Greenhouse v. Mcg Capital Corp.

• Citation: 392 F.3d 650
• Decision Date: 21 December 2004
• Docket Number: No. 03-2318.,03-2318.
• Parties: Charles GREENHOUSE, individually and on behalf of all others similarly situated; Evelyn Rosen; William B. Mouk, Plaintiffs-Appellants, v. MCG CAPITAL CORPORATION; Bryan Mitchell; Janet C. Perlowski; Steven F. Tunney, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

392 F.3d 650

Charles GREENHOUSE, individually and on behalf of all others similarly situated; Evelyn Rosen; William B. Mouk, Plaintiffs-Appellants, v. MCG CAPITAL CORPORATION; Bryan Mitchell; Janet C. Perlowski; Steven F. Tunney, Defendants-Appellees.

No. 03-2318.

United States Court of Appeals, Fourth Circuit.

Argued: September 30, 2004.

Decided: December 21, 2004.

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ARGUED: Sanford Svetcov, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P., San Francisco, California, for Appellants. Charles Edward Davidow, Wilmer, Cutler, Pickering, Hale & Dorr, L.L.P., Washington, D.C., for Appellees. ON BRIEF: Jack Reise, Scott L. Adkins, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P., Boca Raton, Florida; John C. Pasierb, Cohen, Gettings & Caulkins, P.C., Arlington, Virginia; David Kessler, Stephen P. McFate, Schiffrin & Barroway, L.L.P., Bala Cynwyd, Pennsylvania, for Appellants. Paul R. Eckert, Wilmer, Cutler, Pickering, Hale & Dorr, L.L.P., Washington, D.C., for Appellees.

Before WILKINSON, GREGORY, and SHEDD, Circuit Judges.

Affirmed by published opinion. Judge Gregory wrote the opinion, in which Judge Wilkinson and Judge Shedd joined.

OPINION

GREGORY, Circuit Judge:

This suit arises from a CEO's lie about finishing college. Specifically, Bryan J. Mitchell ("Mitchell"), the founder and leader of MCG Capital Corporation ("MCG" or "the company") misled his company into believing that he was awarded a college degree when, in truth, he never obtained one. As a result, MCG misrepresented Mitchell's educational background in the documents it publicly filed for investors. Once Mitchell came clean, MCG corrected its statements. MCG's stock price dipped sharply once the truth was revealed, and shortly thereafter it found itself defending this class action lawsuit brought by MCG shareholders in the United States District Court for the Eastern District of Virginia. The stock owners pursued claims against MCG under § 11(a) of the Securities Act of 1933, § 10b of the Securities Exchange Act of 1934, and SEC Rule 10b-5, and against several individual defendants, including Mitchell, under the control-person liability provisions of the respective securities statutes. On September 12, 2003, the district court dismissed the case, finding as a matter of law that Mitchell's education was immaterial. While we freely acknowledge that Mitchell's conduct is indefensible, we agree that the actual fact misrepresented was immaterial under the securities laws. Therefore, we affirm.

I.

MCG is an Arlington, Virginia-based venture capital firm that makes debt and equity investments in small and mid-sized private businesses in the media, communications, technology, and information services sectors.¹ The company has been traded publicly since its Initial Public Offering ("IPO") in late 2001.

Following about a decade of experience at two banks, in 1998 Mitchell helped found MCG and began his tenure as the company's CEO and Chairman of the Board. The Appellees admit that Mitchell held himself out as having earned a bachelor's degree in economics from Syracuse University.² The truth, however, is that Mitchell attended Syracuse for three years and studied economics, but left before getting his degree.

MCG included Mitchell's purported educational background in various forms filed with the SEC in preparation for its IPO.³ As an example, the "biographical information" section of the registration statements and prospectus ("Prospectus") stated:

Bryan J. Mitchell has served as our Chief Executive Officer since 1998 and as the Chairman of our board of directors since May 2001. Mr. Mitchell has served as a member of our board of directors since 1998 and also served as our President from 1998 to May 2001. From 1997 to 1998, Mr. Mitchell was a Senior Vice president for First Union National Bank. From 1988 to 1997, Mr. Mitchell was employed by Signet Bank where he served as a Senior Vice President. Mr. Mitchell serves on the board of directors of MCG Finance Corporation and MCG Finance Corporation II. Mr. Mitchell earned a B.A. in Economics from Syracuse University.

Prospectus at 79 (emphasis added). The brief biographical statements about MCG's managers were, of course, merely one part of MCG's filings; other extensive information existed. Aside from this single sentence, repeated in various forms, however, Appellants allege no other misstatements.

After apparent pressure by Herb Greenberg ("Greenberg"), a reporter with the website "TheStreet.com" who questioned Mitchell's actual history, Mitchell told the truth to MCG's board on November 1, 2002. Later that same day, MCG publicly corrected Mitchell's misrepresentation through a press release, which read:

MCG Capital Corporation announced today that its Chairman and Chief Executive Officer, Bryan J. Mitchell, informed the Company's Board of Directors this morning that contrary to prior disclosures, he does not hold a Bachelor of Arts degree from Syracuse University. The Board of Directors has requested the Chairman of the Company's Audit Committee, Wallace B. Millner, III, to review the facts relating to these matters and to report to the full board as promptly as possible.

J.A. 74. Appellants assert that this announcement brought MCG negative attention in the investment world. Specifically, they allege that an analyst for Wachovia Securities downgraded MCG to "Hold" from "Buy" on the day of the announcement, noting a worry that this misrepresentation foreshadowed larger "credibility issues" and that two reporters on CNN's Lou Dobbs Moneyline discussed the stock shortly after the company's correction, noting that Mitchell was "another CEO that lied about his resume". J.A. 28-29. Appellants also note that Greenberg questioned on "TheStreet.com" whether other "corrections" were forthcoming. Specifically, on November 1, 2002 Greenberg wrote that, "... if the CEO's disclosure isn't correct, you can't help but wonder ... what else isn't?". J.A. 76. He repeated this refrain in a November 3rd post: "Can't help but wonder why [sic] credibility an admitted liar, of a CEO, will have going forward. (And can't help but wonder what else at the company has been, shall we say, embellished.)". J.A. 81. Finally, on November 12th, Greenberg opined in an article about MCG that, "[w]hen a CEO lies about his educational background ... you have to wonder what else might not be right." J.A. 84.

It is plainly plausible that, at least temporarily, investors ingested or shared these financial pundits' concerns about the company's credibility in the wake of the corrective announcement. The stock dipped to $8.40 from $11.85 per share on November 1, 2002. The full price history of the stock, however, complicates the case: the next day, the stock regained approximately half of the previous day's loss, and the remainder of its losses were recovered within about a month.⁴

While Mitchell was an undoubtedly important person for MCG,⁵ he was by no means above its punishment. On November 3rd, the Board withheld Mitchell's 2001 and 2002 bonuses, made him repay monies loaned to him by MCG, and removed his title as Chairman of the Board. Mitchell remains stripped of his title as Chairman; he retained (and retains) his position as CEO.

Appellee's Fed.R.Civ.P. 12(b)(6) motion to dismiss did not deny that Mitchell's credentials were misstated, but rather argued that whether Mitchell finished his degree at Syracuse was immaterial as a matter of law. Concluding that the Appellants "cannot use the credibility and integrity problems that result from a false statement to bootstrap an otherwise immaterial false statement into creating a basis for a securities fraud action," J.A. 152, the district court dismissed the case.

II.

A.

A district court's dismissal for failure to state a claim under Fed.R.Civ.P. 12(b)(6) is reviewed de novo. Goldstein v. Moatz, 364 F.3d 205, 211 (4th Cir.2004). In general, the motion should not be granted "unless it appears certain that the plaintiff can prove no set of facts which would support its claim and would entitle it to relief." Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993).

B.

In order to prevail on a claim for securities fraud under either S.E.C. Rule 10b-5 ("Rule 10b-5") or Section 11(a) of the Securities Act of 1933, 15 U.S.C. § 77k ("Section 11(a)"), the plaintiff must prove, inter alia, "materiality."⁶ Specifically, Rule 10b-5 makes it unlawful to "... make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ..." and carries with it a private right of action for the Rule's enforcement. Likewise, Section 11(a) creates a right of action for purchasers when a registration statement "contained an untrue statement of a material fact" or omits a material fact.⁷

Here, an investment in close textual reading pays dividends. The plain language of Rule 10b-5 and Section 11(a) requires any successful securities-fraud suit to allege a fact that is both untrue and material. Sometimes the term "material misrepresentation" is used in the securities-fraud context. As this case illustrates, however, this statement can be imprecise. "Material" modifies "fact"; it does not modify "misrepresentation." This is deceptively simple. Assuming other requirements for liability are satisfied, these laws prohibit any misrepresentation of a fact deemed material. But they decidedly do not prohibit any misrepresentation — no matter how willful, objectionable, or flatly false — of im material facts, even if it induces reactions from investors that, in hindsight or otherwise, might make the misrepresentation appear material.⁸ It follows that no matter the attendant outcry or opprobrium about a lie, if the specific fact misrepresented is immaterial, a suit cannot succeed.

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