Flaherty & Crumrine Preferred Income Fund v. Txu

• Citation: 565 F.3d 200
• Decision Date: 08 April 2009
• Docket Number: No. 08-10414.,08-10414.
• Parties: FLAHERTY & CRUMRINE PREFERRED INCOME FUND, INCORPORATED; Flaherty & Crumrine Preferred Income Opportunity Fund, Incorporated; Flaherty & Crumrine/Claymore Preferred Securities Income Fund, Incorporated; Stan Haiduk, Plaintiffs-Appellants, v. TXU CORP.; C. John Wilder, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

565 F.3d 200

FLAHERTY & CRUMRINE PREFERRED INCOME FUND, INCORPORATED; Flaherty & Crumrine Preferred Income Opportunity Fund, Incorporated; Flaherty & Crumrine/Claymore Preferred Securities Income Fund, Incorporated; Stan Haiduk, Plaintiffs-Appellants, v. TXU CORP.; C. John Wilder, Defendants-Appellees.

No. 08-10414.

United States Court of Appeals, Fifth Circuit.

April 8, 2009.

David Wilson Dodge, Dodge Legal Group, PC, Dallas, TX, Samuel Issacharoff (argued), New York University, School of Law, New York City, Francis J. Balint, Jr., Bonnett, Fairbourn, Friedman & Balint, Phoenix, AZ, for Plaintiffs-Appellants.

Gerard G. Pecht (argued), Fulbright & Jaworski LLP, Houston, TX, Richard S. Krumholz, Fulbright & Jaworski LLP, Dallas, TX, Peter Andrew Stokes, Fulbright & Jaworski LLP, Austin, TX, for Defendants-Appellees.

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

Before KING, BENAVIDES and CLEMENT, Circuit Judges.

BENAVIDES, Circuit Judge:

Appellants, Flaherty & Crumrine Preferred Income Fund, Inc.; Flaherty & Crumrine Preferred Income Opportunity Fund, Inc.; Flaherty & Crumrine/Claymore Preferred Securities Income Fund, Inc. (collectively, "F&C"); and Stan Haiduk ("Haiduk"), filed a securities fraud class action and individual fraud claims against Appellees TXU Corporation ("TXU") and its former CEO John Wilder ("Wilder") for allegedly making material misrepresentations and omissions of fact in connection with a self-tender offer to purchase certain convertible TXU securities (the "tender offer") in 2004. Specifically, Appellants alleged that Appellees fraudulently misrepresented the timing and magnitude of a planned stock repurchase program and dividend increase in order to induce the Appellants to participate in the tender offer. The district court dismissed Appellants' fraud claims alleged under Sections 10(b) and 14(e) of the Securities Exchange Act and SEC Rule 10b-5, as well as Appellants' common law fraud claims, for failure to state a claim under the heightened pleading standards applicable to securities fraud claims. We affirm the judgment of the district court.

I.

Appellants are three investment funds (F&C) and an individual plaintiff (Haiduk), all of whom owned convertible TXU securities called TXU Corporate Units (the "Corporate Units") and TXU Income PRIDES (the "PRIDES"). Both classes of securities were traded on the New York Stock Exchange and were convertible into TXU common stock.

Prior to the tender offer, Wilder, TXU's CEO, had implemented a three-phase restructuring program aimed at improving TXU's business. On May 18, 2004, approximately four months before the tender offer, TXU issued a press release outlining its view of the company's financial restructuring program. The press release indicated that TXU did not anticipate a dividend increase until 2006, when certain financial benchmarks were reached, but noted that TXU's Board of Directors (the "Board") might consider other relevant factors in determining when or if to authorize a dividend increase:

Upon reaching the targeted balance sheet strength and financial flexibility, management would recommend that the Board of Directors reevaluate the current dividend policy. At that time, management expects it would recommend targeting annual common stock dividends equal to a pay out of 100 percent of the earnings of TXU's electric delivery business. Of the free cash flow, management would expect to return roughly 80 percent to shareholders in the form of distributions or repurchases and to retain roughly 20 percent for long term growth initiatives. Assuming the execution of the business initiatives and transactions described above, and depending on market trends in commodity prices, management expects that this capital allocation program will enable management to recommend an increase of the dividend in 2006. In addition to management's recommendation, the Board of Directors may consider other relevant factors in determining if and when to make a change in the dividend policy.

On September 15, 2004, TXU announced that it was offering to purchase up to 11,433,285 outstanding Corporate Units and up to 8,700,000 outstanding PRIDES. Appellants collectively held 530,000 Corporate Units and 5,000 PRIDES prior to the tender offer. Investors holding the outstanding securities had the option to tender their securities to TXU or retain them, and Appellants were among the roughly 65% of investors who accepted the tender offer and sold their securities back to TXU. The price offered for the securities in the tender offer was $52.28 for each Corporate Unit and $52.39 for each PRIDE. The tender offer purchase price was determined by applying a factor to the twenty-day weighted average price of TXU common stock between September 20, 2004, and October 8, 2004. The tender price was higher than the market price for the securities at the time of the tender offer. The offer itself (as well as forms filed with the SEC and the associated press release) contained the following language concerning the dividend policy:

TXU Corp.'s debt and capital management program is intended to strengthen TXU Corp.'s balance sheet and financial flexibility. As a part of its capital management and restructuring program and considering current business and market conditions, TXU Corp.'s management is evaluating whether it should recommend to the TXU Corp. Board of Directors that they reevaluate TXU Corp.'s current common stock dividend policy. TXU Corp. cannot predict the outcome of management's evaluation, when, if at all, management would make a recommendation to the Board of Directors to change the current common stock dividend policy, or what management's recommendation might be. In addition to any recommendation from management, the Board of Directors may consider other relevant factors in determining if and when to make a change in TXU Corp.'s common stock dividend policy.

TXU also announced its intent to repurchase up to 10 million shares of its common stock, subject to market conditions and other factors. On September 28, 2004, CEO Wilder made a presentation in which he reiterated previous representations that the dividend policy was under review and discussed TXU's capital allocation and growth strategy.

On October 12, 2004, just one day before the expiration of the offer, TXU management gave a detailed financial plan to certain credit rating agencies for the purpose of facilitating the agencies' determinations of whether an increase in TXU's annual dividend would adversely affect the corporation's credit rating. On October 13, 2004, the final day of the tender offer, F&C tendered 425,000 of its 525,000 Corporate Units to TXU for total proceeds of $22,219,000, and Haiduk tendered 5,000 Corporate Units for total proceeds of $260,093.89 and 5,000 PRIDES for total proceeds of $261,103.88.

On October 19, 2004, six days after the end of the tender offer period, TXU management provided materials to the Board proposing a change in dividend policy, and on October 21, 2004, management recommended a 350% increase of the annual dividend on common stock and a 400% increase in the stock repurchase program. In the interim between management's provision of the materials to the Board and the final recommendation, TXU management received final reports from the credit rating agencies informing the corporation that an increase in dividend payouts would not adversely affect its credit rating. On October 22, 2004, the Board approved the dividend increase and the stock repurchase program. On October 25, 2004, TXU publicly announced its plan to increase the common stock dividend from $0.50 to $2.25 and to repurchase approximately 50 million shares of TXU common stock. Immediately following the announcement, the per-share value of TXU common stock jumped nearly 20%. The Corporate Units and the PRIDES experienced correlated increases in value.

On, September 6, 2005, Appellants filed their original class action complaint in the district court, alleging that the Appellees violated federal securities laws and intentionally defrauded Appellants and other similarly situated holders of TXU securities by failing to inform those who participated in the tender offer that a dividend increase and increased stock repurchase was imminent. Appellants' essential theory is that TXU and Wilder failed to inform them of the impending dividend increase in order to induce Appellants to participate in the tender offer before the value of their securities increased. Appellants alleged three causes of action for fraud under the Securities Exchange Act: (1) a violation of Section 14(e)¹; (2) a violation of Section 10(b)² and Rule 10b-5³; and (3) controlling person liability against Wilder under Section 20(a).⁴ Appellees filed a motion to dismiss all of the Appellants' claims on December 16, 2005, which was granted by the district court. Appellants appealed to this court, but while the appeal was pending, the United States Supreme Court issued its decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), which clarified the pleading standard for scienter under the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In response to the Tellabs decision, and without addressing the merits of the appeal, this court vacated the district court's judgment and remanded the case for further consideration in light of Tellabs. Flaherty & Crumrine Preferred Income Fund Inc. v. TXU Corp., 242 Fed.Appx. 253 (5th Cir. 2007).

Appellants filed a second amended complaint on November 26, 2007, restating their original claims and supplementing the complaint with the expert report of Professor Linda Allen, Professor of Finance at the City University of New York, and additional instances of alleged fraudulent misrepresentations. Appellants also added individual non-class common law fraud claims under Texas state law. Appellees...