Coates v. Heartland Wireless Communications, Inc.

• Decision Date: 16 June 2000
• Docket Number: No. Civ.A. 3:98-CV-0452-D.,Civ.A. 3:98-CV-0452-D.
• Citation: 100 F.Supp.2d 417
• Parties: Robert COATES, et al., Plaintiffs, v. HEARTLAND WIRELESS COMMUNICATIONS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

100 F.Supp.2d 417

Robert COATES, et al., Plaintiffs, v. HEARTLAND WIRELESS COMMUNICATIONS, INC., et al., Defendants.

No. Civ.A. 3:98-CV-0452-D.

United States District Court, N.D. Texas, Dallas Division.

June 16, 2000.

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Roger F. Claxton, Robert J. Hill, Claxton & Hill, PLLC, Dallas, TX, for plaintiffs.

Ralph I. Miller, Penny P. Reid, Robert R. Summerhays, Weil, Gotshal & Manges LLP, Dallas, Texas, Joseph S. Allerhand, Weil, Gotshal & Manges, LLP, New York City, for defendants.

FITZWATER, District Judge.

In this securities fraud action, the court is again called upon to decide whether plaintiffs have adequately pleaded scienter. Concluding that they at most allege a reasonable, but not strong, inference of the required state of mind, the court grants defendants' motion to dismiss.

I

Plaintiffs Robert Coates and Management Insights, Inc. purchased 504,000 shares of common stock in defendant Heartland Wireless Communications, Inc. ("Heartland") during the period December 18, 1996 through February 28, 1997. Heartland was a developer, owner, and operator of wireless cable television systems, primarily in the central United States, that targeted small to mid-size markets inadequately served by hard-wire cable companies. It commenced operations in 1993 and went public in 1994. Heartland was one of several competitors in the wireless markets, but was considered during the relevant time period to be the largest and most successful based on an ever-increasing reported subscriber base. It reported dramatic growth in number of subscribers, which in turn fueled glowing analyst reports that were disseminated to the market.

On March 20, 1997 Heartland announced that it was writing down its subscriber base by approximately 25% and taking a number of charges, including one for $5.2 million for bad debt expense and reserve for uncollectible accounts receivable. Plaintiffs allege that most if not all of these writeoffs should have been taken no later than September 30, 1996, and that Heartland should have disclosed the necessity for writeoffs, or the circumstances that led to the them, no later than November 14, 1996, when Heartland announced third quarter 1996 results, or by February 7, 1997, when Heartland's Board of Directors met to discuss the company's financial condition. They allege that defendants engaged in a scheme to misrepresent and conceal the adverse truth regarding Heartland's success and financial condition to inflate artificially the market price of Heartland common stock. Plaintiffs assert that the misrepresentations and omissions concerned two distinct but related areas of Heartland's business: subscriber count and the growth thereof, and revenue and financial condition (accounts receivable). They aver that defendants intentionally misrepresented and failed to disclose the number of subscribers and misrepresented Heartland's financial performance. According to plaintiffs' second amended complaint ("amended complaint"), defendants failed to disclose and concealed these facts in a Heartland November 14, 1996 press release, various other press releases issued before the March 20, 1997 announcement, Heartland's Form 10-Q for the quarter ended September 30, 1996, its 1996 Form 10-K, its December 1996 debt offering prospectus, and its February 1997 debt offering prospectus.

Plaintiffs bring this fraud-on-the-market securities fraud action against Heartland which is now bankrupt,¹ David E. Webb, L. Allen Wheeler, John R. Bailey, Alvin H. Lane ("Lane"), John A. Sprague ("Sprague"), and J.R. Holland, Jr. (hereafter, "defendants" or "the individual defendants"), who are present or former Heartland officers and/or directors. Plaintiffs maintain that Heartland and the individual defendants are liable for violating § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. They allege that all the individual defendants except Lane are also liable under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as controlling persons.

The court has twice dismissed this case for pleading deficiencies. In Coates v. Heartland Wireless Communications, Inc., 26 F.Supp.2d 910 (N.D.Tex.1998) ("Coates I"), the court held that plaintiffs had engaged in impermissible group pleading, id. at 916, and that they had failed adequately to plead scienter, id. at 918-922. Although the court granted defendants' motion to dismiss, it allowed plaintiffs to replead. Id. at 923. In Coates v. Heartland Wireless Communications, Inc., 55 F.Supp.2d 628 (N.D.Tex.1999) ("Coates II"), the court dismissed plaintiffs' first amended complaint on the ground that they had failed adequately to plead scienter. Id. at 645. It again allowed them to replead. Id. at 633, 646. Plaintiffs have since amended their complaint, and the individual defendants move to dismiss, arguing in pertinent part that plaintiffs have failed adequately to plead scienter.²

II

A

Scienter — a mental state embracing intent to deceive, manipulate, or defraud³ — is an essential element of a securities fraud claim under § 10(b) of the Exchange Act and Rule 10b-5. See Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994). Section 10(b) proscribes knowing or intentional conduct. In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 548 (6th Cir.1999).

The Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4, requires that "the complaint shall, with respect to each act or omission ... state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. § 78u-4(b)(2) (emphasis added). "[T]he PSLRA did not change the scienter that a plaintiff must prove to prevail in a securities fraud case but instead changed what a plaintiff must plead in his complaint in order to survive a motion to dismiss." Comshare, 183 F.3d at 548-49. "[I]nferences of scienter do not survive if they are merely reasonable.... Rather, inferences of scienter survive a motion to dismiss only if they are both reasonable and `strong' inferences." Greebel v. FTP Software, Inc., 194 F.3d 185, 195-96 (1st Cir.1999) (footnote omitted); see id. at 197 ("It is clear that scienter allegations now must be judged under the `strong inference' standard at the motion to dismiss stage."). "In the guise of tinkering with procedural requirements, Congress has effectively, for policy reasons, made it substantively harder for plaintiffs to bring securities fraud cases, through the `strong inference' of scienter requirement." Id. at 196 n. 9; see Phillips v. LCI Int'l, Inc., 190 F.3d 609, 620 (4th Cir.1999) ("the [PSLRA] indisputably seeks to make pleading scienter more difficult for plaintiffs"). "Congress enacted the PSLRA to deter opportunistic private plaintiffs from filing abusive securities fraud claims, in part, by raising the pleading standards for private securities fraud plaintiffs." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 973 (9th Cir.1999).

Although the circuits have diverged in their understandings of the effect of the PSLRA on previously-recognized methods of pleading scienter, see Greebel, 194 F.3d at 199 ("The effect of the PSLRA on the standard for scienter has been much disputed."), this court held in Coates II that plaintiffs can allege scienter based on strong circumstantial evidence of conscious behavior or severe recklessness, or based on motive and opportunity. Coates II, 55 F.Supp.2d at 635, 640, 642. Absent controlling Fifth Circuit authority to the contrary, the court will evaluate plaintiffs' amended complaint under all these methods.

Regardless which method is employed to plead scienter, the PSLRA mandates that plaintiffs state with particularity facts that give rise to a strong inference that the defendant acted with the required state of mind. See 15 U.S.C. § 78u-4(b)(2).⁴ This court must interpret the statute according to the plain meaning of its words. See United States v. Ron Pair Enters., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). "When a statute does not define its terms, we employ the ordinary meaning of the words." Silicon Graphics, 183 F.3d at 983 (defining words "facts" and "particularity" in PSLRA by examining dictionary definitions); see Hulsey v. USAir, Inc., 868 F.2d 1423, 1427 (5th Cir. 1989) ("Where possible, courts interpret the words of statutes `in their ordinary, everyday sense.'").

BLACK'S LAW DICTIONARY defines "inference" as "[a] conclusion reached by considering other facts and deducing a logical consequence from them." BLACK'S LAW DICTIONARY at 781 (7th ed.). The adjective "strong" is defined, in its relevant sense, as "[p]ersuasive, effective, and cogent." WEBSTER'S II NEW RIVERSIDE UNIVERSITY DICTIONARY at 1149. Therefore, for securities fraud plaintiffs to plead a strong inference of the required state of mind, they must allege with particularity facts that, assumed to be true, constitute persuasive, effective, and cogent evidence from which it can logically be deduced that defendants acted with intent to deceive, manipulate, or defraud.

B

Plaintiffs have elaborated in some respects on the scienter allegations of their first amended complaint, but the foundations for their theories remain essentially unchanged.

They posit that defendants engaged in conscious and/or severely reckless behavior by misrepresenting Heartland's subscriber count and the growth of its subscriber base. According to the amended complaint, defendants knew that a material number of subscribers/customers were nonexistent, had quit paying their bills, and/or either already had or would soon have their service disconnected. They failed to disclose that a material number of reported subscribers were residents of multiple dwelling units ("MDUs"), with which Heartland had contracts with management to offer wireless...