,
In fact, we doubt that we would be
they may have been reckless in blindly
able to uncover any offering circular
reporting results for the following quarter,
which cautioned that due diligence had
and proof of recklessness is enough.” Id.
been materially obstructed by the target
and that this issue was still unresolved,
While such a scenario may very
given that it seems unlikely that any
well constitute recklessness under the facts
acquirer would proceed with an
of Lucent, we do not believe that
acquisition under such circumstances.
-17-
Washington’s conduct here rises to the substituted different financial statements.
“extreme departure from the standards of At most, it could have included an
ordinary care” which is required for a additional cautionary note. While the
finding of recklessness. In re Advanta, inclusion of such a note may have been a
180 F.3d at 535 (quoting McLean, 599 good idea, we do not believe its omission
F.2d at 1197). First, the circular contained rises to the level of recklessness required
both audited and unaudited financial under the PSLRA.
statements for some overlapping periods as
well as for periods closely linked in time. In conclusion, plaintiffs have failed
See, e.g., App. at 126, 288. Therefore, to to plead with particularity the required
the extent that the unaudited statements e l e m e n t o f s c i e nt e r , e i t h er b y
were out of line with the audited demonstrating motive and opportunity,
statements, this deviation could be conscious misbehavior or recklessness.
deduced from the circular itself, obviating Therefore, the district court properly
the need for a special note. granted Washington's motion to dismiss.
S e c o n d , a s n o t e d ea r l ie r , C. Credit Suisse First Boston
Washington disclosed in the circular that
REC’s accounting was aggressive. App. at The plaintiffs allege that CSFB
126. This would give any reasonable conducted its own due diligence, had
investor pause before relying on REC’s access to Washington’s due diligence and
unaudited statements. Third, plaintiffs communicated with Washington about due
have shown at most that Washington diligence findings. They further allege
believed REC had “poor” accounting that, because CSFB had access to and
practices. App. at 554 (March 14, 2000 shared information with Washington,
presentation) (noting that REC had “[p]oor CSFB “knew and/or recklessly disregarded
financial controls/accounting practices”). all of the information known by
In contrast, in Lucent, plaintiffs alleged Washington Group and the other
that before it reported its earnings for the Defendants.” App. at 43, 53 (Cplt. ¶¶ 43,
fourth quarter, Lucent already knew that it 85). This a bare bones allegation, and the
“had improperly booked hundreds of plaintiffs fail to specify which statements
millions of dollars of revenue on sales to CSFB knew were false or misleading.
customers in situations where customers Furthermore, as noted supra, an allegation
had not ordered products”— clearly a more that CSFB “must have known,” because of
egregious allegation. In re Lucent Tech., its relationship with Washington, that a
217 F. Supp. 2d at 538. Finally, in Lucent, statement was false or misleading, is
the alleged manipulations were in the insufficient to raise a “strong inference”
company’s own balance sheet, rather than that CSFB acted recklessly or with
on the balance sheet of the company to be conscious misbehavior. See In re Advanta,
acquired, as in this case. Therefore, unlike 180 F.3d at 539. The plaintiffs cannot
Lucent, Washington realistically could not satisfy the scienter requirement by
have revised REC’s financial statements or grouping CSFB with the Washington
-18-
defendants. Oran, 226 F.3d at 290; In re D. Dismissal with prejudice
Advanta, 180 F.3d at 539 (“Generalized
imputations of knowledge do not suffice . The plaintiffs ask that the case be
. .”). Regardless, since the plaintiffs have remanded with instructions to allow them
failed to show scienter with respect even to to replead, yet they “do not specify what
Washington, the plaintiffs certainly cannot additional facts, if any, they would plead if
establish scienter with respect to CSFB, given another opportunity to amend their
since the plaintiffs have made no Complaint.” In re NAHC, 306 F.3d at 1332
allegation unique to CSFB. (holding that amendment of the complaint
would be futile). One of Congress’
Finally, the plaintiffs have failed to objectives in enacting the PSLRA was “‘to
attribute any false statement or omission to provide a filter at the earliest stage (the
CSFB. The plaintiffs rely on Gabriel pleading stage) to screen out lawsuits that
Capital, L.P. v. NatWest Fin., Inc., 94 F. have no factual basis.” Id. (quoting In re
Supp. 2d 491 (S.D.N.Y. 2000), for their Champion Enters., Inc., Sec. Litig., 145 F.
argument that CSFB can be held liable as Supp. 2d 871, 874 (E.D. Mich. 2001).
an initial purchaser for a Rule 10b-5 This objective would be frustrated where
violation. The district court correctly “there is a stark absence of any suggestion
noted that Gabriel is distinguishable on its by the plaintiffs that they have developed
facts. In Gabriel, the plaintiffs alleged that any facts since the action was commenced
the defendants, in addition to being the which would, if true, cure the defects in
initial purchasers, also drafted the offering the pleadings under the heightened
memorandum as well as distributed it requirements of the PSLRA.” Id. at 1333.
during sales pitches. Id. at 502. The Because the plaintiffs have offered no
plaintiffs here do not allege that CSFB additional facts that would cure their
drafted or distributed the circular. amended complaint, we decline the
Therefore, the holding of Gabriel is not plaintiffs' request for permission to replead
applicable here.6 and for the foregoing reasons, we affirm
6 the district court's grant of defendants’
Gabriel is distinguishable for
motion to dismiss.
another reason. In Gabriel, the
disclaimer in the offering memorandum
stated only that the initial purchasers
made “no warranty” as to the statements
contained therein. Id. Here, in contrast,
the offering circular states that the initial circular is, or shall be relied upon as, a
purchasers made “no representations” at promise or representation by the initial
all. App. at 74 (“No representations or purchasers.”) While this subtle
warranty, express or implied, is made by difference in language is hardly
the initial purchasers as to the accuracy dispositive, it adds to our conclusion that
or completeness of the information Gabriel does not apply and that CSFB
contained in this offering circular. did not make any actionable statement.
Nothing contained in this offering
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