Melder v. Morris
| Decision Date | 08 August 1994 |
| Docket Number | No. 93-1550,93-1550 |
| Citation | 27 F.3d 1097 |
| Parties | Fed. Sec. L. Rep. P 98,350 Adron L. MELDER, Etc., et al., Plaintiffs, Adron L. Melder, Etc., et al., Plaintiffs-Appellants, v. Clifton H. MORRIS, Jr., et al., Defendants-Appellees. Steven G. COOPERMAN, Plaintiff-Appellant, v. URCARCO, INC., et al., Defendants-Appellees. Anthony HAND, et al., Plaintiffs-Appellants, v. URCARCO, INC., et al., Defendants-Appellees. David J. STEINBERG, Etc., et al., Plaintiffs-Appellants, v. URCARCO, INC., et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Daniel L. Berger, Rochelle Feder Hansen, Bernstein, Litowitz, Berger & Grossmann, New York City, Sherrie R. Savett, Karen S. Orman, Berger & Montague, Philadelphia, PA, Theodore C. Anderson, Kilgore & Kilgore, Dallas, TX, for Melder, et al.
David Brian Dyer, John Anderson Gilliam, Kurt W. Meaders, Jenkins & Gilchrist, Dallas, TX, for URCARCO, et al.
Melinda Gayle Jayson, Lisa Staler Gallerano, Eric Wolf Pinker, Akin, Gump, Strauss, Hauer & Feld, Dallas, TX, for Merrill Lynch, et al.
Richard D. Milvenan, Austin, TX, Robert C. Walters, Barry Daniels Burgdorf, Vinson & Elkins, Dallas, TX, Charles T. Newton, Jr., Vinson & Elkins, Houston, TX, for Coopers & Lybrand.
Appeal from the United States District Court for the Northern District of Texas.
Before REAVLEY, JONES and BENAVIDES, Circuit Judges.
URCARCO operates a chain of "we finance" used car lots in Fort Worth, Dallas, Houston, and Austin. The company targets market areas with a high concentration of prospective purchasers who would otherwise have trouble locating financing because of their income levels, credit history, or inability to provide an adequate down payment. 1 The company launched an Initial Public Offering (IPO) in November 1989, and turned to the capital markets again in May 1990 with a Secondary Public Offering (SPO). In April 1990, URCARCO's stock traded at a high of $25 5/8 per share, but in part following some critical reports in the financial press, the company's stock price nosedived to $10 7/8 per share by July 31, 1990.
This downturn precipitated the four consolidated securities fraud suits filed against URCARCO, its officers and directors, Coopers & Lybrand, and three securities underwriters--Merrill Lynch, Alex. Brown, and Cazenove. 2 The plaintiffs alleged violations of Secs. 11, 12(2), and 15 of the Securities Act of 1933, Sec. 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Sec. 20(a) of the Exchange Act, state law misrepresentation, Tex.Bus. & Com.Code Ann. Sec. 27.01, and common law fraud. After allowing the plaintiffs to replead twice and conducting a hearing on this matter, the district court dismissed the federal securities fraud and common law fraud claims for failure to plead fraud with particularity as required under Fed.R.Civ.P. 9(b). 3 We have reviewed the district court's dismissal on the pleadings de novo and AFFIRM. 4
In general terms, all securities fraud claims require the plaintiff to establish: (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused the plaintiff's injury. See Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.1993). For its part, Rule 9(b) imposes certain pleading requirements on securities and other fraud claims:
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.
Fed.R.Civ.P. 9(b). The application of the requirements of Rule 9(b) to securities fraud claims was recently addressed by this court in Tuchman v. DSC Communications Corp., 14 F.3d 1061 (5th Cir.1994) and Shushany, supra.
In Shushany, the court explained that Rule 9(b) requires certain minimum allegations in a securities fraud case, namely the specific time, place, and contents of the false representations, along with the identity of the person making the misrepresentations and what the person obtained thereby. 5 See Shushany, 992 F.2d at 521 (quoting Tel-Phonic Servs., Inc. v. TBS Int'l, Inc., 975 F.2d 1134, 1139 (5th Cir.1992)). The heightened pleading standard of Rule 9(b) serves an important screening function in securities fraud suits. As this court described in Tuchman,
the heightened pleading standard 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 then attempting to discover unknown wrongs.
Plaintiffs' complaint fails to meet the stringent pleading requirements of Rule 9(b) as explained in Shushany. As the district court concluded, the complaint here fails to put the defendants on notice, places defendants' reputations at risk, and burdens the courts with a potential strike suit. The task to which we now turn is showing precisely how the complaint fails to meet the requirements of Rule 9(b) on a defendant-by-defendant basis. 6
In terms of its allegations against URCARCO and its officer and directors, the complaint falls short of the heightened Rule 9(b) pleading requirements for at least two reasons. First, plaintiffs rely heavily on alleged misstatements made in the URCARCO prospectuses, but upon further review these alleged misstatements amount to gross mischaracterizations of the contents of the prospectuses. Second, the plaintiffs fail to plead scienter adequately under Rule 9(b).
As an initial matter, the plaintiffs fail to base their allegations on statements actually made by URCARCO, opting instead to selectively distort the company's public statements to create an inference of fraud. For example, the plaintiffs allege that in its IPO and SPO Prospectuses:
the Company claimed to base its loss reserves on its own experience with delinquencies at a time when it had been selling cars for less than three years, so that none of its longer-term loans had yet been paid in full, and the Company had no reasonable basis for determining their delinquency rate[.]
C. 51 at p 89(c). 7 In fact, however, this claim is belied in the prospectuses which clearly and prominently discuss URCARCO's limited operating history and its potential impact on the company's loan loss provision:
The Company began operations in March 1987 and therefore has had only a limited operating history upon which prospective investors may base an evaluation of its performance ... Changes in historical experience caused by changes in economic conditions or other factors could require a change in the Company's periodic provision for losses.
IPO Prospectus at 5; SPO Prospectus at 5.
Similarly misconstruing the company's public statements, the plaintiffs also allege that URCARCO in its "IPO Prospectus minimized the risk of default by the Company's customers." C. 28 at p 43. The plaintiffs read the IPO Prospectus to stress "the Company's purported highly efficient and sophisticated collection procedures leading investors to believe that the Company's loans were not only safe, but constantly monitored." Id.
These serious mischaracterizations of the IPO Prospectus find no support in the actual text of that document which clearly explains that URCARCO makes loans to high-risk customers:
The Company finances its used car sales in a relatively high-risk market and anticipates that a portion of its retail sales contracts will become seriously delinquent and that in those circumstances the Company's only practical alternative is repossession of the cars.
IPO Prospectus at 5. An interested reader need go no further than the second page of the IPO Prospectus to find a prominently displayed, clear explanation that the Company purposefully targets prospective purchasers of used cars "unable to obtain traditional car financing because of their income levels, credit history or inability to provide a sufficient down payment." Id. at 2.
Significantly, the IPO explains the risk that URCARCO assumed to gain a competitive advantage:
The Company believes that most used car dealers that finance purchases for their customers require approximately a 50% downpayment by these customers, so that the downpayment covers the cost of the car for the dealer. The Company believes that its low downpayment financing for customers provides it a competitive advantage over most "we finance" dealerships selling used cars.
Id. at 21. No reasonable reader of the IPO Prospectus could conclude that URCARCO was somehow attempting to lead investors to believe its loans were "safe" when its express corporate purpose was to the contrary. 8
In addition to severely distorting the company's public statements in their complaint, plaintiffs do not merit a third opportunity to replead for still another reason, namely their failure to plead scienter adequately under Rule 9(b). The scienter element is satisfied by proof that the defendants acted with severe recklessness. See Shushany, 992 F.2d at 521. Although Rule 9(b) expressly allows scienter to be "averred generally", simple allegations that defendants possess fraudulent intent will not satisfy Rule 9(b). See Tuchman, 14 F.3d at 1068. The plaintiffs must set forth specific facts supporting an inference of fraud. See id. Because the complaint does not set forth specific facts to support an inference of fraudulent intent, dismissal under Rule 9(b) is appropriate as to the corporation and its officers and directors.
The plaintiffs attempt to meet their Rule 9(b) scienter burden by alleging that the defendants engaged in a conspiracy to commit securities fraud
so that they could inflate the price of the Company's common stock in order to: (i) successfully bring to fruition the offerings; (ii) protect and enhance their executive positions and the substantial compensation and...
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