Schoenfeld Asset Management LLC v. Cendant Corp.

Page 1

P. SCHOENFELD ASSET MANAGEMENT LLC, on behalf of itself and all others similarly situated, Plaintiff, v. CENDANT CORP., WALTER A. FORBES, E. KIRK SHELTON, COSMO CORIGLIANO, CHRISTOPHER MCLEOD and ERNST & YOUNG, LLP, Defendants.

GEORGE SEMERENKO, on behalf of himself and all others similarly situated, Plaintiff, v. CENDANT CORP., WALTER A. FORBES, E. KIRK SHELTON, COSMO CORIGLIANO, CHRISTOPHER MCLEOD and ERNST & YOUNG, LLP, Defendants.

Civ. No. 98-4734 (WHW).

Civ. No. 98-5384 (WHW).

United States District Court, D. New Jersey.

Joseph DePalma, Esq., Lite DePalma Greenberg & Rivas LLC, Newark, NJ, Attorneys for Plaintiffs.

Carl Greenberg, Esq., Budd Larner Gross Rosenbaum, Greenberg & Sade, P.C., Short Hills, NJ, Attorneys for Cendant Corporation.

Douglas Eakeley, Esq., Lowenstein Sandler, PC, Roseland, NJ, Attorneys for Ernst & Young, LLP.

Richard Schaeffer, Esq., Dornbusch Mensch Mandelstam & Schaeffer, LLP, New York, NY, Attorneys for E. Kirk Shelton.

Steven Radin, Esq., Sills Cummis Radin Tischman Epstein & Gross, Newark, NJ, Attorneys for Christopher K. McLeod.

OPINION

WILLIAM H. WALLS, District Judge.

Defendants Cendant Corporation, Inc. ("Cendant"), Ernst & Young, LLP ("E&Y"), E. Kirk Shelton ("Shelton"), and Christopher K. McLeod ("McLeod") have renewed their motions to dismiss the Amended Complaints in the above actions.¹ The Third Circuit's August 10, 2000 Opinion (the "August 10 Opinion") reversed and remanded this court's earlier determination to dismiss the complaint under Rule 12(b) for failure to state a claim under Section 10(b) and Rule 10b-5, and claims against individual defendants for control person liability under Section 20(a). See Semerenko v. Cendant Corp. et al., 223 F.3d 165 (3d Cir. Aug. 10, 2000). Issues now before the Court are:

1. Whether plaintiffs' allegations against E&Y satisfy the "in connection with" requirement of Section 10(b);

2. At what point in time Cendant's alleged misrepresentations could no longer be trusted sufficient to fulfill the reasonable reliance requirement;

3. Whether the complaint must be dismissed against Cendant, E&Y, Shelton and McLeod for failure to plead fraud and scienter with particularity; and

4. Whether plaintiffs have sufficiently plead Section 20(a) claims against Shelton and McLeod.

This Court holds that plaintiffs have satisfied the "in connection with" requirement as to E&Y. The Court also concludes that plaintiffs have adequately plead scienter against E&Y and Shelton. The Court finds, however, that plaintiffs have failed to plead scienter against Cendant with regard to claims by purchasers of ABI stock after April 15, 1998. The Court grants plaintiffs' request for leave to file an Amended Complaint to add allegations against McLeod sufficient to plead fraud and scienter with particularity, but holds that McLeod may not be liable to post-April 15, 1998 purchasers. Consequently, this Court denies E&Y's motion to dismiss the Section 10(b) claim; grants Cendant's motion to dismiss plaintiffs' Section 10(b) claims based upon post-April 15, 1998 purchases of ABI stock; denies Shelton's and McLeod's motions to dismiss plaintiffs' Section 10(b) and Section 20(a) claims for purchasers before April 15, 1998, and grants Shelton's and McLeod's motions to dismiss Section 10(b) and 20(a) claims as to post-April 15, 1998 purchasers. It further directs plaintiffs to file their Second Amended Complaint within fifteen days of the date of entry of this Opinion and Order. Finally, this Court holds that to the extent certain defendants have not moved to dismiss post-April 15, 1998 claims, plaintiffs could reasonably rely upon the alleged misrepresentations in the April 15, 1998 announcement until July 14, 1998, when Cendant announced that the accounting restatements would actually be much greater than originally anticipated and affected other major CUC business units.

BACKGROUND²

This Court's earlier opinion dismissed the Complaint on several grounds, including (1) that plaintiffs had failed to satisfy the "in connection with" requirement of Section 10(b) and Rule 10b-5; (2) plaintiffs failed to establish reasonable reliance on the alleged misrepresentations; and (3) plaintiffs failed to establish loss causation. See P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546 (D.N.J. April 30, 1999) (the "April 30 Opinion"). Accordingly, the Court also dismissed the Class's Section 20(a) claim against the individual defendants on the basis that a claim for control person liability cannot be maintained in the absence of an underlying violation of the Exchange Act. Because of its decision to dismiss the Complaint under Rule 12(b)(6), this Court did not determine whether the Class's complaint also failed to satisfy the heightened pleading requirements of Rule 9(b).

By its August 10 Opinion, the Third Circuit remanded and directed this Court to apply the standards enunciated by the Second and Ninth Circuits in their discussions of the "in connection with" requirement when the alleged fraud involves the public dissemination of false and misleading information. Those circuits have held that

. . . where the alleged fraud involves the public dissemination of information in a medium upon which an investor would presumably rely, the "in connection with" element may be established by proof of the materiality of the misrepresentation and the means of its dissemination.

Semerenko, 223 F.3d at 176, citing In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 963, 965 (2d Cir. 1993); Securities & Exch. Comm'n v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993); In re Leslie Fay Cos. Sec. Litig., 871 F. Supp. 686, 698 (S.D.N.Y. 1995).

Furthermore, the Third Circuit held that Class members could have reasonably relied upon the anticipated restatement of Cendant's 1997 financial information discussed in the April 15, 1998 announcement and were not precluded from reasonable reliance on the defendants' later statements about Cendant's intent to merge with ABI. Id. at 183. However, the Circuit also held that Class members were not entitled to indefinite reliance upon the alleged April 15, 1998 misrepresentations, explaining that Cendant (1) announced on July 15, 1998 that it had revised the restatement of its 1997 income; and (2) disseminated the formal results of the Audit Committee's investigation on August 27, 1998. The Court of Appeals observed that one or both of these actions might have cured the effect of the alleged misrepresentations in the April 15, 1998 announcement and rendered the disclosure thereafter unreliable. Id. This Court was required to determine "the point at which the particular misrepresentations could no longer be trusted." Id.³

Lastly, the Third Circuit instructed this Court to determine whether, if the Section 10(b) requirements are met, the Complaint should nevertheless be dismissed because of plaintiffs' failure to satisfy the heightened pleading requirements for fraud under Rule 9(b). Id. at 173, 187.

In its renewed motion, Cendant seeks dismissal of the plaintiff's claims based upon purchases of ABI stock after April 15, 1998. All defendants, except Corigliano and Forbes who have not renewed their motions, seek dismissal of the complaint for failure to plead fraud and scienter with particularity.⁴ Shelton and McLeod seek dismissal of the Section 20(a) claims against them, apparently in recognition that their concession of the "in connection with" requirement for purposes of the 12(b)(6) motion resurrects those claims unless the complaint is dismissed for failure to plead fraud or scienter with particularity.

DISCUSSION

I. Standard for a Motion to Dismiss

Under 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 non-moving party. See In re Cendant Corp. Derivative Action Litig., 189 F.R.D. 117, 127 (D.N.J. 1999); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the claimant can prove any set of facts consistent with his allegations that will entitle him 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.Ed2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions case in the form of factual allegations. 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). 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, 101-02, 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, 258 (3d Cir. 1998).

II. Section 10(b) and Rule 10b-5

As the Court has written, see In re Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999); see also Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp. 2d 417 (D.N.J. 1999); P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546, 552 (D.N.J. 1999), 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 Section 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. 15 U.S.C. § 78j(b). To implement the...