9 F.3d 259 (2nd Cir. 1993), 836, In re Time Warner Inc. Securities Litigation

Docket Nº:836, Docket 92-7816.
Citation:9 F.3d 259
Party Name:27 Fed.R.Serv.3d 1005 In re TIME WARNER INC. SECURITIES LITIGATION. ZVI TRADING CORP. EMPLOYEES' MONEY PURCHASE PENSION PLAN AND TRUST, and Barry Zonon, Plaintiffs-Appellants, v. Steven J. ROSS, N.J. Nicholas, Jr., Gerald M. Levin, Bert W. Wasserman, and Time Warner Inc., Defendants-Appellees.
Case Date:November 30, 1993
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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9 F.3d 259 (2nd Cir. 1993)

27 Fed.R.Serv.3d 1005



TRUST, and Barry Zonon, Plaintiffs-Appellants,


Steven J. ROSS, N.J. Nicholas, Jr., Gerald M. Levin, Bert W.

Wasserman, and Time Warner Inc., Defendants-Appellees.

No. 836, Docket 92-7816.

United States Court of Appeals, Second Circuit

November 30, 1993

Argued Jan. 29, 1993.

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[Copyrighted Material Omitted]

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Arthur R. Miller, Cambridge, MA (David J. Bershad, Sol Schreiber, Lee S. Shalov, James E. Tullman, Milberg Weiss Bershad, Specthrie & Lerach, New York City, Michael J. Freed, Joseph D. Ament, Ellyn M. Lansing, Much Shelist Freed Denenberg & Ament, Chicago, IL, Roger W. Kirby, Kaufman Malchman Kaufmann & Kirby, New York City, on the brief), for plaintiffs-appellants.

Stuart Robinowitz, New York City (Jonathan J. Freedman, Matthew L. Levine, Paul, Weiss, Rifkind, Wharton & Garrison, on the brief), for defendants-appellees.

Before NEWMAN, Chief Judge, WINTER and MINER, Circuit Judges.

JON O. NEWMAN, Chief Judge:

This appeal from the dismissal of a securities fraud complaint requires us to consider the recurring issue of whether stock fraud claims are sufficiently pleaded to warrant at least discovery and perhaps trial. Three separate issues are presented: (1) whether a corporation has a duty to update somewhat optimistic predictions about achieving a business plan when it appears that the plan might not be realized, (2) whether a corporation has a duty to disclose a specific alternative to an announced business plan when that alternative is under active consideration, and (3) whether a corporation is responsible for statements in newspapers and security analyst reports that are attributed to unnamed corporate personnel. These issues arise on an appeal by plaintiffs ZVI Trading Corporation Employees' Money Purchase Pension Plan and Trust and Barry Zolon from the June 1, 1992, order of the District Court for the Southern District of New York (Morris E. Lasker, Judge) dismissing plaintiffs' complaint, 794 F.Supp. 1252 (S.D.N.Y.1992), and

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the July 16, 1992, order denying plaintiffs' motion for reconsideration.

Plaintiffs' complaint alleged that defendant Time Warner, Inc. and four of its officers had misled the investing public by statements and omissions made in the course of Time Warner's efforts to reduce its debt. The District Court dismissed the complaint with prejudice for failure to adequately plead material misrepresentations or omissions attributable to the defendants and for failure to adequately plead scienter. We hold that the complaint's allegations of scienter and certain of its allegations concerning omissions are adequate to survive a motion to dismiss, and we accordingly reverse the order of dismissal and remand.


On June 7, 1989, Time, Inc. received a surprise tender offer for its stock from Paramount Communications. Paramount's initial offer was $175 per share, in cash, and was eventually increased to $200 per share. See Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140, 1147-49 (Del.1989). Time's directors declined to submit this offer to the shareholders and continued discussions that had begun somewhat earlier concerning a merger with Warner Communications, Inc. Eventually, Time and Warner agreed that Time would acquire all of Warner's outstanding stock for $70 per share, even though this acquisition would cause Time to incur debt of over $10 billion. Time shareholders and Paramount were unsuccessful in their effort to enjoin the Warner acquisition, which was completed in July 1989.

Thus, in 1989, Time Warner Inc., the entity resulting from the merger, found itself saddled with over $10 billion in debt, an outcome that drew criticism from many shareholders. The company embarked on a highly publicized campaign to find international "strategic partners" who would infuse billions of dollars of capital into the company and who would help the company realize its dream of becoming a dominant worldwide entertainment conglomerate. Ultimately, Time Warner formed only two strategic partnerships, each on a much smaller scale than had been hoped for. Faced with a multi-billion dollar balloon payment on the debt, the company was forced to seek an alternative method of raising capital--a new stock offering that substantially diluted the rights of the existing shareholders. The company first proposed a variable price offering on June 6, 1991. This proposal was rejected by the SEC, but the SEC approved a second proposal announced on July 12, 1991. Announcement of the two offering proposals caused a substantial decline in the price of Time Warner stock. From June 5 to June 12, the share price fell from $117 to $94. By July 12, the price had fallen to $89.75.

The plaintiff class, which has not yet been certified, consists of persons who bought Time Warner stock between December 12, 1990, and June 7, 1991. Their complaint, containing causes of action under sections 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. Secs. 78j(b), 78t(a) (1988), and state law, alleges that a series of statements from Time Warner officials during the class period were materially misleading in that they misrepresented the status of the ongoing strategic partnership discussions and failed to disclose consideration of the stock offering alternative. The parties have classified the challenged statements into two categories: (1) press releases and public statements from the individual defendants, and (2) statements to reporters and security analysts emanating from sources within the company but not attributed to any identified individual. The statements, which we discuss in more detail below, consist of generally positive messages concerning the progress of the search for strategic partners, and imply to varying degrees that significant partnerships will be consummated and announced in the near future. None of the statements acknowledged that negotiations with prospective partners were going less well than expected or that an alternative method of raising capital was under consideration.

Plaintiff ZVI Trading filed its complaint on June 14, 1991, and amended the complaint on June 19 to add one additional defendant, to expand the class period, and to supplement the list of alleged misstatements. Plaintiff Barry Zolon filed a complaint on June 24,

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1991. Plaintiffs made discovery requests in June and July, and defendants moved on August 21 for a protective order pending resolution of an anticipated motion to dismiss. Defendants' motion papers argued in part that the complaint was inadequate. The District Court granted the protective order motion in part, limiting plaintiffs' discovery to documents produced in an unrelated Delaware action that challenged the terms of the rights offering. Pursuant to a stipulated order, plaintiffs filed on August 30 a consolidated complaint that responded to some of the deficiencies defendants had complained of in their protective order motion. On October 11, defendants moved to dismiss under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Relying on both rules, the District Court granted the motion and denied plaintiffs leave to amend the complaint.

The District Court's opinion considered the two categories of misstatements in turn. As to the first category--attributed public statements by the individual defendants or the corporation--the Court agreed that defendants attempted to drum up enthusiasm for strategic partnerships and did not disclose either their difficulties in pursuing that course or the possibility of a stock offering. But the Court found that the statements were accurate when made, and that later events did not give rise to a duty to correct or update the statements. The Court also concluded that plaintiffs had not adequately pled scienter under any theory. As to the second category of statements, the Court ruled that Rule 9(b) required plaintiffs to allege the identity of the speakers. The Court further concluded that the defendants could not be held responsible for any of the unattributed statements and that in any event the statements were not actionable for the same reasons that the attributed statements were not actionable. The Court then dismissed plaintiffs' pendent state claims of common law fraud and negligent misrepresentation on the merits. Finally, the Court concluded that leave to replead should not be granted, since the defects went to the merits and were not mere pleading niceties. 1


Cases of this sort present an inevitable tension between two powerful interests. On the one hand, there is the interest in deterring fraud in the securities markets and remedying it when it occurs. That interest is served by recognizing that the victims of fraud often are unable to detail their allegations until they have had some opportunity to conduct discovery of those reasonably suspected of having perpetrated a fraud. Consistent with that interest, modern pleading rules usually permit a complaint to survive dismissal unless, in the familiar phrase, "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).

On the other hand, there is the interest in deterring the use of the litigation process as a device for extracting undeserved settlements as the price of avoiding the extensive discovery costs that frequently ensue once a complaint survives dismissal, even though no recovery would occur if the suit were litigated to completion. It has never been clear how these competing interests are to be...

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