Ronconi v. Larkin
| Decision Date | 08 December 1999 |
| Docket Number | DEFENDANTS-APPELLEES,No. 98-15993,PLAINTIFFS-APPELLANTS,98-15993 |
| Citation | 2001 WL 609520,253 F.3d 423 |
| Parties | (9th Cir. 2001) ALFRED RONCONI; JAMES V. BIGLAN; JEAN MULLIN,, v. C. RAYMOND LARKIN, JR.; LAUREEN DEBUONO; DAVID B. SWEDLOW; MICHAEL P. DOWNEY; KENNETH E. BENNERT; ROBERT L. DOYLE; LEE MIDDLEMAN; BOUDEWIJN L. BOLLEN; CHARLES H. BOWDEN; DAVID J. ILLINGWORTH; KENNETH SUMNER; NELLCOR PURITAN BENNETT, INC., |
| Court | U.S. Court of Appeals — Ninth Circuit |
Leonard B. Simon (argued) and Eric A. Isaacson (briefed), Milberg Weiss Bershad Hynes & Lerach Llp, San Diego, California, for the plaintiffs-appellants.
Darryl Rains, Morrison & Foerster Llp, San Francisco, California, for the defendants-appellees.
Appeal from the United States District Court for the District of Northern California Charles A. Legge, District Judge, Presiding. D.C. No. CV-97-01319-CAL
Before: James R. Browning, Pamela Ann Rymer, and Andrew J. Kleinfeld, Circuit Judges.
OPINION
This case concerns sufficiency of the pleadings in a securities fraud case.
The district court dismissed this case for failure to state a claim upon which relief could be granted, so we state the facts as they are stated in the complaint to determine whether the complaint states a claim upon which relief could be granted. In the context of securities litigation under the Private Securities Litigation Reform Act,1 we may also properly consider SEC filings incorporated by reference in the complaint.2 Nothing has been proved in this case because it was dismissed before the occasion arose for any proof, so, as in any decision reviewing a 12(b)(6) dismissal, our statement of facts should not be understood as a true description of anything that actually happened.
Larkin and the other defendants were officers and directors of Nellcor. It made medical devices for people with breathing difficulties. In May of 1995, Nellcor announced that it was making a very large acquisition, paying $475 million for a company called Puritan Bennett. Puritan Bennett had been losing money and had just laid off a sixth of its personnel. This raised the obvious question of how Nellcor could expect to make money by spending almost a half billion dollars to acquire a company that was losing money. But Nellcor's principals said they expected the combined company to make money because it would dominate the market for respiratory care products, would have much greater financial strength because of its size, and would have lower overhead than the combined overhead of the two companies operating separately.
The theory of the complaint is that the merger was a failure and that the Nellcor principals knew that almost from the start. But they repeatedly lied to the market through stock analysts and press releases, misleading the stock market into overvaluing their stock based on a false impression that the merger was going well. Meanwhile, the principals sold off their personal stock as the time approached for the truth to come out. They made a great deal of money from the people who were misled by their false statements, and when the bad news came out, the price of the stock dropped.
Plaintiffs brought a class action suit on behalf of shareholders who purchased the stock of the combined company between the time Nellcor filed an optimistic 10-K report about the merger and the time it announced that earnings would be "well below expectations," driving the price of the stock down. The district judge concluded that the pleadings lacked adequate specificity and dismissed the complaint. He dismissed with prejudice, because the plaintiffs had already had an opportunity to amend the complaint to cure the defect. He did not reach the issue of class certification. Plaintiffs appeal.
Securities fraud class actions are not all good or all bad. In a large public securities market, dishonest insiders may be able to cover their tracks fairly well, and falsely claim to be as surprised as the ribbon clerks, when they take the market for a ride. Unless reasonable inferences from circumstances suffice to get a case to a jury, the welfare of victimized investors and the integrity of the stock market may be insufficiently protected from deceptive manipulators. Capital may be inefficiently diverted from honest to dishonest enterprises. But plaintiffs can also be undeserving, and lawsuits can extort a great deal of undeserved settlement money if the courts do not filter out the unfounded ones early enough to avoid huge litigation expenses. Juries can make mistakes, especially in matters of great complexity where the trials are lengthy. If a defendant is entirely innocent of wrongdoing, yet faces a 10% chance of a $100 million dollar jury error, the rational course, if the case cannot be kept from a jury, may be to pay $10 million undeserved dollars. That just wastes capital and unfairly transfers money from those who have earned it to those who have not. Securities fraud cases typically claim that optimistic statements were lies. But business decisions have to be based on predictions about the future that "can only be taken as a result of animal spirits,"3 and "if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die."4
There is but one issue raised in this appeal, whether the complaint stated a claim upon which relief could be granted.5 This inquiry is governed by the Private Securities Litigation Reform Act of 1995 (PSLRA), which altered our pre-Act pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter.6 Pursuant to the PSLRA, a complaint must "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."7 The complaint must also "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind"8 -- that is, that he acted with intentionality or deliberate recklessness9 or, where the challenged act is a forward looking statement, with "actual knowledge . . . that the statement was false or misleading."10
Because falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, we have incorporated the dual pleading requirements of 15 U.S.C. §§§§ 78u-4(b)(1) and (b)(2) into a single inquiry. In considering whether a private securities fraud complaint can survive dismissal under Rule 12(b)(6), we must determine whether "particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or `deliberate recklessness' made false or misleading statements to investors."11 Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a "strong inference" that misleading statements were knowingly or deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6).
On September 29, 1995, Nellcor's annual report to the shareholders said that "growth opportunities . . . will be significantly enhanced" by the merger and that "we expect earnings accretion in the first year . . . [and] anticipate cost savings through consolidation of facilities and operations." On October 16, defendants Larkin and Downey, Nellcor's Chief Executive Officer and Chief Financial Officer, told securities analysts that
International and Homecare markets were driving Nellcor's growth. Homecare revenues, which represent 43% of Nellcor's business, were up 21% in the quarter.
The consolidation of Nellcor's and Puritan Bennett's U.S. sales and distribution efforts would be completed by the end of the second quarter and corporate staff consolidation by the end of the third quarter.
Nellcor expected to reduce headcount by at least 300 as merger synergies were effected. This would set the stage for leveraged [earnings per share] growth to $2.65-$2.70 and $3.15-$3.35 for [fiscal year] 96-97, respectively.
Numerous other optimistic predictions about the merger were made to the public by defendants during this first couple of months: the new company "will be the leading provider," growth opportunities "will be significantly enhanced," "we expect" higher earnings and cost savings, etc. The merged company's "plan to cut about 300 jobs" by consolidating sales forces largely in the quarter then beginning was"on track" and would cut expenses.
The complaint alleges that these statements "were false and misleading when issued," because the merger "would hurt Nellcor's earnings" and provide no revenue and cost benefits. It was "not true" that the sales force consolidation "would be completed" by the end of the quarter nor would earnings grow as much as predicted, etc. But no facts are alleged in the complaint that would support an inference that the company's more optimistic predictions were known to be false or misleading at that time by the people who made them. The complaint does not plead facts that show that company insiders knew what the complaint says "would" occur in what was then the future.12 That a pessimistic argument could have been made against the merger, and that had they known in September what they learned by the following May they would not have spoken so optimistically, does not raise a strong inference that defendants actually knew their...
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