IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-40645
ABC ARBITRAGE PLAINTIFFS GROUP; ET AL.,
Plaintiffs,
ALCATEL PLAINTIFFS GROUP,
Plaintiff-Appellant,
versus
SERJE TCHURUK; ET AL.,
Defendants,
SERJE TCHURUK; JEAN-PIERRE HALBRON; ALCATEL SA,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Texas
May 13, 2002
Before HIGGINBOTHAM, DeMOSS, and BENAVIDES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This appeal presents questions concerning the pleading
requirements under the Private Securities Litigation Reform Act of
1995, the PSLRA. The Alcatel Plaintiffs Group filed this putative
class action after a precipitous drop in the stock price of Alcatel
SA. The amended complaint alleged that Alcatel misrepresented its
financial condition by covering up problems associated with its
German subsidiary Alcatel SEL, intentional overstatements of its
1997 financial results, and contract losses in Southeast Asia and
Europe. Those were assertedly part of a series of financial set-
backs concealed in order to artificially inflate the price of
Alcatel American Depository Shares (“ADSs”) and to avoid
compromising a $4.4 billion stock-for-stock acquisition of DSC
Communications, a Texas company.
The district court held that the majority of allegations of
the amended complaint were not pleaded with sufficient
particularity to meet the requirements of the PSLRA. It further
concluded that the remaining alleged misrepresentations were
immaterial as a matter of law. Plaintiffs appeal, contending that
the standard applied by the district court was too onerous and that
its complaint should be reinstated. For the reasons stated herein,
we agree in part, but nevertheless conclude that the sufficiently
particular allegations do not state a claim.
I.
On September 24, 1998, a group later identified as the Alcatel
Plaintiffs Group filed their original complaint in the United
States District Court for the Southern District of New York. In
all, more than twenty separate actions were filed in four
jurisdictions against Alcatel and its officers and directors
immediately after a drop in the price of its stock. The Judicial
2
Panel on Multidistrict Litigation transferred all the cases to the
Eastern District of Texas pursuant to 28 U.S.C. § 1407.
The transferee court divided the group into two classes of
shareholders: (1) purchasers of Alcatel ADSs on the open market
during the class period, and (2) those persons who acquired Alcatel
ADSs as a result of the merger between Alcatel and DSC. The
Alcatel Plaintiffs Group were designated Lead Plaintiff and their
attorneys Lead Counsel pursuant to 15 U.S.C. § 78u-4(a)(3)(B) for
a putative class consisting of all purchasers, other than the
defendants, of Alcatel ADSs on the open market between June 8,
1998, and September 17, 1998.
On May 24, 1999, Plaintiffs filed their First Consolidated
Amended Complaint against Alcatel, Alcatel Chief Executive Officer
and Chairman Serge Tchuruk, and Alcatel senior Executive Vice
President and Alcatel Telecom Executive Committee member Jean-
Pierre Halbron (collectively “Alcatel”), alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder,
17 C.F.R. § 240.10b-5.1
1
Another group of plaintiffs, the so-called DSC Plaintiffs,
represented by separate counsel, were appointed to represent the
class of former shareholders of DSC who acquired ADSs in exchange
for DSC common stock pursuant to the merger of DSC and Alcatel.
This group of plaintiffs filed a separate complaint, which was not
dismissed in its entirety, and has since settled with Alcatel,
without prejudice to the claims of the Alcatel Plaintiffs Group.
All references to “Plaintiffs” herein are to the appellants here,
the Alcatel Plaintiffs Group.
3
Alcatel moved to dismiss. The district court granted the
motion without prejudice, holding that the amended complaint did
not meet the pleading standards of Federal Rule of Civil Procedure
9(b) and the PSLRA. Specifically, it held that Plaintiffs had
failed to plead facts demonstrating the falsity of Alcatel’s
alleged representations or that Alcatel knew they were false when
made, nor the sources of their allegations made on information and
belief.
With leave, Plaintiffs filed their Second Consolidated Amended
Complaint on January 31, 2000.2 Alcatel filed a motion to dismiss
this second amended complaint pursuant to Rule 12(b)(6). Although
this new complaint added significant information, the district
court dismissed with prejudice. Plaintiffs now appeal.3
II.
First we will summarize the facts alleged in the complaint,
which for purposes of a Rule 12(b)(6) motion are accepted as true
and construed in the light most favorable to Plaintiffs.4
2
References to the “complaint” herein are to the live
pleading at issue on this appeal, Plaintiffs’ Second Consolidated
Amended Complaint filed January 31, 2000.
3
Plaintiffs appealed this dismissal previously, but this
court, after hearing oral argument, held in an unpublished per
curiam opinion that it did not have jurisdiction because a final
judgment had not been properly entered. ABC Arbitrage Plaintiffs
Group v. Tchuruk, No. 00-40850 (5th Cir. May 2, 2001) (unpublished
per curiam). The district court then issued a final judgment, and
this appeal ensued.
4
See Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir.
2001).
4
A.
Alcatel is a French telecommunications firm whose shares trade
on the New York Stock Exchange in the form of ADSs.5 Alcatel
employs approximately 190,000 people and has four principal product
lines: telecommunications, accounting for 44.3% of sales in 1997;
cable and related components, accounting for 22.8% of sales in
1997; energy and transport, accounting for 18.4% of sales in 1997;
and engineering and systems, accounting for 14.1% of sales in
1997.6
Tchuruk was at all relevant times Chief Executive Officer and
Chairman of the Board of Alcatel and also served on Alcatel’s
Telecom Executive Committee.7 Halbron was at all relevant times
senior Executive Vice President of Alcatel and also served on the
Telecom Executive Committee.8
Plaintiffs are a proposed class of those who (1) bought
Alcatel ADSs, (2) purchased Alcatel call options, or (3) sold
Alcatel put options during the class period of June 8, 1998 through
September 17, 1998.9
5
Second Consolidated Amended Class Action Complaint
(“Complaint”) at 6 ¶ 11.
6
Id.
7
Id. at 6 ¶ 12.
8
Id. at 7 ¶ 13.
9
Id. at 1 ¶ 1.
5
During this proffered class period, Alcatel was simultaneously
dealing with the effects of the lingering Asian financial crisis,
European deregulation, and a pending merger with DSC.10 Under the
terms of the merger agreement, which involved a stock-for-stock
acquisition, DSC had the right to terminate the deal if the average
price of Alcatel ADSs for the twenty-day period before the closing
date fell below $37.11
B.
The complaint alleges that Alcatel made materially false and
misleading statements and omissions concerning Alcatel’s financial
condition and the future of Alcatel’s business, which statements
and omissions were contained in public statements in news reports,
press releases, Alcatel’s 1997 annual report, and the Registration
Statement and Joint Proxy/Prospectus disseminated in connection
with Alcatel’s merger with DSC.12 The alleged misrepresentations
began on June 8, 1998, when Tchuruk was paraphrased in an AFX News
article:
Tchuruk also said that Alcatel has the potential for
its sales to grow by 10-20 pct per year, outperforming
the telecommunications market as a whole which is seen
rising 8-10 pct in nominal terms.
Tchuruk also said that his company is better
protected than others from the fallout of the Asian
10
Id. at 11-12 ¶¶ 24-26.
11
Id. at 12 ¶¶ 25-26.
12
Id. at 1 ¶ 2.
6
financial crisis, because cuts in investment in the
region are usually not aimed at telecommunications.13
The same day, a Bloomberg article paraphrased Tchuruk as saying
that sales at Alcatel SA “will grow between 10 and 20 percent a
year—faster than the 10 percent for the market as a whole.”14
On June 25, 1998, Alcatel filed its annual report on a Form
20-F with the SEC for the fiscal year ending December 31, 1997.
This report included the following sections quoted in the
complaint:
Income from operations increased by 175.6% to FF 8.0
billion in 1997 compared with FF 2.9 billion in 1996 and
including a FF 506 million provision for risks related to
the Southeast Asian crises ... the increase in that
income in operations was due to the improved performance
in all segments, in particular the improvement in Telecom
segment’s income from operations which increased to FF
3.1 billion in 1997 compared with the loss of FF 953
million in 1996.
TELECOM
Sales to Asia increased to FF 9.0 billion in 1997
compared to FF 6.0 billion in 1996 due principally to
sales growth in China. Net sales increased in all of the
Telecom segment divisions, with increases of more than
30% each in Transmission systems, Access Systems and
Mobile Communications.
Order bookings amounted to FF 85.4 billion in 1997 a 7.5
percent increase compared with FF 79.4 billion in 1996.
The substantial increase in order bookings that were
registered in the Transmission Systems, Access Systems,
Mobile Communications, and Submarine Networks were
partially offset by a decline in orders in the Switching
Systems division principally to the completion of
13
Id. at 19 ¶ 45; see also id. at 1-2 ¶¶ 3-4.
14
Id. at 19 ¶ 44; see also id. at 1-2 ¶¶ 3-4.
7
Deutsche Telecom’s network digitalization program in
Germany.
....
Impact of Economic Crises in Southeast Asia
The recent economic crises of certain countries in
Southeast Asia could have a negative impact on prices and
demand for certain of the Company’s products and
services, due particularly to the risk of a significant
decline in infrastructure investment in the region.
Management expects such impact to be relatively less
significant with respect to investments in
telecommunications infrastructure. Such development
could thereby affect the results of operations of certain
of the Company’s business segments. Based on current
information, management does not believe that the impact
of such economic crises will be material for Alcatel
Alsthom on a consolidated basis. Excluding sales by GEC
Alsthom and Cegelec, net sales recorded by Alcatel
Alsthom in 1997 from sales in Asia amounted to
approximately 4.4% of net sales.15
This annual report was also incorporated by reference into the
Joint Proxy/Prospectus included in a Form F-4 Registration
Statement filed on July 28, 1998 with the SEC in connection with
the DSC merger.16 In section 5.7 of the merger agreement attached
to the Form F-4, Alcatel certified that it had experienced no
“Material Adverse Effect” since December 31, 1997, defined in
section 5.1 as “a material adverse effect on the condition
(financial or otherwise), business, assets or results of operations
of Alcatel and its Subsidiaries, taken as a whole, that is not the
result of general changes in the economies in which such entities
15
Id. at 20-21 ¶¶ 48-49 (emphasis in original); see also id.
at 2 ¶ 4.
16
Id. at 29 ¶ 66.
8
operate,” and, in section 8.2, Alcatel certified as a condition of
closing that the representations in the merger agreement remained
true and correct.17
The same day, on July 28, 1998, Alcatel issued a press release
stating:
After double-digit growth in the first quarter for
the Group, both in sales and orders on a comparable
basis, the second quarter was adversely impacted by the
completion of the telecom digitalization program in
Germany and the non-recurrence of the strong second
quarter experienced in Southeast Asia during 1997.
However, current indications point to a continued double-
digit growth both in sales and orders for the full year
in the Telecom segment with the corresponding impact on
the Group’s overall performance.18
In conjunction with this statement, Alcatel reported a sales
increase of only 2.4 percent for the first half of 1998, which
caused Alcatel’s share price to decline approximately 4 percent.19
This press release was attached to a Report on Form 6-K (Report of
Foreign Issuer Pursuant to Rules 13a-16 or 15d-16 under the
Securities Exchange Act of 1934) filed by Alcatel on July 31,
1998.20
C.
The complaint alleges that at the time of these public
statements Alcatel was aware but did not disclose that:
17
Id. at 30 ¶ 68.
18
Id. at 27 ¶ 62; see also id. at 2 ¶ 4.
19
Id. at 27 ¶ 62.
20
Id. at 31 ¶ 72.
9
(1) Alcatel “intentionally” overstated its financial
results for 1997 by at least 125 million French francs,
according to the Group Services Report, which states that
Alcatel improperly understated the costs of sales on
hundreds of contracts totaling 58 million French francs
and overstated inventory in the amount of 18 million
French francs, receivables amounting to 27 million French
francs, and revenue in the amount of 22 million French
francs, and also understated its provision of losses
associated with work in progress on contracts in
Thailand, Malaysia, Indonesia, and the Philippines by at
least 200 million French francs;21
(2) by February 1998 there was an “obvious” deteriorating
trend in Alcatel SEL’s orders and margins, according to
the Group Services Report;22
(3) Alcatel SEL was in a total state of disarray,
according to the Group Services Report;23
(4) a high ranking Alcatel SEL official personally
informed a member of the Alcatel Telecom Executive
Committee in July 1998 that Alcatel SEL was experiencing
significant losses and that these losses had reached
approximately 240 million French francs year-to-date, but
later increased dramatically to approximately 400 million
French francs by August 1998;24
(5) in early 1998 a contract for services to Borneo worth
9 trillion Rupiah (over 9 billion French francs) over a
five-year period was postponed for two years because
Alcatel was found to have paid a substantial bribe to a
high-ranking Indonesian telephone official;25
(6) by June 1998 Swiss Telecom’s orders for the year had
been completed and Alcatel’s 1998 sales to Swiss Telecom
21
Id. at 2 ¶ 4, 12 ¶ 27, 13 ¶ 28, 19 ¶ 46, 22-26 ¶¶ 50-59,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(a).
22
Id. at 2 ¶ 4, 12 ¶ 27, 15-16 ¶¶ 34-35, 19 ¶ 46, 26 ¶ 60,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(c).
23
Id. at 2 ¶ 4, 14-15 ¶¶ 30-32.
24
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 16-17 ¶¶ 36-38, 19 ¶ 46,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(b).
25
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 17 ¶¶ 39-40, 19 ¶ 46, 26
¶ 60, 28 ¶ 65, 29 ¶ 67, 37 ¶ 92(d).
10
would be only 62 million Swiss Francs, little more than
half of the previous year’s level;26
(7) Alcatel had lost a major contract with Telefonica,
the Spanish telephone company, to Alcatel’s rival
Ericsson;27
(8) in early July 1998 Alcatel lost a contract worth $340
million over two years with Retevision, another Spanish
telephone company, to Ericsson;28
(9) in July 1998 a contract worth over 2 billion Baht
(over 251 million French francs) to supply high-speed
telephone wire in Thailand was cancelled;29
(10) Alcatel’s business with Deutsche Telecom had
declined substantially, after Deutsche Telecom completed
its network digitalization program;30 and
(11) Alcatel’s revenues, earnings and profitability had
been and were continuing to be drastically negatively
impacted by these events.31
The complaint alleges that the defendants had actual knowledge of
the falsity of their statements at the time the statements were
made because the defendants had received oral and written reports
concerning the true and undisclosed state of affairs at Alcatel,
including Monthly Management Reports (MMRs), i.e., “written reports
... prepared by the controller’s office of each Alcatel subsidiary
... which were transmitted to defendants Halbron and Tchuruk
26
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 42, 19 ¶ 46, 26 ¶ 60,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(e).
27
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 43, 29 ¶ 67, 37 ¶
92(g).
28
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 43, 28 ¶ 65, 29 ¶ 67,
37 ¶ 92(g).
29
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 17 ¶ 41, 28 ¶ 65, 37 ¶
92(f).
30
Id. at 11 ¶ 24; see also id. at 32 ¶ 76.
31
Id. at 2 ¶ 4, 29 ¶ 67, 37 ¶ 92(h).
11
shortly after the close of each month” and which “concern[ed] the
Telecom sector at each of Alcatel’s subsidiaries” and “compar[ed]
actual results to budgeted numbers.”32
The complaint further alleges that, during the first half of
1998, Alcatel experienced only a 6.5% increase in sales and 4.7%
increase in orders in its Telecom segment, such that, in order to
achieve double-digit growth in sales and orders for 1998, Alcatel
would require at least 13.5% growth in sales and 15.3% in orders
for the Telecom segment for the second half of 1998.33 The
complaint alleges that, as a result, at the time of its public
statements, Alcatel was aware it could not achieve its predicted
double-digit growth in the Telecom sector for 1998 due to the
undisclosed adverse information described above.34
Specifically, the complaint alleges that Tchuruk’s June 8
statements were false or misleading because they failed to disclose
that Alcatel had intentionally overstated its 1997 financial
results, Alcatel SEL was experiencing significant losses, the
contract in Borneo was postponed, and sales to Swiss Telecom were
down.35 The statements in the annual report were false or
misleading because the report failed to disclose that Alcatel’s
32
Id. at 4 ¶ 5, 7 ¶ 15, 15 ¶ 33.
33
Id. at 27 ¶ 64.
34
Id. at 11 ¶ 24, 27 ¶ 64, 28 ¶ 65, 29 ¶ 67, 32 ¶ 74.
35
Id. at 19 ¶ 46.
12
financial statements contained therein for the year ended December
31, 1997 overstated its results of operations by material amounts
for the Telecom segment in violation of Generally Accepted
Accounting Principles, falsely represented that Alcatel’s business
remained strong and would not be materially impacted by the Asian
financial crisis because Alcatel had already created reserves to
provide for the crisis, and failed to disclose problems at Alcatel
SEL, the contract postponement in Borneo, and reduced sales to
Swiss Telecom.36
The July 28 press release was false or misleading because it
failed to disclose that Alcatel had intentionally overstated its
1997 financial results, there were problems and mounting losses at
Alcatel SEL, the contract in Borneo was postponed, sales to Swiss
Telecom were down, a contract in Spain was lost to rival Ericsson,
and the contract in Thailand was cancelled.37
Finally, the merger registration statement was false or
misleading because it failed to disclose Alcatel’s intentional
overstatement of its 1997 financial results, problems and mounting
losses at Alcatel SEL, the contract postponement in Borneo, reduced
sales to Swiss Telecom, the loss of two contracts in Spain to rival
Ericsson, and the cancelled contract in Thailand, as well as the
fact that Alcatel’s revenues, earnings and profitability had been
36
Id. at 20 ¶ 48, 22-27 ¶¶ 50-61.
37
Id. at 28 ¶ 65.
13
and were continuing to be negatively impacted, and because it
falsely certified that Alcatel had not had experienced or was not
likely to experience a “Material Adverse Effect.”38
The complaint also alleges that the July 28 press release and
merger registration statement were false or misleading because they
failed to disclose that Alcatel’s management was aware that Alcatel
would not meet predictions of “continued double-digit growth both
in sales and orders for the full year in the Telecom segment” made
by Alcatel on July 28, 1998, the day the Proxy/Prospectus was
disseminated.39 The complaint further alleges that at no time prior
to the closing of the DSC merger—which became final on September 8,
1998—did Alcatel disclose that it had experienced or was likely to
experience a “Material Adverse Effect” as required by the merger
agreement, although material adverse effects had occurred.40
The complaint alleges that the defendants did not disclose
these material facts because they had agreed to merge with DSC and
knew these facts would depress the price of Alcatel ADSs and
thereby increase dramatically the number of shares Alcatel would
have to pay to acquire DSC and might even trigger DSC shareholders’
right to terminate the merger.41 The complaint alleges that later
38
Id. at 12 ¶ 27, 29 ¶ 67, 31 ¶ 73.
39
Id. at 28 ¶ 65, 29 ¶ 67, 31 ¶ 74.
40
Id. at 31 ¶ 73.
41
Id. at 4 ¶ 6, 8 ¶ 19, 12 ¶¶ 26-27, 20 ¶ 47, 31 ¶ 70, 31 ¶
74; see also id. at 30 ¶ 69.
14
news reports indicated that Alcatel knew of expected disappointing
profits and “Deutsche Telecom cuts” in July but failed to disclose
this information to Plaintiffs until after the DSC merger closed.42
The complaint also alleges that the Proxy/Prospectus included in
the merger registration statement deliberately did not disclose the
material adverse information listed above, because the defendants
planned to release this information only after DSC’s right to
terminate the merger had expired and the merger had closed.43 The
complaint further alleges that the defendants rushed the merger
through to closing in September rather than October 1998 in order
to prevent DSC from exercising its right to terminate the merger.44
Further, according to the complaint, Alcatel not only withheld
the material information listed above but also embarked on a scheme
commencing on or about June 8, 1998 to artificially inflate the
price of Alcatel ADSs by issuing a series of false and misleading
statements, designed to mislead Alcatel Plaintiff class members
into believing that (1) Alcatel, unlike its competitors, was not
experiencing a slowdown in demand for its products and (2)
Alcatel’s Telecom segment would report double-digit sales and order
growth for full-year 1998.45
42
Id. at 33 ¶¶ 78-79.
43
Id. at 29 ¶ 66.
44
Id. at 31 ¶ 74, 38 ¶ 94.
45
Id. at 4 ¶ 6, 8 ¶ 19.
15
D.
The complaint alleges that the material omissions and false
representations in Alcatel’s annual report “had the desired
effect,” because, “[o]n July 16, 1998, Alcatel ADS’s hit a Class
Period and 1998 high of $47 1/16 per ADS, up from $40 7/8 per share
at the start of the Class Period.”46 The complaint also cites
comments of analysts from J.P. Morgan and Salomon Smith Barney as
support for the positive effect of the reassuring comments in the
July 28, 1998 press release made to assuage analysts’ concerns
about the below-expectations sales growth announced in July 1998.47
The complaint alleges that, because of this nondisclosure, the
price of Alcatel’s ADSs remained artificially inflated until after
September 17, 1998.48
The complaint alleges that the true financial and operating
condition of Alcatel, although known to Alcatel throughout the
class period, remained concealed from Plaintiffs until September
17, 1998, a few days after the DSC merger closed, when Alcatel
stunned investors by revealing that Alcatel’s Telecom segment’s
income would “be adversely impacted by the sharp investment cuts
recently decided by some traditional operators and the deepening of
the Southeast Asian and Russian crisis” and that, as a result,
46
Id. at 27 ¶ 61.
47
Id. at 27 ¶ 63.
48
Id. at 32 ¶ 75.
16
Alcatel’s “operating performance” would “not meet expectations.”49
This announcement led to a decline in the price of Alcatel ADSs of
more than 30 percent to $19-1/4.50
E.
In sum, the complaint alleges that the defendants made false
and misleading statements and omissions contemporaneous with the
agreement to merge with DSC, which statements and omissions
included (1) Tchuruk’s statements on June 8, 1998 that Alcatel’s
sales would grow between 10 and 20 percent per year and that
Alcatel was “better protected than others” from the Asian financial
crisis, (2) the statements in Alcatel’s 1997 annual report that
Alcatel had sufficient reserves to meet the Asian financial crisis
and that the impact of the crisis will be immaterial for Alcatel on
a consolidated basis, (3) a statement in a press release on July
28, 1998 that Alcatel’s Telecom segment would continue to report
“double-digit growth” in both sales and orders for the full year
1998, and (4) the certification in the merger agreement attached to
the Form F-4 merger registration statement that Alcatel had not
experienced and was not likely to experience a “Material Adverse
Effect.”51 These statements and omissions were false because the
defendants knew at the time of the statements and omissions (or
49
Id. 1 ¶ 3, 32 ¶ 76.
50
Id. 1 ¶ 3, 33 ¶ 80.
51
Id. at 19-32 ¶¶ 44-75.
17
acted with recklessness if they did not know) but did not disclose
that: (1) Alcatel SEL was having undisclosed problems and
experiencing significant and mounting losses, (2) Alcatel
intentionally overstated its financial results for 1997 by at least
325 million French francs, (3) Alcatel lost or had postponed major
contracts in Borneo and Thailand and with two Spanish telephone
companies and had substantially reduced sales to Swiss Telecom and
reduced business with Deutsche Telecom, and (4) as a result,
Alcatel’s revenues, earnings and profitability had been and were
continuing to be negatively impacted. According to the complaint,
the defendants’ knowledge of this undisclosed adverse information
and the timing of the release of this information gives rise to a
strong inference of scienter, that is, defendants acted with at
least reckless disregard for the truth of their statements and
omissions of material facts.52 The complaint also alleges that
these materially false or misleading statements and omissions were
made to support the artificial price of Alcatel ADSs and to sustain
the DSC agreement until the merger closed and DSC’s right to
terminate the merger had expired.53
III.
52
Id. at 37-38 ¶¶ 92-94.
53
Id. at 4 ¶ 6, 8 ¶ 19, 20 ¶ 47, 31 ¶ 70, 31 ¶ 74.
18
We review a district court’s dismissal under Rule 12(b)(6) de
novo.54 A Rule 12(b)(6) motion should be granted only if it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief.55 On the
other hand, we have noted that conclusory allegations or legal
conclusions masquerading as factual conclusions will not suffice to
prevent dismissal under Rule 12(b)(6).56
It is well-settled that, “[i]n order to state a claim under
section 10(b) of the 1934 Act and Rule 10b-5, a plaintiff must
allege, in connection with the purchase or sale of securities, ‘(1)
a misstatement or an omission (2) of material fact (3) made with
scienter (4) on which plaintiff relied (5) that proximately caused
[the plaintiffs’] injury.’”57 We address, as necessary, the
adequacy of Plaintiffs’ complaint as to the elements on which
54
Nathenson, 267 F.3d at 406.
55
Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720,
725 (5th Cir. 2002).
56
S. Christian Leadership Conference v. Supreme Court of
State of La., 252 F.3d 781, 786 (5th Cir.), cert. denied, 122 S.
Ct. 464 (2001).
57
Nathenson, 267 F.3d at 406-07 (quoting Tuchman v. DSC
Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994)). The
complaint also alleges that the two individual defendants are
liable as “controlling persons” under section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). “‘Control
person’ liability is, however, derivative, i.e., such liability is
predicated on the existence of an independent violation of the
securities laws.” Rubinstein v. Collins, 20 F.3d 160, 166 n.15
(5th Cir. 1994); see also Lovelace v. Software Spectrum Inc., 78
F.3d 1015, 1021 n.8 (5th Cir. 1996).
19
Alcatel challenges Plaintiffs’ allegations: materiality, scienter,
and loss causation. We turn first, however, to the adequacy of
Plaintiffs’ allegations of misstatements and omissions,
particularly those made upon information or belief.
A.
The district court held that, although Plaintiffs adequately
pleaded the who, what, where, and when elements of their securities
fraud claim, they failed to meet the pleading standard regarding
why the particular statements were misleading. In particular, the
district court faulted Plaintiffs for not sufficiently identifying
the source of the information about the contract losses. The
district court held that Plaintiffs’ paragraph generally describing
the source of their allegations as based on the investigation of
counsel was insufficient to satisfy the PSLRA requirements for
information and belief pleading. Regarding the MMRs and the “Kom-
Aktuell” internal Alcatel newsletter, the district court held that
Plaintiffs’ reliance on these documents was no different from vague
assertions about “internal documents” that had been deemed
insufficient by other courts. It noted that Plaintiffs did not
provide sufficient detail regarding the origins of Plaintiffs’
allegations or particulars such as direct quotes from the documents
and the name of the author of the “Kom-Aktuell” newsletter, “what
was known or when,” or who had access to the information.
Under the PSLRA, 15 U.S.C. § 78u-4(b)(1) provides:
20
In any private action arising under this chapter in which
the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in
order to make the statements made, in the light of
the circumstances in which they were made, not
misleading;
the complaint shall 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.
Rule 9(b), which applies to securities fraud claims,58 states that
“[i]n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity.”59
We have held that, pursuant to Rule 9(b), “articulating the
elements of fraud with particularity requires a plaintiff to
specify the statements contended to be fraudulent, identify the
speaker, state when and where the statements were made, and explain
why the statements were fraudulent,”60 which is, as we have stated
in dicta, “the same standard” required by the PSLRA under 15 U.S.C.
58
Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.
1997).
59
FED. R. CIV. P. 9(b)
60
Williams, 112 F.3d at 177; cf. Tuchman, 14 F.3d at 1067
(“In securities fraud suits, this heightened pleading standard
provides defendants with fair notice of the plaintiffs’ claims,
protects defendants from harm to their reputation and goodwill,
reduces the number of strike suits, and prevents plaintiffs from
filing baseless claims and then attempting to discover unknown
wrongs.”).
21
§ 78u-4(b)(1).61 Put another way, “[p]leading fraud with
particularity in this circuit requires ‘time, place and contents of
the false representations, as well as the identity of the person
making the misrepresentation and what [that person] obtained
thereby.’”62 We have thus noted that, although “the requirement for
particularity in pleading fraud does not lend itself to refinement,
and it need not in order to make sense,” nevertheless, “[d]irectly
put, the who, what, when, and where must be laid out before access
to the discovery process is granted.”63
Likewise, “the PSLRA also requires the plaintiff to identify
specifically the alleged misrepresentations and/or misleading
omissions” under 15 U.S.C. § 78u-4(b)(1).64 Synthesizing these
standards, we have observed that “[t]he effect of the PSLRA in this
respect is to, at a minimum, incorporate the standard for pleading
fraud under Fed. R. Civ. P. 9(b).”65 That is, section § 78u-4(b)(1)
“appears to comport with this Court’s relatively strict
interpretation of Rule 9(b), which requires a plaintiff ‘to specify
the statements contended to be fraudulent, identify the speaker,
61
See Nathenson, 267 F.3d at 410 n.9; Williams, 112 F.3d at
178.
62
Williams, 112 F.3d at 177 (quoting Tuchman, 14 F.3d at
1068).
63
Id. at 178.
64
Nathenson, 267 F.3d at 412.
65
Id.
22
state when and where the statements were made, and explain why the
statements were fraudulent.’”66 Additionally, the PSLRA
specifically provides in 15 U.S.C. § 78u-4(b)(1) as to pleading
allegations on information and belief that, “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.”67 If a complaint fails to meet the
pleading requirements of the PSLRA or Rule 9(b), the complaint must
be dismissed.68
To summarize, a plaintiff pleading a false or misleading
statement or omission as the basis for a section 10(b) and Rule
66
Id. (quoting Williams, 112 F.3d at 177).
67
Cf. United States ex rel. Thompson v. Columbia/HCA
Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997) (“At a minimum,
Rule 9(b) requires that a plaintiff set forth the ‘who, what, when,
where, and how’ of the alleged fraud. Williams v. WMX Tech., Inc.,
112 F.3d 175, 179 (5th Cir. 1997). Thompson argues, however, that
the pleading requirements of Rule 9(b) are relaxed where, as here,
the facts relating to the alleged fraud are peculiarly within the
perpetrator’s knowledge. Although we have held that fraud may be
pleaded on information and belief under such circumstances, we have
also warned that this exception ‘must not be mistaken for license
to base claims of fraud on speculation and conclusory allegations.’
See Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th
Cir. 1994). In addition, even where allegations are based on
information and belief, the complaint must set forth a factual
basis for such belief. Kowal v. MCI Communications Corp., 16 F.3d
1271, 1279 n.3 (D.C. Cir. 1994); Neubronner v. Milken, 6 F.3d 666,
672 (9th Cir. 1993).”).
68
15 U.S.C. § 78u-4(b)(3)(A); Nathenson, 267 F.3d at 412-13;
Keith v. Stoelting, Inc., 915 F.2d 996, 1000 (5th Cir. 1990) (per
curiam).
23
10b-5 securities fraud claim must, to avoid dismissal pursuant to
Rule 9(b) and 15 U.S.C. §§ 78u-4(b)(1) & 78u-4(b)(3)(A):
(1) specify the each statement alleged to have been
misleading, i.e., contended to be fraudulent;
(2) identify the speaker;
(3) state when and where the statement was made;
(4) plead with particularity the contents of the false
representations;
(5) plead with particularity what the person making the
misrepresentation obtained thereby; and
(6) explain the reason or reasons why the statement is
misleading, i.e., why the statement is fraudulent.
This is the “who, what, when, where, and how” required under Rule
9(b) in our securities fraud jurisprudence and under the PSLRA.
Additionally, under 15 U.S.C. § 78u-4(b)(1), for allegations made
on information and belief, the plaintiff must:
(7) state with particularity all facts on which that
belief is formed, i.e., set forth a factual basis
for such belief.
The dimensions of this last requirement—that, “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”—are a matter of first impression in
this circuit.
Plaintiffs argued for the first time at oral argument that the
complaint’s challenged allegations are not made on information and
belief but rather simply state facts and so the information and
belief pleading requirements of 15 U.S.C. § 78u-4(b)(1) do not
apply. Because it was not raised in the briefs, we need not
24
consider this argument.69 Nevertheless, this argument is without
merit because the allegations in the complaint are not based upon
Plaintiffs’ personal knowledge and are therefore necessarily
pleaded on “information and belief,” although not labeled as such.70
Turning, then, to the standard governing the information and
belief pleading requirements under section 78u-4(b)(1), we find
69
Comsat Corp. v. FCC, 250 F.3d 931, 936 n.5 (5th Cir. 2001).
70
See 5 Charles Alan Wright & Arthur R. Miller, Federal
Practice & Procedure Civil § 1224 at 205-06 (2d ed. 1990); cf.
Isquith for & on Behalf of Isquith v. Middle S. Utils., Inc., 847
F.2d 186, 194 (5th Cir. 1988) (“There is no question, since most of
the allegations in plaintiffs’ complaint are explicitly based on
‘information and belief’ and not personal knowledge, that the
complaint’s allegations do not meet Rule 56(e)’s stringent
standards.”). Other courts have reached the contrary conclusion,
holding, for instance, that “[t]he logical result of th[e]
proposition [that where plaintiffs do not have personal knowledge,
the complaint must be based on information and belief] would be
that a plaintiff would have to plead all his evidence in the
complaint.” In re Honeywell Int’l, Inc. Sec. Litig., 182 F. Supp.
2d 414, 426 (D.N.J. 2002); cf. Fla. State Bd. of Governors v. Green
Tree Fin. Corp., 270 F.3d 645, 668 (8th Cir. 2001). This is not
so, of course, outside the PSLRA and Rule 9(b) context, where a
plaintiff may simply plead the allegations on information and
belief without stating the facts on which the belief is founded,
but the special requirements of Rule 9(b) required even before the
enactment of the PSLRA that more be pleaded in the context of
securities fraud claims. See Thompson, 125 F.3d at 903; 5 Wright
& Miller, supra, § 1224 at 206; cf. Williams, 112 F.3d at 177-78.
However, even when the requirements of Rule 9(b) are combined with
the requirements of 15 U.S.C. § 78u-4(b)(1) under the PSLRA, the
plaintiff need not plead “all his evidence” related to a securities
fraud claim, as we hold herein. Cf. Williams, 112 F.3d at 178
(Rule 9(b) does “not reflect a subscription to fact pleading.”).
We also agree with those courts which have held that allegations
made on “investigation of counsel” are equivalent to those made on
“information and belief” for purposes of the heightened pleading
requirements under 15 U.S.C. § 78u-4(b)(1). E.g., In re Sec.
Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 885 n.33 (S.D. Tex.
2001).
25
persuasive the Second Circuit’s interpretation of these
requirements in Novak v. Kasaks.71 In Novak, “the complaint [did]
not state with particularity every fact upon which this belief was
based, since it [was] apparent that there were also personal
sources who were not specifically identified.”72 Novak held that
“plaintiffs who rely on confidential sources are not always
required to name those sources, even when they make allegations on
information and belief concerning false or misleading statements,
as here.”73 Novak rejected the contrary conclusion of a California
district court in In re Silicon Graphics, Inc. Securities
Litigation,74 which relied on dubious legislative history as support
for the proposition that “the PSLRA generally requires plaintiffs
to include the names of their confidential sources,” because the
Second Circuit noted, “the applicable provision of the law as
ultimately enacted requires plaintiffs to plead only facts and
makes no mention of the sources of these facts.”75 It then held:
71
216 F.3d 300 (2d Cir.), cert. denied, 531 U.S. 1012 (2000).
72
Id. at 313.
73
Id.
74
970 F. Supp. 746, 763-64 (N.D. Cal. 1997).
75
Novak, 216 F.3d at 313 (citing Silicon Graphics, 970 F.
Supp. at 763, and 15 U.S.C. § 78u-4(b)(1)); cf. Green Tree, 270
F.3d at 667-68 (“Whether pleading with particularity requires the
identification of the speaker whose words are relied on is not
apparent from the face of the statute. Some opponents of the
Reform Act argued in the House of Representatives that the House
version of the Reform Act would require pleading names of
26
More fundamentally, our reading of the PSLRA rejects
any notion that confidential sources must be named as a
general matter. In our view, notwithstanding the use of
the word “all,” paragraph (b)(1) does not require that
plaintiffs plead with particularity every single fact
upon which their beliefs concerning false or misleading
statements are based. Rather, plaintiffs need only plead
with particularity sufficient facts to support those
beliefs. Accordingly, where plaintiffs rely on
confidential personal sources but also on other facts,
they need not name their sources as long as the latter
facts provide an adequate basis for believing that the
defendants’ statements were false. Moreover, even if
personal sources must be identified, there is no
requirement that they be named, provided they are
described in the complaint with sufficient particularity
to support the probability that a person in the position
occupied by the source would possess the information
alleged. In both of these situations, the plaintiffs
will have pleaded enough facts to support their belief,
even though some arguably relevant facts have been left
out. Accordingly, a complaint can meet the new pleading
requirement imposed by paragraph (b)(1) by providing
documentary evidence and/or a sufficient general
description of the personal sources of the plaintiffs’
beliefs.76
Novak further observed in a footnote:
Paragraph (b)(1) is strangely drafted. Reading “all”
literally would produce illogical results that Congress
cannot have intended. Contrary to the clearly expressed
purpose of the PSLRA, it would allow complaints to
survive dismissal where “all” the facts supporting the
plaintiff’s information and belief were pled, but those
facts were patently insufficient to support that belief.
Equally peculiarly, it would require dismissal where the
confidential informants. See, e.g., 141 Cong. Rec. H2849 (March 8,
1995) (statement of Rep. Dingell). The Second Circuit sensibly
refused to give weight to these ‘hyperbolic statements of
legislators attempting (unsuccessfully) to amend the proposed act
to lighten plaintiffs’ pleading burden.’ Novak v. Kasaks, 216 F.3d
300, 313 (2d Cir.), cert. denied, 531 U.S. 1012, 121 S. Ct. 567,
148 L. Ed. 2d 486 (2000).”).
76
Novak, 216 F.3d at 313-14 (footnote omitted).
27
complaint pled facts fully sufficient to support a
convincing inference if any known facts were omitted.
Our reading of the provision focuses on whether the facts
alleged are sufficient to support a reasonable belief as
to the misleading nature of the statement or omission.77
The court concluded that “we find no requirement in existing law
that, in the ordinary course, complaints in securities fraud cases
must name confidential sources, and we see no reason to impose such
a requirement under the circumstances of this case,” noting that
the purpose of Rule 9(b) and the PSLRA “can be served without
requiring plaintiffs to name their confidential sources as long as
they supply sufficient specific facts to support their
allegations.”78 The court also observed that “[i]mposing a general
requirement of disclosure of confidential sources serves no
legitimate pleading purpose while it could deter informants from
providing critical information to investigators in meritorious
cases or invite retaliation against them.”79
The district court here relied upon the district court’s
analysis in Silicon Graphics, but we find the reasoning of that
case unpersuasive. As noted in Novak, the Silicon Graphics
district court’s reading of the PSLRA’s legislative history to
require pleading of confidential sources is fatally flawed.80
77
Id. at 314 n.1.
78
Id. at 314.
79
Id.
80
See id. at 313.
28
Moreover, as the Second Circuit aptly observed, contrary to the
Silicon Graphics conclusion, the language requiring that “the
complaint shall state with particularity all facts on which that
belief is formed” in 15 U.S.C. § 78u-4(b)(1) “requires plaintiffs
to plead only facts and makes no mention of the sources of these
facts.”81
We align this circuit with the Second Circuit and adopt the
reasoning and holding of Novak, rejecting the rule of Silicon
Graphics. Under the interpretation of section 78u-4(b)(1) we adopt
today, a plaintiff must “plead with particularity sufficient facts
to support” their allegations of false or misleading statements
made on information and belief.82 In determining whether this
requirement has been met we see no reason to embroider the multi-
step analysis of the Second Circuit and accept it as stated:
(1) if plaintiffs rely on confidential personal sources
and other facts, their sources need not be named in the
complaint so long as the other facts, i.e., documentary
evidence, provide an adequate basis for believing that
81
Id.
82
Id. at 313-14; see also In re Scholastic Corp. Sec. Litig.,
252 F.3d 63, 75 (2d Cir.), cert. denied sub nom., Scholastic Corp.
v. Truncellito, 122 S. Ct. 678 (2001); cf. United States ex rel.
Russell v. Epic Healthcare Mgmt. Group, 193 F.3d 304, 308 (5th Cir.
1999) (“We have held that when the facts relating to the alleged
fraud are peculiarly within the perpetrator’s knowledge, the Rule
9(b) standard is relaxed, and fraud may be pled on information and
belief, provided the plaintiff sets forth the factual basis for his
belief.”).
29
the defendants’ statements or omissions were false or
misleading;83
(2) if the other facts, i.e., documentary evidence, do
not provide an adequate basis for believing that the
defendants’ statements or omissions were false, the
complaint need not name the personal sources so long as
they are identified through general descriptions in the
complaint with sufficient particularity to support the
probability that a person in the position occupied by the
source as described would possess the information pleaded
to support the allegations of false or misleading
statements made on information and belief;
(3) if the other facts, i.e., documentary evidence, do
not provide an adequate basis for believing that the
defendants’ statements or omissions were false and the
descriptions of the personal sources are not sufficiently
particular to support the probability that a person in
the position occupied by the source would possess the
information pleaded to support the allegations of false
or misleading statements made on information and belief,
the complaint must name the personal sources.
Accordingly, in some circumstances, pleading allegations on
information and belief sufficient to satisfy 15 U.S.C. § 78u-
4(b)(1) may require the naming of confidential sources. However,
this interpretation of the requirements of section 78u-4(b)(1)
avoids a general requirement of naming confidential sources which
may, as Plaintiffs here argue and as Novak found, make impossible
the adequate pleading of meritorious securities fraud cases in
circumstances in which informants do not wish to be exposed too
early but in which the PSLRA’s stay of discovery under 15 U.S.C. §
78u-4(b)(3)(B) prevents the acquisition of other sources for
83
As this rule demonstrates, Plaintiffs are incorrect that
allegations relying on documentary evidence are necessarily not
pleaded on information and belief—rather, documentary evidence may
be pleaded as the source or factual basis for the plaintiff’s
belief underlying his allegations.
30
allegations which the plaintiffs have no choice but to make on
information and belief.
The PSLRA was enacted, in part, to compensate for “the
perceived inability of Rule 9(b) to prevent abusive, frivolous
strike suits.”84 It was not enacted to raise the pleading burdens
under Rule 9(b) and section 78u-4(b)(1) to such a level that
facially valid claims, which are not brought for nuisance value or
as leverage to obtain a favorable or inflated settlement, must be
routinely dismissed on Rule 9(b) and 12(b)(6) motions.85 As one
district court in this circuit has recently noted, “the plaintiffs
need not allege ‘all’ facts that may be ‘related’ to their claims,”
since “[s]uch a requirement is impossible at the pleading stage
because, in nearly every securities fraud case, only the defendants
84
Nathenson, 267 F.3d at 407; cf. In re BankAmerica Corp.
Sec. Litig., 263 F.3d 795, 800 n.2 (8th Cir. 2001) (“A ‘strike
suit’ is defined as ‘[a] suit (esp. a derivative action) often
based on no valid claim, brought either for nuisance value or as
leverage to obtain a favorable or inflated settlement.’ (quoting
Black’s Law Dictionary 1448 (7th ed. 1999))), cert. denied sub
nom., Desmond v. BankAmerica Corp., 122 S. Ct. 1437 (2002). Other
circuits are in agreement as to this proposition. See City of
Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir.
2001); BankAmerica, 263 F.3d at 800; Helwig v. Vencor, Inc., 251
F.3d 540, 547 (6th Cir. 2001); Lander v. Hartford Life & Annuity
Ins. Co., 251 F.3d 101, 107 (2d Cir. 2000); Novak, 216 F.3d at 306;
Greebel v. FTP Software, Inc., 194 F.3d 185, 191 (1st Cir. 1999).
85
Cf. In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d
574, 595 (D.N.J. 2001) (observing that the Novak standard comports
with “the PSLRA’s goal of flushing out suits which are built on
mere speculation and conclusory allegations and which aim to use
discovery as a fishing expedition to substantiate frivolous
claims”).
31
know ‘all’ the facts related to the alleged fraud.”86 In this
sense, “[t]he PSLRA may have changed federal securities law; it did
not eliminate it.”87
To the extent, then, that the district court dismissed the
allegations in the complaint for failure to adhere to a strict per
se rule requiring the pleading of the names of confidential
sources, Plaintiffs are correct that the standard applied by the
district court was too onerous. However, we turn to the
application of the Novak standard, considering each allegation for
its particularization of fraud in compliance with the requirements
of Rule 9(b) and section 78u-4(b)(1).88
Neither the district court nor Alcatel contend that the
pleading of the so-called Group Services Report89—an Alcatel
86
In re NetSolve, Inc. Sec. Litig., 185 F. Supp. 2d 684, 696
n.10 (W.D. Tex. 2001).
87
Id.
88
See Williams, 112 F.3d at 178.
89
The Group Services Report is provided as the source for
Plaintiffs’ allegations regarding the intentional overstatement of
Alcatel SEL’s 1997 results by at least 125 million French francs
and an October 23, 1998 conversation between the former head of
Alcatel SEL’s Business Systems Division with Dr. Gottfried Dutine,
the chairman of the Managing Board of Alcatel SEL, regarding the
fact that “cost of several hundred contracts were not booked in
1997,” in which conversation was mentioned the word “fraud.”
Complaint at 2 ¶ 4, 13-14 ¶¶ 28-29, 22 ¶ 50. It is also provided
as the source for the allegations of the total state of disarray at
Alcatel SEL due to a pervasive lack of internal controls and of the
“obvious” deteriorating trend in Alcatel order intake and margins
by February 1998. Id. at 2 ¶ 4, 14 ¶¶ 30-31, 15 ¶ 32, 15 ¶ 34.
32
internal report prepared by Alcatel’s Group Audit Services
department and dated November 12, 1998 which quotes extensively
from a report authored by Arthur Andersen—or an article in
Stuttgarter Zeitung on October 14, 199890 was insufficient to
support the complaint’s corresponding allegations on information
and belief, and with good reason: Plaintiffs provided a date for
the Stuttgarter Zeitung article, which is available to the general
public, and Alcatel itself appended the Group Services Report as a
document supporting its motion to dismiss. As such, this
documentary evidence provides an adequate basis for believing that
Alcatel’s corresponding statements and omissions were false or
misleading.
Alcatel argues, however, that the complaint, outside of its
allegations based on the Group Services Report and the Stuttgarter
Zeitung article, fails to meet the pleading requirements of section
78u-4(b)(1) even under the Novak standard. Alcatel contends that
Plaintiffs failed to link the source of each allegation of falsity
to the allegation itself so as to allow the court to evaluate the
reliability of the allegations to determine whether an inference of
fraud may fairly be drawn.
90
The complaint cites this article as stating that during the
first six months of 1998, Alcatel SEL had “slipped into losses due
to the operating results of one of its holdings with a deficit of
DM 28.4 million,” whereas “[i]n the previous year a profit of DM
104.4 million had been achieved.” Id. at 16 ¶ 35.
33
Alcatel further argues, with regard to the allegations relying
on documentary evidence rather than personal sources, that by Novak
the sufficiently particular facts necessary to support an
allegation on information and belief must include identification of
the source of Plaintiffs’ knowledge of the documentary evidence
offered as the basis for the belief. Alcatel, as the district
court did, relies on the district court’s decision in Coates v.
Heartland Wireless Communications, Inc.91 Coates followed Silicon
Graphics, holding that “plaintiffs must provide more details about
the alleged negative internal reports, such as report titles, when
they were prepared, who prepared them, to whom they were directed,
their content, and the sources from which plaintiffs obtained this
information.”92 We decline to adopt this standard as a threshold
requirement in every case. At the same time, we do not disagree
with the Second Circuit’s statement in San Leandro Emergency
91
26 F. Supp. 2d 910 (N.D. Tex. 1998).
92
Id. at 921; see also In re Silicon Graphics Inc. Sec.
Litig., 183 F.3d 970, 985 (9th Cir. 1999) (“It is not sufficient
for a plaintiff’s pleadings to set forth a belief that certain
unspecified sources will reveal, after appropriate discovery, facts
that will validate her claim. In this case, Brody’s complaint does
not include adequate corroborating details. She does not mention,
for instance, the sources of her information with respect to the
reports, how she learned of the reports, who drafted them, or which
officers received them. Nor does she include an adequate
description of their contents.... We would expect that a proper
complaint which purports to rely on the existence of internal
reports would contain at least some specifics from those reports as
well as such facts as may indicate their reliability.”).
34
Medical Group Profit Sharing Plan v. Philip Morris Cos., Inc.,93
that an “unsupported general claim of the existence of confidential
company sales reports that revealed the larger decline in sales is
insufficient to survive a motion to dismiss.”94
Nevertheless, we find more helpful the Second Circuit’s post-
Novak decision in In re Scholastic Corp. Securities Litigation.95
Scholastic explained that San Leandro required that “a plaintiff
needs to specify the internal reports, who prepared them and when,
how firm the numbers were or which company officers reviewed them”
and that the Scholastic plaintiffs “satisfied this standard by
specifying who prepared internal company reports, how frequently
the reports were prepared and who reviewed them.”96 This is a
sensible standard, because “[e]ven with the heightened pleading
standard under Rule 9(b) and the Securities Reform Act we do not
require the pleading of detailed evidentiary matter in securities
litigation.”97
Here, the complaint alleges that, in an October 22, 1998
internal Alcatel newsletter entitled “Kom-Aktuell,” Dr. Gottfried
93
75 F.3d 801 (2d Cir. 1996).
94
Id. at 812.
95
252 F.3d 63 (2d Cir.), cert. denied sub nom., Scholastic
Corp. v. Truncellito, 122 S. Ct. 678 (2001).
96
Id. at 72, 73.
97
Id. at 72.
35
Dutine, Chairman of the Alcatel SEL Managing Board, confirmed that
the significant problems at Alcatel SEL were known as of the middle
of 1998.98 The complaint also offers the MMRs as the source for
defendants’ awareness by June 1998 that Alcatel SEL had experienced
a dramatic decline in its profitability and was losing money and
that this decline was continuing.99 The complaint further alleges,
without specifically citing a source, that in July 1998 “a top
executive of Alcatel SEL flew to Paris and reported the losses [of
60 million DM (or approximately 240 million French francs) for the
year-to-date] directly to Jacques Dunoge, Executive Vise President,
Alcatel’s Director of Marketing and Business Development, and one
of the members of Alcatel’s Telecom Executive Committee” and that
this executive lacked confidence in the accountants at Alcatel SEL
and asked Dunoge to send auditors to Alcatel SEL from Alcatel’s
headquarters.100 The complaint also alleges without citing a source
that the losses at Alcatel SEL continued to grow and by August 1998
the year-to-date losses had grown to 100 million DM (approximately
400 million French francs), which was reported to Alcatel, Halbron,
98
Complaint at 16 ¶ 37.
99
Id. at 15 ¶ 33, 16 ¶ 36, 28 ¶ 65; see also id. at 4 ¶ 5,
6 ¶ 12, 7 ¶ 13, 7 ¶ 15.
100
Id. at 16 ¶ 37; see also id. at 2 ¶ 4 (“In July 1998, a
high ranking Alcatel SEL official personally informed a member of
this committee that: (i) Alcatel’s German subsidiary was
experiencing significant losses; (ii) these losses had reached
approximately 240 million French francs year-to-date....”).
36
and Tchuruk through regular reports from Alcatel SEL.101 The
allegations regarding the postponement of a contract for services
to Borneo, the cancellation or loss of the Thailand contract and
the two Spanish telephone company contracts, and the lower sales to
Swiss Telecom and reduced business with Deutsche Telecom, as well
as the defendants’ awareness of these facts, are likewise not
accompanied by citation to any specific sources.102 Plaintiffs
admit that the only source of these allegations regarding the lost
or postponed contracts and reduced sales and business is the
paragraph entitled “Basis of Allegations,” which generally states:
Plaintiffs have alleged the foregoing based upon the
investigation of its counsel, which included, among other
things, a review of Alcatel’s SEC filings, securities
analysts’ reports, and advisories about the Company,
press releases issued by the Company, media reports
regarding Alcatel, internal Alcatel documents, and
consultations and interviews with various entities and
individuals including employees of Deutsche Telecom and
other Alcatel customers throughout the world, German,
French, Swiss, Thai, and Indonesian business journalists,
former employees of Alcatel, trade union officials, and
Telecom analysts. Plaintiffs believe that substantial
evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for
discovery.103
101
Id. at 17 ¶ 38; see also id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27,
37 ¶ 92(b).
102
Id. at 11 ¶ 24, 17-18 ¶¶ 39-43.
103
Id. at 40 ¶ 101; see also id. at 1 (“Plaintiffs,
individually and on behalf of all other persons similarly situated,
by their undersigned counsel, allege upon personal knowledge as to
their own acts and upon an investigation undertaken by plaintiffs’
counsel, which included, among other things, a review of the press
releases issued by defendants, Alcatel SA’s (‘Alcatel’ or the
‘Company’) filings with the Securities and Exchange Commission
37
Looking to each pleaded source or unsupported allegation in
turn, we first conclude that, under the first step of the Novak
analysis, the allegations based on the “Kom-Aktuell” newsletter are
pleaded with sufficient particularity to obviate the need for
identifying personal sources as the basis for the allegations that
the significant problems at Alcatel SEL were known as of the middle
of 1998. The complaint provides the name of this documentary
evidence, its date, and the name and position of the person who
made the statement quoted, whom, by virtue of his position, would
possess the information pleaded, and so provides an adequate basis
for believing that Alcatel’s statements and omissions, in light of
its knowledge in the middle of 1998 of the significant problems at
Alcatel SEL, were false or misleading.
Likewise, the MMRs are sufficiently identified to stand as
other facts that provide an adequate basis for Plaintiffs’ belief
that Alcatel’s statements and omissions were false or misleading
due to Alcatel’s awareness by June 1998 that Alcatel SEL had
experienced a dramatic decline in its profitability and was losing
money and that this decline was continuing. The complaint
identifies the MMRs as being prepared monthly by each subsidiary’s
(‘SEC’), securities analysts’ reports about the Company, media
reports regarding Alcatel, internal Alcatel documents, and
consultations and interviews with various entities and individuals
including employees of Deutsche Telecom and other Alcatel customers
throughout the world, German, French, Swiss, Thai, and Indonesian
business journalists, former employees of Alcatel, trade union
officials, and Telecom analysts.”).
38
controller’s office and transmitted to Halbron and Tchuruk at the
beginning of each month to convey information about the Telecom
sector at each subsidiary by comparing actual results to budgeted
numbers. This pleading satisfies the Scholastic standard.
Likewise, the allegations concerning the conversation between
“a high ranking Alcatel SEL official” who was “a top executive of
Alcatel SEL” and Dunoge are pleaded with sufficient particularity
to meet the Novak standard for pleadings on information and belief.
This executive, and his conversation with Dunoge, is described with
sufficient particularity to support the probability that a person
in such a position would possess the information pleaded and that,
to the extent it is necessary, construing the allegations in the
light most favorable to Plaintiffs, this executive was himself
Plaintiffs’ source for this information.104
104
See Campbell Soup, 145 F. Supp. 2d at 595-96 (“Moreover,
in addition to the numerous documents cited, the Amended Complaint
specifies discussions, phone conversations, and memoranda
addressing the basis of Plaintiffs’ factual allegations and
identifies numerous individuals who participated in those
communications, as well as their positions in the Company. This
specificity strongly suggests that Plaintiffs, without the benefit
of discovery, have adequately investigated and substantiated their
allegations and, as a result, have allayed the PSLRA’s concerns
about frivolous and abusive fraud suits.”); cf. Kowal v. MCI
Communications Corp., 16 F.3d 1271, 1278, 1279 n.3 (D.C. Cir. 1994)
(holding that the Rule 12(b)(6) construed-in-the-light-most-
favorable standard applies even to the review of dismissals under
Rule 9(b), although pleadings of fraud on information and belief
“must also be accompanied by a statement of the facts upon which
the allegations are based”).
39
However, no citation to documentary evidence or personal
sources, named or simply identified with a general description, is
provided for the further allegation that, by August 1998, Alcatel
SEL’s losses had increased to approximately 400 million French
francs year-to-date, other than unidentified “regular reports from
Alcatel SEL” to Alcatel, Halbron, and Tchuruk. Any such “regular
reports” are insufficiently identified as to who prepared them and
how frequently they were prepared. Moreover, Plaintiffs may not
avail themselves of reliance on an inferred allegation of a
personal source because the top Alcatel SEL executive clearly did
not convey this information regarding losses through August 1998 to
Dunoge in a July 1998 conversation. The complaint therefore does
not provide an adequate basis for believing that Alcatel’s
statements and omissions were false or misleading based on this
allegation.
Additionally, no source is provided, documentary or personal,
for the allegation that Tchuruk and Halbron caused Alcatel to
materially understate its provision of losses associated with work
in progress on contracts in Thailand, Malaysia, Indonesia, and the
Philippines by at least 200 million French francs, which allegedly
rendered false or misleading Alcatel’s statements in its 1997
annual report regarding the adequacy of its reserves set aside for
the Asian financial crisis. Likewise, in support of the
allegations of lost or postponed contracts in Europe and Southeast
Asia and reduced sales and business with Deutsche Telecom and Swiss
40
Telecom, no other facts are alleged to provide an adequate basis
for believing that Alcatel’s statements and omissions were false or
misleading on the basis of this information. Rather, Plaintiffs
rely on their general allegation of consultations and interviews
with “Swiss, Thai, and Indonesian business journalists,” “employees
of Deutsche Telecom and other Alcatel customers throughout the
world,” “trade union officials, and Telecom analysts” in the course
of the investigation of counsel as the source of these allegations.
Under the Novak standard, however, unlike the allegations based on
the conversation between the top Alcatel SEL executive and Dunoge,
these personal sources are not identified with sufficient
particularity to support the probability that a person in the
position occupied by the source as described would possess the
information pleaded to support the allegations of false or
misleading statements made on information and belief.105
Accordingly, we conclude that Plaintiffs’ allegations relying
on the Group Services Report, the Stuttgarter Zeitung article, the
MMRs, and the “Kom-Aktuell” newsletter, as well as the allegations
based on a July 1998 conversation between a top Alcatel executive
and Dunoge, survive dismissal under section 78u-4(b)(1) of the
PSLRA. However, the district court correctly concluded that the
allegations of lost or postponed contracts and reduced sales and
105
Compare In re McKesson HBOC, Inc. Sec. Litig., 126 F.
Supp. 2d 1248, 1254-57 (N.D. Cal. 2000).
41
business, as well as the allegations that, by August 1998, Alcatel
SEL’s losses had increased to approximately 400 million French
francs year-to-date and that Alcatel understated its provision of
losses associated with work in progress on contracts in Thailand,
Malaysia, Indonesia, and the Philippines by at least 200 million
French francs do not meet the Novak standard for adequately pleaded
allegations on information and belief under section 78u-4(b)(1).
B.
Plaintiffs’ complaint must also adequately plead materiality,
on which score Alcatel contends Plaintiffs’ claims fail. We have
recently explained that “[m]ateriality is determined by evaluating
whether there is ‘[a] substantial likelihood that’ the false or
misleading statement ‘would have been viewed by the reasonable
investor as having altered the ‘total mix’ of information made
available.’”106 Put another way, “[a] statement or omitted fact is
‘material’ if there is a substantial likelihood that a reasonable
investor would consider the information important in making a
decision to invest.”107
At the same time, “projections of future performance not
worded as guarantees are generally not actionable under the federal
106
Nathenson, 267 F.3d at 418 (quoting Basic Inc. v.
Levinson, 485 U.S. 224, 231-32 (1988)).
107
R&W Technical Servs. Ltd. v. Commodity Futures Trading
Comm’n, 205 F.3d 165, 169 (5th Cir.), cert. denied, 531 U.S. 817
(2000).
42
securities laws” as a matter of law.108 Additionally, “it is well-
established that generalized positive statements about a company’s
progress are not a basis for liability.”109 As such, “[s]tatements
that are predictive in nature are actionable only if they were
false when made.”110 However, “the materiality of predictions is
analyzed on a case-by-case basis.”111
Plaintiffs argue that it is improper for a court deciding a
Rule 12(b)(6) motion to dismiss a complaint on the basis of
materiality. We cannot agree with this assertion, so broadly cast.
It is well-established that, “[b]ecause materiality is a mixed
question of law and fact, it is usually left for the jury.”112 At
the same time, as we have recently affirmed, a court can determine
statements to be immaterial as a matter of law on a motion to
dismiss.113
108
Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th
Cir. 1993).
109
Nathenson, 267 F.3d at 419.
110
Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.
1993).
111
Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 547 (5th
Cir. 2001).
112
United States v. Peterson, 101 F.3d 375, 380 (5th Cir.
1996) (citing, inter alia, TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 450 (1976)).
113
See Nathenson, 267 F.3d at 422; see also Shushany, 992
F.2d at 521-25.
43
We turn to consider whether the complaint adequately alleges
materially false or misleading statements and omissions in the June
8 newspaper articles, Alcatel’s July 28 press release, Alcatel’s
1997 annual report, and Alcatel’s merger registration statement,
specifically the certification that Alcatel had not experienced or
was not likely to experience a “Material Adverse Effect,” on the
basis of Plaintiffs’ surviving allegations, to wit: (1) Alcatel’s
intentional overstatement of its financial results for 1997 by at
least 125 million French francs in violation of GAAP due to
accounting problems at Alcatel SEL and (2) the obvious
deteriorating trend in Alcatel SEL’s orders and margins and its
losses of approximately 240 million French francs year-to-date in
July 1998.114
First, the allegations of overstated financials. We need not
venture into whether Alcatel’s alleged overstatement of 125
millions French francs in its 1997 financial results, while a large
absolute sum, is nonetheless insufficient as a matter of law to
materially affect Alcatel on a consolidated basis. The
overstatements alleged in the complaint on the basis of the Group
Services Report concern only Alcatel’s German subsidiary, Alcatel
114
We initially reject Alcatel’s argument that quoted
statements by Tchuruk in a newspaper article are per se not
actionable under section 10(b)/Rule 10b-5. The statements
Plaintiffs cite are directly attributed to Tchuruk and may
therefore form the basis for a securities fraud claim. Compare
Williams, 112 F.3d at 179-80.
44
SEL, from which Plaintiffs seek to infer through conclusory
assertions that Alcatel’s financials on a consolidated basis were
overstated by 125 million French francs. We have previously
rejected similar allegations as insufficiently pleaded under Rule
9(b) in Shushany v. Allwaste, Inc.:115
We find the deficiencies in the complaint
particularly troubling because the alleged fraudulent
acts occurred at AAA, an Allwaste subsidiary. Although
it is foreseeable that misstatements in AAA’s ledgers
could materially skew the accuracy of Allwaste’s
financial reports, such an inference standing alone is
obviously insufficient to support a securities fraud
claim against Allwaste and Nelson. The complaint
provides only conclusory allegations to support any
connection between the alleged fraudulent accounting
practices at AAA and Allwaste’s financial reports, which
do not satisfy the requirements of Rule 9(b).116
We are persuaded that Plaintiffs failed to allege material
misstatements or omissions in Alcatel’s statements in June and July
1998 projecting “continued double-digit growth both in sales and
orders for the full year” 1998 and the potential for sales growth
of 10 to 20 percent per year or its annual report and merger
registration statement on the basis of the alleged overstatements
in Alcatel’s 1997 financial results.
As for the failure to disclose Alcatel SEL’s alleged
operational problems and losses of 240 million French francs,
Plaintiffs have failed to plead why Alcatel’s awareness of these
losses and problems renders Alcatel’s growth predictions for
115
992 F.2d 517 (5th Cir. 1993).
116
Id. at 523-24 (footnote omitted).
45
Alcatel’s business on a consolidated basis false when made. We
have recently observed that “ordinarily a reasonable investor may
deem a significant decrease in projected income material to its
decision to invest in an entity.”117 However, Plaintiffs do not
plead the existence of any internal projections at Alcatel of
reduced sales and order growth or income produced between June and
September 1998 that would undermine the reasonableness of Alcatel’s
announced growth predictions in June and July 1998. Indeed, the
September 17, 1998 press release projected order and sales growth
of 10 percent for the full year 1998, in line with the range
predicted in Alcatel’s June and July 1998 public statements.
Moreover, Plaintiffs do not plead that these June and July 1998
growth predictions did not account for known problems and losses at
Alcatel SEL. Consequently, there is no substantial likelihood that
a reasonable investor would consider the omission of information
about alleged problems and losses at Alcatel SEL to have
significantly altered the total mix of information about investing
in Alcatel SA, not simply Alcatel SEL, such that these alleged
omissions regarding Alcatel SEL were immaterial as a matter of
law.118
117
Mercury Air, 237 F.3d at 547.
118
This conclusion applies equally to the allegations that
Alcatel’s certification that it had not experienced and was not
likely to experience a “Material Adverse Effect” and Alcatel’s
statement that it had created adequate reserves to provide for the
Asian financial crisis were false or misleading on the basis of
problems and losses at Alcatel SEL.
46
At oral argument, Plaintiffs urged the court to apply common
sense in conducting its materiality analysis.119 This is an
appropriate suggestion, and we note in particular that the
complaint alleges that the market reacted severely to Alcatel’s
September 17 announcement that Alcatel’s “Telecom segment’s income
from operations, while growing over 1997, will be adversely
impacted by the sharp investment cuts recently decided by some
traditional operators and the deepening of the Southeast Asian and
Russian crisis” and that, as a result, “[a]fter reviewing the
accounts and the currently available forecasts, Alcatel anticipates
that 1998 will not meet expectations in regards to the Group’s
operating performance.” Plaintiffs’ best argument, then, may be
that the complaint alleges that Alcatel SEL’s problems and losses
and the 1997 financial overstatements contributed to this announced
failure to meet expectations and so there is a substantial
likelihood that a reasonable investor would consider the omission
of this information to have significantly altered the total mix of
information about Alcatel, as revealed by the sharp decline in
Alcatel’s share price following the September 17 announcement.
The Third Circuit has recently held, applying a rule it
developed in In re Burlington Coat Factory Securities Litigation,120
119
See Peterson, 101 F.3d at 380 (“We believe that common
sense alone suggests that the Duenas lawsuit was highly significant
information which would have likely altered the ‘’total mix’ of
information.’” (quoting Basic, 485 U.S. at 232)).
120
114 F.3d 1410 (3d Cir. 1997).
47
that, “when a stock is traded in an efficient market, the
materiality of disclosed information may be measured post hoc by
looking to the movement, in the period immediately following
disclosure, of the price of the firm’s stock.”121 We, in turn,
recently approved of the Burlington decision’s “requirement, in
cases depending on the fraud-on-the-market theory, that the
complained of misrepresentation or omission have actually affected
the market price of the stock,” although “we conclude[d] that it is
more appropriate in such cases to relate this requirement to
reliance rather than to materiality.”122 However, even if we were
to apply this efficient market theory rule to materiality, as the
Third Circuit has, Plaintiffs’ allegations of materially false or
misleading statements and omissions would not be saved. Alcatel
did not disclose the alleged financial overstatements or problems
and losses at Alcatel SEL in its September 17 statement, or any
alleged public statement thereafter, and so the sharp price decline
of Alcatel ADSs’ share price does not support the sufficiency of
the allegation of the materiality of this alleged omitted
information.
121
Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000).
122
Nathenson, 267 F.3d at 415. We also agreed with
Burlington that, “although there is generally a presumption that
potentially significant publicly disseminated information is
reflected in the price of stock traded on an efficient market, the
presumption is rebuttable.” Id.
48
Accordingly, we conclude that, even as to those allegations in
the complaint that survive dismissal under the PSLRA’s pleading
requirements, Plaintiffs have failed to allege materially false or
misleading statements and omissions sufficient to state securities
fraud claims under section 10(b) and Rule 10b-5 upon which relief
can be granted. We need not, therefore, address Alcatel’s
arguments regarding the complaint’s deficiencies with regard to
scienter or loss causation.123
IV.
Plaintiffs alternatively argue that the district court erred
in dismissing their complaint with prejudice and should have
granted them leave to replead. They note that they offered to
provide the names of the confidential informants to the district
court in camera, which offer the district court did not accept, and
that the district court did not hold a hearing on Alcatel’s second
motion to dismiss.124
A district court’s denial of leave to amend the complaint is
reviewed only for abuse of discretion.125 We find no abuse of
discretion here. The district court noted in support of its
123
Plaintiffs’ section 20(a) control-person liability claims
against Tchuruk and Halbron were also properly dismissed based on
Plaintiffs’ failure to plead predicate securities fraud claims
under section 10(b) and Rule 10b-5 against Alcatel upon which
relief can be granted. See Lovelace, 78 F.3d at 1021 n.8.
124
The district court did hold a hearing on Alcatel’s motion
to dismiss Plaintiffs’ First Consolidated Amended Complaint.
125
Lewis v. Fresne, 252 F.3d 352, 356 (5th Cir. 2001).
49
decision that it had given Plaintiffs almost two years to
investigate and substantiate their claims. Moreover, when
dismissing Plaintiffs’s First Consolidated Amended Complaint, the
court offered Plaintiffs a chance to replead in order to provide
more details about why Alcatel’s statements and omissions were
false or misleading, to sufficiently plead that Alcatel knew they
were false when made, and to identify the sources of their
allegations pleaded on information and belief. Having offered
Plaintiffs this second chance, it was not an abuse of discretion to
deny them a third chance to offer more details, either in camera or
in an amended complaint.126
V.
For the foregoing reasons, the district court’s judgment
dismissing Plaintiffs’ complaint is AFFIRMED.
126
Cf. Southmark Corp. v. Schulte Roth & Zabel (In re
Southmark Corp.), 88 F.3d 311, 316 (5th Cir. 1996) (noting that “we
have indicated that, in exercising its discretion to deny leave to
amend a complaint, a trial court may properly consider ... whether
the facts underlying the amended complaint were known to the party
when the original complaint was filed”).
50