In re Cabletron Systems, Inc., No. 01-1965.
| Court | United States Courts of Appeals. United States Court of Appeals (1st Circuit) |
| Writing for the Court | Lynch |
| Citation | 311 F.3d 11 |
| Parties | In re: CABLETRON SYSTEMS, INC., Charles Mesko, Steven Goldman, BGC Investment Club, Malcolm R. Braid, Linda Lee Braid, Jo Bridgeford, James E. Chesney, Steven M. Cross, Charles C. Cullers, Thomas D'Ambrosio, Lisa D'Ambrosio, Robert J. Datsko, Kathy O. Datsko, Bert M. Davis, William Deneen, Fred V. Gakstatter, Larry M. Giesen, Robert Glamb, Deborah Glamb, Donald F. Godwin, Natalie Greenberg, John Halicks, Patricia Halicks, Simon X. He, Intrepid Investors, Ashvin Kapadia, Irwin Kramer, Mark F. Kuligowski, Gary W. Kurtz, Suzanne Kurtz, Paul Lawson, Edmond E. LeBlanc, Terry Lenmark, Craig Lukemire, Bret J. May, David L. Mayes, Timothy M. McMahon, Walter C. Meyer, Edith L. Meyer, Ed Neubert, William Kent Nichols, Martin Palkovic, Richard W. Penoza, Fred Perlman, Roy Philemon, David Phillips, Josie Phillips, Gregory Pinto, Gregory Piro, William Carl Porter, Denis A. Pratt, Andrew Robinton, Tracy Robinton, Barbara Robinton, Ali Robinton, Michael R. Scharf, Romildo J. Scolari, Wolfgang U. Spendel, Lee Stein, Peter Swanson, James F. Sweeney, Titan Investors, John R. Tonsager, Caryl Traugott, Robert F. White Jr., Robert C. White, James W. Whitmer, John Robinton, James Wong, Bernard Yamner, Nancy Zorner, Patricia J. Zumpfe, Bernard Robinson, Marc Linsky, Mala Balasubramanian, Matthew J. Decker, Ron Grynkiewicz, Ron Knecht, Vincent Luongo, Richard Nadzieja, Thai Nguyen, Chani Pangali, Robert Rando, Russell Ruffino, Babette Spatz, Karen Borick, Richard Durr, James G. Pettus, Kenneth M. Williams, and Philip Adler, Plaintiffs, Appellants, George R. Bielski, Henry Brener, BYSG Capital, John Campbell, Frank Charamitaro, Ed Dunn, Leslie C. Hale, Charles Hammond, Carole Kops, Larry Morrison, Lou Ann Murphy, Muriel Robinson, Jim Spencer, Patricia Stack, Albert Shapiro, Peter Samek as Trustee of Robert and Joanne Samek Living Trust, and Nathan Schlessinger, Plaintiffs, v. Cabletron Systems, Inc., Robert Levine, Craig R. Benson, Paul R. Duncan, David J. Kirkpatrick, Donald F. McGuinness, Michael D. Myerow, And Christopher J. Oliver, Defendants, Appellees. |
| Docket Number | No. 01-1965. |
| Decision Date | 12 November 2002 |
Charles Mesko, Steven Goldman, BGC Investment Club, Malcolm R. Braid, Linda Lee Braid, Jo Bridgeford, James E. Chesney, Steven M. Cross, Charles C. Cullers, Thomas D'Ambrosio, Lisa D'Ambrosio, Robert J. Datsko, Kathy O. Datsko, Bert M. Davis, William Deneen, Fred V. Gakstatter, Larry M. Giesen, Robert Glamb, Deborah
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George R. Bielski, Henry Brener, BYSG Capital, John Campbell, Frank Charamitaro, Ed Dunn, Leslie C. Hale, Charles Hammond, Carole Kops, Larry Morrison, Lou Ann Murphy, Muriel Robinson, Jim Spencer, Patricia Stack, Albert Shapiro, Peter Samek as Trustee of Robert and Joanne Samek Living Trust, and Nathan Schlessinger, Plaintiffs,
v.
Cabletron Systems, Inc., Robert Levine, Craig R. Benson, Paul R. Duncan, David J. Kirkpatrick, Donald F. McGuinness, Michael D. Myerow, And Christopher J. Oliver, Defendants, Appellees.
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Sanford P. Dumain with whom William C. Fredericks, Bruce D. Bernstein, Milberg Weiss Bershad Hynes & Lerach LLP, Herbert E. Milstein, Mark S. Willis, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Jules Brody, Mark Levine, and Stull Stull & Brody were on briefs for appellants.
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Harvey J. Wolkoff with whom Robert G. Jones, David C. Potter, Ropes & Gray, Wilbur A. Glahn III, and McLane, Graf, Raulerson & Middleton were on brief for appellees.
Before LYNCH, Circuit Judge, COFFIN and CYR, Senior Circuit Judges.
LYNCH, Circuit Judge.
This case requires us to apply the pleading standards for private securities fraud litigation under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b) (2000), and raises several issues of first impression for this court. The district court, acting under Fed.R.Civ.P. 12(b)(6), dismissed the complaint. We differ with the district court concerning certain tests to be applied in assessing securities fraud claims and in construction of our precedent. We conclude that the complaint as a whole complies with the PSLRA in sufficient part, and we reverse the dismissal and remand the case for further proceedings, with the exception that we affirm dismissal of one of the two claims against defendant Christopher J. Oliver. Our ruling does not mean that plaintiffs' claims have any merit. It means only that the claims are not to be dismissed at this very early stage. Nothing has been proven yet.
Charles Mesko and other investors filed a class action suit against Cabletron Systems, Inc. and seven individuals who served as executives or directors of Cabletron.1 Mesko alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated by the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.10b-5 (2002). Plaintiffs purchased Cabletron stock, or bought call options or sold put options for Cabletron stock, between March 3, 1997 and December 2, 1997 (the "class period"). The first consolidated amended complaint was rejected for failing to meet the standards of the PSLRA, but Mesko was granted leave to amend it. He did, and the district court then ruled that this second consolidated amended complaint (the "complaint") satisfied the requirements of the PSLRA. After the judge who issued this ruling died, the defendants renewed their motion to dismiss.
Contrary to the first district judge's ruling, a successor district judge granted defendants' motion to dismiss the complaint. This dismissal occurred before discovery was conducted or any class was certified. The district court held that the complaint fails the particularity test for pleading fraud, that it fails to allege facts supporting a belief that the misstatements were material, and that the pleadings do not raise a strong inference of scienter. We disagree on all three points.
As to the particularity ruling, it is unclear if the district court held that any pleading based upon confidential sources would fail the PSLRA's pleading requirements, thus adopting the rule from a case it cited, In re Silicon Graphics Securities Litigation, 970 F.Supp. 746, 763-64
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(N.D.Cal.1997), aff'd, 183 F.3d 970, 985 (9th Cir.1999). Alternatively, the court may have utilized a rule that allows confidential sources if there are other specific facts alleged, but then determined that this complaint lacked such facts. We reject the Silicon Graphics per se test forbidding PSLRA pleadings based on confidential sources, and instead adopt a test similar to the Second Circuit's test in Novak v. Kasaks, 216 F.3d 300, 314 (2nd Cir.2000). Applying that test, we find there was sufficient detail in the allegations, including those made by confidential sources, to permit the complaint to go forward. We also hold, contrary to the district court, that the complaint provides adequate information concerning internal company documents on which it relies.
As to materially misleading statements, the district court erred in the overly restrictive test it applied to statements made by third parties — in this instance mostly market analysts — which were in turn based on statements made by company officials. We reject the district court's determination that the defendants must have either "controlled" the content of the third party statements or adopted them. Instead we join the majority of courts in applying the "entanglement" test first articulated in Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir.1980).
As to both materiality and scienter, we conclude that the pertinent portions of the complaint sufficiently meet pleading requirements at this stage of the case.
While some of the allegations are stronger than others, and those against the defendant outside directors present a close call, we conclude that the complaint as a whole states a claim against Cabletron and against all but one of the individual defendants. As to that defendant, Oliver, the director of engineering and manufacturing, we affirm dismissal of the section 10(b) claim against him but not dismissal of the section 20(a) claim. We reverse the remainder of the district court decision and remand.
In addition to appealing the dismissal of the complaint, Mesko asks this court to remand the case to a district judge who had previously recused himself, on the basis that his disqualification was improper. We deny this request.
Mesko filed his original complaint in the U.S. District Court for the District of New Hampshire, where the case was assigned to the late Judge Shane Devine. On December 23, 1998, in response to defendants' motion to dismiss, Judge Devine ruled that Mesko's first consolidated amended complaint lacked enough detail concerning statements made "on information and belief" to survive heightened pleading standards under the PSLRA, but granted Mesko leave to amend.
Mesko amended the complaint by adding sources for the allegations pled, particularly "more than a half dozen former Cabletron employees who worked at the Company during the Class Period." Judge Devine accepted these changes in a one-page order on February 4, 1999, writing, "The court has reviewed the complaint and is satisfied that it meets the PSLRA's requirements relative to pleadings based on information and belief." His order invited defendants to either renew their motion to dismiss or file an answer.2 Shortly
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after Judge Devine passed away on February 22, 1999, the defendants renewed their motion to dismiss.
The case was then reassigned several times as the result of recusals. First it went before Judge Joseph A. DiClerico Jr., who recused himself from the case because he owned stock in companies that were defendants in other securities class actions brought by plaintiffs' counsel or their firms. One of defendants' attorneys was on the recusal lists of the two other federal district judges in the District of New Hampshire. Therefore, the case was transferred to the District of Rhode Island for assignment to a judge there, sitting by designation in the District of New Hampshire, which retained jurisdiction. The case was then assigned to Chief Judge Ernest C. Torres, but, like Judge DiClerico, he owned stock in several corporations against which counsel in this case had brought securities litigation, and he too disqualified himself. The case was finally reassigned once more, to Judge Mary M. Lisi. Neither party objected to any of these recusals at the time they occurred.3
Judge Lisi heard oral argument on the...
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...clients to make an appropriate disclosure, and if the client refuses, to do so itself. AU § 561.04–.08; see In re Cabletron Sys., Inc. , 311 F.3d 11, 36 (1st Cir. 2002) (recognizing duty to correct). Such disclosure may include issuing revised financial statements and auditor's reports. AU ......
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...the defendants can be held primarily liable for violating Ride 10b-5(b) under an entanglement test. See. e.g., In re Cabletron Sys., Inc., 311 F.3d 11, 37-38 (1st Cir.2002); Elkind v. Liggett & Myers, Inc., 635 F.2d 156. 163 (2d Cir.1980). Under this test, a defendant may be held primarily ......
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Miller Inv. Trust v. Morgan Stanley & Co., CIVIL ACTION NO. 11–12126–DPW
...clients to make an appropriate disclosure, and if the client refuses, to do so itself. AU § 561.04–.08; see In re Cabletron Sys., Inc. , 311 F.3d 11, 36 (1st Cir. 2002) (recognizing duty to correct). Such disclosure may include issuing revised financial statements and auditor's reports. AU ......
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U.S. ex rel. Smith v. Yale University, No. 3:00CV1359 (PCD).
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...the entire document, or that specific portion of the document containing the statement."). See also, e.g., In re Cabletron Systems, Inc., 311 F.3d 11, 41 (1st Cir.2002) (each outside director that signed Form 10-K accepted responsibility for its contents for § 10(b) claim; relying on Howard......
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Sec. And Exch. v. Tambone, No. 07-1384.
...the defendants can be held primarily liable for violating Ride 10b-5(b) under an entanglement test. See. e.g., In re Cabletron Sys., Inc., 311 F.3d 11, 37-38 (1st Cir.2002); Elkind v. Liggett & Myers, Inc., 635 F.2d 156. 163 (2d Cir.1980). Under this test, a defendant may be held primarily ......
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