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April 30, 1999


The opinion of the court was delivered by: Walls, District Judge.

    All defendants move to dismiss plaintiffs' amended complaints for failure to state a claim upon which relief may be granted and plaintiffs move for leave to amend their complaints if any or all of their claims are dismissed. The complaints charge defendants with violations of sections 10(b), 14(e), and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaints are dismissed because they fail to state a cause of action under the securities laws. Plaintiffs' motion to amend their complaints is denied.


Plaintiffs are arbitrageurs who purchased shares of American Bankers Insurance Group, Inc. ("ABI") stock between January 27, 1998 and October 13, 1998 after an announcement by Cendant that it would purchase ABI.*fn1 Earlier, on December 22, 1997, the American International Group, Inc. ("AIG") and ABI had announced their entry into a merger agreement whereby AIG would acquire 100 % of the outstanding stock of ABI for $47 cash per share. Then, on January 27, 1998, Cendant filed a Schedule 14D-1 with the Securities Exchange Commission ("SEC") which included an offer by Season Acquisition Corp., its wholly owned subsidiary, to purchase ABI for a share price of $58 or approximately $2.7 billion. The "offer to purchase" was also sent to ABI shareholders and included information about Cendant's earnings, revenues, and other financial and operational information. Cendant had engaged in a bidding war with AIG, and AIG had also offered to purchase ABI for $58 per share. Finally, on March 23, 1998 Cendant entered into an agreement with ABI to acquire it for $67 per share or approximately $3.1 billion (the "ABI Merger Agreement").

Cendant filed amendments to its 14D-1 Schedule with the SEC on March 23, 1998, May 7, 1998, July 2, 1998, July 27, 1998, September 1, 1998, and October 2, 1998. Plaintiffs contend that the financial statements contained in the original and amended 14D-1 Schedules and the offer to purchase were materially false and misleading. Plaintiffs allege that they purchased ABI stock in reliance on this materially false and misleading information contained in Cendant's offer to purchase, its 14D-1 Schedules, and other documents and press releases related to the tender offer. They maintain that Cendant's false and misleading statements caused the artificial inflation of the price of ABI's shares and that the true value of the securities was substantially lower than the prices they paid. They purchased the stock in the belief that they would receive $58 or $67 per share from Cendant.

On April 15, 1998, after Cendant announced that it had discovered potential accounting irregularities and expected to restate its annual and quarterly earnings for 1997 and possibly earlier periods, ABI shares dropped 11 % from $64-7/8 to $57-3/4. Plaintiffs assert that ABI's stock price fell further after the July 14, 1998 announcement by Cendant that the accounting irregularities would have a larger impact on its financial statements than had been previously anticipated. However, the stock price of ABI "was buoyed by Cendant's repeated public commitment to complete the ABI Merger." (Am.Compl. ¶ 60.) On September 29, 1998, Cendant publicly announced that it had lost $217.2 million in 1997 instead of earning $55.5 million as it had reported earlier. The price of ABI's stock dropped to $43 on that day. Two weeks later, on October 13, 1998, Cendant announced that ABI and it had ended their agreement for the acquisition of ABI; ABI's stock price fell to $35-1/2. (Pl.'s Mem. in Supp. of Mot. at 7.)

According to plaintiffs, Cendant reaffirmed its agreement to buy ABI at the $67 share price on April 27, 1998, May 7, 1998, July 27, 1998, August 31, 1998, and October 2, 1998. (Am.Compl. ¶¶ 55, 57, 62, 78, 81.) Cendant ultimately extended the tender offer date to November 2, 1998, but terminated the offer on October 13, 1998. In their complaints and opposition brief to defendants motions, plaintiffs do not allege that they ever tendered any shares of ABI to Cendant. However, at oral argument plaintiffs' counsel represented, without any support, that 28 million shares of ABI were tendered before Cendant's tender offer was withdrawn, but Cendant did not purchase any of the tendered shares.

The ABI Merger Agreement contained several mechanisms for the termination of the merger. The Agreement expressly provided that it could be terminated and the proposed merger abandoned by mutual consent of the Boards of Directors of Cendant and ABI. (Agreement at § 8.1.) Such termination would result in no liability on the part of any party or any of its directors, officers, employees, agents, legal and financial advisors or shareholders. (Id. at § 8.5(a)).

None of plaintiffs' complaints mentions the conditions of the termination of the ABI Merger Agreement. Cendant and ABI entered into a Settlement Agreement, which was filed with the SEC, to effect the termination of the ABI Merger Agreement. Cendant and ABI agreed to release each other, including "their respective affiliates, their respective Representatives and stockholders, and their respective successors and assigns" from any claims related to the proposed acquisition of ABI by Cendant. (Settlement Agreement § 4.) Cendant agreed to pay ABI $400 million cash payment as a break-up fee. (Settlement Agreement § 2.) This break-up fee was announced on October 13, 1998. The Court considers the terms of the Settlement Agreement because that agreement was filed with the SEC as an exhibit to Cendant's quarterly report Form 8-K and Schedule 14D-1 and is a matter of public record.

On October 14, 1998, plaintiffs filed suit in this Court against Cendant and individual defendants. The individual defendants Forbes, McLeod, Shelton, and Corigliano had been officers or directors of Cendant and/or its predecessor, CUC. The additional defendant Ernst & Young LLP ("E & Y") acted as CUC's independent public accountant from 1983 through the formation of Cendant, and afterwards, audited the financial statements of Cendant Membership Services ("CMS"), a wholly owned subsidiary of Cendant, for the year ending December 31, 1997. These financial statements of CMS were consolidated into Cendant's financial statements and included in Cendant's Form 10-K for the 1997 fiscal year, filed with the SEC.*fn2 Plaintiffs' complaints allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The class period in the original complaint began March 23, 1998 and ended October 13, 1998. On February 8, 1999, plaintiffs filed an amended complaint which re-set the beginning of the class period to January 27, 1998, added another claim, a violation of section 14(e) of the Williams Act, and another defendant, Ernst & Young, LLP. Plaintiffs claim that all the defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, that Cendant and the individual defendants also violated § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (the Williams Act), and that the individual defendants have violated § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t.


A. Motion to Dismiss Standard

On a motion to dismiss pursuant to Fed. R.Civ.P. 12(b)(6), the court is required to accept as true all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the nonmoving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the plaintiff can prove any set of facts consistent with his/her allegations that will entitle him/her to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). While a court will accept well-pleaded allegations as true for the purposes of the motion, it will not accept legal or unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegation. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977); Washington Legal Found. v. Massachusetts Bar Found., 993 F.2d 962, 971 (1st Cir. 1993); Violanti v. Emery Worldwide A-CF Co., 847 F. Supp. 1251, 1255 (M.D.Pa. 1994). Moreover, the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed.R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). The Court may consider the allegations of the complaint, as well as documents attached to or specifically referenced in the complaint, and matters of public record. See Pittsburgh v. West Penn Power Co., 147 F.3d 256, 259 (3d Cir. 1998); see also 5A Charles A. Wright & Arther R. Miller, Federal Practice & Procedure § 1357 at 299 (2d ed. 1990).

B. Section 10(b) of the Securities Exchange Act of 1934 and Rule

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), prohibits the use of fraudulent schemes or devices in connection with the purchase or sale of securities. Under § 10(b), it is unlawful to "employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention" of any rule promulgated by the SEC designed to protect the investing public. To implement the statute, the SEC enacted Rule 10b-5, violation of which gives rise to a private cause of action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). That Rule, in turn, deems it unlawful: (1) "To employ any device, scheme, or artifice to defraud," (2) "[t]o make any untrue statement of a material fact" or to omit to state a material fact so that the statements made "in light of the circumstances," are misleading, and (3) "[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." 17 C.F.R. § 240.10b-5. The Supreme Court has held that standing to bring a private cause of action under Rule 10b-5 is limited to actual purchasers or sellers of securities. Blue Chip Stamps, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539.

This tort, although statutory in origin, sounds in the common law of fraud and deceit and retains, in modified form, the common law elements of duty, breach, causation, and damage. See Huddleston v. Herman & MacLean, 640 F.2d 534, 547 (5th Cir. 1981) (10b-5 claim derived from common law action for deceit), modified on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). The plaintiff must prove knowledge by the defendant, an intent to defraud, misrepresentation or failure to disclose, materiality of the information and, injurious reliance by the plaintiff. Thomas v. Duralite Co., 524 F.2d 577 (3d Cir. 1975); Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir.), cert. denied, 425 U.S. 993, 96 S.Ct. 2205, 48 L.Ed.2d 817 (1976). More precisely, these elements form the following test. To make a 10b-5 claim, a plaintiff must allege that the defendant made (1) a misstatement or an omission (2) of a material fact (3) with scienter (knowledge) (4) in connection with the purchase or sale of a security (5) upon which plaintiff reasonably relied, and (6) that reliance proximately caused injury to the plaintiff. Kline v. First Western Government Securities, Inc., 24 F.3d 480, 487 (3d Cir.), cert. denied sub nom., Arvey, Hodes, Costello & Burman v. Kline, 513 U.S. 1032, 115 S.Ct. 613, 130 L.Ed.2d 522 (1994); In re Phillips Petroleum Secs. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989) (citing Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 942-43 (3d Cir.), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d 274 (1985)).

Defendants McLeod, Forbes, and Shelton argue that plaintiffs have failed to adequately allege that the subject material misstatements were made in connection with the purchase or sale of ABI securities, that they reasonably relied on defendants' conduct, and that their injuries were proximately caused by defendants' conduct. Defendants McLeod and Forbes also argue that they owed no duty to purchasers of ABI securities. Defendant Cendant maintains that plaintiffs have failed to allege that the purported misrepresentations proximately caused them injury. Defendant E & Y insists that plaintiffs have not alleged that the misrepresentations were made in connection with the purchase or sale of ABI securities and that plaintiffs have failed to plead facts giving rise to a strong inference of scienter on the part of E & Y. Finally, both defendants Cendant and E & Y assert that as a matter of law, plaintiffs could not have reasonably relied on any of their statements after April 15, 1998. Defendant Corigliano adopts the arguments of the other defendants generally, and in particular, the arguments that defendants owed no duty to purchasers of ABI securities and the alleged misstatements were not made in connection with the sale or purchase of ABI securities.

1. In Connection with the Purchase or Sale of Securities

According to these individual defendants and E & Y, plaintiffs have failed to state a § 10(b) claim in their complaints because they have not charged that defendants' purported misrepresentations were made in connection with the sale or purchase of ABI securities. Defendants Forbes, McLeod, and Corigliano further assert that they owed no duty to plaintiffs in the purchase or sale of ABI securities.

Defendants argue that because the misrepresentations plaintiffs have alleged do not pertain to the securities plaintiffs purchased or sold, they have failed to state a § 10(b) claim. As support, defendants rely on Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984). There, Chemical Bank had extended loans to Frigitemp Corporation and its subsidiary, Elsters, Inc., which loans were partially secured by a pledge of Elsters stock. After Frigitemp and Elsters defaulted on the loans, Chemical Bank brought a § 10(b) and Rule 10b-5 claim against the accounting firm of Arthur Andersen based upon its preparation of allegedly false and misleading financial statements for Frigitemp but not for Elsters. Because the alleged misleading statements were not made in connection with the pledge of Elsters stock, the court found that Chemical Bank had failed to state a claim for relief under § 10(b) and Rule 10b-5.

As the Third Circuit Court of Appeals announced in Angelastro, the law in this circuit "is not inconsistent with Chemical Bank." 764 F.2d at 946. Angelastro recognized the danger "in construing the `in connection with' requirement so broadly that virtually any type of misconduct related to a securities transaction even in the most tenuous or tangential way might be claimed to give rise to a federal securities law violation." 764 F.2d at 945. Our circuit has cautioned trial courts to flesh out the proper scope of the "connection" requirement on a case-by-case basis to "avoid the pitfalls of overreaching." Angelastro, 764 F.2d at 945 (citing Ketchum v. Green, 557 F.2d 1022, 1027 (3d Cir.), cert. denied, 434 U.S. 940, 98 S.Ct. 431, 54 L.Ed.2d 300 (1977). (1977)). Although the Supreme Court has concluded that § 10(b) must be read broadly to redress injuries which are the result of deceptive practices "touching" the purchase or sale of securities, Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 12-13, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971),*fn3 there must be a high degree of proximity of the securities transaction to the claimed fraud. Ketchum, 557 F.2d at 1027.

The securities transaction in Bankers Life was part of the defendants' fraudulent scheme. Bankers Life & Casualty Co. had agreed to sell all of the stock of the Manhattan Life Insurance Company ("Manhattan") to one of the defendants, Begole, for $5 million. Begole conspired with others and drew a check for the $5 million payment on an account at Irving Trust Co. ("Irving") although he then had no funds on deposit at that bank. Once Begole and his co-conspirators became stockholders and directors of Manhattan, they replaced Manhattan's board of directors with new members and convinced them to sell U.S. Treasury Bonds held by Manhattan for approximately $5 million. That sum was deposited in Begole's account at Irving to cover the check for the stock purchase. Begole and his co-conspirators then engaged in a complex series of transactions to conceal their misappropriation of Manhattan's funds. Thus, it is obvious that the defendants undertook the bond transaction in order to misappropriate the proceeds and acquire Manhattan's stock without any cost. In its analysis of Bankers Life, our circuit noted that the bond transaction itself was only one step away from the misappropriation. Ketchum, 557 F.2d at 1028.

By its Ketchum decision, the Third Circuit has concluded that where the claimed fraud is several steps away from the securities transaction, the relationship between the two is too attenuated to satisfy the "connection" requirement of § 10(b). 557 F.2d at 1027-1028. Defendant directors and officers of Babb, Inc. conspired to remove from office the Ketchum plaintiffs, who were two officers and employees of Babb as well as shareholders. This conspiracy included an alleged misrepresentation about the re-election of officers and directors. Once plaintiffs were removed from office, the board terminated them as employees as well. Pursuant to a stock retirement agreement which had been established many years earlier, plaintiffs were required to tender their shares to the corporation. Plaintiffs brought an action under § 10(b) and Rule 10b-5 against defendants on the theory that they were forced to tender their shares as a result of defendants' fraudulent scheme. The Court of Appeals found that the degree of proximity between the securities transaction, the forced stock sale, and the claimed fraud was too attenuated to satisfy the "connection" requirement of § 10(b). 557 F.2d at 1027-1028. Significantly, the court found that there were a "substantial number of intermediate steps between the fraud and the accomplishment of the forced sale of plaintiffs' shares: the shareholders' vote subsequent to the misrepresentation; the ensuing meeting of ...

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