Zishka v. American Pad & Paper Co.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
August 4, 2003
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 02-10120
ALLAN ZISHKA, Etc; ET AL,
Plaintiffs,
GERALD R DAILEY, On behalf of themselves and all others similarly
situated; ROGER NORTON; PRISCILLA KNIGHT; DAVID W LEFFLER and FRED
E RYALS,
Plaintiffs-Appellants,
versus
AMERICAN PAD & PAPER CO; ET AL,
Defendants,
BAIN CAPITAL INC; BAIN VENTURE CAPITAL; GREGORY M BENSON; JONATHAN
S LAVINE; RUSSELL M GARD; MARC B WOLPOW; CHARLES G HANSON, III;
ROBERT C GAY and KEVIN W MCALEER,
Defendants-Appellees.
Appeal from the United States District Court
For the Northern District of Texas
(98-CV-1072)
Before HIGGINBOTHAM, EMILIO M. GARZA, and DENNIS, Circuit Judges.
PER CURIAM:*
Plaintiffs-appellants appeal the dismissal with prejudice of
their federal securities fraud claims which were brought as a
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
putative class action under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the SEC.
Plaintiffs alleged that defendants made numerous false and
misleading statements regarding the success of American Pad & Paper
Company (Ampad) in order to deceive investors and maintain company
stock prices. Specifically, plaintiffs alleged that defendants
misrepresented the success of Ampad’s strategy of acquiring other
paper products companies and integrating them into Ampad to achieve
efficiencies and higher profits; that defendants misrepresented the
success of their pricing strategy to insulate profits from
fluctuations in the price of raw materials (paper) by passing on
the increased costs to customers; and, that defendants manipulated
their Last In First Out (LIFO) accounting reserves to maintain
false earnings statements. Plaintiffs alleged that these
misstatements were made by defendants at numerous times in earnings
reports, prospectus, SEC filings, and through analysts who relied
on statements made to them by the defendants. Plaintiffs also
alleged that Bain Capital Inc., Bain Venture Capital, as well as
the directors of Ampad nominated by Bain - Wolpow, Gay, and Lavine
- were liable as control persons pursuant to Section 20(a).
The defendants moved to dismiss, and the district court
dismissed all claims with leave to amend, finding that the
plaintiffs had failed to adequately allege scienter and had not
pled with sufficient particularity to state a claim. Plaintiffs
filed their First Amended Complaint, and the defendants again moved
2
to dismiss. The district court granted their motions in part, and
denied them in part. On defendants’ motion to reconsider following
the publishing of this court’s decision in Nathenson v. Zonagen
Inc.,1 the district court dismissed the remaining claims with
prejudice. Plaintiffs timely appealed. We affirm, essentially for
the reasons stated by the district court.
I
We review a district court’s dismissal under Rule 12(b)(6) de
novo.2 In doing so, we accept the facts alleged in the complaint
as true and construe the allegations in the light most favorable to
the plaintiffs.3 A Rule 12(b)(6) motion should be granted only if
it appears beyond doubt that the plaintiffs can prove no set of
facts in support of their claim which would entitle them to
relief.4 On the other hand, conclusory allegations or legal
conclusions masquerading as factual conclusions will not suffice to
prevent dismissal under Rule 12(b)(6).5
We find that appellants have failed to sufficiently plead the
element of scienter with respect to the individual defendants,
1
267 F.3d 400 (5th Cir. 2001).
2
See Nathenson, 267 F.3d at 406.
3
Id.4
See ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336,
348 (5th Cir. 2002).
5
Id.3
Benson, McAleer, Hanson, and Gard.6 A “strong inference” of
fraudulent intent is not supported by the alleged insider trading
by Hanson and Gard. Insider trading “must be unusual to have
meaningful probative value,” and here the timing and amount of the
trade is not unusual.7 The plaintiffs’ other allegations, for the
most part, amount to nothing more than the unsupported assumption
that because of their positions in the company, the defendants had
knowledge that the company’s statements were false or misleading.
The defendants’ positions within the company are not sufficient to
presume knowledge of the company’s difficulties and manipulation of
the LIFO reserve.8 While the appellants do not rely solely on the
alleged insider trading and the defendants’ position within the
company, taking all of the allegations together, we find them
insufficient to create a strong inference of scienter. We
therefore affirm the dismissal of the claims against defendants
Benson, McAleer, Hanson, and Gard.
We also affirm the dismissal of the claims against the Bain
defendants - Bain Capital Inc., Bain Venture Capital, and
defendants Wolpow, Gay, and Lavine - as there can be no control
6
In order to state a claim under section 10(b) of the
Securities and Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff
must allege, in connection with the purchase or sale of securities,
(1) a misstatement or an omission (2) of material fact (3) made
with scienter (4) on which plaintiff relied (5) that proximately
caused the plaintiffs' injury. See Nathenson, 267 F.3d at 406-7.
7
Id. at 420-21.
8
Id. at 424.
4
person liability where the appellants have failed to plead the
predicate securities fraud claims.9
II
For the reasons stated, we AFFIRM the district court’s
dismissal of all claims with prejudice.
9
See ABC Plaintiffs Group, 291 F.3d at 362 n.123.
5