Kalnit v. Eichler

Decision Date01 August 2000
Citation264 F.3d 131
CourtU.S. Court of Appeals — Second Circuit

Appeal from the judgment of the United States District Court for the Southern District of New York (Scheindlin, J.), entered on April 11, 2000, dismissing plaintiff's Amended Complaint alleging securities fraud without leave to amend, under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim and under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(2) (1994 & Supp. V 1999), for failure to plead fraud with the requisite particularity.


[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Arthur N. Abbey, Abbey, Gardy & Squitieri, Llp, New York, New York (Stephen J. Fearon, Jr., on the brief) for Appellant.

Dennis J. Block, Cadwalader, Wickersham & Taft, New York, New York (Jason M. Halper, Jennifer L. Hurley, on the brief) for Appellees.

Parker, Circuit Judge

In this uncertified securities fraud class action, plaintiff Richard L. Kalnit, on behalf of himself and all others similarly situated, alleges that defendants violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1994) ("section 10(b)") and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (2001) ("Rule 10b-5"), by fraudulently failing to disclose material information in connection with a proposed merger between MediaOne Group, Inc. ("MediaOne") and Comcast Corporation ("Comcast"). Kalnit and the purported class members sold shares of MediaOne stock during the period from March 31, 1999 through April 22, 1999, inclusive, at an allegedly artificially deflated price due to defendants' alleged fraud.

The United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge) dismissed plaintiff's amended complaint for failure to allege the element of scienter with adequate particularity. See Kalnit v. Eichler, 99 F. Supp. 2d 327, 344 (S.D.N.Y. 2000) ("Kalnit II"). The district court dismissed plaintiff's first complaint for the same reason, but granted plaintiff leave to amend. See Kalnit v. Eichler, 85 F. Supp. 2d 232, 245-46 (S.D.N.Y. 1999) ("Kalnit I"). Plaintiff appeals the district court's second dismissal, contending that his amended complaint adequately set forth scienter allegations.

For the reasons set forth below, we affirm the decision of the district court to dismiss plaintiff's complaint without leave to amend.

A. Factual Background

Mindful that we are reviewing a dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6), the following facts are contained in the plaintiff's amended complaint and are assumed to be true. See Press v. Chem. Inv. Servs., 166 F.3d 529, 534 (2d Cir. 1999).

Plaintiff-appellant Richard Kalnit was an investor in MediaOne, who sold 1,820 shares of MediaOne stock on April 16, 1999. He purports to represent a class comprised of those who sold shares of MediaOne stock during the period between March 31, 1999 and April 22, 1999.1

Defendant-appellee, MediaOne, is a Delaware corporation with its principal place of business in Colorado. MediaOne provides telecommunications services, including local, long distance and cellular telephone services. The 11 individual defendants-appellees were, at the time relevant to this action, MediaOne officers or members of MediaOne's board of directors. Defendant Lillis was the Chairman of the Board, President and Chief Executive Officer, and a director. Defendant Eichler was MediaOne's Executive Vice President, General Counsel and Secretary.

In 1996, MediaOne acquired a company called Continental Cablevision ("Continental"). As part of this acquisition, MediaOne entered into a publicly-disclosed shareholder's agreement with Amos Hostetter, Continental's co-founder. This agreement included a "standstill" provision which limited Hostetter's ability to propose mergers, directly or indirectly, involving MediaOne (the "standstill restriction"). At all times relevant to this suit, Hostetter owned 56.3 million shares, or approximately 9.3% of all outstanding MediaOne shares, and was MediaOne's largest shareholder. Hostetter also possessed considerable clout in the telecommunications industry.

On March 22, 1999, MediaOne announced that it had entered into a "definitive Merger Agreement" with Comcast, whereby Comcast would acquire MediaOne for approximately $48 billion. Pursuant to this agreement, each MediaOne shareholder would receive 1.1 shares of Comcast common stock for each share of MediaOne common stock. The agreement allowed MediaOne forty-five days to accept a superior proposal, subject to payment of a $1.5 billion termination fee to Comcast. This agreement also contained a provision that prohibited defendants from directly or indirectly soliciting acquisition proposals that would compete with the Comcast proposal. This provision, section 6.03 of the agreement, also referred to as the "No Shop" provision, stated:

From the date hereof until the termination hereof, MediaOne will not, and will cause the MediaOne Subsidiaries and the officers, directors, employees... or advisors of MediaOne and the MediaOne Subsidiaries not to, directly or indirectly: (i) take any action to solicit, initiate, facilitate or encourage the submission of any Acquisition Proposal; and (ii) other than in the ordinary course of business and not related to an Acquisition Proposal, engage in any discussions or negotiations with, or disclose any non-public information relating to MediaOne or any MediaOne Subsidiary or afford access to the properties, books or records of MediaOne or any MediaOne Subsidiary to, any Person who is known by MediaOne to be considering making or has made, an Acquisition Proposal.

Section 10.1 of the agreement provided that Comcast could terminate if MediaOne breached its "no shop" obligation. In short, MediaOne could accept a superior offer within forty-five days, but could not directly or indirectly solicit such offers.

On March 25, 1999, Hostetter sent a letter to the defendants, expressing his dissatisfaction with the terms of the Comcast Agreement, and seeking to be released from the 1996 standstill restriction to permit him to develop a superior proposal. On March 31, 1999, defendant Eichler, on behalf of all defendants, wrote to Hostetter and agreed to waive the 1996 standstill restriction. Eichler informed Hostetter that MediaOne had "no objection to [his] speaking with third parties about participating in any Superior Proposal." Additionally, Eichler confirmed an agreement of March 30, 1999, between MediaOne and Hostetter that Hostetter would not "make any public announcement of [his] efforts to develop a Superior Proposal without the Board's written consent, and to respond with `no comment' if a press inquiry is made."

In the meantime, on March 30, 1999, MediaOne filed its Annual Report (Form 10K) with the Securities & Exchange Commission ("SEC") for the fiscal year ending December 31, 1998. This report included information about the Comcast Agreement, similar to the information previously released to the public, but did not disclose the Hostetter letter or defendants' response.

On April 5, 1999, MediaOne filed a Proxy Statement pursuant to section 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n(a) (1994 & Supp. V 1999), informing shareholders that a special meeting regarding the proposed Comcast merger would likely occur. This statement did not disclose any of the communications between Hostetter and MediaOne's Board of Directors.

On April 16, 1999, plaintiff-appellant Kalnit sold 1,820 shares of MediaOne stock at approximately $65.44 per share, with no knowledge about Hostetter's release from the 1996 standstill restriction or about his desire to seek a superior proposal.

On April 22, 1999, AT&T Corporation ("AT&T") publicly proposed to acquire MediaOne in a transaction valued at $58 billion, approximately $9 billion more than the value of the Comcast proposal. Also on April 22, Hostetter filed a Schedule 13D with the SEC, disclosing, for the first time MediaOne's waiver of the 1996 standstill restriction. The Schedule 13D also revealed that Hostetter had discussed with AT&T, among others, the possibility of a superior proposal for MediaOne and that AT&T's current proposal resulted from these discussions.

On April 23, 1999, MediaOne's stock opened at $79 per share and closed at $77.375 per share, up from a value of $69.50 per share on April 22, 1999. Four days later, MediaOne's stock closed at $81.8125 per share.

On May 1, 1999, MediaOne's Board voted unanimously in favor of terminating the Comcast agreement in order to accept AT&T's proposal. A few days later, AT&T and Comcast negotiated a transaction where Comcast would not interfere with AT&T efforts to acquire MediaOne, and AT&T and Comcast would exchange certain cable properties resulting in a net increase in Comcast's cable subscribers.

On May 6, 1999, MediaOne officially terminated the Comcast agreement. Appellant filed his complaint that same day.

B. Proceedings Below

Kalnit filed this complaint as a class action, purporting to represent himself and all others who sold MediaOne securities during the period from March 31, 1999 through April 22, 1999 inclusive. He asserted claims under sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), alleging that defendants fraudulently failed to disclose Hostetter's March 25, 1999 letter and their subsequent decision to release Hostetter from the 1996 standstill restriction.

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