In re Sinclair Broad. Grp., Inc. Sec. Litig.

IN RE SINCLAIR BROADCAST GROUP, INC. SECURITIES LITIGATION

Civil No. CCB-18-2445

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

February 4, 2020

MEMORANDUM

This is a class action securities case brought by lead plaintiffs City of Atlanta Police Pension Fund and the City of Atlanta Firefighters' Pension Fund (collectively "Atlanta P&F") against Sinclair Broadcast Group, Inc., Christopher S. Ripley, Lucy A. Rutishauser, Steven M. Marks, and David D. Smith (collectively "Sinclair"). On behalf of itself and all persons or entities that acquired Sinclair common stock between February 22, 2017, and July 26, 2018, Atlanta P&F alleges numerous violations of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq., stemming from a failed merger between Sinclair and Tribune Media ("Tribune"). (Am. Compl. ¶ 1, ECF 45). Now pending is Sinclair's motion to dismiss. The motion is fully briefed, and no oral argument is necessary. For the reasons explained in this Memorandum, the motion will be granted in part and denied in part.

BACKGROUND¹

Sinclair, a publicly traded company, is a telecommunications conglomerate and the largest owner of local television stations in the country. On May 8, 2017, Sinclair announced its plan to acquire Tribune, another large media company, for $3.9 billion dollars. (Am. Compl. ¶ 3, ECF 45). Federal Communications Commission (FCC) and Department of Justice (DOJ)approval of the proposed merger (the "Merger"), however, was necessary before the transaction could become final, due to FCC and DOJ limits on the amount of control one entity may have over the broadcast television market. (Id.). Specifically, regulatory approval of the Merger required compliance with the FCC's National Cap (or "National Ownership") Rule, which prohibits a single entity from having television stations that reach more than 39 percent of U.S. households; the FCC's Duopoly Rule, which prohibits a single entity from owning two of the "top four" stations in the same "designated market area," ("DMA");² and DOJ antitrust regulations that prohibit a single entity from owning more than 40 percent of the market share in a DMA. (Id. ¶ 26).

Accordingly, in Sinclair's merger agreement with Tribune, (the "Merger Agreement"), filed publicly with the Securities and Exchange Commission ("SEC") on May 9, 2017, Sinclair agreed to divest its ownership in television stations as necessary to obtain regulatory approval of the Merger. (Am. Compl. ¶ 27). In public statements and filings throughout the summer and fall of 2017, Sinclair repeated its commitment to make station divestitures as required by the Merger Agreement. (Id. ¶¶ 28-30, 137-48, 153). Negotiations with regulators during this time period, however, were contentious. According to Tribune in its complaint filed after the Merger failed, "from virtually the moment the Merger Agreement was signed," Sinclair was engaged in an effort to obtain regulatory approval without making station divestitures. (Id. ¶ 33). In the fall of 2017, Assistant Attorney General ("AAG") Makan Delrahim told Sinclair that divestitures in the ten DMAs specified in the Merger Agreement would facilitate a path to regulatory approval. (Id. ¶ 35). In response, according to Tribune, Sinclair became "confrontational" with DOJ staff and AAG Delrahim. (Id.). Throughout the remainder of 2017 and into early 2018, Sinclair continuedits attempts to convince the DOJ that divestitures in the ten specified DMAs were unnecessary. (Id. ¶¶ 36-39, 42-45).

On February 21, 2018, Sinclair announced a plan to divest stations in order to comply with the National Cap Rule (the "February 2018 Divestiture Plan"). (Am. Compl. ¶¶ 46, 155). The February 2018 Divestiture Plan included proposals to the FCC to divest Tribune's WPIX-TV New York station and its WGN-TV Chicago station. Sinclair proposed to divest WPIX and WGN, however, to entities with close ties to the family of Sinclair's founder (the "Smith family"): Cunningham Broadcast Corporation ("Cunningham") and WGN-TV LLC.³ (Id. ¶ 47). Moreover, the proposed divestitures of WPIX and WGN included "local marketing agreements" ("LMAs"), pursuant to which Sinclair could control station operations and collect revenue. (Id. ¶¶ 37, 47). According to Tribune, the FCC reacted negatively to the February 2018 Divestiture Plan, taking specific issue with Sinclair's relationships with the buyers and the terms of the LMAs. (Id. ¶¶ 47-48). The FCC decided not to put the February 2018 Divestiture Plan out for public comment, and Tribune stated the FCC "emphatic[ally] reject[ed]" the plan. (Id. ¶ 53).

On April 24, 2018, Sinclair announced another plan to divest stations in order to obtain regulatory approval of the Merger (the "April 2018 Divestiture Plan"). (Am. Compl. ¶ 55). While the proposed divestitures in this plan differed somewhat from those proposed in the February 2018 Divestiture Plan, Sinclair still proposed divesting certain stations to Cunningham and WGN-TV LLC. (Id.). The FCC did, however, put the April 2018 Divestiture Plan out for public comment and began its formal review process of the Merger on May 21, 2018. (Id. ¶ 63).

The proposed divestitures drew scrutiny from media outlets and from outside commenters who petitioned the FCC to deny approval of the Merger. (Am. Compl. ¶¶ 63-64). In response to a July 2, 2018, Bloomberg report questioning the legitimacy of the divestitures, Sinclair stated that its proposals complied with FCC regulations, adding that "Cunningham is operated completely separately from Sinclair." (Id. ¶ 65). On July 5, 2018, Sinclair filed with the FCC an opposition to the petitions to deny, arguing that the proposed divestitures complied with FCC regulations and noting that "Sinclair does not control or hold any attributable interest in Cunningham." (Id. ¶ 66).

On July 16, 2018, FCC Chairman Ajit Pai issued a statement expressing "serious concerns about the Sinclair/Tribune transaction," due to the FCC's receipt of "evidence . . . suggest[ing] that certain station divestitures that have been proposed to the FCC would allow Sinclair to control those stations in practice, even if not in name, in violation of the law." (Am. Compl. ¶ 67). News outlets also reported that Chairman Pai was circulating a draft Hearing Designation Order ("HDO") referring the question of whether to approve the Merger to an FCC Administrative Law Judge ("ALJ"). (Id.). On July 17, 2018, Tribune confirmed the reports, announcing that it was "disappointed," which suggested it was "contemplating pulling out of the merger." (Id. ¶¶ 73, 223-25). Various media outlets noted that a hearing in front of an ALJ would likely result in a denial of the Merger. (Id. ¶¶ 67-70, 223). On July 18, 2018, the FCC announced its final decision to send the Merger to an ALJ hearing. (Id. ¶ 78).

The FCC released the HDO on July 19, 2018. (Am. Compl. ¶ 79; see also HDO, Mot. Ex. 31, ECF 49-33). The HDO stated in part that "[t]he record raises significant questions as to whether [the proposed divestitures to Cunningham and WGN-TV LLC] were in fact 'sham' transactions," (id. ¶ 80), and that there were "substantial and material questions as to whetherSinclair was the undisclosed real party-in-interest" to the WGN-TV LLC and Cunningham divestitures, (id. ¶¶ 82, 85). Between July 16, 2018, and July 19, 2018, the price of Sinclair stock fell over 20 percent. (Id. ¶¶ 92). On August 9, 2018, Tribune withdrew from the Merger and filed a $1 billion breach of contract action against Sinclair in the Delaware Chancery Court (the "Tribune Complaint"). (Id. ¶ 93).

Several months later, on November 13, 2018, the DOJ filed a complaint against Sinclair, alleging that the company engaged in illegal anticompetitive activities. (Am. Compl. ¶ 115). The existence of the DOJ investigation had been revealed in a July 26, 2018, Wall Street Journal article, the publication of which corresponded with a 3.4 percent decline in Sinclair's stock price from July 26, 2018, to July 27, 2018. (Id. ¶¶ 126-27). In its complaint, the DOJ claimed that during its investigation of the Merger, the DOJ discovered evidence that Sinclair was colluding with its competitors in an effort to fix prices for spot advertising sales. (Id.). On the same day the complaint was filed, however, the DOJ announced that it had reached a settlement with Sinclair and the other participants in the alleged scheme. (Id. ¶ 128). The settlement did not impose sanctions, but required Sinclair and the other companies to cooperate in the DOJ investigation and adopt antitrust compliance and reporting measures. (Id.).

Atlanta P&F initiated this lawsuit on August 9, 2018, (ECF 1), and filed the Amended Complaint on March 1, 2019, (ECF 45). Atlanta P&F alleges violations of the Exchange Act by corporate defendant Sinclair, as well as by senior Sinclair executives Ripley, Rutishauser, Smith, and Marks (the "Individual Defendants"). Sinclair filed its motion to dismiss on May 3, 2019, (ECF 49), arguing that Atlanta P&F has failed to state any claims under the Exchange Act.

STANDARD OF REVIEW

To survive a motion to dismiss, the factual allegations of a complaint "must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted). "To satisfy this standard, a plaintiff need not 'forecast' evidence sufficient to prove the elements of the claim. However, the complaint must allege sufficient facts to establish those elements." Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012) (citation omitted). "Thus, while a plaintiff does not need to demonstrate in a complaint that the right to relief is 'probable,' the complaint must advance the plaintiff's claim 'across the line from conceivable to plausible.'" Id. (quoting Twombly, 550 U.S. at 570). Additionally, although courts "must view the...