08-0612-cv
In re: Omnicom Group, Inc. Securities Litigation
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 August Term, 2008
4 (Argued: May 5, 2009 Decided: March 9, 2010)
5 Docket No. 08-0612-cv
6 - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
7 IN RE: OMNICOM GROUP, INC. SECURITIES LITIGATION
8
9 NEW ORLEANS EMPLOYEES’ RETIREMENT SYSTEM,
10
11 Plaintiff-Appellant,
12
13 PHILIP SZANTO, DR. JOSEPH S. FISHER, M.D. PROFIT SHARING PLAN, on
14 behalf of itself and all others similarly situated, DIANEE GLYNN,
15 on behalf of herself and all others similarly situated, RICHARD
16 LEHAN, PETER “PETER KIM”, EDWARD KAIMINSKI, SUSAN BLACK, MATT
17 BRODY, AMY HOFFMAN, ROBERT E. GARREN, and ALAN MIRKEN,
18
19 Consolidated-Plaintiffs,
20
21 v.
22
23 OMNICOM GROUP, INC., JOHN WREN and RANDALL J. WEISENBURGER, BRUCE
24 CRAWFORD and PHILIP J. ANGELASTRO,
25
26 Consolidated-Defendants-Appellees.
27
28 - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
29
30 B e f o r e: FEINBERG, WINTER, and CABRANES, Circuit Judges.
31
32 Appeal from an order of the United States District Court for
33 the Southern District of New York (William H. Pauley III, Judge)
34 granting defendants’ motion for summary judgment. The district
35 court held that defendants were entitled to summary judgment on
36 plaintiffs’ claims under Section 10(b) of the Securities Exchange
37 Act of 1934 and Rule 10b-5 because plaintiffs failed to show loss
1
1 causation. We affirm.
2 JOHN P. COFFEY, Bernstein Litowitz
3 Berger & Grossmann LLP, New York,
4 New York, for Plaintiff-Appellant
5 and the Certified Class.
6
7 PETER A. WALD (Jeff G. Hammel,
8 Latham & Watkins LLP, New York, New
9 York; Janey Mallow Link, Latham &
10 Watkins LLP, Chicago, Illinois, of
11 counsel; Abid R. Qureshi, Latham &
12 Watkins LLP, Washington, D.C., of
13 counsel, on the brief) Latham &
14 Watkins LLP, New York, New York,
15 for Defendants-Appellees.
16
17
18 WINTER, Circuit Judge:
19
20 The New Orleans Employees’ Retirement System, the lead
21 plaintiff in this class action, appeals from Judge Pauley’s grant
22 of summary judgment dismissing its complaint alleging securities
23 fraud in violation of Section 10(b), 15 U.S.C. § 78j(b), against
24 Omnicom Group, Inc. and its managers. The district court held
25 that appellant proffered no evidence sufficient to support a
26 finding of loss causation.
27 For the reasons set forth below, we affirm.
28 BACKGROUND
29 Given the procedural posture of this matter, an appeal from
30 a grant of summary judgment dismissing a complaint, “we construe
31 the evidence in the light most favorable to the plaintiff,
32 drawing all reasonable inferences and resolving all ambiguities
33 in [its] favor.” Colavito v. N.Y. Organ Donor Network, Inc., 438
34 F.3d 214, 217 (2d Cir. 2006).
35 a) The Seneca Transaction
2
1 Omnicom is a large global marketing and advertising holding
2 company. Around 1996, Omnicom began using its subsidiary,
3 Communicade, to invest in internet marketing and advertising
4 companies. The value of the internet companies began to decline
5 in 2000. Omnicom determined that these losses were not “other-
6 than-temporary impairment[s],” and thus non-reportable, a
7 position that was reviewed without exception by Arthur Andersen.
8 During the first quarter of 2001, Omnicom entered into a
9 transaction with Pegasus Partners II, L.P., a Delaware private
10 equity firm, that created a new company, Seneca, owned by both
11 Omnicom and Pegasus. In a press release, Omnicom and Pegasus
12 stated that the objective of the Seneca transaction was to
13 “maximize consolidation and other strategic opportunities among
14 companies in the currently depressed e-services consulting and
15 professional services marketplace.” The Seneca transaction
16 involved Omnicom’s transfer to Seneca of $47.5 million in cash
17 and its Communicade subsidiary, whose sole assets were the
18 internet companies, and Pegasus’s promise to transfer a total of
19 $25 million in cash, $12.5 million up front and $12.5 million
20 when Seneca requested it. Omnicom received $325 million in
21 Seneca’s non-voting preferred stock, while Pegasus received all
22 of Seneca’s common stock. Omnicom reported that it would incur
23 no gain or loss from this transaction because it was exchanging
24 the internet companies, purported to be worth $277.5 million, and
25 $47.5 million in cash for preferred stock of equivalent value.
26 Appellant alleges that the accounting for the Seneca
3
1 transaction was fraudulent, a claim we assume to be true, albeit
2 one that is disputed. While Omnicom’s auditors, it is claimed,
3 viewed Pegasus’s willingness to invest $25 million in Seneca as
4 support for Omnicom’s valuation of the internet companies at
5 $277.5 million, there is evidence that, despite the
6 representations that Pegasus would immediately transfer $12.5
7 million to Seneca, it instead transferred only $100 to Seneca,
8 while transferring the $12.5 million to a Pegasus holding
9 company. Appellant argues that this fact, which was not
10 disclosed to the market in any of the news articles that
11 appellant relies on, raises doubts about Omnicom’s valuation of
12 the assets transferred to Seneca.
13 Appellant also claims that Omnicom misrepresented the value
14 of its Seneca stock to its auditors at the end of 2001. To
15 conceal the decline in the value of Seneca’s assets, Omnicom is
16 said to have arranged for Seneca, rather than Omnicom, to buy a
17 technology license from Live Technology Holdings, Inc., one of
18 Seneca’s investee companies. Seneca would then sell the license
19 to Omnicom for $75 million. The $75 million would nearly offset
20 Seneca’s yearly losses.
21 b) Publicly Available Information About the Seneca Transaction
22 Several news articles at or near the time reported the
23 Seneca transaction and suggested that it was an attempt to move
24 the internet companies, whose value was deteriorating, off
4
1 Omnicom’s books.1 Indeed, observers expressed these views well
2 into 2002.2 However, Omnicom’s stock never experienced any
3 statistically significant drop in value at or near the time of
4 these news reports.
5 On June 5, 2002, Omnicom filed a Form 8-K disclosing that
6 Robert Callander, an outside director and Chair of Omnicom’s
7 Audit Committee, had resigned from its board of directors on May
8 22, 2002. Although the Form 8-K did not disclose the reason for
9 Callander’s resignation, appellant argues that it was because of
10 Callander’s concern over the accounting of the Seneca
11 transaction. Appellant relies on Callander’s request for a
12 review of the Seneca transaction by a separate accounting firm,
13 his handwritten notes on a copy of Omnicom’s 2001 Form 10-K, his
14 request for Seneca’s financial statements, questions he asked
1
On May 7, 2001, Advertising Age published an article stating that the
Seneca transaction “was seen by some as a way for Omnicom to get struggling
stocks off of its books.” Debra Aho Williamson, The Fairy Tale Ends;
Interactive 100 Stumbles After Dot-Com Business Blows Away, Advertising Age,
May 7, 2001, at S1. InternetNews.com featured an article about the Seneca
transaction on June 26, 2001, in which it stated that “[t]he merger comes out
of a complicated effort by ad agency group Omnicom to lessen its losses in the
interactive sector, by sharing its stakes in Agency.com and other I-shops with
a private equity firm, Pegasus Partners.” Christopher Saunders, Seneca to
Absorb Agency.com, InternetNews.com, June 26, 2001. Later, on September 17,
2001, an article in Fortune stated that “[Omnicom’s CEO John] Wren is just
cleaning up the mess from his last big foray into untapped market terrain: the
Internet,” and that “Wren is now getting all the Net assets off Omnicom’s
books by shoveling them into a private holding company called Seneca.”
Patricia Sellers, Rocking Through the Ad Recession: Omnicom Is Defying the
Madison Avenue Slump Thanks to Its CEO’s Aggressive, Contrarian Strategy,
Fortune, Sept. 17, 2001, at 145.
2
In May 2002, New Media Agencies reported that if Omnicom hadn’t entered
into the Seneca transaction, it “might have faced the prospect of having to
accept sizeable write-offs in the value of its [internet] investments and, in
the case of Agency.com, it would have had to deduct its share of the
increasing losses from the profit that Omnicom would hope to report for 2001.”
How Omnicom Detached its Internet Ventures But Still Kept its Options Open,
New Media Agencies Financial Intelligence, May 2002, at 2-1.
5
1 during audit committee meetings, and his request for advice
2 regarding his responsibilities from a Columbia Business School
3 professor. Appellant also relies on the fact that Callander
4 resigned the same day that the board rejected his suggestion that
5 the audit committee review Omnicom’s proposal to reacquire two of
6 the internet companies recently transferred to Seneca.
7 On June 6, 2002, Omnicom’s stock price declined as rumors
8 circulated that The Wall Street Journal would be publishing a
9 negative article about accounting issues at Omnicom. That same
10 day, Salomon Smith Barney issued a report noting “an article
11 circulated on Briefing.com which speculated that The Wall Street
12 Journal was set to break a potentially negative story about
13 accounting issues at Omnicom.” Joint App. at 1566. However, the
14 report also expressed the belief that Callander resigned because
15 his “relationship with other board members had become
16 increasingly strained and counter-productive,” noting that “[h]ad
17 Mr. Callander complained about or disagreed with something in
18 particular, Omnicom would have had to disclose it.” Id. The
19 next day, June 7, 2002, UBS Warburg published a report stating
20 that “[w]e believe that [Callander’s] resignation has more to do
21 with ‘fit’ than actual auditing improprieties, but note that the
22 director who headed the audit committee has given fuel to
23 concerns with auditing irregularity.” Id. at 1570.
24 On June 10, 2002, The Wall Street Journal published a short
25 article in which it stated that Callander “quit the board after
26 expressing concerns about the creation of an entity that houses
6
1 Omnicom’s Internet assets,” and, in particular, his
2 “unhapp[iness] with Omnicom management’s limited disclosure to
3 the audit committee about the entity that holds many of Omnicom’s
4 former Internet assets.” Vanessa O’Connell & Jesse Eisinger,
5 Leading the News: Omnicom Director Quits Due to Entity Concerns,
6 Wall St. J., June 10, 2002, at B4. The article further suggested
7 that Callander left due to “some broader corporate governance
8 concerns,” but quoted Omnicom’s Chairman as reassuring investors
9 that “‘there is no issue’ with Seneca.” Id.
10 Late on June 11, 2002, the Financial Times published an
11 article describing Omnicom’s investors’ “post-Enron concerns
12 about disclosure.” Richard Tomkins & Christopher Grimes, Omnicom
13 Shares Wobble Amid Disclosure Fears, Fin. Times, June 11, 2002.
14 It acknowledged that “there is no suggestion of impropriety,
15 still less any breaking of the rules,” but noted that,
16 nonetheless, industry executives and analysts were still
17 concerned with Omnicom’s methods of calculating organic growth.
18 Id. The article also stated that investors were concerned with
19 the Seneca transaction, which the article stated had been
20 described as “a clever ploy” and “very skillful financial
21 engineering,” but the article stated that “there is no suggestion
22 of impropriety or rule-breaking.” Id.
23 On June 12, 2002, The Wall Street Journal published the
24 rumored article on Omnicom that discussed Callander’s resignation
25 and the Seneca transaction. Vanessa O’Connell & Jesse Eisinger,
26 Unadvertised Deals: At an Ad Giant, Nimble Financing Fuels Rapid
7
1 Growth -- But Omnicom’s Web Stakes Spark Board Controversy; A
2 Question of Disclosure -- The Impact of Acquisitions, Wall St.
3 J., June 12, 2002, at A1. The article stated that Callander had
4 “resigned amid questions about how the company handled a series
5 of soured Internet investments,” that “[h]e questioned whether
6 something wasn’t being disclosed to the board about the initial
7 off-loading of the problematic investments and the proposal to
8 buy two Internet firms,” that “he had voiced doubts about
9 Seneca’s purpose for months,” and that he had concerns that
10 management “had engaged in transactions without running it
11 through the board.” Id. (internal quotation marks omitted). In
12 further discussing the Seneca transaction, the article stated
13 that it “allowed the company to avoid the possibility of writing
14 down the value of its investments in some of the online firms.”
15 Id. It quoted Omnicom’s CEO as saying that “Seneca was smart
16 because instead of just walking away from these [Internet
17 investments] and taking a write-off, we said we believe that
18 Pegasus, through Seneca, could restructure the assets and make
19 them valuable again.” Id. (internal quotation marks omitted)
20 (alteration in original).
21 The article also quoted Omnicom’s general counsel, who
22 stated that he had told Callander that the board had not approved
23 Seneca. Id. This information was mistaken because “the still-
24 unnamed venture wasn’t called Seneca then, so the word hadn’t
25 shown up in automated searches of board minutes,” even though the
26 transaction had been approved. Id. (internal quotation marks
8
1 omitted). Furthermore, the June 12 article referred to
2 statements by two accounting professors, one who thought that
3 Seneca “raises a red flag,” and one who said, “[y]ou really have
4 to wonder where this fair value is coming from in this
5 environment, in this area.” Id. (internal quotation marks
6 omitted).
7 The June 12 article also raised questions about Omnicom’s
8 general accounting practices. For example, the article stated
9 that “[i]n the wake of the collapse of Enron Corp., investors are
10 demanding clearer and simpler financial statements from big
11 companies, putting particular pressure on serial acquirers with
12 tangled webs of deals.” Id. It noted that Omnicom “uses a more
13 aggressive means than its competitors to calculate the critical
14 statistic of how much of its growth it generates from existing
15 operations.” Id. The article also claimed that “[t]he clash
16 over Seneca [between Callander and management] signals new
17 concern about the financial side of the Omnicom juggernaut.” Id.
18 In addition, it suggested that Omnicom may have a cash flow
19 problem because “if cash spent on acquisitions is subtracted, the
20 company has a negative cash flow,” further noting that “Omnicom
21 has sharply increased its borrowing lately.” Id. Finally, the
22 June 12 article discussed Omnicom’s use of earn-out payments in
23 its deal structures, stating that “[w]ith such a high volume of
24 acquisitions, Omnicom’s obligations to make future earn-out
25 payments amount to a substantial potential liability . . . .
9
1 [that Omnicom does not] carry . . . on its balance sheet.” Id.
2 Later that day, Omnicom held a telephone conference to
3 reassure investors. During the conference, Omnicom’s CEO stated
4 that there was no dissent among the board members, but
5 acknowledged that “Mr. Callander’s reasons [for resigning from
6 the board] were presented accurately as in ‘The Journal’ this
7 morning.”
8 A number of articles and analyst reports also responded to
9 the June 12 article, some of which suggested that the article
10 raised questions about Omnicom’s accounting practices. For
11 example, a Reuters article that day stated that Omnicom “was
12 forced to play defense on Wednesday amid questions about its
13 accounting,” and suggested that Omnicom’s management’s
14 credibility was harmed by the June 12 article. Adam Pasick,
15 UPDATE 1-Omnicom Defends Accounting as Stock Plunges, Reuters,
16 June 12, 2002. Nonetheless, the article also noted that “Omnicom
17 said Callander’s resignation was the result of a
18 misunderstanding: that he was told, erroneously, that the board
19 had not approved the creation of Seneca when it [sic] fact it
20 had.” Id. A New York Times article on June 13 also suggested
21 that Omnicom “scrambled yesterday to repair damage caused by a
22 newspaper article critical of its accounting practices.” Stuart
23 Elliott, Omnicom Shares Tumble 20%, N.Y. Times, June 13, 2002, at
24 C11. Similarly, an analyst report from Lehman Brothers on June
25 13, 2002, stated that “[i]nvestors’ concerns focus on whether or
10
1 not the assets should have been written down either at the time
2 of the transaction or at the end of last year,” yet it noted that
3 “yesterday’s Wall Street Journal article did not bring up any
4 substantial ‘new’ issues.” On June 21, 2002, a Campaign article
5 stated that “[t]he questions now being asked are about whether
6 the [Seneca] deal was entirely at arm’s length, whether it was
7 adequately disclosed and whether there might still be some
8 lingering potential liabilities that might come back to haunt
9 Omnicom in the future.” Bob Willott, Omnicom Could Stand Test of
10 WSJ Allegations, Campaign, June 21, 2002.
11 However, some analyst reports and news articles also
12 indicated that the June 12 article did not raise any new factual
13 issues and suggested that the market’s negative reaction was due
14 to the article’s negative tone and innuendo in the post-Enron
15 market. See, e.g., Merrill Lynch, FlashNote, Omnicom Group Inc.:
16 Good News: No New News in WSJ Article, June 12, 2002; Richard
17 Morgan, Hatchet Job, TheDeal.com, June 14, 2002; Bear Stearns,
18 Omnicom Group (OMC-62.30) - Buy: Follow Up On WSJ Article, June
19 13, 2002; SalomonSmithBarney, Omnicom Group Inc. (OMC): Comments
20 on Management Meeting, June 13, 2002; SalomonSmithBarney, Omnicom
21 Group Inc. (OMC): Comments on WSJ Article, June 12, 2002; Richard
22 Tomkins, Omnicom Slides on S&P’s Move to Cut Outlook, Fin. Times,
23 June 13, 2002; UBS Warburg, Global Equity Research: Omnicom Group
24 (OMC), June 13, 2002.
25 In the two days following the June 12 article, Omnicom’s
11
1 stock dropped over twenty-five percent relative to trading prices
2 and activity in the market and the industry. However, after
3 Omnicom announced that its new auditor, KPMG, reviewed the
4 accounting for the Seneca transaction and had not recommended any
5 changes, Omnicom’s stock increased substantially relative to the
6 industry and the market.
7 c) The Present Action
8 On June 13, 2002, as Omnicom’s closing price fell, appellant
9 and other plaintiffs filed this action. On May 19, 2003,
10 appellant filed an amended complaint, which appellees moved to
11 dismiss. The district court granted appellees’ motion in part,
12 dismissing claims involving Omnicom’s organic growth calculations
13 and its earn-out and put-out liabilities, but denied the motion
14 with regard to the Seneca transaction.
15 The complaint made three allegations of fraud concerning the
16 Seneca transaction. First, it alleged that Omnicom should have
17 written down the value of the internet companies before engaging
18 in the Seneca transaction. Second, it alleged that the
19 accounting of the Seneca transaction was fraudulent because
20 Omnicom failed to appropriately value the internet companies.
21 Third, it alleged that Omnicom should have accounted for Seneca’s
22 losses after the Seneca transaction occurred because Omnicom
23 controlled Seneca. Each allegation, therefore, focused on the
24 loss in value of the internet companies and the failure to
25 reflect that loss on Omnicom’s books.
12
1 The class action complaint invoked the rebutable presumption
2 of shareholder reliance established in Basic, Inc. v. Levinson,
3 485 U.S. 224, 241-42 (1988). It alleged that Omnicom was an
4 actively traded company and that the market for its shares
5 promptly reflected public information about the company.
6 In July 2005, appellant moved to certify a class “consisting
7 of all persons and entities who purchased or otherwise acquired
8 the securities of Omnicom from February 20, 2001 through June 11,
9 2002 and who were damaged thereby.” Appellant’s Br. at 24. The
10 district court certified the class on April 30, 2007.
11 After extensive discovery and in response to appellees’
12 motion for summary judgment, appellant proffered, inter alia, a
13 report of its expert witness, Dr. Scott D. Hakala. Dr. Hakala
14 prepared an event study analysis and was prepared to testify that
15 “the investing public’s initial reactions to the partially
16 corrective disclosures in June 2002 were tied to the news of
17 Omnicom’s inappropriate accounting for investments in Internet-
18 related entities and not to other news during that time period.”
19 Joint App. at 1221. He claimed that “[i]nvestors legitimately
20 feared that Omnicom’s transfers of its Internet investments
21 created the potential for losses and hidden liabilities and/or
22 had allowed Omnicom to hide losses in the past.” Joint App. at
23 803. Dr. Hakala also stated that:
24 [T]he declines from June 5 to June 13, 2002,
25 would not have occurred on those dates had
26 Defendants not previously engaged in the
27 fraudulent scheme alleged by Plaintiffs. The
13
1 information revealed in that time period
2 constituted a partial revelation of
3 information about this scheme.
4
5 Id. at 793-94 (internal citation omitted).
6 On January 29, 2008, the district court granted appellees’
7 motion for summary judgment. See In re Omnicom Group, Inc. Sec.
8 Litig., 541 F. Supp. 2d 546 (S.D.N.Y. 2008). The district court,
9 in a thorough and well-reasoned opinion, held that appellant had
10 failed to proffer sufficient evidence that the fraud alleged --
11 the Seneca transaction -- caused the drop in stock price that
12 damaged the class. We agree.
13 DISCUSSION
14 a) Standard of Review
15 “We review the grant of summary judgment de novo.” Lawrence
16 v. Cohn, 325 F.3d 141, 147 (2d Cir. 2003). Summary judgment is
17 only appropriate if the record shows “that there is no genuine
18 issue as to any material fact and that the movant is entitled to
19 judgment as a matter of law.” Fed. R. Civ. P. 56(c); see also
20 Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). An issue
21 of fact is genuine “if the evidence is such that a reasonable
22 jury could return a verdict for the nonmoving party.” Anderson
23 v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In looking at
24 the record, we “constru[e] the evidence in the light most
25 favorable to the nonmoving party and draw[] all inferences and
26 resolv[e] all ambiguities in favor of the nonmoving party.” Doro
27 v. Sheet Metal Workers’ Int’l Ass’n, 498 F.3d 152, 155 (2d Cir.
14
1 2007). Nonetheless, summary judgment is appropriate where a
2 defendant:
3 has moved for summary judgment on the ground
4 that undisputed facts reveal that the
5 plaintiff cannot establish an essential
6 element of the claim, on which element the
7 plaintiff has the burden of proof, and the
8 plaintiff has failed to come forth with
9 evidence sufficient to permit a reasonable
10 juror to return a verdict in his or her favor
11 on that element . . . .
12
13 Burke v. Jacoby, 981 F.2d 1372, 1379 (2d Cir. 1992); see also
14 Anderson, 477 U.S. at 248-49.
15 b) The Section 10(b) Claims
16 To sustain a claim under Section 10(b), appellant must show
17 (i) a material misrepresentation or omission; (ii) scienter;
18 (iii) “a connection with the purchase or sale of a security[;]”
19 (iv) reliance by the plaintiff(s); (v) economic loss; and (vi)
20 loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-
21 42 (2005). The district court granted summary judgment on the
22 ground that appellant failed to proffer sufficient evidence to
23 show loss causation.
24 Use of the term “loss causation” is occasionally confusing
25 because it is often used to refer to three overlapping but
26 somewhat different concepts. It may be used to refer to whether
27 the particular plaintiff or plaintiff class relied upon -- or is
28 refutably presumed to have relied upon -- the misrepresentation.
29 ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d
15
1 Cir. 2007). Generally, however, courts use the term “transaction
2 causation” to refer to this element. See, e.g., Dura Pharms.,
3 544 U.S. at 341-42; Emergent Capital Inv. Mgmt., LLC v. Stonepath
4 Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) (“Like reliance,
5 transaction causation refers to the causal link between the
6 defendant’s misconduct and the plaintiff’s decision to buy or
7 sell securities.”).
8 “Loss causation” may also refer to the requirement that the
9 wrong for which the action was brought is a but-for cause or
10 cause-in-fact of the losses suffered, also a requirement for an
11 actionable Section 10(b) claim. Dura Pharms., 544 U.S. at 342;
12 see also 15 U.S.C. § 78u-4(b)(4) (“In any private action arising
13 under this chapter, the plaintiff shall have the burden of
14 proving that the act or omission of the defendant alleged to
15 violate this chapter caused the loss for which the plaintiff
16 seeks to recover damages.”). In short, plaintiffs must show “a
17 sufficient connection between [the fraudulent conduct] and the
18 losses suffered . . . .” Lattanzio v. Deloitte & Touche LLP, 476
19 F.3d 147, 157 (2d Cir. 2007).3 This requirement exists because
3
Appellant argues that:
It is not Lead Plaintiff’s burden, on this motion, to
show that the entire relative price drop in June 2002
was due to the fraud. Rather, summary judgment may be
granted only if Defendants can prove as a matter of
undisputed fact that none of the price drop could have
resulted from the fraud.
Appellant’s Br. at 42 (emphasis omitted). In doing so, it misstates the
parties’ burdens on summary judgment. Although “a party seeking summary
judgment always bears the initial responsibility of informing the district
court of the basis for its motion, and identifying [the evidence] which it
16
1 private securities fraud actions are “available, not to provide
2 investors with broad insurance against market losses, but to
3 protect them against those economic losses that
4 misrepresentations actually cause.” Dura Pharms., 544 U.S. at
5 345.
6 A third concept sometimes referred to as “loss causation”
7 relates to the question whether events that are a cause-in-fact
8 of investor losses fall within the class of events from which
9 Section 10(b) was intended to protect the particular plaintiffs
10 and which the securities laws were intended to prevent. This
11 issue, one of proximate cause, was the subject of extended (to
12 say the least) discussion in three opinions in AUSA Life Ins. Co.
13 v. Ernst & Young, 206 F.3d 202 (2d Cir. 2000). Subsequently, we
14 adopted the “zone of risk” test outlined in the dissenting
15 opinion in AUSA. See Lentell v. Merrill Lynch & Co., 396 F.3d
16 161, 172-75 (citing AUSA, 206 F.3d at 235, 238 (Winter, J.,
17 dissenting)).
18 To one degree or another, all three of these overlapping but
19 somewhat differing issues are involved in the present matter.
20 With regard to reliance, appellant’s complaint invokes the
21 presumption of reliance based on the fraud-on-the-market theory
believes demonstrate the absence of a genuine issue of material fact,” this
does not relieve appellant of its burden of making “a showing sufficient to
establish the existence of an element essential to [appellant’s] case, and on
which [appellant] will bear the burden of proof at trial.” Celotex, 477 U.S.
at 322. As a result, summary judgment is appropriate if appellant cannot show
that at least some of the price drop was due to the fraud.
17
1 adopted in Basic. 485 U.S. at 241-42 (reliance of investors on
2 misrepresentations is presumed where market for securities is
3 open and developed). The complaint alleges active trading by
4 Omnicom in a “highly efficient and automated market,” Omnicom’s
5 provision of information to the public through SEC filings and
6 other means of disclosure, and scrutiny of available information
7 by professional analysts who themselves communicate with the
8 public. Joint App. at 152. It further alleges that “[a]s a
9 result . . . the market for Omnicom’s securities promptly
10 digested current information regarding Omnicom from all publicly
11 available sources and reflected such information in Omnicom’s
12 stock price.” Id. at 153.
13 Having sought to establish investor reliance by the fraud-
14 on-the-market theory, appellant faces a difficult task. The
15 fraud alleged -- the Seneca transaction and failure to write down
16 the value of the internet companies -- was the subject of
17 continuing media reports beginning in May 2001. See supra notes
18 1 & 2. The stock price decline, which is the basis for the
19 damages claim, occurred in June 2002. In short, appellant must
20 concede that the numerous public reports on the Seneca
21 transaction were “promptly digested” by the market and “reflected
22 . . . in Omnicom’s stock price” in 2001 while seeking to recover
23 for a stock price decline a year later in 2002.
24 Appellant seeks to do so through two means: first, by
25 claiming the existence of cause-in-fact on the ground that the
18
1 market reacted negatively to a corrective disclosure of the
2 fraud, Lentell, 396 F.3d at 175; and, second, by arguing the
3 existence of proximate cause on the ground that negative investor
4 inferences drawn from Callander’s resignation and from the news
5 stories in June 2002 caused the loss and were a foreseeable
6 materialization of the risk concealed by the fraudulent
7 statement. ATSI, 493 F.3d at 107 (2d Cir. 2007) (citing Lentell,
8 396 F.3d at 173). Establishing either theory as applicable would
9 suffice to show loss causation.
10 1) Corrective Disclosure
11 A fraud regarding a company’s financial condition in May
12 2001, if concealed, may cause investors’ losses in June 2002 when
13 disclosure of the fraud is made and the available public
14 information regarding the company’s financial condition is
15 corrected. See Lentell, 396 F.3d at 175 n.4 (acknowledging that
16 loss causation can be established by a “corrective disclosure to
17 the market” that “reveal[s] . . . the falsity of prior
18 recommendations”). Appellant argues that information disclosed
19 to the market in June 2002, particularly by the June 12 article,
20 constituted a partial corrective disclosure of the fraud and that
21 the disclosure caused the market to respond negatively.
22 To reiterate, the June 12 article reported that Callander, a
23 director and Chair of Omnicom’s Audit Committee, had resigned
24 amid questions he had raised for months regarding the purpose of
25 the Seneca transaction. Callander was also reported to have
19
1 questioned whether the board had received full information about
2 the initial Seneca transaction and about the new proposal to buy
3 back two of the internet companies. The article also noted
4 concerns, including those of accounting professors, about
5 Omnicom’s aggressive accounting strategy and about Omnicom’s cash
6 flow and increased borrowing. In opposing the motion for summary
7 judgment, appellant offered the expert testimony of Dr. Hakala
8 regarding causation issues.
9 However, none of these matters even purported to reveal some
10 then-undisclosed fact with regard to the specific
11 misrepresentations alleged in the complaint concerning the Seneca
12 transaction. See In re Flag Telecom Holdings, Ltd. Sec. Litig.,
13 574 F.3d 29, 40-41 (2d Cir. 2009) (holding that plaintiffs’
14 evidence of news events and the expert’s event study did not
15 provide sufficient evidence of causation). The use of the Seneca
16 transaction as an accounting method to remove losses from
17 Omnicom’s books was known to the market a year before Callander’s
18 resignation. See supra notes 1 & 2. There was no ambiguity in
19 that regard in these articles.
20 All that the June 12 article stated was that Callander’s
21 resignation was due to general concerns over an aggressive
22 accounting strategy, including perhaps Omnicom’s year-old failure
23 to write-down the value of the internet companies, and other
24 matters concerning governance, in particular management’s keeping
25 the board informed. At best, from appellant’s viewpoint, it has
20
1 shown that the market may have reacted as it did because of
2 concerns that Callander’s resignation and the negative tone of
3 the June 12 article implied accounting or other problems in
4 addition to the known Seneca transaction.
5 Appellant also relies on comments in the June 12 article by
6 the two accounting professors to support a nexus between the
7 fraud alleged and the June 2002 decline in share price. They
8 argue that “a reasonable jury could conclude that the professor
9 found Omnicom’s accounting suspicious in light of Callander’s
10 resignation and Omnicom’s decision to unwind Seneca, which were
11 newly disclosed facts.” Appellant’s Br. at 55. However, the
12 conclusory suspicions of the accounting professors and the
13 unwinding of the Seneca transaction added nothing to the public’s
14 knowledge that the Seneca transaction was designed to remove
15 losses from Omnicom’s books.4
16 What appellant has shown is a negative characterization of
17 already-public information. See Teacher’s Ret. Sys. of La. v.
18 Hunter, 477 F.3d 162, 187-88 (4th Cir. 2007) (negative
19 characterization of previously known information cannot
20 constitute a corrective disclosure); In re Merck & Co. Sec.
21 Litig., 432 F.3d 261, 269-70 (3d Cir. 2005) (same). A negative
4
Appellant also relies on the fact that Omnicom’s stock price recovered
after Omnicom announced that KPMG had reviewed its accounting of the Seneca
transaction and did not recommend any changes. Appellant’s Br. at 52-53.
However, KPMG’s conclusion that there was no fraud in the Seneca transaction
hardly supports a finding that fraud in the Seneca transaction caused a loss.
21
1 journalistic characterization of previously disclosed facts does
2 not constitute a corrective disclosure of anything but the
3 journalists’ opinions. After all, no hard fact in the June 12
4 article suggested that the avoidance of the write-down was
5 improper.
6 Dr. Hakala’s study does not alter our conclusion. It is
7 true that “[w]here, as here, there are conflicting expert reports
8 presented, courts are wary of granting summary judgment.” Harris
9 v. Provident Life & Accident Ins. Co., 310 F.3d 73, 79 (2d Cir.
10 2002) (internal quotation marks omitted). However, summary
11 judgment is not per se precluded because there are conflicting
12 experts. See Raskin v. Wyatt Co., 125 F.3d 55, 65 (2d Cir. 1997)
13 (“As we read the opinion, [the district court] concluded that the
14 [expert’s] report was probative of no material fact, from which
15 we deduce that it was, in [the district court’s] view, irrelevant
16 and inadmissible. We therefore can review this ruling as
17 evidentiary in character . . . .”) (citations omitted). Although
18 the reports must be construed in the non-moving party’s favor,
19 “if the admissible evidence is insufficient to permit a rational
20 juror to find in favor of the plaintiff, the court remains free
21 to direct a verdict or grant summary judgment for defendant.”
22 Amorgianos v. Nat’l R.R. Passenger Corp., 303 F.3d 256, 267 (2d
23 Cir. 2002); see also Raskin, 125 F.3d at 66 (“[A]n expert’s
24 report is not a talisman against summary judgment.”).
25 Summary judgment is appropriate here because Dr. Hakala’s
22
1 testimony does not suffice to draw the requisite causal
2 connection between the information in the June 12 article and the
3 fraud alleged in the complaint. His event study merely “links
4 the decline in the value of [the company’s] stock to various
5 events.” Flag Telecom, 574 F.3d at 41.
6 If Dr. Hakala is opining that Omnicom’s stock dropped
7 because investors first became aware in June 2002 of the fraud
8 alleged in the complaint, that opinion is, as a matter of law,
9 unsustainable on this record. It runs squarely into the
10 undisputed fact that the internet company losses and the failure
11 to write them down was known in May 2001 and into appellant’s
12 allegation that the market for Omnicom’s securities at all times
13 promptly digested and reflected in its share price all public
14 information.5 If he is opining that Omnicom’s stock dropped
15 because the fraud in May 2001 caused the negative press of June
16 2002 attending Callander’s resignation, then his testimony is
17 irrelevant because these events were not proximately caused by
18 the fraud alleged, for reasons discussed immediately below. The
5
Appellant is mistaken to compare this to our cases in Suez Equity
Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001), Rothman
v. Gregor, 220 F.3d 81 (2d Cir. 2000), and Mfrs. Hanover Trust v. Drysdale
Sec. Corp., 801 F.2d 13 (2d Cir. 1986). Those cases are factually
distinguishable because in each case the plaintiffs demonstrated a specific
causal connection between the loss and the alleged fraud. See Suez Equity,
250 F.3d at 96-97 (facts omitted from executive’s background report would have
indicated executive’s inability to run company and forecast company’s eventual
liquidity problems); Rothman, 220 F.3d at 87, 89, 95 (company’s misleading
accounting of royalty expenses caused later losses when market became aware
that a massive write-down was imminent); Mfrs. Hanover, 801 F.2d at 16-17, 19,
21-22 (defendant accounting firm’s misrepresentations as to company’s solvency
induced plaintiff to do business with the company which ultimately led to the
plaintiff’s loss).
23
1 remainder of his report establishes only that, as previously
2 noted, the June 12 article raised questions about potential
3 accounting concerns, including the Seneca transaction.
4 Because appellant failed to demonstrate any new information
5 in the June 12 article regarding Omnicom’s alleged fraud,
6 appellant has failed to show a price decline due to a corrective
7 disclosure.
8 2) The Materialization of the Risk Theory
9 Appellant argues that, even if no new financial facts were
10 revealed in June 2002, Callander’s resignation and the ensuing
11 negative media attention were foreseeable risks of the fraudulent
12 Seneca transaction and caused the temporary share price decline
13 in June 2002. The losses suffered by the class are, the argument
14 goes, due to the materialization of that risk.
15 As noted, plaintiffs can prove loss causation by showing
16 “that the loss was foreseeable and caused by the materialization
17 of the risk concealed by the fraudulent statement.” ATSI, 493
18 F.3d at 107. A misrepresentation is “the ‘proximate cause’ of an
19 investment loss if the risk that caused the loss was within the
20 zone of risk concealed by the misrepresentations . . . .”
21 Lentell, 396 F.3d at 173. Because Omnicom’s internet company
22 losses were publicly known, the matter concealed must be the
23 invalidity of Omnicom’s accounting for those losses in the Seneca
24 transaction.
24
1 The zone of risk is determined by the purposes of the
2 securities laws, i.e., “to make sure that buyers of securities
3 get what they think they are getting.” Chem. Bank v. Arthur
4 Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984). In this
5 context, therefore, recovery is limited to only the foreseeable
6 losses “for which the intent of the laws is served by recovery.”
7 AUSA, 206 F.3d at 234 (Winter, J., dissenting).
8 Fraud may lead to a director’s resignation -- to escape
9 personal liability, if for no other reason, see, e.g., 15 U.S.C.
10 § 77k(b)(1) (providing exemption from civil liability for
11 director who resigns before effective date of fraudulent
12 registration statement) -- and to negative stories by the media.
13 In such circumstances, it is generally the facts underlying the
14 fraud and resignation that causes a compensable investor’s loss.
15 In the present case, as noted, the facts were known a year before
16 the resignation, and the resignation did not add to the public
17 knowledge any new material fact about the Seneca transaction.
18 The essence of the claim is that Callander’s resignation
19 concerned the Seneca transaction and that the resultant negative
20 publicity suggesting possible accounting malfeasance may lead to
21 recovery for a temporary drop in share price.
22 To be sure, the record shows that Callander was concerned
23 over general accounting practices and governance problems. In
24 that regard, he was concerned about the Seneca transaction, but
25 he had also been mistakenly informed that the Board had never
25
1 approved it. On the present record, appellant has at best shown
2 that Callander’s resignation and resulting negative press stirred
3 investors’ concerns that other unknown problems were lurking in
4 Omnicom’s past. Indeed, there is no allegation that investors
5 were ever told that improper accounting had in fact occurred with
6 regard to the Seneca transaction, either in the June 2002 stories
7 or later.
8 The generalized investor reaction of concern causing a
9 temporary share price decline in June 2002, is far too tenuously
10 connected -- indeed, by a metaphoric thread -- to the Seneca
11 transaction to support liability. The securities laws require
12 disclosure that is adequate to allow investors to make judgments
13 about a company’s intrinsic value. Firms are not required by the
14 securities laws to speculate about distant, ambiguous, and
15 perhaps idiosyncratic reactions by the press or even by
16 directors. To hold otherwise would expose companies and their
17 shareholders to potentially expansive liabilities for events
18 later alleged to be frauds, the facts of which were known to the
19 investing public at the time but did not affect share price, and
20 thus did no damage at that time to investors. A rule of
21 liability leading to such losses would undermine the very
22 investor confidence that the securities laws were intended to
23 support.
24 CONCLUSION
25 Appellant has failed to raise a material issue of fact that
26
1 would support a finding of loss causation, and, as a result, the
2 district court properly granted defendants’ summary judgment
3 motion.6 For the foregoing reasons, we affirm.
4
5
6
7
8
6
Plaintiffs also rely on Section 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. § 78t. However, in order to establish control person
liability, appellant must first establish a primary violation. See ATSI, 493
F.3d at 108. Because appellant fails to establish a primary violation, the
district court properly granted defendants’ summary judgment motion on the
Section 20(a) claims.
27