The opinion of the court was delivered by: LASKER
In this suit alleging securities fraud, common law fraud, and negligent misrepresentation, the defendants, Time Warner Inc. and four individual officers of the company,
move to dismiss the amended class action complaint
under Rules 9(b) and 12(b)(6), Fed. R. Civ. P., on the grounds that plaintiffs have alleged neither material misstatements nor material omissions and that the complaint does not allege scienter on the part of the defendants.
The events giving rise to the complaint followed the celebrated, or notorious, creation of Time Warner through the former Time, Inc.'s 1989 leveraged buyout of the former Warner Communications, Inc., which was consummated to defeat a competing $ 200 per share tender offer for Time from Paramount Communications, Inc., and which imposed a heavy debt load on Time Warner. Despite Time's and Warner's representations before the merger that shares of the combined company would have a value over $ 200, stock prices fell substantially below that level following the merger.
Against this background, the complaint alleges, Time Warner and the individual defendants misled purchasers of its stock during the asserted class period of December 12, 1990 through June 7, 1991 by falsely claiming that the company was undervalued and that the intrinsic value of its shares was far higher than the market reflected, particularly because, the company claimed, it was negotiating "strategic alliances" in which foreign businesses would acquire minority shares in Time Warner subsidiaries, and thereby would provide Time Warner with needed capital and enhanced global prospects. The complaint alleges that these claims were false and were inconsistent with the defendants' knowledge, which they fraudulently omitted to reveal, that the strategic alliances were unlikely to occur and that the company was considering an additional stock offering that it knew was inevitable and would further dilute the value of existing Time Warner shares. Compl. P95. The alleged motivation for this misleading behavior was defendants' desire "to maintain the impression that Time Warner was well positioned to achieve the generous share value which they had represented would be recognized following the merger of Time and Warner," Compl. P22, and their desire "to dispel the public perception created by the Company's continuing losses and enormous debt load that the merger injured the Company." Id.
During the class period, Time Warner did not mention the possibility of a new stock offering. Nevertheless, rumors of such an offering circulated on June 5, 1991, and Time Warner stock fell $ 6.25 to a closing price of $ 110.75 per share. On June 6 Time Warner announced its intention to make a variable-price stock offering of approximately 34.5 million shares to add to the 57.8 million then-existing shares. Time Warner stock closed on June 6 at $ 99.50 per share. On June 7 it closed at $ 94.625. When it became apparent that this initial plan would not succeed, Time Warner on July 12, 1991 announced a fixed-price offering. The July 12 closing price was $ 89.75 per share.
The complaint objects to several categories of statements, maintaining that they were materially misleading and that they rendered Time Warner's failure to reveal information concerning a possible stock offering materially misleading: first, statements by individual defendants that were quoted in the popular media or were released by Time Warner, and that are quoted in the complaint; second, unattributed statements quoted in the media and attributed to "Time Warner officials," that also are quoted in the complaint; third, unspecified but allegedly frequent informal contacts with persons who are not specifically identified in the complaint but are alleged to be influential Wall Street figures. Of the last category it is said that the statements were part of a Time Warner scheme to "provide information to securities analysts and others in order to promote the Company and purportedly inform the investment community of the current status and near and long-term prospects of the Company," Compl. P6, in support of Time Warner's efforts to gain market credibility. As evidence of Time Warner's attempt to influence the market in this way, the complaint cites analysts' reports and recommendations and media reports that suggest that Time Warner officials provided information underlying the reports.
A. Statements by Time Warner or Individual Defendants
The complaint recites statements made directly by the company or the individual defendants both before and during the class period, which, it alleges, created false expectations of imminent strategic alliances that would improve the company's outlook and stock price, and which even if true at one time gave rise to an ongoing duty on the part of Time Warner to inform investors if and when those expectations were unjustified.
Defendant Gerald Levin was quoted in the February 7, 1990 Wall Street Journal (ten months before the class period) as saying:
The combination of Warner and Time, Inc. assets is proving to be a very sturdy and growth-oriented set of businesses. This company is worth a hell of a lot more than $ 200.00 a share. It was then. It is now. Given the expansion opportunities, particularly in terms of geography and technology, the company would have been undersold, and that's truer today than it was last spring.
On November 30, 1990 (still before the beginning of the class period), the Wall Street Journal reported that defendant Steven Ross stated that Time Warner "continues to have serious talks that could lead to the sale of five or six separate minority stakes in its entertainment subsidiaries next year  . . . we want strategic alliances with partners thinking the same way we are." Compl. P50. The Wall Street Journal also reported, on a date unspecified in the complaint, that Ross stated in November 1990, "There may be four big industrial partners with one in Europe and two in Japan, or two in Europe and two in Japan. . . ." Compl. P51. And on December 3, 1990, Time Warner issued a press release stating that it had "received and continued to receive many expressions of interest in forming joint ventures all over the world." Compl. P52.
On March 7, 1991, Ross stated that the "company was in talks with possible buyers of stakes in some of its entertainment businesses," while on March 15 Nicholas said the company was "continuing talks with potential foreign partners," and added, "We're not selling or buying. We're partnering." Compl. P63. On April 11, Ross addressed an entertainment industry conference and stressed the need for entertainment corporations to develop "strategic alliances" "to provide access to new products or the markets that would otherwise be closed or difficult to penetrate." Compl. P64.
The May 13, 1991 issue of Business Week quoted Ross as saying that Time Warner was "currently engaged in nearly two dozen discussions in Europe and Asia that could link most of the world's entertainment and media companies in a complex web of relationships." Ross further stated in the same interview, "Our objective is to build global partnerships. . . . We are making alliances at the subsidiary level with the partners keeping their national identities and bringing their respective strengths to bear." Compl. P66.
B. Statements Attributed to Unnamed Time Warner Sources
An unnamed Time Warner spokesman said on February 15, 1991 that the company had "said all along that we are interested in the concept of international partnership, and we have been talking with many interested parties. . . . Now we are in the process of selecting from among them those that share our vision." Compl. P59. On February 20, the complaint alleges, "Time Warner stated" that it was still negotiating strategic alliances with "a significant number of parties." Compl. P60.
On April 19, 1991, an unidentified Time Warner spokesman stated that talks regarding possible mergers with Time Warner subsidiaries had "intensified." Compl. P65.
Finally, a Time Warner spokesman on June 5, 1991 "refused to comment" on rumors that Time Warner was contemplating a stock offering, and stated that the "company has been saying and continues to say that discussions to form partnerships are ongoing." Compl. P72. Time Warner announced its new offering the next day.
C. Analysts' and Media Reports Allegedly Influenced by Time Warner Informal Contacts
The complaint recites a number of media reports and market analysts' recommendations which, it maintains, support an inference that Time Warner informally disseminated sham "information" as to its prospects in an attempt to enhance the shares of its stock.
On November 27, 1990, still before the class period, Shearson Lehman issued a positive analyst's report that similarly stressed the potential benefits, including debt reduction, of strategic alliances believed to be under negotiation. The report stated, "Management has said that those negotiations involve the potential sale of minority equity interests in Time Warner assets." Compl. P49.
On December 12, 1990, at the beginning of the class period, the Wall Street Journal reported that Time Warner was engaged in "serious talks" toward strategic alliances. Compl. P54. On February 13, 1991, the Journal reported that Time Warner appeared to be closer to completing "a strategic alliance with one or more partners that would bring cash into the company while opening new world markets to Time Warner." The same story ...