Coates v. Heartland Wireless Communications, Inc.

• Decision Date: 02 November 1998
• Docket Number: No. Civ.A. 3:98-CV-0452-D.,Civ.A. 3:98-CV-0452-D.
• Citation: 26 F.Supp.2d 910
• Parties: Robert COATES, et al., Plaintiffs, v. HEARTLAND WIRELESS COMMUNICATIONS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

Page 910

26 F.Supp.2d 910

Robert COATES, et al., Plaintiffs, v. HEARTLAND WIRELESS COMMUNICATIONS, INC., et al., Defendants.

No. Civ.A. 3:98-CV-0452-D.

United States District Court, N.D. Texas, Dallas Division.

November 2, 1998.

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Roger F. Claxton and Robert J. Hill (argued) of Kilgore & Kilgore, Dallas, TX, for plaintiffs.

Joseph S. Allerhand (argued) of Weil Gotshal & Manges LLP, New York City, Ralph I. Miller, Penny P. Reid, and Robert R. Summerhays of Weil Gotshal & Manges LLP, Dallas, TX, for defendants.

FITZWATER, District Judge.

Defendants' motion to dismiss presents questions concerning changes effected by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), codified in relevant part at 15 U.S.C. § 78u-4, in pleading claims for relief pursuant to § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1998), and § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). For the reasons that follow, the court grants defendants' motion, but permits plaintiffs to replead.

I

Defendant Heartland Wireless Communications, Inc. ("Heartland") develops, owns, and operates wireless cable television systems in the central United States. These systems transmit television signals from a broadcasting tower to an antenna on a subscriber's rooftop. Heartland began operations in 1993 and made its initial public offering of securities in 1994.

Plaintiffs Robert Coates and Management Insights, Inc. purchased 500,400 shares of Heartland common stock during the period December 18, 1996 through February 28, 1997. Plaintiffs allege that from November 14, 1996 through March 20, 1997 Heartland and defendants David E. Webb ("Webb"), L. Allen Wheeler, John R. Bailey, Alvin H. Lane, John A. Sprague, and J.R. Holland, Jr. (the "individual defendants") misstated material facts about Heartland's subscriber base and related accounts receivable. The individual defendants are either Heartland officers, inside directors, or outside directors. Plaintiffs maintain that, in a series of press releases issued between November 14, 1996 and March 20, 1997, Heartland's third quarter 1996 financial statements, and its December 1996 and February 1997 debt offering prospectuses, defendants misstated material facts concerning Heartland's subscriber base and omitted to disclose the need for substantial, material charges and/or write-downs of the subscriber base and related accounts receivable. Plaintiffs principally focus their complaint and briefing, however, on the press releases alone. They allege that in each of these press releases, defendants reported an increasing subscriber base when they knew or should have known that Heartland reflected on its books approximately $5.2 million in doubtful accounts receivable related to its subscriber base. Nevertheless, these press releases contained information such as disappointing third quarter results, dramatic management changes, and below-expectation fourth quarter results. The price of Heartland stock declined from $19 1/8 on November 14, 1996 to $3 13/16 on March 20, 1997. Plaintiffs allege that defendants touted a growing subscriber base when they in fact knew or should have known the subscriber base was overstated.

After the market closed on March 20, 1997, Heartland announced that fourth quarter 1996 results were below market expectations. Defendants also revealed that Heartland was taking several charges totaling $9.1 million, including a $5.2 million charge relating to a bad debt reserve for uncollectible accounts. This charge was based on approximately 33,000 of 240,700 subscribers with past due balances. Plaintiffs allege that defendants knew or should have known by November 14, 1996 of the need to write down the subscriber base and the related accounts receivable, but failed to disclose these facts until March 20, 1997.

Plaintiffs assert that Heartland's common stock fell from $3 13/16 on March 20, 1997 to $2 3/16 on March 21, 1997, a drop of approximately 43%. They also maintain that the stock trades today at approximately $1 per share. Plaintiffs maintain that if they had known the omitted information, they would not have purchased Heartland stock or would not have done so at artificially inflated prices.

II

Plaintiffs allege claims against all defendants for relief under § 10(b) of the Exchange Act and Rule 10b-5, and against the individual defendants pursuant to § 20(a) of the Exchange Act. Defendants move to dismiss pursuant to Fed.R.Civ.P. (9)(b) and (12)(b)(6) for failure to plead fraud with particularity and for failure to state a claim upon which relief can be granted.

A

The court may not dismiss plaintiffs' complaint pursuant to Rule 12(b)(6) for failure to state a claim unless it appears beyond doubt that they can prove no set of facts in support of their claims that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). To decide the motion, the court must accept as true the allegations of the complaint and view them in the light most favorable to plaintiffs. Royal Bank of Canada v. FDIC, 733 F.Supp. 1091, 1094 (N.D.Tex.1990) (Fitzwater, J.).

To survive a Rule 12(b)(6) dismissal, plaintiffs must allege facts entitling them to relief for their substantive causes of action. Section 10(b) makes it unlawful for any person

[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b-5, in relevant part, makes it unlawful for any person, directly or indirectly,

[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ... in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To establish a securities fraud claim under Rule 10b-5, a plaintiff must show (1) a misstatement or an omission, (2) of a material fact, (3) made with scienter, (4) on which plaintiff relied,¹ and (5) which proximately caused plaintiff's injury. Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.), cert. denied, ___ U.S. ___, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994).

Section 20(a) defines controlling person liability. It provides, in pertinent part, that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter ... shall also be liable jointly and severally with and to the same extent as such controlled person...." 15 U.S.C. § 78t(a).

B

Rule 9(b) provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

(Emphasis added).

Section 10(b) claims sound in fraud. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). A plaintiff's pleadings must therefore satisfy the strict pleading requirements for fraud set forth in Rule 9(b). See Oppenheimer v. Prudential Secs. Inc., 94 F.3d 189, 195 (5th Cir.1996); Tuchman, 14 F.3d at 1067. A plaintiff must plead the elements of his Rule 10b-5 claim with particularity. See Shushany v. Allwaste, Inc., 992 F.2d 517, 520-21 (5th Cir.1993).

The pleading-with-particularity requirement is further reinforced in the PSLRA for allegations made on information and belief. The PSLRA provides, in relevant part, that

the complaint shall 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) (emphasis added). Such particularity is required so that the complaint provides defendants with fair notice of the plaintiffs' claims, protects defendants from harm to their reputation and goodwill, reduces the number of strike suits, and prevents plaintiffs from filing baseless claims and then attempting to discover unknown wrongs.

Tuchman, 14 F.3d at 1067.

A plaintiff must "plead with sufficient particularity attribution of the alleged misrepresentations or omissions to each defendant; the plaintiff is obligated to `distinguish among those they sue and enlighten each defendant as to his or her part in the alleged fraud.'" In re Silicon Graphics, Inc. Secs. Litig., 970 F.Supp. 746, 752 (N.D.Cal.1997) (citations omitted) (discussing pleading requirements of Rule 9(b)).

A plaintiff "must plead specific facts, not mere conclusory allegations." Tuchman, 14 F.3d at 1067 (citation omitted). The court will not accept conclusory allegations and unwarranted deductions as true on a motion to dismiss. Id. To satisfy the heightened pleading standard of Rule 9(b), a plaintiff 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." Williams, 112 F.3d at 177. Further, the PSLRA requires that a plaintiff who asserts on information and belief that a statement is misleading or fraudulent must state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1).

Finally, a plaintiff who asserts a § 10(b) claim must satisfy the PSLRA's requirement for pleading scienter. The PSLRA requires 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...