223 F.3d 165 (3rd Cir. 2000), 99-5355, Semerenko v Cendant Corp.

Docket Nº:99-5355, 99-5356
Citation:223 F.3d 165
Party Name:GEORGE SEMERENKO v. CENDANT CORP.; WALTER A. FORBES; E. KIRK SHELTON; COSMO CORIGLIANO; CHRISTOPHER K. MCLEOD; ERNST & YOUNG LLP George Semerenko, individually and on behalf of all others similarly situated, Appellant P. SCHOENFELD ASSET MANAGEMENT LLC, on behalf of itself and all others similarly situated, Appellant v. CENDANT CORP.; WALTER A. FOR
Case Date:June 16, 2000
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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223 F.3d 165 (3rd Cir. 2000)




George Semerenko, individually and on behalf of all others similarly situated, Appellant

P. SCHOENFELD ASSET MANAGEMENT LLC, on behalf of itself and all others similarly situated, Appellant



No. 99-5355, 99-5356

United States Court of Appeals, Third Circuit

June 16, 2000

Argued March 21, 2000

Amended Opinion Filed: August 10, 2000

On Appeal from the United States District Court for the District of New Jersey, D.C. Civil Nos. 98-05384 & 98-04734, District Judge: Honorable William H. Walls

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Arthur N. Abbey [Argued] Jill S. Abrams Stephen J. Fearon, Jr. Nancy Kaboolian Abbey, Gardy & Squitieri, LLP 212 East 39th Street New York, NY 10016, Allyn Z. Lite Joseph J. DePalma Mary Jean Pizza Lite DePalma Greenberg & Rivas, LLC Two Gateway Center - 12th Floor Newark, NJ 07102-5003, Andrew Barroway David Kessler Schiffrin & Barroway Three Bala Plaza East - Suite 400 Bala Cynwyd, PA 19004, Attorneys for Appellants George Semerenko and P. Schoenfeld Management, LLC

Jonathan J. Lerner Samuel Kadet [Argued], Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, NY 10036, Michael M. Rosenbaum Carl Greenberg Budd Larner Gross Rosenbaum Greenberg & Sade, P.C. 150 John F. Kennedy Parkway CN 1000 Short Hills, NJ 07078-0999, Attorneys for Appellee Cendant Corporation

James M. Hirschhorn Steven S. Radin Sills Cummis Radin Tischman Epstein & Gross, P.A. One Riverfront Plaza Newark, NJ 07102-5400, Dennis J. Block [Argued] Howard R. Hawkins, Jr. Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038, Greg A. Danilow Timothy E. Hoeffner Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153, Attorney for Appellees Walter Forbes and Christopher McLeod

Richard Schaeffer [Argued] Bruce Handler Dornbush Mensch Mandelstam & Schaeffer, LLP 747 Third Avenue New York, NY 10017, Attorneys for Appellee E. Kirk Shelton

Gary P. Naftalis Kramer, Levin, Naftalis & Frankel 919 Third Avenue New York, NY 10022, Attorney for Appellee Cosmo Corigliano

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Alan N. Salpeter Michele Odorizzi Mayer, Brown & Platt 190 South LaSalle Street Chicago, IL 60603, William P. Hammer, Jr. J. Andrew Heaton [Agrued] Ernst & Young LLP 1225 Connecticut Avenue, NW Washington, D.C. 20036, Douglas S. Eakeley Lowenstein Sandler 65 Livingston Avenue Roseland, NJ 07068, Attorneys for Ernst & Young LLP

Harvey J. Goldschmid General Counsel, Jacob H. Stillman Solicitor, Eric Summergrad Deputy Solicitor, Hope Hall Augustini Special Counsel, Securities & Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0606, Attorneys for Amicus-Appellant Securities and Exchange Commission

BEFORE: MANSMANN and GREENBERG, Circuit Judges and ALARCON, Senior Circuit Judge[*]


ALARCON, Senior Circuit Judge.


The P. Schoenfeld Asset Management LLC and the class of similarly situated investors (collectively, the "Class") appeal from the order of the district court dismissing their claims for securities fraud pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Class's complaint was filed under S 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. The complaint also alleged that the individual defendants were liable for the underlying violations of S 10(b) and Rule 10b-5 as control persons under S 20(a) of the Exchange Act.

We conclude that the complaint alleges sufficient facts to establish the elements of reliance and loss causation, and that the district court applied the incorrect analysis for determining whether the complaint alleges that the purported misrepresentations were made "in connection with" the purchase or the sale of a security. Because the standard that we have articulated for the "in connection with" requirement is different from the one applied by the district court, we vacate the judgment below and remand the matter for further proceedings. Given that we do not resolve whether the dismissal was proper under S 10(b) and Rule 10b-5, we do not address the dismissal of the Class's claim under S 20(a).


The Class filed this action against the Cendant Corporation ("Cendant"),1 its former officers and directors Walter A. Forbes, E. Kirk Shelton, Christopher K. McLeod, and Cosmo Corigliano (the "individual defendants"), and its accountant Ernst & Young LLP ("Ernst & Young") (collectively, the "defendants"). The Class alleges that the defendants violated S 10(b) and Rule 10b-5 by making certain misrepresentations about Cendant during a tender offer for shares of American Bankers Insurance Group, Inc. ("ABI") common stock. The Class consists of persons who purchased shares of ABI common stock during the course of the tender offer. The class period runs from January 27, 1998 to October 13, 1998. The complaint does not allege that any member of the Class purchased securities issued by Cendant, or that any member of the Class tendered shares of ABI common stock to Cendant. Instead, it alleges that the defendants made certain misrepresentations about Cendant that artificially inflated the price at which the Class purchased their shares of ABI common stock, and that the Class suffered a corresponding loss when those misrepresentations were disclosed to the public and the merger agreement was terminated. In light of the procedural

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posture of this case, we must assume the truth of the facts alleged in the complaint. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997).

On December 22, 1997, the American International Group, Inc. ("AIG") announced that it would acquire one hundred percent of the outstanding shares of ABI common stock for $47 per share. On January 27, 1998, Cendant made a competing tender offer to purchase the same shares at a price of $58 per share, or a total price of approximately $2.7 billion. In conjunction with its tender offer, Cendant filed with the Securities and Exchange Commission (the "SEC") a Schedule 14D-1 that overstated its income during prior financial reporting periods.

On March 3, 1998, AIG matched Cendant's bid and offered to pay ABI shareholders $58 for each share of outstanding ABI common stock. Cendant eventually raised its bid price to $67 per share. It then executed an agreement to purchase ABI for approximately $3.1 billion, payable in part cash and in part shares of Cendant common stock. Cendant filed an amendment to its Schedule 14D-1 on March 23, 1998 reporting the terms of the merger agreement. Eight days later, Cendant filed a Form 10-K reporting its financial results for the 1997 fiscal year.

After the close of trading on April 15, 1998, Cendant announced that it had discovered potential accounting irregularities, and that its Audit Committee had engaged Willkie, Farr & Gallagher and Arthur Andersen LLP to perform an independent investigation. Cendant also announced that it had retained Deloitte & Touche LLP to reaudit its financial statements, and that "[i]n accordance with [Statement of Accounting Standards] No. 1, the Company's previously issued financial statements and auditors' reports should not be relied upon." Nevertheless, the April 15, 1998 announcement reported that the irregularities occurred in a single business unit that "accounted for less than one third" of Cendant's net income, and it indicated that Cendant would restate its annual and quarterly earnings for the 1997 fiscal year by $0.11 to $0.13 per share. Immediately after Cendant disclosed the accounting irregularities, the price of ABI common stock dropped from $64-7/8 to $57-3/4, representing an eleven percent decrease from the price at which the shares had been trading.

Following the April 15 announcement, Cendant made several pubic statements in which it represented that it was committed to completing the merger with ABI notwithstanding the discovery of the accounting irregularities. On April 27, 1998, Walter A. Forbes, the chairman of the board of directors of Cendant, and Henry R. Silverman, the president and the chief executive officer of Cendant, issued a letter to Cendant shareholders, which was published in the financial press. That letter states:

We are outraged that the apparent misdeeds of a small number of individuals within a limited part of our company has adversely affected the value of your investment -- and ours -- in Cendant. We are working together diligently to clear this matter up as soon as possible. We fully support the Audit Committee's investigation and continue to believe that the strategic rationale and industrial logic of the HFS/CUC merger that created Cendant is as compelling as ever.

Cendant is strong, highly liquid, and extremely profitable. The vast majority of Cendant's operating businesses and earnings are unaffected and the prospects for the Company's future growth and success are excellent.

We have reaffirmed our commitment to completing all pending acquisitions: American Bankers, National Parking Corporation and Providian Insurance.

In a press release issued on May 5, 1998, Cendant stated that "over eighty percent of the Company's net income for the first quarter of 1998 came from Cendant business

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units not impacted by the potential accounting irregularities."

On July 14, 1998, Cendant revealed that the April 15, 1998 announcement anticipating the restatement of its financial results for the 1997 fiscal year was inaccurate,...

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