264 F.3d 1245 (10th Cir. 2001), 00-6081, City of Philadelphia v. Fleming Companies
|Citation:||264 F.3d 1245|
|Party Name:||CITY OF PHILADELPHIA, acting through its Board of Pensions and Retirement, and RONALD T. GOLDSTEIN, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. FLEMING COMPANIES, INC.; ROBERT E. STAUTH; R. RANDOLPH DEVENING; DONALD N. EYLER; KEVIN J. TWOMEY, Defendants-Appellees.|
|Case Date:||September 07, 2001|
|Court:||United States Courts of Appeals, Court of Appeals for the Tenth Circuit|
Appeal from the United States District Court for the Western District of Oklahoma (D.C. No. 96-CV-853-M)
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M. Richard Komins of Barrack Rodos & Bacine, Philadelphia, Pennsylvania (Leonard Barrack of Barrack Rodos & Bacine, Philadelphia, Pennsylvania; Sanford P. Dumain and William C. Fredericks of Milberg Weiss Bershad Hynes & Lerach LLP, New York, New York; and Robert Nelson of Bass Bass & Nelson, El Reno, Oklahoma, with him on the briefs) for Plaintiffs-Appellants.
Reid E. Robison of McAfee & Taft, P.C., Oklahoma City, Oklahoma (John N. Hermes and James R. Webb of McAfee & Taft, P.C., Oklahoma City, Oklahoma; Tower C. Snow, Jr. and Robert P. Varian of Brobeck, Phleger & Harrison LLP, San Francisco, California; and Paul R. Bessette, P.C. of Brobeck, Phleger & Harrison, LLP, Austin, Texas, with him on the brief) for Defendants-Appellees.
Before EBEL,MCKAY and CUDAHY,[*] Circuit Judges.
EBEL, Circuit Judge.
This case requires us for the first time to interpret the provisions of the Private
Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. Plaintiffs brought this consolidated class action lawsuit alleging securities fraud under the Securities Exchange Act of 1934 ("the Act"), see 15 U.S.C. §§ 78a et seq., and Rule 10b-5, see 17 C.F.R. § 240.10b-5, on behalf of all people who purchased stock in Fleming Companies, Inc. ("Fleming") during the period November 15, 1993, to March 14, 1996. Plaintiffs alleged that the individual Defendants, all current or former executives of Fleming, omitted material information regarding a pending lawsuit both from its required SEC filings and from its quarterly and annual reports issued during the class period. According to Plaintiffs, these alleged omissions caused corporate Defendant Fleming to file materially misleading documents with the SEC, and to issue materially misleading statements to current and potential investors, during the class period.
After Plaintiffs twice amended their complaint, the district court dismissed the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, stating that the second amended complaint did not meet the pleading requirements for scienter set forth in the PSLRA, 15 U.S.C. § 78u-4(b)(1)(2).
This court has not yet ruled on what is required to plead scienter in a securities fraud case that falls under the PSLRA. Under the PSLRA, plaintiffs in securities fraud cases must plead facts giving rise to a "strong inference" of scienter. While allegations of motive and opportunity may be considered as part of the mix of information that may, in appropriate circumstances, give rise to a strong inference of scienter, we reject the argument that pleading motive and opportunity, without more, provides an alternative method to establish scienter.
Reviewing Plaintiffs' complaint under these standards, we find that they have not pled facts giving rise to a strong inference that Defendants intentionally or recklessly failed to disclose the pending litigation in a manner that would give rise to liability for securities fraud. Further, because we find that Plaintiffs have not sufficiently pled a primary violation of the securities laws, we find that Plaintiffs' claims of controlling person liability necessarily fail as well.
We therefore AFFIRM the dismissal of Plaintiffs' complaint.
A. The Defendants
Corporate Defendant Fleming Companies, Inc. ("Fleming") is a large food wholesaler servicing more than 10,000 retail food stores, including 3,500 supermarkets, and itself operates approximately 370 company-owned stores, of which approximately 335 are supermarkets. Fleming's common stock is listed on the New York, Midwest and Pacific stock exchanges. Plaintiffs allege that "millions of shares" of Fleming stock were traded during the class period, November 15, 1993, to March 14, 1996, and that Fleming listed 13,300 shareholders of record, and 20,500 beneficial owners with shares held in street name by brokerage firms and financial institutions, in its 1995 Annual Report.
The four individual Defendants, Robert E. Stauth, R. Randolph Devening, Donald N. Eyler, and Kevin J. Twomey, were all officers of Fleming during the class period.2 During the class period, each of the
individual Defendants signed at least one of the publicly filed documents that Plaintiffs now allege were materially false and misleading.
B. The David's Litigation
In dealing with its customers both prior to and during the class period, Fleming had a number of different pricing arrangements, one of which was the utilization of "cost-plus" contracts. Under its "cost-plus" contracts, Fleming agreed to charge customers its actual costs plus a fixed percentage markup based upon the type and quantity of items purchased. This pricing arrangement, at least in theory, allowed customers to reap the benefits of Fleming's ability to negotiate low prices with its wholesalers and distributors. Both prior to and during a portion of the class period, Fleming entered into "cost-plus" contracts with an unspecified number of its customers.
Beginning in 1989, Fleming entered into a series of "cost-plus" contracts to provide food and other products to David's Supermarkets, Inc. ("David's"), a chain of supermarkets located in northern Texas. These contracts specified that Fleming would provide goods to David's at Fleming's cost plus a fixed percentage over the actual cost, e.g., supplying groceries, dairy products and meat at cost plus 3.45%, supplying frozen foods and frozen meat at cost plus 6.25%, and supplying produce at cost plus 7.65%.
On August 24, 1993, David's filed a lawsuit in Texas state court alleging that Fleming had artificially inflated its actual costs and had pocketed discounts and other buyers' incentives, and thus that it had systematically overcharged David's under the "cost-plus" contracts. Specifically, the David's complaint alleged that Fleming had artificially increased its costs through the use of paper transfers within the Fleming corporate structure, and by refusing to pass on to David's substantial savings realized by Fleming through manufacturers' rebates, promotional and volume discounts, and "forward buying."3 The David's complaint thus alleged breach of contract, fraud, and violations of the Texas Deceptive Trade Practices Act ("Texas Act"), and it sought damages of "at least" $ 20 million, trebled under the Texas Act to total $ 60 million, and exemplary damages of "at least $ 50 million." The initial complaint in the David's Litigation thus requested damages of approximately $ 110 million, which represented approximately 3.5% of Fleming's total assets in 1993 and 2.4% of Fleming's total assets in 1994. The $110 million damage request also represented approximately 10.37% of Fleming's total net worth as reported in its 1993 Annual Report (filed March 15, 1994), and 10.19% of Fleming's total net worth as reported in its 1994 Annual Report (filed March 13, 1995). Plaintiffs did not allege financial data from which we could determine what percentage of Fleming's current assets the $ 110 million damages claim represented in 1993 or 1994.
The complaint was later amended on or about September 19, 1995,4 to include a damages request of "at least $ 50 million" in actual damages, trebled under the Texas Act to total "at least $ 150 million," and exemplary damages of "at least $ 100 million." The amended complaint in the David's Litigation thus requested damages of approximately $ 250 million. We do not know what percentage of Fleming's total or current assets, or total net worth, the amended damages claim represented at the time of amendment because Plaintiffs did not plead those financial figures for 1995.
Finally, the complaint was again amended on or about February 9, 1996, to include damages claims of: $ 54,632,000 in actual damages for breach of contract and related claims, trebled under the Texas Act to $ 163,896,000; actual damages of $ 38,655,000 for fraud; and exemplary damages in the amount of $ 242,550,000. The total amount requested in the damages claim in the David's Litigation as amended in February 1996 was therefore $ 445,101,000. Again, because Plaintiffs did not include information about Fleming's financial situation in late 1995 or early 1996, we do not know what percentage of Fleming's total or current assets, or total net worth, this figure represented at the time of amendment.
The David's Litigation went to trial in February 1996 and, on March 14, 1996, the jury returned a verdict of liability against Fleming. On March 18, 1996, it was reported by the media that the jury in the David's Litigation had assessed punitive damages of "at least $ 100 million," bringing the total damage award in that case to approximately $ 200 million. The final damages amount assessed against Fleming in the David's Litigation was approximately $ 200 million plus attorney's fees and costs.
In response to the verdict being announced, the price of Fleming shares closed at $17.50 on March 14, down from $19.63 the previous day. On March 18, when the punitive damages award was announced, Fleming shares closed at $15.13. On March 28, Fleming announced that it was cutting its quarterly...
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