580 F.3d 755 (8th Cir. 2009), 08-1593, Horizon Asset Management Inc. v. H & R Block, Inc.

Docket Nº:08-1593, 08-1670.
Citation:580 F.3d 755
Opinion Judge:COLLOTON, Circuit Judge.
Party Name:HORIZON ASSET MANAGEMENT INC., Plaintiff/Appellant, v. H & R BLOCK, INC.; Mark A. Ernst; William L. Trubeck, Defendants/Appellees, Michael Nettie; Iron Workers Local 16 Pension Fund; Feivel Gottlieb; Adele Lebowitz; Phyllis J. Winters; Doris Staehr; Raymond J. Kadigan; Momentum Partners; Stephen T. Hibbard, Plaintiffs, Frank J. Cotroneo: James W. Y
Attorney:Solomon B. Cera, argued, Thomas C. Bright and Gwendolyn R. Giblin, San Francisco, CA and Patrick J. Stueve and Matthew L. Dameron, Kansas City, MO, on the brief, for appellant Horizon. Michael W. Stocker, argued, Ira A Schochet, Laurence D. Paskowitz, and Roy L. Jacobs, New York, NY and Diane A. ...
Judge Panel:Before RILEY, BOWMAN, and COLLOTON, Circuit Judges.
Case Date:September 09, 2009
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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580 F.3d 755 (8th Cir. 2009)

HORIZON ASSET MANAGEMENT INC., Plaintiff/Appellant,

Michael Nettie; Iron Workers Local 16 Pension Fund; Feivel Gottlieb; Adele Lebowitz; Phyllis J. Winters; Doris Staehr; Raymond J. Kadigan; Momentum Partners; Stephen T. Hibbard, Plaintiffs,

v.

H & R BLOCK, INC.; Mark A. Ernst; William L. Trubeck, Defendants/Appellees,

Frank J. Cotroneo: James W. Yabuki; Bret G. Wilson; Thomas M. Bloch; Donna R. Ecton; Henry F. Frigon; Roger W. Hale; Louis W. Smith; Rayford Wilkins, Jr.; David Bak, Defendants.

Horizon Asset Management Inc.; Michael Nettie, Plaintiffs,

Iron Workers Local 16 Pension Fund, Plaintiff/Appellant,

Feivel Gottlieb; Adele Lebowitz; Phyllis J. Winters; Doris Staehr; Raymond J. Kadigian, Plaintiffs,

Momentum Partners, Plaintiff/Appellant, Stephen T. Hibbard, Plaintiff,

v.

H & R Block, Inc.; Mark A. Ernst; William L. Trubeck; Frank J. Cotroneo; James W. Yabuki; Bret G. Wilson; Thomas M. Bloch; Donna R. Ecton; Henry F.D. Seip; Jeffrey E. Nachbor; Melanie K. Coleman, Defendants/Appellees.

Nos. 08-1593, 08-1670.

United States Court of Appeals, Eighth Circuit.

September 9, 2009

         Submitted: Oct. 16, 2008.

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         Solomon B. Cera, argued, Thomas C. Bright and Gwendolyn R. Giblin, San Francisco, CA and Patrick J. Stueve and Matthew L. Dameron, Kansas City, MO, on the brief, for appellant Horizon.

          Michael W. Stocker, argued, Ira A Schochet, Laurence D. Paskowitz, and Roy L. Jacobs, New York, NY and Diane A. Nygaard, Kansas City, MO on the brief, for Local 16.

          Thomas Walsh, argued St. Louis, MO, W. Perry Brandt and Robert M. Thompson, Kansas City, MO, Thomas H. Golden and Deirdre N. Hykal, New York, NY on the brief, for appellees in 08-1593; Thomas H. Golden, New York, NY Steven M. Schatz, Jerome F. Birn, Jr., and Gregory L. Watts, Palo Alto, CA, on the brief, for appellees in 08-1670.

          Before RILEY, BOWMAN, and COLLOTON, Circuit Judges.

          COLLOTON, Circuit Judge.

         This case involves two appeals arising from the dismissal of a putative consolidated class action against H & R Block, Inc. (" Block" ), and individual defendants who are corporate officers or directors of Block. First, Horizon Asset Management Inc. (" Horizon" ) appeals the merits of the dismissal, arguing that the district court erred in concluding that Horizon failed adequately to plead scienter under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (" PSLRA" ). Second, Momentum Partners and Iron Workers Local 16 Pension Fund (" Iron Workers" ) appeal the district court's appointment of Horizon as the sole lead plaintiff to pursue all claims against the defendants. Iron Workers contends that the district court's ruling prevented them from litigating the merits of their derivative claims against the individual defendants, because Horizon refused to include the derivative claims in its consolidated complaint, and the district court subsequently dismissed the complaint and the entire case. We affirm in part, reverse in part, and remand for further proceedings.

         I.

         Block is a publicly traded corporation that provides a diverse range of tax, investment, mortgage, and business services and products. In June 2005, Block announced that it would restate its financial results filed with the Securities and Exchange Commission (" SEC" ) for fiscal years 2003 and 2004 and the first three quarters of fiscal year 2005. The restatement corrected, among other things, errors in the calculation of Block's corporate income tax. In February 2006, Block announced the need for a second restatement of its financial results for fiscal years 2004 and 2005 and the first two quarters of fiscal year 2006, which pertained primarily to errors in determining Block's state effective income tax rate. Also in early 2006, the Attorney General of California commenced an action against Block, alleging that its Refund Anticipation Loan program violated state and federal law, and the Attorney General of New York filed suit asserting that Block fraudulently marketed its Express Individual Retirement Account (" IRA" ) program.

          As a result of these events, shareholders of Block filed nine separate actions in

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state and federal court. The cases were consolidated in the district court, and the court appointed Horizon the lead plaintiff. Horizon filed a consolidated class action complaint bringing securities fraud claims under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240. 10b-5. The complaint alleged that Block and individual defendants, including Mark A. Ernst, Block's Chairman, President, and Chief Executive Officer, and William L. Trubeck, Block's Executive Vice President and Chief Financial Officer, made false and misleading statements to public investors regarding Block's financial condition. Specifically, Horizon alleged that Block misled investors by (1) failing to disclose the unlawful nature of its Refund Anticipation Loan and Express IRA programs, which artificially inflated reported earnings; (2) failing to disclose its lack of safeguards and procedural controls to ensure accurate financial statements; and (3) misstating financial results due to errors in calculating its state effective income tax rate, which resulted in Block's filing restatements of its financial results. Horizon also asserted an additional claim against the individual defendants, alleging liability of " controlling persons" under section 20(a) of the Securities Exchange Act of 1934. See 15 U.S.C. § 78t(b).

         The district court granted Block's motion to dismiss the case. The court found that Horizon failed to plead adequately that Block had made any false statements, with the exception of the financial results that were based on the tax calculation errors. See In re H & R Block Sec. Litig., 527 F.Supp.2d 922, 926-28 (W.D.Mo.2007). The court concluded that Block admitted the falsity of the financial results by restating them in a subsequent SEC filing, id. at 928, but dismissed the claims because Horizon failed to plead scienter adequately. Id. at 930. Because the control-person claims were predicated on the underlying securities fraud violations, the court determined that those claims also failed. The court granted Horizon leave to amend its complaint, but only with respect to the false statements of financial results. Id. at 931.

         Horizon filed an amended consolidated class action complaint that removed its claims regarding the Refund Anticipation Loan and Express IRA programs and added some additional detail to its other allegations. The district court again granted Block's motion to dismiss, concluding that Horizon still failed to plead scienter adequately. See In re H & R Block Sec. Litig., No. 06-0236, 2008 WL 482403, at *6-7 (W.D.Mo. Feb.19, 2008). Horizon appeals the dismissal of the amended complaint.

         II.

          To state a private securities fraud claim under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must allege: " (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as ‘ transaction causation’ ; (5) economic loss; and (6) ‘ loss causation,’ i.e., a causal connection between the material misrepresentation and the loss." Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (internal citations omitted) (emphases omitted); see also In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir.2002). The district court dismissed Horizon's complaint for failing to plead adequately the element of scienter, and that is the only issue on appeal. We review the district court's dismissal de novo. Elam v. Neidorff, 544 F.3d 921, 926 (8th Cir.2008).

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          The PSLRA imposes heightened pleading requirements on private securities actions " to curb perceived abuses" of such actions, including " nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests and manipulation by class action lawyers." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (internal quotation omitted). As relevant to the pleading of scienter, the PSLRA instructs that " 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). The required state of mind for private securities fraud actions is " ‘ scienter, i.e., the defendant's intention to deceive, manipulate, or defraud,’ " or the defendant's " severe recklessness." In re Ceridian Corp. Sec. Litig., 542 F.3d 240, 244 (8th Cir.2008) (quoting Tellabs, 551 U.S. at 313, 127 S.Ct. 2499).

          " To determine whether the plaintiff has alleged facts that give rise to the requisite ‘ strong inference’ of scienter," we must weigh " plausible nonculpable explanations for the defendant's conduct" against inferences favoring the plaintiff's allegation of scienter. Tellabs, 551 U.S. at 323-24, 127 S.Ct. 2499. Although the inference of scienter need not be " the most plausible of competing inferences," it " must be more than merely reasonable or plausible-it must be cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id. at 324, 127 S.Ct. 2499 (internal quotation omitted);...

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