Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
April 8, 2009

No. 08-10414 Charles R. Fulbruge III
Clerk

FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED; FLAHERTY & CRUMRINE PREFERRED INCOME
OPPORTUNITY FUND INCORPORATED; FLAHERTY &
CRUMRINE/CLAYMORE PREFERRED SECURITIES INCOME FUND
INCORPORATED; STAN HAIDUK

Plaintiffs-Appellants
v.

TXU CORP.; C. JOHN WILDER

Defendants-Appellees

Appeal from the United States District Court
for the Northern District of Texas

Before KING, BENAVIDES, and CLEMENT, Circuit Judges.
FORTUNATO P. BENAVIDES, Circuit Judge:
Appellants, Flaherty & Crumrine Preferred Income Fund, Inc.; Flaherty
& Crumrine Preferred Income Opportunity Fund, Inc.; Flaherty &
Crumrine/Claymore Preferred Securities Income Fund, Inc. (collectively, “F&C”);
and Stan Haiduk (“Haiduk”), filed a securities fraud class action and individual
fraud claims against Appellees TXU Corporation (“TXU”) and its former CEO
John Wilder (“Wilder”) for allegedly making material misrepresentations and
omissions of fact in connection with a self-tender offer to purchase certain
 No. 08-10414

convertible TXU securities (the “tender offer”) in 2004. Specifically, Appellants
alleged that Appellees fraudulently misrepresented the timing and magnitude
of a planned stock repurchase program and dividend increase in order to induce
the Appellants to participate in the tender offer. The district court dismissed
Appellants’ fraud claims alleged under Sections 10(b) and 14(e) of the Securities
Exchange Act and SEC Rule 10b-5, as well as Appellants’ common law fraud
claims, for failure to state a claim under the heightened pleading standards
applicable to securities fraud claims. We affirm the judgment of the district
court.
I.
Appellants are three investment funds (F&C) and an individual plaintiff
(Haiduk), all of whom owned convertible TXU securities called TXU Corporate
Units (the “Corporate Units”) and TXU Income PRIDES (the “PRIDES”). Both
classes of securities were traded on the New York Stock Exchange and were
convertible into TXU common stock.
Prior to the tender offer, Wilder, TXU’s CEO, had implemented a
three-phase restructuring program aimed at improving TXU’s business. On
May 18, 2004, approximately four months before the tender offer, TXU issued
a press release outlining its view of the company’s financial restructuring
program. The press release indicated that TXU did not anticipate a dividend
increase until 2006, when certain financial benchmarks were reached, but noted
that TXU’s Board of Directors (the “Board”) might consider other relevant factors
in determining when or if to authorize a dividend increase:
Upon reaching the targeted balance sheet strength and financial
flexibility, management would recommend that the Board of
Directors reevaluate the current dividend policy. At that time,
management expects it would recommend targeting annual common
stock dividends equal to a pay out of 100 percent of the earnings of
TXU’s electric delivery business. Of the free cash flow, management
would expect to return roughly 80 percent to shareholders in the

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form of distributions or repurchases and to retain roughly 20
percent for long term growth initiatives. Assuming the execution of
the business initiatives and transactions described above, and
depending on market trends in commodity prices, management
expects that this capital allocation program will enable management
to recommend an increase of the dividend in 2006. In addition to
management’s recommendation, the Board of Directors may
consider other relevant factors in determining if and when to make
a change in the dividend policy.

On September 15, 2004, TXU announced that it was offering to purchase
up to 11,433,285 outstanding Corporate Units and up to 8,700,000 outstanding
PRIDES. Appellants collectively held 530,000 Corporate Units and 5,000
PRIDES prior to the tender offer. Investors holding the outstanding securities
had the option to tender their securities to TXU or retain them, and Appellants
were among the roughly 65% of investors who accepted the tender offer and sold
their securities back to TXU. The price offered for the securities in the tender
offer was $52.28 for each Corporate Unit and $52.39 for each PRIDE. The
tender offer purchase price was determined by applying a factor to the
twenty-day weighted average price of TXU common stock between September
20, 2004, and October 8, 2004. The tender price was higher than the market
price for the securities at the time of the tender offer. The offer itself (as well as
forms filed with the SEC and the associated press release) contained the
following language concerning the dividend policy:
TXU Corp.’s debt and capital management program is intended to
strengthen TXU Corp.’s balance sheet and financial flexibility. As
a part of its capital management and restructuring program and
considering current business and market conditions, TXU Corp.’s
management is evaluating whether it should recommend to the
TXU Corp. Board of Directors that they reevaluate TXU Corp.’s
current common stock dividend policy. TXU Corp. cannot predict
the outcome of management’s evaluation, when, if at all,
management would make a recommendation to the Board of
Directors to change the current common stock dividend policy, or

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what management’s recommendation might be. In addition to any
recommendation from management, the Board of Directors may
consider other relevant factors in determining if and when to make
a change in TXU Corp.’s common stock dividend policy.

TXU also announced its intent to repurchase up to 10 million shares of its
common stock, subject to market conditions and other factors. On September 28,
2004, CEO Wilder made a presentation in which he reiterated previous
representations that the dividend policy was under review and discussed TXU’s
capital allocation and growth strategy.
On October 12, 2004, just one day before the expiration of the offer, TXU
management gave a detailed financial plan to certain credit rating agencies for
the purpose of facilitating the agencies’ determinations of whether an increase
in TXU’s annual dividend would adversely affect the corporation’s credit rating.
On October 13, 2004, the final day of the tender offer, F&C tendered 425,000 of
its 525,000 Corporate Units to TXU for total proceeds of $22,219,000, and
Haiduk tendered 5,000 Corporate Units for total proceeds of $260,093.89 and
5,000 PRIDES for total proceeds of $261,103.88.
On October 19, 2004, six days after the end of the tender offer period, TXU
management provided materials to the Board proposing a change in dividend
policy, and on October 21, 2004, management recommended a 350% increase of
the annual dividend on common stock and a 400% increase in the stock
repurchase program. In the interim between management’s provision of the
materials to the Board and the final recommendation, TXU management
received final reports from the credit rating agencies informing the corporation
that an increase in dividend payouts would not adversely affect its credit rating.
On October 22, 2004, the Board approved the dividend increase and the stock
repurchase program. On October 25, 2004, TXU publicly announced its plan to
increase the common stock dividend from $0.50 to $2.25 and to repurchase

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approximately 50 million shares of TXU common stock. Immediately following
the announcement, the per-share value of TXU common stock jumped nearly
20%. The Corporate Units and the PRIDES experienced correlated increases in
value.
On, September 6, 2005, Appellants filed their original class action
complaint in the district court, alleging that the Appellees violated federal
securities laws and intentionally defrauded Appellants and other similarly
situated holders of TXU securities by failing to inform those who participated in
the tender offer that a dividend increase and increased stock repurchase was
imminent. Appellants’ essential theory is that TXU and Wilder failed to inform
them of the impending dividend increase in order to induce Appellants to
participate in the tender offer before the value of their securities increased.
Appellants alleged three causes of action for fraud under the Securities
Exchange Act: (1) a violation of Section 14(e)1 ; (2) a violation of Section 10(b)2

1
Section 14(e) of the Securities Exchange Act makes it unlawful:

for any person to make any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made, in the light
of the circumstances under which they are made, not misleading, or to engage
in any fraudulent, deceptive, or manipulative acts or practices, in connection
with any tender offer or request or invitation for tenders, or any solicitation of
security holders in opposition to or in favor of any such offer, request, or
invitation.

15 U.S.C. § 78n(e).
2
Section 10(b) of the Exchange Act provides:

It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce or of the mails, or of any
facility of any national securities exchange . . . (b) To use or employ, in
connection with the purchase or sale of any security registered on a national
securities exchange or any security not so registered, . . . any manipulative or
deceptive device or contrivance in contravention of such rules and regulations
as the [Securities and Exchange] Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.

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and Rule 10b-5 3; and (3) controlling person liability against Wilder under Section
20(a).4 Appellees filed a motion to dismiss all of the Appellants’ claims on
December 16, 2005, which was granted by the district court. Appellants
appealed to this court, but while the appeal was pending, the United States
Supreme Court issued its decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 127 S. Ct. 2499 (2007), which clarified the pleading standard for
scienter under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
In response to the Tellabs decision, and without addressing the merits of the
appeal, this court vacated the district court’s judgment and remanded the case
for further consideration in light of Tellabs. Flaherty & Crumrine Preferred
Income Fund Inc. v. TXU Corp., 242 F. App’x 253 (5th Cir. 2007).
Appellants filed a second amended complaint on November 26, 2007,
restating their original claims and supplementing the complaint with the expert
report of Professor Linda Allen, Professor of Finance at the City University of
New York, and additional instances of alleged fraudulent misrepresentations.

15 U.S.C. § 78j(b).
3
SEC Rule 10b-5, promulgated pursuant to Section 10(b), provides:

It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, (a) To employ any device, scheme,
or artifice to defraud, (b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase
or sale of any security.

17 C.F.R. § 240.10b-5.
4
Under Section 20(a), a person who exerts control over a person who violates any
provision of the Securities Exchange Act can be held jointly and severally liable with the
primary actor of the underlying securities law violation. 15 U.S.C. § 78t(a). Liability under
§20(a) requires the primary actor to be liable for the underlying violation, and here is premised
on the Section 10(b) or 14(e) violation.

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Appellants also added individual non-class common law fraud claims under
Texas state law. Appellees again filed a motion to dismiss Appellants’ claims.
The district court dismissed the Appellants’ federal securities fraud claims on
the pleadings under Rule 12(b)(6) because the pleadings failed to give rise to a
strong inference of scienter under the standard articulated in Tellabs and
dismissed their common law fraud claim for failure to plead fraud with
particularity as required by Rule 9(b). The instant appeal followed.
II.
A district court’s dismissal of federal securities law claims under Rule
12(b)(6) is reviewed de novo. Herrmann Holdings, Ltd. v. Lucent Tech. Inc., 302
F.3d 552, 557–58 (5th Cir. 2002); Cent. Laborers’ Pension Fund v. Integrated
Elec. Servs., Inc., 497 F.3d 546, 550 (5th Cir. 2007). A dismissal for failure to
state fraud with particularity as required by Rule 9(b) is a dismissal on the
pleadings for failure to state a claim, and is also reviewed de novo. Shushany
v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir. 1993).
Rule 12(b)(6) authorizes dismissal of a complaint for “failure to state a
claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a
Rule 12(b)(6) motion, the plaintiff must plead ‘enough facts to state a claim to
relief that is plausible on its face.’” In re Katrina Canal Breaches Litigation, 495
F.3d 191, 205 (5th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 570 (2007)).
Rule 9(b) states that “in alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P.
9(b). This Circuit’s precedent interprets Rule 9(b) strictly, requiring the 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.” Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.
1997); Nathenson v. Zonagen, Inc., 267 F.3d 400, 412 (5th Cir. 2001).

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In order to state a claim for fraud under Section 10(b) and Rule 10b-5 of
the Securities Exchange Act, a plaintiff must allege, in connection with the
purchase or sale of securities, (1) a misstatement or an omission (2) of a material
fact (3) made with scienter (4) on which the plaintiffs relied (5) that proximately
caused the plaintiff’s injury. R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th
Cir. 2005). The elements of a claim under Section 14(e), which applies to tender
offers, are identical to the Section 10(b)/Rule 10b-5 elements. Smallwood v.
Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974).
The Private Securities Litigation Reform Act (“PSLRA”), which governs
federal securities fraud claims, requires that a plaintiff in a securities fraud case
must, for “each act or omission alleged” to be false or misleading, “state with
particularity facts giving rise to a strong inference that the defendant acted with
the required state of mind.” 15 U.S.C. § 78u-4(b)(2); see also Ind. Elec. Workers’
Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.
2008); Zonagen, 267 F.3d at 407 (“[A] plaintiff alleging a section 10(b)/Rule 10b-5
claim must now plead specific facts giving rise to a strong inference of scienter.”
(citations omitted)). The PSLRA also incorporates the Rule 9(b) requirements
into the pleading standard for federal securities fraud claims. Abrams v. Baker
Hughes Inc., 292 F.3d 424, 431 (5th Cir. 2002). Under the PSLRA, the court
considers whether all the facts and circumstances, taken together, give rise to
a strong inference of scienter. Id.; Zonagen, 267 F.3d at 425.
Scienter, in the context of securities fraud, is defined as “an intent to
deceive, manipulate, or defraud or that severe recklessness in which the danger
of misleading buyers or sellers is either known to the defendant or is so obvious
that the defendant must have been aware of it.” R2 Invs., 401 F.3d at 643; see
also Plotkin v. IP Axess Inc., 407 F.3d 690, 697 (5th Cir. 2005) (“[A] securities
fraud plaintiff must prove that the defendant either consciously
misbehaved . . . or was so severely reckless that it demonstrates that the

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defendant must have been aware of the danger of misleading the investing
public.”). “Severe recklessness is limited to those highly unreasonable omissions
or misrepresentations that involve not merely simple or even inexcusable
negligence, but an extreme departure from the standards of ordinary care.” R2
Invs., 401 F.3d at 643 (quotation omitted). In Tellabs, the Supreme Court
clarified the standard for pleading a “strong inference” of scienter. Tellabs, 127
S. Ct. at 2509–10. This Circuit has recently interpreted Tellabs as requiring a
“three step approach to reviewing scienter allegations on a motion to dismiss a
federal securities fraud case pursuant to the PSLRA”:
First, the allegations must, as in federal pleadings generally, be
taken as true. Second, courts may consider documents incorporated
in the complaint by reference and matters subject to judicial notice.
The facts must be evaluated collectively, not in isolation, to
determine whether a strong inference of scienter has been pled.
Third, a court must take into account plausible inferences opposing
as well as supporting a strong inference of scienter. The inference
of scienter must ultimately be “cogent and compelling,” not merely
“reasonable” or “permissible.”

Ind. Elec., 537 F.3d at 533 (citing Tellabs, 127 S. Ct. at 2509–10). In addition,
“omissions and ambiguities count against inferring scienter, for plaintiffs must
‘state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.’” Tellabs, 127 S. Ct. at 2511 (citation
omitted).
Although we have stated that allegations of motive and opportunity
standing alone will not suffice to meet the scienter requirement, motive and
opportunity allegations may meaningfully enhance the strength of the inference
of scienter. Ind. Elec., 537 F.3d at 533 (citing Southland Sec. Corp. v. INSpire
Ins. Solutions, Inc., 365 F.3d 353, 368 (5th Cir. 2004)). We have rejected the
group pleading approach to scienter and instead look to the state of mind of the
individual corporate official or officials “who make or issue the statement (or

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order or approve it or its making or issuance, or who furnish information or
language for inclusion therein, or the like) rather than generally to the collective
knowledge of all the corporation’s officers and employees acquired in the course
of their employment.” Id.
III.
Appellants point to several statements made by either TXU or Wilder
which they assert violate federal securities laws. For each of these statements,
we must evaluate the scienter allegations pertinent to each and determine
whether the facts, evaluated collectively, support a “cogent and compelling”
inference that Appellees acted with intent to deceive, manipulate, or defraud or
acted with severe recklessness. See Ind. Elec., 537 F.3d at 533–34. In
evaluating whether scienter has been established, we will consider the
complaint, documents incorporated in the complaint by reference, and matters
subject to judicial notice. Id. This evaluation must take into account plausible
inferences opposing as well as supporting a strong inference of scienter. Id.
Appellants urge that, in accepting the tender offer, they relied on the
representation originally stated in TXU’s May 2004 press release indicating that
TXU did not anticipate a dividend increase until 2006, when certain financial
benchmarks were reached. Appellants do not clearly delineate between whether
they allege an affirmative misrepresentation or an omission. In their second
amended complaint, Appellants pointed to various statements made after the
May 2004 press release which they allege do not contain a sufficient disclosure
of the impending dividend increase or affirmatively misstate that no dividend
increase will occur until after certain financial benchmarks are reached.
The first of these statements, issued in the tender offer materials on
September 15, 2004, stated:
As a part of its capital management and restructuring program and
considering current business and market conditions, TXU Corp.’s

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management is evaluating whether it should recommend to the
TXU Corp. Board of Directors that they reevaluate TXU Corp.’s
current common stock dividend policy. TXU Corp. cannot predict
the outcome of management’s evaluation, when, if at all,
management would make a recommendation to the Board of
Directors to change the current common stock dividend policy, or
what management’s recommendation might be. In addition to any
recommendation from management, the Board of Directors may
consider other relevant factors in determining if and when to make
a change in TXU Corp.’s common stock dividend policy.

Appellants contend that this statement is misleading because, although it does
state that the dividend policy is under review, it does not sufficiently disclose the
alleged “steps taken to increase the TXU dividend” upon completion of the
tender offer.
The second statement that Appellants point to was made by Wilder at the
Merrill Lynch Global Power & Gas Leaders Conference on September 28, 2004,
during the tender offer period.5 Wilder presented a power point presentation,
which included a slide that described TXU’s capital allocation policy. The slide
stated that the “dividend payout” was “under review.” The statement concerning
the dividend payout was contained in a flow chart and was preceded by a
statement that “debt reduction” was to continue until certain financial goals had
been met. An arrow pointing toward the “dividend payout” section flowed from
the “debt reduction” section of the chart. Appellants contend that this flow chart
indicated that the “dividend payout” step would not take place until the “debt
reduction” goals had been met. Appellants contend that at the time Wilder made
this statement, he knew (1) that the financial benchmarks would not be met
before the dividend was increased and (2) that significant steps had been taken
to increase the dividend which were not communicated sufficiently by the

5
This presentation was incorporated into a Form 8-K filed with the SEC on September
28, 2004.

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statement that the dividend policy was “under review.” Appellants also contend
that Appellees’ failure to “retract” the May 2004 statement concerning the
dividend policy violated federal securities’ laws.
In addition to the facts pleaded in the their complaint, Appellants
reference statements made in a January 18, 2005 letter (appended to their
complaint) written by then TXU Associate General Counsel David Poole (the
“Poole letter”)6 and conclusions in an expert report prepared by Professor Linda
Allen (the “Allen Report”) which Appellants claim provides evidence that at the
time of the tender offer, Appellees were fully aware of the impending dividend
increase.
In the Poole letter, TXU’s counsel stated that management had been
contemplating a change in dividend policy since August 2004, but did not make
a final decision until after the close of the tender offer on October 13. The Poole
letter also asserted that TXU’s management would not make a decision
concerning the dividend policy until they had received information from certain
credit rating agencies, evaluating the impact of changes in dividend policy and
capitalization on the credit ratings of debt securities of TXU Corp. and its
subsidiaries. Appellants contend that this explanation, advanced here by the
Appellees, is implausible, pointing to conclusions made in the Allen Report. By
comparing the TXU restructuring and dividend policy changes with those of
other companies and evaluating the dates put forth in the Poole letter, the Allen
Report concludes that—despite the fact that the agencies had not given any
official evaluation of the dividend increase—TXU senior management likely

6
Appellants contend that the statements in the Poole letter should not be considered
when evaluating opposing inferences. Appellants fail to acknowledge that because they
attached the letter to their complaint (not to mention referenced the letter in the report of
their own expert), it is relevant for the purposes of evaluating a motion to dismiss. See
Tellabs, 127 S. Ct. at 2509 (stating that, in the context of a motion to dismiss, courts may
consider documents incorporated in the complaint by reference when evaluating whether
scienter has been established).

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 No. 08-10414

already knew during the tender offer period that the credit rating agencies
would not downgrade its issuer rating based on the common share dividend
increase. The Allen Report also concludes, based on Allen’s evaluation of the
general credit rating process of major credit rating agencies, that the credit
agency review could not be completed between October 12, 2004 (the date on
which Appellees furnished the credit agencies with paperwork concerning the
proposed dividend increase) and October 19, 2004, two days before management
recommended the increase.
Although the timing of the dividend increase, which was recommended by
TXU management just eight days after the close of the tender offer, is suspect,
Appellants have not provided facts sufficient to support a “cogent and
compelling” inference that Appellees made any statements intentionally or
recklessly to mislead TXU’s investors. In fact, it is not clear that Appellees ever
issued a materially misleading statement or omission of fact concerning the
dividend policy. The close proximity of the dividend increase to the end of the
tender offer, though it provides some support for an inference of scienter, is not
sufficient, without more, to establish a strong inference of the requisite intent.
See In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 555–56 (D. Del. 2002),
aff’d, 357 F.3d 322 (3d Cir. 2004) (holding that the fact that the offeror company
disclosed two successful transactions within weeks after tender offer was
completed does not establish that company had knowledge of these transactions
at time tender offer was made).
Appellants contend that they relied on the May 2004 press release which
stated that a dividend increase was not likely until 2006 when certain financial
benchmarks had been made, but reserved the right of the management to
consider other factors in determining if and when to change the dividend policy.
Appellants have not presented any evidence of scienter with regard to this
statement. There is no evidence that at the time this statement was made in

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May 2004, TXU management, specifically Wilder, was aware or should have
been aware that TXU planned to increase the dividend prior to the financial
benchmarks being reached.
The second statement pointed to by Appellants, made at the start of the
tender offer period, was that the dividend policy was “under review.” Appellants
contend that this statement was made to mislead investors because at the time
it was made, substantial steps had been taken toward a dividend increase which
warranted a more substantial disclosure or a “retraction” of the May 2004 press
release statements. Again, Appellants’ evidence does not support a strong
inference that, on the date this statement was issued, Appellees knew and were
at least reckless in failing to disclose that there was an impending dividend
increase. Although the Allen Report provides some support for the notion that
TXU’s management likely made preparations for the dividend increase before
the close of the tender offer, such preparations do not support a cogent and
compelling inference that Wilder or other TXU management were intentionally
or recklessly misleading investors. In fact, the statement that the dividend
policy was “under review” conveyed that TXU had taken some steps in
evaluating a change in the dividend policy.
The precedent of this court does not support the notion that TXU’s
disclosure that its policy was “under review” was insufficient, let alone
fraudulent, under federal securities laws. TXU had disclosed that its dividend
policy was “under review,” but that it could not predict if, or when, management
would ultimately recommend a dividend increase. TXU management did not
recommend the dividend increase until sometime after October 19, 2004 and the
Board did not actually approve a dividend increase until October 22, 2004. Both
of these dates fell after the expiration of tender offer on October 13, 2004. This
court’s precedent advises that a “middle course” is proper when making
disclosures concerning future plans which have not been fully determined in the

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context of a tender offer. Susquehanna Corp. v. Pan Am. Sulphur Co., 423 F.2d
1075, 1085–86 (5th Cir. 1970) (holding that a tender offeror “is not required to
make predictions of future behavior, however tentatively phrased, which may
cause the offeree or the public investor to rely on them unjustifiably”). TXU
could not have disclosed that a dividend increase was likely during the tender
offer without running a risk of liability if the dividend increase was not
ultimately approved. See id. The statement that the dividend policy was “under
review” appears to be a statement that, although vague, accurately represents
the state of the dividend policy during the tender offer period. Furthermore,
given that the May 2004 press release stated that the Board could consider
factors other than the outlined financial benchmarks when determining whether
to change the dividend policy, the statement in the tender offer materials that
the dividend policy was currently “under review” was entirely consistent with
the press release, and obviated the need to retract the May 2004
representations.
The statement made by Wilder during his presentation provides a closer
question as to whether the Appellants have established scienter. Appellants
contend that Wilder’s presentation reiterated the structure stated in the May
2004 press release, conveying that a dividend increase was contingent upon the
completion of certain financial benchmarks. In order to satisfy the scienter
requirement, Appellants must establish that Wilder made this representation
knowingly or recklessly in order to mislead investors.
In the first instance, there is a question as to whether Wilder’s
presentation was a misstatement. Although the phrase “dividend payout” is
contained in a flow chart which is preceded by the “debt reduction” step, the
dividend payout step does affirmatively state that it is presently “under review,”

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consistent with TXU’s prior disclosures.7 Even assuming that the presentation
was a misleading statement concerning the dividend policy, Appellants have not
provided evidence to support a strong inference of scienter. Appellants again
point to the Allen report, which provides some circumstantial evidence that
Wilder may have known at the time of the presentation that a dividend increase
was imminent. Appellants also point to Wilder’s position in TXU, and assert
that as CEO he must have been present during Board discussions of a possible
dividend increase. Appellants also contend that because Wilder was a TXU
stockholder, he stood to benefit from the repurchase of Appellants’ securities at
a low price. This court, in applying Tellabs and the pleading standards of the
PSLRA, has discounted similar types of evidence against company executives as
insufficient to establish scienter. Ind. Elec., 537 F.3d at 535 (holding that
“pleading[s] of scienter may not rest on the inference that defendants must have
been aware of the misstatement based on their positions with the company”); see
also id. at 543–44 (holding that monetary rewards for executives tied to company
performance are standard and “can hardly be the basis on which an allegation
of fraud is predicated”).
Even assuming Wilder was aware that the Board was contemplating a
dividend increase, this knowledge alone would not suffice to establish that
Wilder intended to deceive investors or was reckless in revealing only that the
dividend policy was under review at the time of the tender offer. Shivangi v.
Dean Witter Reynolds, Inc., 825 F.2d 885, 889 (5th Cir.1987) (holding that
“knowledge of omitted facts does not itself establish scienter”). These motive
allegations, in conjunction with the conclusions of the Allen report and the
timing of the dividend increase, provide a basis for some inference of fraud, but

7
In addition, the chart does not ever explicitly state that the various steps are
dependent upon one another such that the dividend policy could not be evaluated until the
other capital allocation goals had been achieved.

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this inference is merely permissible, and does not rise to the “cogent and
compelling” level required by Tellabs. Even if Wilder was negligent in
representing that the dividend payout was contingent upon the completion of
certain debt reduction goals, negligence does not suffice for scienter purposes.
Ind. Elec., 537 F.3d at 533 (noting that “simple or even inexcusable negligence”
does not constitute the requisite state of mind for a federal securities case).
Furthermore, as this court stated in Indiana Electric, under Tellabs, we
are obligated to consider inferences opposing the allegations of fraud. Id. Here,
it can be inferred that Appellees had not made a final decision concerning a
change in the dividend policy during the tender offer period, and were thus
truthfully stating that the policy was under review. This constitutes a plausible
nonculpable explanation of Appellees’ actions. The credit rating agencies’
evaluation of the proposed dividend increase—according to the dates in the Poole
letter, which was appended to Appellants complaint, and the dates referenced
in Appellants’ expert report—was not furnished to TXU until after the end of the
tender offer period. In addition, TXU management did not recommend a
dividend increase, nor did the Board approve one, until after the close of the
tender offer. Given that TXU and Wilder did disclose that the dividend policy
was “under review” during the tender offer period, the inference of non-
fraudulent intent weighs in favor of the Appellees. Although it is a close
question, the facts alleged support at most only a permissible inference of
scienter. Taking into account all of the facts in the aggregate, as well as
inferences opposing fraudulent intent, Appellants have failed to raise a strong
inference that TXU, and specifically Wilder, acted with the intent to deceive,
manipulate, or defraud or acted with severe recklessness in making statements
concerning the dividend policy.8

8
Appellants’ claim against Wilder as a controlling person under Section 20(a) of the
Securities Exchange Act of 1934 “is secondary only and cannot exist in the absence of a

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IV.
Appellants also alleged a claim for common law fraud under Texas law in
their amended complaint. The common law fraud claim was based on the same
alleged representations and/or omissions underlying Appellants’ federal
securities claims. The elements of common law fraud under Texas law are (1)
a material misrepresentation; (2) that is false; (3) made with knowledge of its
falsity or recklessness as to its truth; (4) made with the intention that it should
be acted upon by another party; (5) relied upon by the other party, and (6)
causing injury. Jag Media Holdings Inc. v. A.G. Edwards & Sons Inc., 387 F.
Supp. 2d 691, 709 (S.D. Tex. 2004); Ernst & Young, L.L.P. v. Pac. Mut. Life Ins.
Co., 51 S.W.3d 573, 577 (Tex. 2001).
Appellants contend that the claim should not have been dismissed
because the district court found that the second amended complaint adequately
specifies with particularity which statements contain the alleged
misrepresentation and omissions, when and where those statements were made,
why the Appellants believe them to be misleading, and that the alleged
misstatements and omissions were material to the decision to participate in the
tender offer. Appellants contend that because common law fraud claims are not
subject to the PSLRA scienter requirements, they have adequately pleaded fraud
even if their pleading was deficient with regard to scienter under the PSLRA.
It is true that common law fraud claims are not subject to the heightened
“strong inference” of scienter standard imposed by the PSLRA. Dorsey v.
Portfolio Equities, Inc., 540 F.3d 333, 341 (5th Cir. 2008). However, the claims
are still subject to the pleading standard of Rule 9(b). Id. (“Although the
PSLRA’s stricter scienter requirement does not apply to state-law fraud claims,

primary violation.” Southland, 365 F.3d at 383. Because we have found the pleadings of
Sections 14(e), 10(b), and Rule 10b-5 liability inadequate, it must be dismissed.

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Rule 9(b) nevertheless incorporates an element of scienter.”). This court has
stated, in the context of a state law securities fraud claim, that:
In order to adequately plead fraudulent intent, ‘a plaintiff
must set forth specific facts to support an inference of fraud.’
‘Alleged facts are sufficient to support such an inference if they
either (1) show a defendant’s motive to commit securities fraud or
(2) identify circumstances that indicate conscious behavior on the
part of the defendant.’

Herrmann Holdings, 302 F.3d at 565 (5th Cir. 2002) (quoting Lovelace v.
Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996)).
Appellants contend that TXU and Wilder had sufficient motive to
fraudulently induce investors to participate in the tender offer by withholding
information about the dividend increase—namely to complete the tender offer
and increase the value of Wilder’s personal stock holdings. However, this court
has held that certain motives alleged, especially those universal to corporations
and their officers, do not suffice to establish an inference of fraud under Rule
9(b). Herrmann Holdings, 302 F.3d at 565–66 (holding that allegations of delay
in order to benefit therefrom were insufficient); Melder v. Morris, 27 F.3d 1097,
1102 (5th Cir. 1994) (holding that alleged motive to successfully bring to fruition
offerings and enhance the value of the securities at issue was insufficient to
establish inference of fraud); Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061,
1068 (5th Cir. 1994) (holding that motive to inflate stock price and value of
defendants investments was insufficient to establish scienter under Rule 9(b)).
In light of this court’s precedent, the motive attributed to Appellees by
Appellants—the desire to complete a financially successful tender offer—is
insufficient to establish an inference of fraud under Rule 9(b).
In the alternative, the complaint also failed to plead specific facts
demonstrating “conscious behavior,” which according to our precedent employs
an even “more stringent standard” than the motive requirement. Lovelace, 78

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F.3d at 1018–19 & n.2. Appellants contend that Wilder was in a position that
demonstrated close personal involvement with the alleged fraud sufficient to
show that Wilder made any misrepresentation consciously. Appellants cite this
court’s opinion in Dorsey, in which we held that the defendants, by virtue of their
places as president and director of two very small businesses employing a total
of eight workers in which they ran all day-to-day operations, could be imputed
with knowledge of the company’s failure to make secured loans. 540 F.3d at
342–43. The factual situation here does not approximate that in Dorsey. There
are no special circumstances that require an assumption of Wilder’s fraudulent
intent because of his place as CEO of TXU, a large company with a complex
system of management and decision-making. The facts plead by Appellants do
not demonstrate that Wilder made any conscious misrepresentation concerning
the dividend policy. Because Appellants failed to adequately allege fraudulent
intent as required by Rule 9(b), the district court did not err in dismissing the
claim for common law fraud.
For the foregoing reasons, the judgment of the district court is
AFFIRMED.

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