R2 Investments Ldc v. Phillips

Decision Date01 March 2005
Docket NumberNo. 04-10030.,04-10030.
Citation401 F.3d 638
PartiesR2 INVESTMENTS LDC, Plaintiff-Appellant, v. John D. PHILLIPS, et al., Defendants, John D. Phillips, Bryan D. Yokley, Martin D. Kidder, W. Todd Chmar, Walter J. Burmeister, Kirby J. Campbell, Bryan Cipoletti, Stephen J. Clearman, John P. Imlay, Jr., Massimo Preiz Oltramonti, John P. Rigas, Carl E. Sanders, Dru A. Sedwick, Lawrence C. Tucker, Michael F. Mies, Henry C. Lyon, Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Craig Smyser, Larry R. Veselka (argued), Kristen L. McKeever, Smyser, Kaplan & Veselka, Houston, TX, for Plaintiff-Appellant.

John H. McElhaney, Bradley W. Foster (argued), Locke, Liddell & Sapp, Dallas, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before BARKSDALE, GARZA and DeMOSS, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Appellant R2 Investments LDC ("R2") brought suit against officers and directors of the now bankrupt World Access, Inc. ("World Access") alleging securities fraud, common-law fraud, conspiracy and negligent misrepresentation relating to World Access's failure to complete a tender offer to repurchase certain previously issued notes.1 The district court granted the defendants' motion to dismiss the federal securities fraud claims for failure to state a claim and declined to exercise supplemental jurisdiction over the remaining state law claims. R2 filed this appeal.

I

In conjunction with a 1999 merger, telecommunications company World Access issued $300 million in debt instruments, referred to by the parties as 13.25% Senior Notes (the "Notes").2 In 2000, World Access filed multiple statements with the Securities and Exchange Commission ("SEC") acknowledging that, as a result of an April 2000 sale of assets, it was obligated under the terms of the Notes' indenture to make a tender offer by January 2, 2001 to repurchase approximately $160 million of the Notes. During the same period, World Access filed an expedited declaratory judgment action in the United States District Court for the Northern District of Georgia asking the court to declare that World Access was in fact not obligated to make the tender offer. The district court refused to issue the declaratory judgment on December 20, 2000, and World Access made the required tender offer on January 2, 2001.

The tender offer stated, in relevant part, that "if holders tender at least $161,357,000 aggregate principal amount of Notes, World Access will pay total consideration of approximately $160 million, provided that under the terms of the Indenture World Access may only accept for tender Notes in a principal amount of $1,000 or integral multiples thereof." The tender offer further stated that Note holders had until March 2, 2001 to tender the Notes for World Access to repurchase and that World Access would repurchase the Notes on a pro rata basis by dividing the total amount of Notes tendered for repurchase by $160 million. At the time World Access made its tender offer, R2 had acquired Notes with a face value totaling $6,750,000.

On January 9, 2001, a week after making its tender offer, World Access announced that it would not complete a previously anticipated acquisition of STAR Communications ("STAR"). In a press release, World Access stated that "the financial liabilities of STAR are such that we don't feel we can close the transaction without the $120 million net cash infusion anticipated...." In a Form 8-K filed with the SEC the following day, World Access stated that it had terminated its agreement to acquire STAR and that, as a result, the company's previously announced financial projections for 2001 and future periods were "no longer an indication of World Access' anticipated financial performance." The company further stated that it was "reviewing its business plan, taking into consideration these recent developments."

Between January 9 and February 13, 2001, R2 acquired additional Notes with a face value totaling $45,300,000.

World Access announced on February 15, 2001 that it had reached an agreement with certain Note holders to redeem only $70.6 million of the Notes rather than the $160 million originally announced. R2 was unaware of and did not participate in the negotiation of this agreement. In an effort to convince R2 to consent to the reduced tender amount, World Access permitted R2 to conduct a "forensic investigation," including reviewing certain financial information and an interview with Executive Vice-President Yokley. R2 ultimately refused to agree to the reduced amount. World Access filed for bankruptcy protection in April 2001.

R2 filed suit, alleging, in addition to state law claims, that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Act") by making material misstatements or omissions with respect to both World Access's SEC filings acknowledging its obligation to make the tender offer and the tender offer itself. The district court dismissed R2's section 10(b) claim pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Because liability under section 20(a) may not be imposed absent an underlying violation of the Act,3 the district court likewise dismissed R2's claims under that section. See Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 509 (5th Cir.1990). Having dismissed the federal securities claims, the district court declined to exercise supplemental jurisdiction over the remaining state law claims. See Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580, 585 (5th Cir.1992) ("Our general rule is to dismiss state claims when the federal claims to which they are pendant are dismissed.").

II
A

"In order to state a claim under section 10(b) ... and Rule 10b-5 [promulgated to enforce section 10(b)], 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 plaintiff's] injury.'"4 Nathenson, 267 F.3d at 406-07 (quoting Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994)). Persons asserting claims under section 10(b) and Rule 10b-5 must also satisfy the enhanced pleading requirements imposed by the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Federal Rule of Civil Procedure 9(b). In relevant part, the PSLRA provides that where the plaintiff alleges a material misstatement or omission, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Further, "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Rule 9(b) states that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). "To satisfy Rule 9(b)'s pleading requirements, the plaintiffs must `specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'" Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir.2004) (quoting Williams v. WMX Tech., Inc., 112 F.3d 175, 177 (5th Cir.1997)).

We review de novo the district court's decision to dismiss R2's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Nathenson, 267 F.3d at 406. A Rule 12(b)(6) motion should be granted only if it appears beyond a reasonable doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 348 (5th Cir.2002). Like the district court, we must accept as true the allegations in the complaint and construe them in the light most favorable to the plaintiff. Nathenson, 267 F.3d at 406. But, "we will not strain to find inferences favorable to the plaintiffs" and we will not accept "conclusory allegations, unwarranted deductions, or legal conclusions." Southland, 365 F.3d at 361 (internal quotations omitted). We may affirm the district court's order granting the defendants' motion to dismiss R2's securities fraud claims on any basis supported by the record. See U.S. ex rel. Doe v. Dow Chem. Co., 343 F.3d 325, 330 (5th Cir.2003).

B

R2's complaint alleges that in multiple SEC filings signed by at least one of the defendants World Access stated that "[b]ased on the sale of Telco Systems in April 2000, [World Access] is currently obligated to tender for approximately $160.0 million of its 13.25% Senior Notes by January 2, 2001." R2 also cites statements in SEC filings that World Access "will be obligated to tender for all or a portion of the Senior Notes at a purchase price equal to 100% of principal, plus accrued and unpaid interest.... The tender offer must be made within 270 days of the qualified asset sale(s)." Finally, the complaint refers to statements in SEC filings that "[b]ased on the net cash received to date from the sale of Telco Systems... World Access is currently obligated to utilize approximately $160.0 million to retire unsubordinated indebtedness or make a tender offer for its 13.25% Senior Notes by January 2, 2001." R2 argues these statements were misleading because they were made "without ever disclosing the fact that World Access either did not have the cash to make the payments required or was relying on risky contingencies [ ] to supply sufficient cash for the payments."

The district court held that, even taking as true R2's...

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