Abc Arbitrage Plaintiffs Group v. Tchuruk

• Decision Date: 13 May 2002
• Docket Number: No. 01-40645.,01-40645.
• Citation: 291 F.3d 336
• Parties: ABC ARBITRAGE PLAINTIFFS GROUP; et al., Plaintiffs, Alcatel Plaintiffs Group, Plaintiff-Appellant, v. Serje TCHURUK; et al., Defendants, Serje Tchuruk; Jean-Pierre Halbron; Alcatel SA, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

291 F.3d 336

ABC ARBITRAGE PLAINTIFFS GROUP; et al., Plaintiffs Alcatel Plaintiffs Group, Plaintiff-Appellant, v. Serje TCHURUK; et al., Defendants Serje Tchuruk; Jean-Pierre Halbron; Alcatel SA, Defendants-Appellees.

No. 01-40645.

United States Court of Appeals, Fifth Circuit.

May 13, 2002.

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Frederic S. Fox, Kaplan, Kilsheimer & Fox, Samuel Issacharoff (argued), Columbia School of Law, New York City, for Plaintiff-Appellant.

Robert Emanuel Zimet (argued), Skadden, Arps, Slate, Meagher & Flom, New York City, Clyde Moody Siebman, Siebman, Reynolds & Burg, Sherman, TX, for Defendants-Appellees.

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

Before HIGGINBOTHAM, DeMOSS and BENAVIDES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This appeal presents questions concerning the pleading requirements under the Private Securities Litigation Reform Act of 1995, the PSLRA. The Alcatel Plaintiffs Group filed this putative class action after a precipitous drop in the stock price of Alcatel SA. The amended complaint alleged that Alcatel misrepresented its financial condition by covering up problems associated with its German subsidiary Alcatel SEL, intentional overstatements of its 1997 financial results, and contract losses in Southeast Asia and Europe. Those were assertedly part of a series of financial set-backs concealed in order to artificially inflate the price of Alcatel American Depository Shares ("ADSs") and to avoid compromising a $4.4 billion stock-for-stock acquisition of DSC Communications, a Texas company.

The district court held that the majority of allegations of the amended complaint were not pleaded with sufficient particularity to meet the requirements of the PSLRA. It further concluded that the remaining alleged misrepresentations were immaterial as a matter of law. Plaintiffs appeal, contending that the standard applied by the district court was too onerous and that its complaint should be reinstated. For the reasons stated herein, we agree in part, but nevertheless conclude that the sufficiently particular allegations do not state a claim.

I.

On September 24, 1998, a group later identified as the Alcatel Plaintiffs Group filed their original complaint in the United States District Court for the Southern District of New York. In all, more than twenty separate actions were filed in four jurisdictions against Alcatel and its officers and directors immediately after a drop in the price of its stock. The Judicial Panel on Multidistrict Litigation transferred all the cases to the Eastern District of Texas pursuant to 28 U.S.C. § 1407.

The transferee court divided the group into two classes of shareholders: (1) purchasers of Alcatel ADSs on the open market during the class period, and (2) those persons who acquired Alcatel ADSs as a result of the merger between Alcatel and DSC. The Alcatel Plaintiffs Group were designated Lead Plaintiff and their attorneys Lead Counsel pursuant to 15 U.S.C. § 78u-4(a)(3)(B) for a putative class consisting of all purchasers, other than the defendants, of Alcatel ADSs on the open market between June 8, 1998, and September 17, 1998.

On May 24, 1999, Plaintiffs filed their First Consolidated Amended Complaint against Alcatel, Alcatel Chief Executive Officer and Chairman Serje Tchuruk, and Alcatel senior Executive Vice President and Alcatel Telecom Executive Committee member Jean-Pierre Halbron (collectively "Alcatel"), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.¹

Alcatel moved to dismiss. The district court granted the motion without prejudice, holding that the amended complaint did not meet the pleading standards of Federal Rule of Civil Procedure 9(b) and the PSLRA. Specifically, it held that Plaintiffs had failed to plead facts demonstrating the falsity of Alcatel's alleged representations or that Alcatel knew they were false when made, nor the sources of their allegations made on information and belief.

With leave, Plaintiffs filed their Second Consolidated Amended Complaint on January 31, 2000.² Alcatel filed a motion to dismiss this second amended complaint pursuant to Rule 12(b)(6). Although this new complaint added significant information, the district court dismissed with prejudice. Plaintiffs now appeal.³

II.

First we will summarize the facts alleged in the complaint, which for purposes of a Rule 12(b)(6) motion are accepted as true and construed in the light most favorable to Plaintiffs.⁴

A.

Alcatel is a French telecommunications firm whose shares trade on the New York Stock Exchange in the form of ADSs.⁵ Alcatel employs approximately 190,000 people and has four principal product lines: telecommunications, accounting for 44.3% of sales in 1997; cable and related components, accounting for 22.8% of sales in 1997; energy and transport, accounting for 18.4% of sales in 1997; and engineering and systems, accounting for 14.1% of sales in 1997.⁶

Tchuruk was at all relevant times Chief Executive Officer and Chairman of the Board of Alcatel and also served on Alcatel's Telecom Executive Committee.⁷ Halbron was at all relevant times senior Executive Vice President of Alcatel and also served on the Telecom Executive Committee.⁸

Plaintiffs are a proposed class of those who (1) bought Alcatel ADSs, (2) purchased Alcatel call options, or (3) sold Alcatel put options during the class period of June 8, 1998 through September 17, 1998.⁹

During this proffered class period, Alcatel was simultaneously dealing with the effects of the lingering Asian financial crisis, European deregulation, and a pending merger with DSC.¹⁰ Under the terms of the merger agreement, which involved a stock-for-stock acquisition, DSC had the right to terminate the deal if the average price of Alcatel ADSs for the twenty-day period before the closing date fell below $37.¹¹

B.

The complaint alleges that Alcatel made materially false and misleading statements and omissions concerning Alcatel's financial condition and the future of Alcatel's business, which statements and omissions were contained in public statements in news reports, press releases, Alcatel's 1997 annual report, and the Registration Statement and Joint Proxy/Prospectus disseminated in connection with Alcatel's merger with DSC.¹² The alleged misrepresentations began on June 8, 1998, when Tchuruk was paraphrased in an AFX News article:

Tchuruk also said that Alcatel has the potential for its sales to grow by 10-20 pct per year, outperforming the telecommunications market as a whole which is seen rising 8-10 pct in nominal terms.

Tchuruk also said that his company is better protected than others from the fallout of the Asian financial crisis, because cuts in investment in the region are usually not aimed at telecommunications.¹³

The same day, a Bloomberg article paraphrased Tchuruk as saying that sales at Alcatel SA "will grow between 10 and 20 percent a year — faster than the 10 percent for the market as a whole."¹⁴

On June 25, 1998, Alcatel filed its annual report on a Form 20-F with the SEC for the fiscal year ending December 31, 1997. This report included the following sections quoted in the complaint:

Income from operations increased by 175.6% to FF 8.0 billion in 1997 compared with FF 2.9 billion in 1996 and including a FF 506 million provision for risks related to the Southeast Asian crises ... the increase in that income in operations was due to the improved performance in all segments, in particular the improvement in Telecom segment's income from operations which increased to FF 3.1 billion in 1997 compared with the loss of FF 953 million in 1996.

TELECOM

Sales to Asia increased to FF 9.0 billion in 1997 compared to FF 6.0 billion in 1996 due principally to sales growth in China. Net sales increased in all of the Telecom segment divisions, with increases of more than 30% each in Transmission systems, Access Systems and Mobile Communications.

Order bookings amounted to FF 85.4 billion in 1997 a 7.5 percent increase compared with FF 79.4 billion in 1996. The substantial increase in order bookings that were registered in the Transmission Systems, Access Systems, Mobile Communications, and Submarine Networks were partially offset by a decline in orders in the Switching Systems division principally to the completion of Deutsche Telecom's network digitalization program in Germany.

....

Impact of Economic Crises in Southeast Asia

The recent economic crises of certain countries in Southeast Asia could have a negative impact on prices and demand for certain of the Company's products and services, due particularly to the risk of a significant decline in infrastructure investment in the region. Management expects such impact to be relatively less significant with respect to investments in telecommunications infrastructure. Such development could thereby affect the results of operations of certain of the Company's business segments. Based on current information, management does not believe that the impact of such economic crises will be material for Alcatel Alsthom on a consolidated basis. Excluding sales by GEC Alsthom and Cegelec, net sales recorded by Alcatel Alsthom in 1997 from sales in Asia amounted to approximately 4.4% of net sales.¹⁵

This annual report was also incorporated by reference into the Joint Proxy/Prospectus included in a Form F-4 Registration Statement filed on July 28, 1998 with the SEC in connection with the DSC merger.¹⁶ In section 5.7 of the merger agreement attached to the Form F-4, Alcatel certified that it had experienced no "Material Adverse Effect" since December 31, 1997, defined in section 5.1 as "a material adverse effect on the condition (financial or otherwise), business, assets or results of operations of Alcatel and its...