Phillips v. LCI International

• Decision Date: 07 June 1999
• Docket Number: No. 98-2572,98-2572
• Parties: (4th Cir. 1999) LIONEL PHILLIPS, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. LCI INTERNATIONAL, INCORPORATED; H. BRIAN THOMPSON, Defendants-Appellees, SECURITIES & EXCHANGE COMMISSION, Amicus Curiae. Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 609

190 F.3d 609 (4th Cir. 1999)

LIONEL PHILLIPS, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. LCI INTERNATIONAL, INCORPORATED; H. BRIAN THOMPSON, Defendants-Appellees, SECURITIES & EXCHANGE COMMISSION, Amicus Curiae.

No. 98-2572

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Argued: June 7, 1999

Decided: September 15, 1999

Filed: September 29, 1999

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Claude M. Hilton, Chief District Judge. [Copyrighted Material Omitted] COUNSEL ARGUED: Douglas Michael Palais, MEZZULLO & MCCAND-LISH, P.C., Richmond, Virginia, for Appellant. Walter Estes Dellinger, III, O'MELVENY & MYERS, L.L.P., Washington, D.C., for Appellees. ON BRIEF: Frederic S. Fox, Christine M. Comas, KAPLAN, KILSHEIMER & FOX, L.L.P., New York, New York; Andrew N. Friedman, Lyn M. Rahilly, COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C., Washington, D.C., for Appellant. Martin Glenn, Achilles M. Perry, O'MELVENY & MYERS, L.L.P., New York, New York; Michael J. Chepiga, David B. Smallman, Felecia L. Stern, SIMPSON, THACHER & BARTLETT, New York, New York, for Appellees. Harvey J. Goldschmid, General Counsel, David M. Becker, Deputy General Counsel, Eric Summergrad, Principal Assistant General Counsel, Nathan A. Forrester, Attorney Fellow, SECURITIES & EXCHANGE COMMISSION, Washington, D.C., for Amicus Curiae.

Before WIDENER and MOTZ, Circuit Judges, and HOWARD, United States District Judge for the Eastern District of North Carolina, sitting by designation.

Affirmed by published opinion. Judge Motz wrote the opinion, in which Judge Widener and Judge Howard joined.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

As of February, 1998, LCI International was the nation's seventh largest long-distance telecommunications company, providing voice and data transmission services to residential and business customers. LCI had a major customer base, operating system, and sales force, but lacked a substantial transmission network. Qwest, a rival telecommunications company, had built an extensive fiber optic network, but lacked a commensurate base of customers, systems, and sales force. By March, 1998, the two companies agreed that a merger would benefit both and announced that Qwest would acquire LCI in a stock for stock merger valued at over $ 4.4 billion, making the merged company the fourth largest long-distance company in the United States. The question presented here is whether a public statement by LCI's chief executive that "[w]e're not a company that's for sale," made less than a month before Qwest acquired LCI, violated federal securities laws. Because we find that, in context, the statement was not a material misstatement made with the intent to defraud, we affirm the district court's dismissal of this action brought by dissatisfied former LCI stockholders.

I.

Relying on the proxy statement issued to LCI shareholders in connection with the merger and certain press statements, the complaint alleges the following facts.

In October, 1997, Joseph P. Nacchio, President and CEO of Qwest, approached H. Brian Thompson, Chairman of the Board and CEO of LCI, at an industry trade convention and proposed that Thompson consider a merger of the two companies. During October and November, Phillip F. Anschutz, Chairman of the Qwest Board, discussed with Thompson the concept of a merger between the two companies.

Starting at the end of October, officers from the two companies began meeting to further discuss a possible merger. On November 27, Anschutz proposed to Thompson that Qwest and LCI begin reciprocal due diligence and begin negotiating a merger of the two companies in which Qwest would acquire LCI in a stock for stock merger. Even though LCI was larger than Qwest, the market value of Qwest was substantially higher than LCI.

On December 8, LCI Executive Vice President of LCI Joseph Lawrence met with officers of Qwest and investment bankers representing each party. On December 11, Nacchio sent a letter to Thompson, stating that Qwest "was prepared to begin its due diligence investigation immediately in order to be in a position to sign a definitive merger agreement within two weeks." This letter also stated that Qwest would be prepared to offer each shareholder, subject to due diligence and satisfactory negotiation of a merger agreement, $36 worth of Qwest stock for each share of LCI stock.

The LCI Board met on December 15 to discuss the offer and concluded that Qwest's offer did not merit a substantive response. On December 16, LCI's Lawrence sent Qwest's Nacchio a letter advising him the LCI Board had considered the offer but that "LCI was not for sale." The letter further indicated that in order for the LCI Board to consider a sale of LCI, an offer would have to be substantially higher than $36 per share.

On February 17, 1998, LCI publicly reported its fiscal fourth quarter earnings. LCI's Thompson was interviewed by the Dow Jones News Service in connection with the earnings announcement. Thompson is quoted as stating that "[w]e're not a company that's for sale." The article also states that "[Thompson] said[that LCI] was more of a buyer than a seller in a telecommunications industry that is rapidly consolidating."

Two days later on February 19, LCI received another letter from Anschutz at Qwest indicating that his company was prepared to offer $40 worth of Qwest stock for each share of LCI stock, subject to a due diligence investigation. As in December, Qwest stated that "it was prepared to begin its due diligence investigation immediately in order to sign a definitive merger agreement within two weeks." On February 23, LCI's Board of Directors, assisted by legal counsel and investment bankers convened via conference call to discuss the Qwest letter. At that meeting, the LCI board directed its legal counsel to negotiate a confidentiality agreement with Qwest pursuant to which each party would conduct due diligence of the other; that agreement was signed on February 26, 1998. During the next two weeks, representatives of LCI and Qwest undertook due diligence and negotiated the terms of the agreement.

On March 8, both Boards approved the final merger agreement. That agreement provided that Qwest would acquire LCI in a stock for stock merger, with LCI shareholders receiving as consideration $42 worth of Qwest stock for every share of LCI stock exchanged. At the LCI Board meeting, Thompson voted against the merger because he "believed that LCI could continue to prosper as an independent company under its current management." Thompson later announced that he wished to vote in favor of the merger, and consequently changed his vote.

After the Boards of LCI and Qwest approved the merger, the companies informed the public of the agreement. On March 9, Thompson and Qwest President Nacchio were interviewed on the Cavuto Business Report. The executives were asked "What got the talks going?" Nacchio stated that "We started talking a couple of months ago . . . on a sincere basis and I guess it accelerated about three weeks ago." Thompson immediately responded "Yes." On the same day, on CNN Moneyline with Lou Dobbs, the host questioned "You have been talking to each other for how long?" Thompson replied, "Talking to each other? It goes way back, but really in earnest for the last three or four weeks."

On April 3, 1998, Lionel Phillips and others (collectively, the stockholders) purportedly representing the class of LCI shareholders that sold their stock after Thompson's February 17 statement but before the public announcement of the merger on March 9, filed this action against LCI and Thompson. The stockholders allege that when on February 17, Thompson stated that LCI was "not a company that's for sale," LCI was in fact in ongoing negotiations to be acquired by Qwest. They maintain Thompson's statement constituted a material misrepresentation designed to defraud the market by artificially depressing the value of LCI stock. As proof of the falsity of Thompson's statement and his intent to defraud, the stockholders cite the post-merger interviews in which Thompson and Nacchio admitted that the parties had been "talking" on a "sincere basis" for three or four weeks prior to the March 9 interview. (Thompson made the statement in question on February 17, exactly three weeks before the March 9 interview.) Finally, they allege that Thompson's statement had the effect he desired--artificially depressing the price of LCI stock--in violation of § 10(b) of the Securities Exchange Act, 15 U.S.C.A. § 78(j)(b) (West 1997), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1998), and that the stockholders, based on the publicly available information that LCI was not for sale, sold their stock at the artificially depressed price.

The district court dismissed the stockholders' original complaint on July 20, 1998, and their amended complaint on September 30, 1998. The stockholders appeal.

II.

In order to prevail on a § 10(b) and a Rule 10b-5 claim, the plaintiff carries the burden of proving:

(1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff's damages.

Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 208 (4th Cir. 1994). If a reasonable investor, exercising due care, would gather a false impression from a statement, which would influence an investment decision, then the statement satisfies the initial element of a § 10(b) claim. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en banc).

The district court held that the stockholders' complaint failed to meet this initial requirement. First, the court concluded that Thompson's statement was not false because the "merger" of LCI and Qwest did not constitute a "sale." The court explained that a sale "is generally considered to occur when cash is...