United States Court of Appeals
For the First Circuit
No. 06-1765
JOSÉ FERNANDO RODRÍGUEZ-ORTIZ,
Plaintiff, Appellant,
v.
MARGO CARIBE, INC.; MICHAEL J. SPECTOR,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Pérez-Giménez, U.S. District Judge]
Before
Torruella, Circuit Judge,
Selya, Senior Circuit Judge,
and Lynch, Circuit Judge.
Celina Romany Siaca, with whom Celina Romany Law Offices was
on brief, for appellant.
Heidi L. Rodríguez, with whom Pietrantoni Mendez & Alvarez LLP
was on brief, for appellees.
June 18, 2007
LYNCH, Circuit Judge. José Fernando Rodríguez-Ortiz
filed a federal securities fraud claim against his former employer
Margo Caribe, Inc. and its chief executive officer, Michael J.
Spector (collectively, "Margo") over Margo's refusal to allow
Rodríguez to exercise certain stock options after he resigned from
the company. The district court dismissed the claim for failure to
meet the pleading standards of the Private Securities Litigation
Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b), and Rodríguez now
challenges that dismissal. As to Rodríguez's primary theory of
fraud, under the PSLRA, Rodríguez has not pleaded "facts giving
rise to a strong inference" of scienter. Id. § 78u-4(b)(2).
Rodríguez adverts to a second theory as well, but even assuming
such a theory were available, he has not sufficiently specified the
"statement alleged to have been misleading" under that theory. Id.
§ 78u-4(b)(1). We thus affirm the dismissal of Rodríguez's federal
securities fraud claim.
I.
Because we are reviewing a motion to dismiss, we recite
the facts as alleged in Rodríguez's complaint in the light most
favorable to him. See In re Cabletron Sys., Inc., 311 F.3d 11, 22
(1st Cir. 2002).
Rodríguez worked for Margo Caribe as its president and
chief operating officer, beginning no later than 2001. On or about
February 9, 2001, Rodríguez was offered a compensation package from
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the company that was to include stock options under the 1998 Margo
Stock Option Plan. Subsequently, Rodríguez and the company signed
a Stock Option Agreement, dated March 2, 2001. The Stock Option
Agreement, at section 5(b), provided that if Rodríguez terminated
his employment "voluntarily (with or without the consent of [Margo
Caribe])," the options would become fully vested and could be
exercised for a period of time after the separation.
On September 3, 2003, at Spector's request, Rodríguez and
Spector began to discuss the possibility of Rodríguez's
resignation. The parties began to negotiate a separation
agreement, but on September 12, after the parties' attorneys had
worked out the details of an agreement, Margo withdrew from the
negotiations and informed Rodríguez that no agreement would be
forthcoming. That same day, Rodríguez tendered his resignation.
Rodríguez asserts that throughout the negotiations, he
at all times notified Margo of his intention
to exercise his rights under the Stock Option
Agreement in the event of his resignation and
was led to believe by Margo that his
resignation would, and could, not be treated
as [a] dismissal for any purposes, including
without limitation, for purposes of the Stock
Option Agreement.
On October 20, 2003, Rodríguez filed suit against Margo
Caribe in federal court in Puerto Rico, initially asserting a COBRA
claim and a state law claim for bad faith withdrawal from the
separation agreement negotiations. These claims are not at issue
on appeal.
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On October 31, 2003, Rodríguez informed the company of
his intention to exercise his options under the Stock Option
Agreement. On November 14, the company replied that Rodríguez's
resignation would be treated as a dismissal under the Agreement,
that as a result the company had the right to terminate his
options, and that the company intended to exercise its right of
termination. That same day, the company also issued a press
release stating that Rodríguez had been dismissed from the company
on August 29, 2003.
On November 24, 2003, Rodríguez amended his complaint to
add Spector as a defendant and to add a federal securities fraud
claim under sections 10(b) and 20(a) of the Securities and Exchange
Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5
promulgated by the Securities and Exchange Commission thereunder,
17 C.F.R. § 240.10b-5. Rodríguez also added a state law claim for
breach of the Stock Option Agreement. On March 31, 2004, Rodríguez
further amended his complaint and added a state law claim for
securities fraud. The alleged fraud was that the company "never
intended to honor the terms and conditions of the Stock Option
Agreement" and that the company and Spector had made misleading
"representations regarding the effect of [Rodríguez's] resignation"
under the Agreement.
Margo filed a motion to dismiss, arguing, inter alia,
that the federal securities claim should be dismissed for failure
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to satisfy the heightened pleading standards of the PSLRA and
Federal Rule of Civil Procedure 9(b).1
The motion to dismiss was referred to a magistrate judge,
who recommended that it be denied in its entirety. On the
securities fraud claim, the magistrate judge found that Rodríguez
had satisfied the heightened pleading standards "by providing the
time, place, date and content of the alleged misrepresentation,"
namely the "promise" in the Stock Option Agreement itself "that in
the event of [Rodríguez's] resignation the full Option would vest."
On August 29, 2005, the district court issued an opinion
and order in which it declined to adopt the magistrate judge's
recommendation on this point and determined instead that Rodríguez
had not satisfied the pleading standards of the PSLRA. The court
found that Rodríguez had "failed to specify a materially misleading
statement or omission, in connection with the sale" of securities,
and that while he had alleged "misrepresentations right and left,"
he had not "specifie[d] their time, place and content." Moreover,
the court noted that "given the juxtaposition of the alleged fraud
with the dismissal and not the original sale of the option," the
complaint seemed to impermissibly allege "fraud in hindsight." As
a result, the district court granted the motion to dismiss the
1
Rule 9(b) requires that "the circumstances constituting
fraud . . . be stated with particularity." We have previously held
that our pre-PSLRA case law interpreting Rule 9(b) in the context
of securities fraud claims is "consistent with the PSLRA." Greebel
v. FTP Software, Inc., 194 F.3d 185, 194 (1st Cir. 1999).
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federal securities claim. The court declined to exercise
supplemental jurisdiction over the state law claims.2
II.
Our review of the district court's granting of the motion
to dismiss is de novo, and we may affirm on any ground apparent in
the record. See Ezra Charitable Trust v. Tyco Int'l, Ltd., 466
F.3d 1, 5-6 (1st Cir. 2006).
At the outset, we note that even under the liberal
pleading standard of Federal Rule of Civil Procedure 8, the Supreme
Court has recently held that to survive a motion to dismiss, a
complaint must allege "a plausible entitlement to relief." Bell
Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1967 (2007). In so doing,
the Court disavowed the oft-quoted language of Conley v. Gibson,
355 U.S. 41, 45-46 (1957), that "a complaint should not be
dismissed for failure to state a claim unless it appears beyond
doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." See Twombly, 127
S. Ct. at 1969. The Court found that the "no set of facts"
language, if taken literally, would impermissibly allow for the
pleading of "a wholly conclusory statement of [a] claim," and that
"after puzzling the profession for 50 years, this famous
observation has earned its retirement." Id. at 1968, 1969.
2
The district court adopted the magistrate judge's
recommendation to deny the motion to dismiss the COBRA claim. The
parties later settled this claim.
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To make out a claim under section 10(b) and Rule 10b-5,
Rodríguez needed to allege that
(1) [Margo] made a materially false or
misleading statement or failed to state a fact
necessary to make a statement not misleading;
(2) in connection with the purchase or sale of
a security; (3) with the intent to deceive,
manipulate, or defraud; and that (4)
[Rodríguez] was injured by his reasonable
reliance on [Margo's] misrepresentations.
Wortley v. Camplin, 333 F.3d 284, 294 (1st Cir. 2003); see also
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). The
first and third elements are critical here.
The PSLRA imposes two heightened pleading requirements on
federal securities fraud claims, beyond the requirements of Rule 8.
First, to support allegations of misleading statements or
omissions, the 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."
15 U.S.C. § 78u-4(b)(1). This standard is "congruent and
consistent with the pre-existing standards of this circuit" under
Rule 9(b), Greebel, 194 F.3d at 193, under which we required the
"specification of the time, place, and content of an alleged false
representation," id. (quoting McGinty v. Beranger Volkswagen, Inc.,
633 F.2d 226, 228 (1st Cir. 1980)) (internal quotation marks
omitted).
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Second, allegations of scienter must be made by stating
"with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind." 15 U.S.C.
§ 78u-4(b)(2). The "required state of mind" for liability under
section 10(b) and Rule 10b-5 is "intent to deceive, manipulate, or
defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), or
recklessness that goes beyond "ordinary negligence and is closer to
a lesser form of intent," Greebel, 194 F.3d at 199.
On a motion to dismiss in a securities fraud case, this
"strong inference" standard has several consequences. A court
continues to take all factual allegations as true and to draw all
reasonable inferences in favor of the plaintiff. See Aldridge v.
A.T. Cross Corp., 284 F.3d 72, 78-79 (1st Cir. 2002). However, as
to scienter, not any inference will do: the ultimate inference of
scienter must be a strong one. See Cabletron, 311 F.3d at 28.
This involves some assessment of the strength of inferences. This
circuit has adopted the rule that the inference of scienter is not
strong "when, viewed in light of the complaint as a whole, there
are legitimate explanations for the behavior that are equally
convincing." In re Credit Suisse First Boston Corp., 431 F.3d 36,
49 (1st Cir. 2005). Furthermore, in this circuit we have avoided
the use of any "rigid pleading formula" for determining the
sufficiency of allegations of scienter, "instead 'preferring to
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rely on a "fact-specific approach" that proceeds case by case.'"3
Ezra Charitable Trust, 466 F.3d at 6 (quoting Cabletron, 311 F.3d
at 38).
Rodríguez argues that he has met both of these pleading
requirements, but on his primary theory, while he has specified the
misleading statements, he has not alleged facts to support a strong
inference of scienter. He adverts briefly to another theory, but
whether or not he has sufficiently alleged scienter as to that
theory, he has not specified the misleading statements in support
of that theory. Because Rodríguez cannot meet both requirements as
to any one theory, his claim was properly dismissed.
Rodríguez argues that he has satisfied the requirement to
specify the "time, place, and content" of the alleged misleading
representations by pointing to section 5(b) of the Stock Option
Agreement, which provided for the vesting of his options following
a voluntary resignation. The theory is that when a party "makes a
specific promise, as part of the consideration for the transfer of
securities, to perform an act, while intending not to perform the
act, this may constitute a basis for a fraud finding." Wortley,
333 F.3d at 294 (citing United Int'l Holdings, Inc. v. Wharf
(Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000), aff'd, 532
U.S. 588 (2001)). Rodríguez contends that Margo misled him into
3
See Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d
588, 601 (7th Cir. 2006) (describing the different approaches in
the various circuits), cert. granted, 127 S. Ct. 853 (2007).
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accepting options as part of his compensation package, while
secretly intending either never to allow the exercise of the
options at all, or at least never to allow their exercise following
a voluntary resignation.
In the context of such a claim, however, the requisite
scienter is an intent to deceive at the time the promise was made,
not a later intent to break a promise already made. See Wharf
Holdings, 532 U.S. at 596-97 (distinguishing a federal securities
claim from an "ordinary state breach-of-contract" claim on the
basis of an allegation of a "secret[] inten[t] from the very
beginning not to honor the option" (emphasis added)). Thus, under
the PSLRA, Rodríguez was required to allege facts sufficient to
establish a strong inference that in 2001, when the Agreement was
signed, Margo intended to deceive Rodríguez by agreeing to section
5(b) while secretly intending to violate it.
It is on this requirement that Rodríguez's claim
founders. His allegations of wrongdoing relate almost entirely to
the later period starting on September 3, 2003, when he and Spector
began to discuss the possibility of his resignation. Rodríguez
argues that his resignation was merely a "triggering event" that
provided the occasion for Margo to act on its "long standing"
intention to violate section 5(b) of the Agreement. Rodríguez
points primarily to the alleged violation itself, however, as the
basis on which to infer that intention.
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The bare allegation that Margo violated the Agreement in
2003 is not enough to establish a strong inference that Margo never
intended to abide by the Agreement when it signed it in 2001. To
hold otherwise would be to permit the pleading of a form of "fraud
by hindsight," essentially inferring earlier knowledge based only
on the situation that later came to pass. This we have
consistently rejected. See, e.g., Ezra Charitable Trust, 466 F.3d
at 6.
Nor do Rodríguez's additional allegations help to
establish a strong inference of Margo's intent in 2001. Rodríguez
points to the November 2003 press release as showing that Margo had
a hidden intention to treat his resignation as a dismissal. But by
its terms, the press release stated only that Rodríguez had been
dismissed as of August 2003, which bears no relationship to Margo's
intentions in 2001. Similarly, in an apparent attempt to allege
bad faith on Margo's part, Rodríguez makes much of the fact that it
was not until "after the breakdown in the negotiations of a
separation agreement," that he learned "that he had been
dismissed." Like the press release, such an allegation suggests
that it was only later that Margo decided to treat Rodríguez as
dismissed, thereby weighing against a strong inference of scienter
in 2001.
Rodríguez also argues that Margo claimed broad discretion
in interpreting the Agreement and that such claims support an
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inference that Margo never intended to be bound by the Agreement.
The complaint, however, only specifically alleges that after
Rodríguez's resignation, Margo claimed the discretion to treat that
resignation as a dismissal. Again, there are no allegations to
support an inference that Margo had any such interpretation of the
Agreement prior to 2003. Rodríguez did not allege any facts
suggesting that Margo had ever considered how it might interpret
section 5(b) of the Agreement before the issue arose in 2003, or
that either party had considered the issue in signing the
Agreement.4 Cf. Wortley, 333 F.3d at 295 (finding that a jury
could reasonably conclude that a contractual promise was
fraudulently made where the promisor never intended to keep the
promise and the promisee had made it clear to the promisor that
such a promise was indispensable to the agreement).
Finally, Rodríguez attributes significance to the
allegation that the proposed, but unexecuted, separation agreement
would have required him to waive his right to sue Margo, including
for breach of the Stock Option Agreement. It is not apparent why
such a provision, freely agreed upon, would have indicated wrongful
4
The lack of any such facts also shows that Rodríguez has not
alleged that Margo had a motive and opportunity to commit fraud by
hiding its intended interpretation of the Agreement. See Greebel,
194 F.3d at 197 (finding the pleading of motive and opportunity
neither necessary nor always sufficient for a strong inference of
scienter, but finding it potentially relevant to the issue).
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intent in 2003, let alone why it has any bearing on Margo's intent
in signing the Stock Option Agreement.
Thus, even considering the various facts offered by
Rodríguez in combination, see Aldridge, 284 F.3d at 82, he failed
to plead facts sufficient to raise a strong inference of scienter.
The constellation of facts pleaded are at least equally, if not
more, consistent with an inference that Margo chose its course only
after relations soured. See Credit Suisse, 431 F.3d at 49.
Rodríguez alleged little that is probative of Margo's intent when
it signed the Stock Option Agreement, and hence is unable to raise
a strong inference as to that intent.
Rodríguez has also suggested a separate theory that Margo
knew from the beginning of the separation agreement negotiations in
September 2003 that it intended to treat Rodríguez's resignation as
a dismissal and that it hid this intention from Rodríguez. Under
this theory, distinct from the one above, the deception lay in the
misrepresentation of Margo's intentions at the time Rodríguez
decided to resign. In support of this theory as a basis for
liability under the securities laws, Rodríguez cites to Smith v.
Duff & Phelps, Inc., 891 F.2d 1567 (11th Cir. 1990). In Smith, the
Eleventh Circuit held that in some situations an employee's
decision to resign or retire can be an investment decision for
purposes of federal securities law, triggering a requirement on the
part of management to disclose objective material information. Id.
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at 1574. Assuming, without deciding, that Smith is good law, it is
doubtful that this case falls within either the rule or the
rationale of Smith, but we need not decide the issue. Nor need we
decide whether Rodríguez sufficiently pleaded scienter even if such
a theory were plausible.
It is clear that any putative claim based on this theory
fails under the PSLRA because Rodríguez did not sufficiently
specify the relevant misrepresentations. Rodríguez's complaint
repeatedly makes only the general claim that he "was led to believe
by Margo that his resignation would, and could, not be treated as
[a] dismissal for any purposes, including without limitation, for
purposes of the Stock Option Agreement." Nowhere does the
complaint specify what statements led Rodríguez to such a belief,
nor when and in what context such statements were made. Nor does
the complaint specify any instances in which Margo misled Rodríguez
by failing to correct any expressions to the contrary. Such a
general allegation falls far short of the requirement to specify
the "time, place, and content" of the alleged misrepresentations or
misleading omissions. See Greebel, 194 F.3d at 193.
Because Rodríguez did not meet both of the PSLRA's
pleading requirements with respect to either of his theories of
liability, his claim for federal securities fraud was properly
dismissed.
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The judgment of the district court is affirmed. Costs
are awarded to appellees.
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