Bd. of Trs. of City of Fort Lauderdale Gen. Emps.? Ret. Sys. v. Mechel OAO

11-3666-cv
Bd. of Trs. of City of Fort Lauderdale Gen. Emps.’ Ret. Sys. v. Mechel OAO, et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January
1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court’s Local Rule
32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal
Appendix or an electronic database (with the notation “summary order”). A party citing a summary order must
serve a copy of it on any party not represented by counsel.
1
2 At a stated term of the United States Court of Appeals for the Second Circuit, held at the
3 Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on
4 the 11th day of April, two thousand twelve.
5
6 PRESENT:
7
8 DEBRA ANN LIVINGSTON,
9 RAYMOND J. LOHIER, JR.,
10 Circuit Judges,
11 JED S. RAKOFF,
12 District Judge.1
13
14
15
16 DEAN FREDERICK, individually and on behalf of
17 all others similarly situated,
18 PENSION AND RETIREMENT GROUP,
19 TEAMSTERS LOCAL 807 LABOR MANAGE-
20 MENT FUND,
21 LOCAL 138 PENSION TRUST FUND,
22 CITY OF WESTLAND POLICE AND FIRE RE-
23 TIREMENT SYSTEM,
24 Plaintiffs,
25
26 BOARD OF TRUSTEES OF CITY OF FORT
27 LAUDERDALE GENERAL EMPLOYEES’ RE-
28 TIREMENT SYSTEM,
1
The Honorable Jed S. Rakoff, United States District Judge for the Southern District of New
York, sitting by designation.
1
1 Plaintiff-Appellant,
2
3 -v- No. 11-3666-cv
4
5 MECHEL OAO,
6 IGOR V. ZYUZIN,
7 STANISLAV A. PLOSCHENKO,
8 VLADIMIR A. POLIN,
9 Defendants-Appellees.2
10
11
12
13 JACK FRUCHTER (Mitchell M.Z. Twersky, Lawrence D. Levit,
14 Ximena R. Skovron, on the brief), Abraham, Fruchter & Twersky,
15 LLP, New York, NY, for Plaintiff-Appellant.
16
17 JEFFREY S. JACOBSON (Yeugenia Shvets, Katherine Kern, on the
18 brief), Debevoise & Plimpton LLP, New York, NY, for Defendant-
19 Appellee Mechel OAO.
20
21
22 Appeal from the United States District Court for the Southern District of New York
23 (Sullivan, Judge).
24 UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED, AND DECREED
25 that the judgment entered on August 10, 2011 is AFFIRMED.
26 Plaintiff-Appellant, the Board of Trustees of the City of Fort Lauderdale General Employees’
27 Retirement System (“Plaintiff”), appeals from the district court’s dismissal of its putative securities
28 class action against the Defendants-Appellees (“Defendants”), which include the Russian mining
29 and metallurgy corporation Mechel OAO (“Mechel”) as well as Igor V. Zyuzin (“Zyuzin”),
30 Stanislav A. Ploschenko (“Ploschenko”), and Vladimir A. Polin (“Polin”) (collectively “Individual
2
The Clerk of Court is directed to amend the caption as reflected above.
2
1 Defendants”).3 Plaintiff alleges that it purchased American Depository Receipts (ADRs)
2 corresponding to shares of Mechel when Mechel’s stock price was inflated as a result of
3 misrepresentations regarding the reasons for a recent period of extremely high profits. Specifically,
4 Plaintiff alleges that Mechel informed investors that its prosperity was due to the prevailing high
5 prices for its products throughout the world, when in reality it was due to a variety of illegal
6 anticompetitive practices. Plaintiff brought suit against Mechel and the Individual Defendants, who
7 are alleged to have been officers of Mechel during the relevant period, under Section 10(b) of the
8 Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and
9 also sued the Individual Defendants under Exchange Act Section 20(a), 15 U.S.C. § 78t(a), alleging
10 control person liability. The district court dismissed Plaintiff’s Second Amended Complaint
11 (“SAC”) pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that it failed adequately to plead scienter
12 against any Defendant. We presume the parties’ familiarity with the remaining underlying facts, the
13 procedural history, and the issues on appeal and revisit those topics below only as necessary to
14 facilitate this discussion.
15 We affirm largely for the reasons articulated in the district court’s well-reasoned and
16 thorough opinion.4 Plaintiff contends that the district court erred in declining to conclude that the
17 SAC adequately pleads scienter on a motive and opportunity theory. We disagree. The SAC’s
18 assertions, taken as true, demonstrate merely the existence of motives that are “generally possessed
3
The Individual Defendants have yet to appear in this action and did not join in Mechel’s
motion to dismiss. Thus, the district court’s dismissal of the action as to the Individual Defendants
was sua sponte.
4
Because we agree with the district court that the SAC fails to plead scienter, we do not
reach Defendants’ alternative argument, not passed upon by the district court, that the SAC also
fails to plead loss causation.
3
1 by most corporate directors and officers,” which are insufficient to withstand a motion to dismiss.
2 Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001). With regard to the allegation that Zyuzin
3 pledged a significant percentage of his personal interest in Mechel as collateral for Mechel’s debts,
4 it may be possible–we need not decide–that in some circumstances a corporate officer who has
5 pledged personal assets as collateral for the debts of the corporation may have a cognizable motive
6 to commit fraud. Here, however, the SAC fails to provide any details regarding the agreements
7 whereby Zyuzin allegedly pledged a portion of his Mechel stock as collateral. In the absence of
8 such details, the SAC has failed to plead with particularity that the risk Zyuzin faced as a result of
9 the pledge of his Mechel stock was any different than the risk he, or any other Mechel shareholder,
10 faced simply as a result of stock ownership: the risk that poor business performance by Mechel
11 would result in a substantial investment loss, including the possible elimination of all shareholder
12 equity should Mechel undergo bankruptcy. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
13 U.S. 308, 313 (2007) (“The PSLRA [Private Securities Litigation Reform Act] requires plaintiffs
14 to state with particularity . . . the facts evidencing scienter . . . .”). As we have held, the risk of
15 investment loss common to all shareholders is insufficient to create a legally cognizable motive to
16 commit fraud. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1131 (2d Cir. 1994) (“[S]tock
17 ownership does not provide sufficient motive to sustain the pleading burden under Rule 9(b).”).
18 Plaintiff also contends that the district court erred by failing to conclude that the SAC
19 adequately pleads scienter on a “core operations” theory. In Cosmas v. Hassett, 886 F.2d 8 (2d Cir.
20 1989), we found scienter to be adequately pled where the complaint alleged that an officer of Inflight
21 Services, Inc. (“Inflight”) had made statements indicating that “[s]ales to the People’s Republic of
22 China [(“PRC”)] . . . are . . . an important new source of revenue” for the company, id. at 10 (first
4
1 alteration and first omission in original), but Inflight later was forced to write down a substantial
2 amount of inventory when the PRC’s regulations–which had existed at the time Inflight was touting
3 the importance of its sales to customers in the PRC–prevented sales being made to that country, see
4 id. at 11. We reasoned that “the . . . complaint alleges facts from which one can reasonably infer that
5 sales to the PRC were to represent a significant part of Inflight’s business. These facts give rise to
6 a strong inference that the defendants, who the . . . complaint alleges were directors of Inflight, had
7 knowledge of the PRC restrictions, since the restrictions apparently eliminated a potentially
8 significant source of income for the company.” Id. at 13.
9 Cosmas was decided prior to the enactment of the PSLRA, and we have not yet expressly
10 addressed whether, and in what form, the “core operations” doctrine survives as a viable theory of
11 scienter. But cf. Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000) (“When all is said and done, we
12 believe that the enactment of [the PSLRA] did not change the basic pleading standard for scienter
13 in this circuit . . . .”). Nor need we do so here. Even assuming arguendo that the “core operations”
14 doctrine survived the PSLRA’s enactment without alteration,5 the facts in this case are far removed
15 from those in Cosmas. Here, the bulk of the allegations of illegal conduct center around findings
16 by Russia’s Federal Antimonopoly Service (“FAS”) that Mechel engaged in anticompetitive
17 practices with regard to a limited number of interactions with two or three customers. There is no
18 indication in the SAC that orders from these customers constituted as “significant [a] part of
5
The district court “consider[ed] circumstantial allegations pertaining to the Individual
Defendants’ knowledge of Mechel’s key products as part of its holistic assessment of the scienter
allegations,” but “in the absence of Second Circuit guidance, [did] not find them to be independently
sufficient to raise a strong inference of scienter.” Bd. of Trs. of City of Fort Lauderdale Gen. Emps.’
Ret. Sys. v. Mechel OAO, 811 F. Supp. 2d 853, 872 (S.D.N.Y. 2011). We do not reach the question
whether the district court was correct in holding that a complaint cannot adequately plead scienter
on the basis of the “core operations” doctrine alone.
5
1 [Mechel’s] business,” Cosmas, 886 F.2d at 13, as did the transactions at issue in Cosmas, in which
2 orders from the PRC accounted for $5 million of the company’s $6 million worth of backlog
3 purchase orders, id. at 11.6 Accordingly, even assuming Cosmas continues in unabated vitality, it
4 does not apply here.
5 Because the SAC fails to plead scienter against any Defendant, the district court properly
6 dismissed the action as against all Defendants. Furthermore, because a violation of Exchange Act
7 Section 20(a) must be predicated on an underlying primary violation, the inadequacy of the SAC’s
8 allegations of scienter requires the conclusion that its allegations of control-person liability also fail.
9 See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). To the extent Plaintiff raises
10 other arguments with respect to the judgment below, we have considered them and reject them as
11 meritless.7
6
FAS also found that Mechel sold coking coal concentrate, one of its products, at higher
prices to domestic customers than it did to foreign customers and apparently concluded that this
violated Russian antimonopoly law. This disparity appears to be due in large part to the fact, noted
by FAS, that Mechel’s export contracts involved fixed prices, whereas Mechel “was permitted to
change the volumes and prices unilaterally” in many instances in the domestic context. While the
overall domestic and foreign pricing scheme of an important product may perhaps be of such
importance to a corporation that its officers should be presumed to know of it under the “core
operations” doctrine, we agree with the district court that the SAC fails to plead facts sufficient to
support an inference that Defendants knew during the class period that charging more for sales to
domestic buyers while simultaneously honoring export contracts with fixed, lower prices was illegal
under Russian law. Thus, the fact that they did not disclose the activities that FAS would later find
illegal does not, standing alone, indicate the “intent to deceive, manipulate, or defraud.” Capital
Mgmt. Select Fund Ltd. v. Bennett, 670 F.3d 194, 204 (2d Cir. 2012) (internal quotation mark
omitted).
7
In particular, we decline to consider Plaintiff’s argument that the SAC adequately pleads
scienter on the theory that, even if none of the Individual Defendants possessed the requisite
scienter, some senior-level employee must have possessed scienter, since the products with respect
to which FAS found Mechel to have violated Russia’s anticompetition law are vital to Mechel’s
business. The district court did not address this “corporate scienter” argument–presumably because
Plaintiff failed to raise it below. “The law in this Circuit is clear that where a party . . . advances
arguments available but not pressed below, . . . waiver will bar raising the issue on appeal.” Wal-
6
1 Accordingly, for the foregoing reasons, the judgment of the district court is AFFIRMED.
2 FOR THE COURT:
3 Catherine O’Hagan Wolfe, Clerk
4
Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 124 n.29 (2d Cir. 2005) (internal quotation marks
omitted).
7