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WHITE v. H&R BLOCK

United States District Court, S.D. New York


July 27, 2004.

PAUL WHITE, on behalf of himself and all others similarly situated, Plaintiff,
v.
H&R BLOCK, INC., et. al. Defendants.

The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District

OPINION & ORDER

Plaintiffs represent a class of persons who purchased common stock of defendant H&R Block ("Block") between November 8, 1997 and November 6, 2002 ("the Class Period"). Plaintiffs have sued Block under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), claiming that Block concealed from investors 20 class action lawsuits relating to Block's Refund Anticipation Loan ("RAL") program. Block has moved to dismiss both claims. As explained below, because plaintiffs were on notice of the facts underlying their claim more than two years before they sued, their claims are time-barred and defendants' motion to dismiss is granted.

  I.

  The court appointed John L. Ross and Robert T. Ross as Lead Plaintiffs on January 21, 2003. They purchased shares of Block common stock during the Class Period. (Consolidated Amended Class Action Complaint ("Compl.") ¶ 16) Plaintiffs Paul White, Richard J. Rodney, Michael F. McCormack and Yuchong Smith also purchased shares of Block common stock during the Class Period. (Id.)

  Defendant Block is a Missouri corporation with its principal offices in Missouri. (Id. at ¶ 17) Defendant Mark A. Ernst has been Chief Executive Officer of Block since January 2001, President since September 1999, and a member of the board of directors since 1999. (Id. at ¶ 18) Ernst was Chief Operating Officer of Block from September 1998 through December 2000 and Executive Vice President from September 1998 until September 1999. (Id. at ¶ 18) Defendant Frank J. Cotroneo joined Block in 2000 and now serves as Block's Senior Vice President and Chief Financial Officer. (Id. at ¶ 19) Defendant Frank L. Salizzoni served as President of Block from June 1996 until September 1999, Chief Executive Officer from June 1996 through December 2000, and Chairman of the Board from September 2000 until September 2002. (Id. at ¶ 20) Defendant Matthew A. Engel is Block's Assistant Vice President and Chief Accounting Officer. (Id. at ¶ 21) Defendant Cheryl L. Givens is Block's Vice President and Corporate Controller. (Id. at ¶ 22) Defendant Ozzie Wenich served as Block's Senior Vice President and Chief Financial Officer from at least the beginning of the Class Period until 2000. (Id. at ¶ 23) Defendant Patrick D. Petrie was Block's Vice President and Corporate Controller from at least the beginning of the Class Period until 1998. (Id. at ¶ 24).

  Plaintiffs' claims arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated by the Securities and Exchange Commission ("SEC"). (Id. at ¶ 12) Federal question jurisdiction therefore is present pursuant to 15 U.S.C. § 78aa and 28 U.S.C. § 1331, and venue in this court is proper under 28 U.S.C. § 1391(b) because a substantial part of the events giving rise to the action occurred in this district. (Id. at ¶ 13)

  II.

  The following facts are drawn from plaintiffs' Consolidated Amended Class Action Complaint and related documents. All of the documents reviewed for the purposes of deciding defendants' motion to dismiss are well within the scope of this court's review on a dismissal motion as they were (i) incorporated into the complaint either by reference or through plaintiffs' reliance in making the allegations in the complaint, see Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (the review of documents on a dismissal motion may encompass "any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference . . . and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit") (citations omitted); I. Meyer Pincus & Associates, P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991) (the review may include a pertinent document where "the complaint contains only `limited quotation' from that document"), or (ii) constitute "matters of which judicial notice may be taken under Fed.R.Evid. 201," Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). Plaintiffs' well-pleaded allegations have been accepted as true for the purpose of this motion, see Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 164 (1993), and all reasonable inferences have been drawn in plaintiffs' favor, see Thomas v. City of New York, 143 F.3d 31, 37 (2d Cir. 1998) (internal quotation marks and citation omitted).

  Block's RAL program enabled customers who were owed a refund on their income taxes to take loans in the amount of their expected refunds. (Compl. ¶ 3) RAL customers could then use their anticipated refund sooner than if they had to wait for the refund from the government. (Id.) Some RAL customers began to sue Block beginning around 1992 for failing to disclose that Block had a 50% participation in the interest on these loans and that the bank which made the loans paid Block a fee for each loan. (Id. at ¶¶ 3, 5) These customers claimed that Block misled them into believing that they were receiving their actual refund rather than an interest-bearing loan and that Block's actions constituted Truth-in-Lending Act violations, usury, breach of contract, fraud, unfair and deceptive trade practices, negligent or intentional misrepresentation, R.I.C.O. violations, and breach of fiduciary duty. (Id.) During the Class Period, Block made numerous filings with the SEC, each of which was signed by one or more of defendants, and issued several press releases. (Id. at ¶¶ 35-67) Plaintiffs allege that defendants mentioned the RAL litigation specifically in three of Block's SEC filings and press releases. (Id. at ¶¶ 50, 54) Block discussed the RAL litigation in a press release issued May 2, 2000, stating that it had reserved $5 million for a pending settlement of class action lawsuits involving refund anticipation loans and that Block had not lost any of the lawsuits filed in the RAL litigation. (Id. at ¶ 50) Block again referred to the RAL litigation in its Form 10-K405 filed with the SEC July 28, 2000. (Id. at ¶¶ 51-54) Block reported its year-end financial results as of April 30, 2000 in the Form 10-K405 and incorporated by reference its Annual Report to Shareholders. (Id.) In Block's Annual Report, Block reported that it had "provided for the pending settlement of class action lawsuits involving refund anticipation loans," that there had not been "any final judgments rendered against it" in the RAL litigation, and that it admitted no wrongdoing in the settlement agreement. (Id. at ¶ 54) Finally, Block addressed the RAL litigation in a press release issued September 26, 2000, in which Block announced a nationwide settlement of the RAL litigation. (Id. at ¶ 56) Plaintiffs allege that beginning July 30, 2001, Block added a new section to its Form 10-K405 filing entitled "Legal Proceedings." (Id. at ¶ 60) Although Block did not refer expressly to the RAL litigation, the new section reported that Block was "involved in various litigation and claims as both defendant and plaintiff relating to matters which arise in the normal course of business which management believes will not have a material adverse effect on the Company's consolidated results of operations or financial position." (Id.) This new section appeared again in Block's Form 10-K405 filed July 29, 2002, and again did not expressly reference the RAL litigation. (Id. at ¶¶ 64-66) The language of the "Legal Proceedings" section in the 2002 Form 10-K405 was substantially the same as that in the 2001 Form 10-K405, but the 2002 Form 10-K405 also reported that the amounts claimed in the pending legal proceedings were "substantial in some instances" and that "the ultimate liability" was "difficult to predict." (Id. at ¶ 66)

  On November 1, 2002, Avalon Research Group, Inc. ("Avalon") released a report discussing two class action lawsuits filed against Block in Texas seeking damages of up to $2 billion. (Id. at ¶ 68) Trading on Block's stock was temporarily halted that day, and Block issued a press release in response to "market rumors regarding litigation" in which Block echoed the language of its 2001 and 2002 Forms 10-K405, stating that while the amounts claimed in the litigation were substantial and that ultimate liability was difficult to predict, management did not believe that any amounts that might be paid by Block would be material. (Id. at ¶ 69) Block also reported in that press release that it had not "lost any of the more than 20 class action lawsuits filed against it involving the refund anticipation loan program" and that it had "agreed to a settlement on a nationwide basis." (Id.) Block explained that the settlement involved a $25 million fund, of which Block would pay half, and that the settlement would be reviewed in a fairness hearing two weeks later. (Id.) Block further reported that the settlement was not material. (Id.) After trading in Block's stock resumed, the price of Block's shares dropped 8% by the close of trading on November 1, 2002. (Id. at ¶ 71) Block's stock then dropped 14% on November 7, 2002, the day after a Texas court informed Block that it intended to order Block to repay about $75 million in tax service fees to clients involved in the RAL litigation. (Id. at ¶ 72).

  Plaintiffs claim that Block's press releases and SEC filings during the Class Period were false and misleading because they "concealed the very existence of the RAL litigation." (Id. at ¶ 76) Plaintiffs concede that defendants did make some references to the RAL litigation, but they argue that defendants disclosed only "good news" about those actions. (Id.) Plaintiffs allege several specific facts that defendants failed to disclose during the Class Period: (1) that Block faced over 20 class action lawsuits; (2) the nature of the claims in these lawsuits; (3) Block's purported liability; (4) charges of excessive interest rates on the RAL loans that Block helped arrange; (5) that damages could reach $2 billion; (6) that some of these lawsuits were "successful" in a "number" of state and federal courts; and (7) that the settlement Block announced in its November 1, 2002 press release was "collusive," "that Block was not even a party to that settlement," and that the settlement had been rejected by the Court. (Id. at ¶¶ 76-77).

  Additionally, plaintiffs contend that Block's statements that it had not lost any of the RAL lawsuits and that there had been no final judgments against Block in any of the RAL lawsuits were misleading because Block failed to disclose that "most of those actions were ongoing, or that the plaintiffs in some of those actions had overcome motions to dismiss or that some had obtained class certification." (Id. at ¶ 77) Plaintiffs claim also that Block's financial statements filed during the Class Period failed to comply with Generally Accepted Accounting Principles ("GAAP"), and are therefore "presumptively misleading and inaccurate." (Id. at ¶¶ 78-79) Finally, plaintiffs claim that defendants understated Block's liabilities, thereby misrepresenting its financial stability, during the Class Period, by reserving only $5 million when Block should have reserved at least $1 billion for potential liability from the RAL litigation. (Id. at ¶ 84) According to plaintiffs, each individual defendant, by virtue of his position at Block, knew of all the facts alleged above and exercised power and influence to cause Block to make false and misleading statements during the Class Period. (Id. at ¶¶ 85, 98-100).

  III.

  Plaintiffs have brought two claims against defendants, the first under Section 10(b) of the Exchange Act and Rule 10b-5, and the second under Section 20(a) of the Exchange Act. (Id. at ¶¶ 1, 96, 98, 101) Defendants argue that both claims are time-barred under the limitations provision of the Sarbanes-Oxley Act, 28 U.S.C. § 1658, which states:

[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws . . . may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.
Plaintiffs do not dispute that the limitations period set by the Sarbanes-Oxley Act applies to this action. However, they do dispute that their claims are time-barred, arguing that five years is the applicable period and that the Class Period extends five years prior to the date plaintiffs filed the first complaint in this case. Defendants, on the other hand, argue that the two-year limitations applies because plaintiffs should have discovered the facts surrounding the RAL litigation more than two years before filing this action.

  The two-year limitations period begins to run after a plaintiff has "notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge." See LC Capital Partners, LP v. Frontier Insurance Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003) (internal quotation marks omitted). This is often called "constructive notice" or "inquiry notice." Id. "Such circumstances are often analogized to `storm warnings.'" Id. (internal quotation marks omitted). The Court of Appeals has explained:

The duty of inquiry results in the imputation of knowledge of a fraud in two different ways, depending on whether the investor undertakes some inquiry. If the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose. However, if the investor makes some inquiry once the duty arises, we will impute knowledge of what an investor `in the exercise of reasonable diligence, should have discovered' concerning the fraud, and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud.
Id. (internal citations omitted). Because plaintiffs filed the first complaint in November 2002 and have not alleged that they undertook any inquiry at any time, whether their claims are time-barred depends on whether a duty of inquiry arose prior to November 2000, two years before the first complaint was filed. See id.

  "Dismissal is appropriate when the facts from which knowledge may be imputed are clear from the pleadings and the public disclosures themselves." In re Ultrafem Inc. Sec. Litig., 91 F. Supp.2d 678, 692 (S.D.N.Y. 2000). Defendants argue that the pleadings and public disclosures here show that plaintiffs, and the market as a whole, were on "inquiry notice" concerning the RAL litigation as early as 1994 and as late as July 2000. Defendants claim that a string of published court decisions in the RAL litigation dates back to 1994 and that these decisions were all publicly available. Defendants emphasize the allegations in the complaint that in July 2000 Block issued a press release concerning a settlement agreement in the RAL litigation, that it released to its shareholders its annual report discussing the settlement agreement, and that it publicly disseminated its annual report by incorporating the report into its Form 10K filed with the SEC. Defendants also emphasize the press reports published before November 2000 concerning the RAL litigation. According to defendants, all of this public information put plaintiffs on "inquiry notice" before November 2000.

  Plaintiffs argue that the public filings and news coverage did not provide "notice of the number, type and location of the pending RAL class actions sufficient to trigger the statute of limitations." (Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Consolidated Amended Class Action Complaint ("Pl. Mem.") 23) However, "[p]laintiffs need not be able to learn the precise details of the fraud. . . ." Ultrafem, 91 F. Supp.2d at 692 (internal quotation marks omitted). They need only "be capable of perceiving the general fraudulent scheme based on the information available to them." Id. One opinion in this District has held:

The information that triggers inquiry notice of the probability of an alleged securities fraud is any financial, legal, or other data, including public disclosures in the media about the financial condition of the corporation and other lawsuits alleging fraud committed by the defendants, available to the plaintiff providing him with sufficient storm warnings to alert a reasonable person to the probability that there were either misleading statements or significant omissions involved in the sale of the securities.
Dietrich v. Bauer, 76 F. Supp.2d 312, 343-44 (S.D.N.Y. 1999) (internal quotation marks omitted).

  Here, the public information concerning the RAL litigation was more than sufficient to reveal the "general fraudulent scheme" alleged by plaintiffs. The fraud alleged by plaintiffs is, succinctly stated, the "conceal[ment] from investors [of] the existence of 20 class action lawsuits in connection with Block's Refund Anticipation Loan (`RAL') Program." (Compl. ¶ 2) This is not a case involving private information held internally by the company, hidden away from the public and available only to the officers or directors. To the contrary, the information that plaintiffs allege Block concealed involved public filings in public proceedings in publicly accessible courts all across the country.*fn1 There is no allegation that the numerous pleadings and motions in any of these proceedings, much less all of them, were filed under seal. In short, the "concealed" information was inherently public information.

  Even assuming arguendo that Block could have concealed enough of the RAL litigation that plaintiffs and market professionals would not have had actual knowledge of the litigation before November 2000, there was nevertheless more than enough publicly disseminated information to put plaintiffs on "inquiry notice" concerning the RAL litigation before November 2000. Additionally, Block itself publicly discussed the RAL litigation before November 2000. On May 2, 2000, Block disclosed that it had reserved $5 million for a pending settlement in the RAL litigation. (Compl. at ¶ 50) Then, on July 28, 2000, Block discussed the RAL litigation in its Annual Report to Shareholders, which was incorporated into a public SEC filing and which reported that Block had "provided for the pending settlement of class action lawsuits involving refund anticipation loans." (Id. at ¶¶ 51-54) Finally, Block discussed the RAL litigation in a press release issued September 26, 2000, in which Block announced a nationwide settlement of the RAL litigation. (Id. at ¶ 56).

  If the public filings and press releases were not enough to put plaintiffs on "inquiry notice," there were also numerous articles about the RAL litigation published before November 2000 in newspapers all over the country.*fn2 Many of these articles discussed the "number, type and location of the pending RAL class actions" in detail. See, supra, note 2. In particular, plaintiffs certainly could not — or should not — have overlooked the torrent of articles published around the country on July 25, 2000, reporting that a court had rejected a $25 million settlement in a lawsuit over Block's RAL program.*fn3 These articles were clear "storm warnings" which would have led a reasonable investor or market professional to inquire into the RAL litigation. See In re Merrill Lynch & Co., Inc., 273 F. Supp.2d 351, 389 (S.D.N.Y. 2003) (Pollack, J.) ("The plethora of public information would have required even a blind, deaf, or indifferent investor to take notice of the purported alleged `fraud.' Every investor of reasonable intelligence would have been absolutely on inquiry notice.") (emphasis in original).*fn4 From the press articles and other public information concerning the RAL litigation, plaintiffs were on "inquiry notice" concerning the RAL litigation well before November 2000. See LC Capital, 318 F.3d at 154 (holding that a single press article "contribut[ed] to a duty of inquiry" and that the complaint was therefore time-barred); Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, (2d Cir. 1975), abrogated on other grounds by Menowitz v. Brown, 991 F.2d 36, 41 (2d Cir. 1993) (holding that plaintiffs were on inquiry notice concerning possible fraud after financial newspapers published articles reporting an SEC action against the company); In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 289 F. Supp.2d 416, 423 (S.D.N.Y. 2003) (Pollack, J.) (holding that "there was clearly enough publicly available information to put the plaintiffs on inquiry notice of their claims more than two years before the commencement of any of these actions"); Ultrafem, 91 F. Supp.2d 678, 691-92 (S.D.N.Y. 2000) (holding that a single press article "placed plaintiffs on inquiry notice" and that the complaint was therefore time-barred). Because plaintiffs have not alleged that they conducted any inquiry at any time, knowledge of the RAL litigation is imputed to them as of the date the duty to inquire arose. See LC Capital, 318 F.3d at 154. The latest date upon which the duty to inquire could have arisen was July 25, 2000 given the flood of press articles published on that date and other information publicly available then, and therefore plaintiffs' complaint is time-barred because it was filed more than two years after discovery of the facts constituting the violation.*fn5 See 28 U.S.C. § 1658. Accordingly, defendants' motion to dismiss both of plaintiffs' claims is granted.

  IV.

  A. Plaintiffs' Section 10(b) and Rule 10b-5 Claim

  Defendants have also moved to dismiss plaintiffs' Section 10(b) and Rule 10b-5 claim on the merits. Section 10(b) makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Rule 10b-5 lists the following among the acts proscribed by Section 10(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 the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).

  To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege that the defendant: "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998) (citations omitted). Further, "it is well-established that a securities fraud complaint must also plead certain facts with particularity in order to state a claim. Fed.R.Civ.P. 9(b) requires that, whenever a complaint contains allegations of fraud, `the circumstances constituting fraud . . . shall be stated with particularity." Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000). "A plaintiff cannot base securities fraud claims on speculation and conclusory allegations." Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001). Defendants argue that plaintiffs have failed to plead scienter and materiality. 1. Scienter

  Section 10(b)'s scienter requirement "demands that plaintiffs establish a strong inference of fraudulent intent either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 99-100 (2d Cir. 2001). "To show motive and opportunity, plaintiffs must allege a likelihood that defendants could realize `concrete benefits' through the deception." Id. at 100. Under the "conscious misbehavior" theory, plaintiffs "must show that they alleged reckless conduct by the [defendant], which is at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." In re Carter-Wallace, Inc., Securities Litigation, 220 F.3d 36, 39 (2d Cir. 2000) (internal quotation marks omitted).

  a. Motive and Opportunity

  According to plaintiffs, defendants' motive for committing the purported fraud was "to produce the appearance of prospering performance and financial results." (Compl. ¶ 88) However, the Court of Appeals has expressly held such an allegation as insufficient to establish motive for committing securities fraud. See, e.g., Kalnit, 264 F.3d at 139-40; Novak, 216 F.3d at 307; Chill v. General Electric Co., 101 F.3d 263, 268 (2d Cir. 1996); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994). In Novak, the Court held:

Plaintiffs could not proceed based on motives possessed by virtually all corporate insiders, including: (1) the desire to maintain a higher corporate rating, or otherwise sustain the appearance of corporate profitability or of the success of an investment; and (2) the desire to maintain a high stock price in order to increase executive compensation or prolong the benefits of holding corporate office. Rather, plaintiffs had to allege that defendants benefitted in some concrete and personal way from the purported fraud.
Id. at 307-08 (internal citations and quotation marks omitted). Plaintiffs have not alleged any personal benefit — much less a "concrete benefit" — to defendants arising from the purported fraud. Indeed, plaintiffs have failed to plead anything more than a general motive "possessed by virtually all corporate insiders," and thus they have failed to plead motive sufficient to sustain a securities fraud claim. Id. at 307.

  Plaintiffs have also failed to plead "opportunity." "Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged." Id. The means by which plaintiffs claim defendants sought to commit securities fraud was silence or anodyne references to the RAL litigation in Block's public filings and press releases. First, as already discussed, plaintiffs have not alleged any "concrete benefits" that inured to defendants from the purported fraud. Second, given that the RAL litigation was the subject of a trove of public information, ranging from public court filings to numerous press articles, see, supra, at 12-16, the "prospect of achieving concrete benefits by the means alleged" was far from "likely." Information on the RAL litigation was publicly available from any court where the cases were pending as well as in the innumerable press articles covering the litigation. See Id. Information was also publicly available from Block itself in its Annual Report to Shareholders and SEC filings. See Id. In short, Block had no "opportunity" to conceal the RAL litigation no matter how much it may have wanted to.

  b. Conscious Misbehavior or Recklessness

  Where a plaintiff has "failed to demonstrate that defendants had a motive to defraud the shareholders, he must produce a stronger inference of recklessness." Kalnit, 264 F.3d at 143 (emphasis added). "[S]ecurities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation." Novak, 216 F.3d at 308. Plaintiffs allege that defendants "recklessly engaged in acts, transactions, practices and a course of business which operated as a fraud upon Plaintiffs and the other members of the Class." (Compl. ¶ 87) However, plaintiffs' conclusory claim is unsupported by pleaded facts. See Kalnit, 264 F.3d at 142.

  Plaintiffs allege that defendants "acted with reckless disregard for the truth by failing to ascertain and disclose the true facts [sic] in the statements made by them or other Block personnel to the SEC, Plaintiffs, and other members of the Class." (Compl. ¶ 89) However, plaintiffs never allege what these "true facts" were. "Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information." Novak, 216 F.3d at 308. Plaintiffs have not identified any particular, non-public reports or statements in the possession of defendants containing facts contrary to defendants' public statements about the RAL litigation.

  Plaintiffs also allege that defendants "recklessly disregarded that such statements would be issued or disseminated to the investing public." (Compl. ¶ 90) However, as already discussed above, there was a wealth of public information on the RAL litigation, ranging from court filings to numerous press articles. See, supra, at 12-16. It was not unreasonable for defendants to believe that the investing public would give these court filings and news articles the same attention as defendants' public statements, in which case the investing public would be well aware of the RAL litigation. As in Kalnit, this is not a case involving "affirmative misstatements," but "merely a failure to disclose" information. 264 F.3d at 144. Even assuming that the investing public miraculously overlooked all the public information concerning the RAL litigation, such a turn of events would be so highly improbable given all the public information available that it could not possibly be deemed "so obvious that the defendant must have been aware of it." Carter-Wallace, 220 F.3d at 39. Defendants' failure to discuss publicly the RAL litigation at length — and defendants did discuss it publicly in some detail, as discussed above — can hardly be characterized as "an extreme departure from the standards of ordinary care." Id.

  Plaintiffs further allege that "Defendants only disclosed good news about" the RAL litigation, and that "they failed to disclose that most of those actions were ongoing, or that the plaintiffs in some of those actions had overcome motions to dismiss or that some had obtained class certification." (Compl. ¶ 77) However, "as long as the public statements are consistent with reasonably available data, corporate officials need not present an overly gloomy or cautious picture of current performance and future prospects." Novak, 216 F.3d at 309. "The fact that management's optimism about a prosperous future turned out to be unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness." Rothman, 220 F.3d at 90. "[A]llegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud. Novak, 216 F.3d at 309. "Corporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them." Id.

  Defendants' positive statements about Block's success in the RAL litigation was consistent with the data available pertaining to the RAL litigation. For example, Block won a summary judgment in RAL litigation in South Carolina which was affirmed by the Fourth Circuit on appeal. See Cade, 1993 U.S. Dist. LEXIS 19042. Block won a series of dismissal motions in both state and federal courts in Illinois. See Beckett, 1994 U.S. Dist. LEXIS 17714, aff'd by, 714 N.E.2d 1033. Block won a summary judgment in Pennsylvania. See Basile, 897 F. Supp. 194. Block defeated class certification in Georgia, a holding affirmed by the Eleventh Circuit on appeal, and plaintiffs then voluntarily dismissed the action. See Buford, 168 F.R.D. 340, aff'd by, Jones, 117 F.3d 1433. Block won a summary judgment in multiple actions in Illinois, one of which was affirmed on appeal. See Peterson, 971 F. Supp. 1204; Peterson, 22 F. Supp.2d 795; Washington, 716 N.E.2d 882. Block won dismissal against all but one claim in New York and defeated class certification as to the remaining claim. See Carnegie, 703 N.Y.S.2d 27. This is just a sample of Block's repeated success in the RAL litigation.

  In view of this success, Block did not act unreasonably in stating that management believed that the RAL litigation would "not have a material adverse effect on the company's consolidated results of operations or financial position." (Compl. ¶ 69) Indeed, Block acted reasonably in "not present[ing] an overly gloomy or cautious picture of" the RAL litigation. Novak, 216 F.3d at 308-09. The Second Circuit has "refused to allow plaintiffs to proceed with allegations of `fraud by hindsight,'" and plaintiffs will not be permitted to do so here. See Novak, 216 F.3d at 308-09.

  Additionally, plaintiffs claim that defendants should have reserved at least $1 billion for potential liability in the RAL litigation. (Compl. ¶ 84) However, plaintiffs do not allege that Block has actually suffered any liability in the RAL litigation. The closest Block has come to actual liability according to plaintiffs' own allegations was when "a Texas court said that it would order Block to repay nearly $75 million in tax service fees to clients in an RAL class action lawsuit," but there is no allegation that any such order was ever entered by that Court or that Block actually repaid any such fees. (Compl. ¶ 72) In fact, plaintiffs themselves allege that the Texas lawsuit was nearly settled, but that this settlement was ultimately rejected by the Court and the case is apparently ongoing. (Id. at ¶¶ 73, 75) Therefore, based on plaintiffs' allegations, Block has not paid the plaintiffs in the Texas action — or any other action — anything. It appears that Block continues to enjoy success in the RAL litigation, and thus the $1 billion reserve demanded by plaintiffs would appear unreasonable. But even assuming arguendo that Block should have reserved $1 billion for the RAL litigation, defendants' decision not to do so would be nothing more than poor business judgment on the facts alleged by plaintiffs, and "poor business judgment is not actionable under section 10(b) and Rule 10b-5." Rothman, 220 F.3d at 90 (2d Cir. 2000).

  Finally, plaintiffs allege that Block's public filings violated GAAP principles. (Compl. ¶¶ 66-67) However, "allegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim. Only where such allegations are coupled with evidence of `corresponding fraudulent intent' might they be sufficient." Novak, 216 F.3d at 309. Because plaintiffs have failed to demonstrate fraudulent intent, as discussed above, their allegations of GAAP violations are insufficient alone to state a securities fraud claim. Plaintiffs have not pleaded facts which show that "defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation." Novak, 216 F.3d at 308. Plaintiffs' conclusory claims do not establish "the stronger inference of recklessness" required to state a securities fraud claim. See Kalnit, 264 F.3d at 142-143. Accordingly, plaintiffs have failed to plead scienter, and defendants' motion to dismiss plaintiffs' claim under Section 10(b) and Rule 10b-5 is granted.

  2. Materiality

  "An omission is material if there is `a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.'" Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). "Material facts include those that affect the probable future of the company and that may affect the desire of investors to buy, sell, or hold the company's securities." Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (internal quotation marks omitted). "The Supreme Court has expressly stated that in such circumstances no single event or factor is necessarily determinative of the materiality inquiry." Id. In their motion to dismiss, defendants argue that plaintiffs are relying on the "fraud-on-the-market" theory, and plaintiffs do not dispute this in their response. The "fraud-on-the-market" theory holds that "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations." Basic, 485 U.S. at 246 (emphasis added). The Second Circuit, among others, has recognized a corollary to the fraud-on-the-market theory called the "truth-on-the-market" defense. See Ganino v. Citizens Utilities Co., 228 F.3d 154, 167 (2d Cir. 2000). The Court of Appeals explained in Ganino:

Under this corollary, a misrepresentation is immaterial if the information is already known to the market because the misrepresentation cannot then defraud the market. A defendant may rebut the presumption that its misrepresentations have affected the market price of its stock by showing that the truth of the matter was already known. However, the corrective information must be conveyed to the public `with a degree of intensity and credibility sufficient to counter-balance effectively any misleading information created by' the alleged misstatements.
Id. Defendants argue that under the truth-on-the-market theory, defendants' alleged misstatements are immaterial because there was a wealth of information on the RAL litigation publicly available in the market from as early as 1993. See, supra, notes 1, 2, 3. "The truth-on-the-market defense is intensely fact-specific and is rarely an appropriate basis for dismissing a § 10(b) complaint for failure to plead materiality." Id. However, "rarely appropriate" is not the same as "never appropriate," and "[m]ateriality is a mixed question of law and fact." Id. at 162. As already discussed above, the facts here show that all the information plaintiffs claim was concealed by defendants was publicly available, see, supra, at 12-16, and on these facts the law renders defendants' purported misstatements immaterial. The RAL litigation involved public lawsuits brought by public filings in public courts, and the litigation was the subject of extensive press coverage, especially around June 25, 2000, as well as press releases and SEC filings from Block itself. Id. In short, the truth was all over the market.

  Further, the truth was available in the market with more intensity and credibility than was any purported misstatement from defendants. The truth about the RAL litigation was available from the courts themselves, where the lawsuits were filed. See, supra, note 1. Plaintiffs claim that investors should not be obligated to "scour county court houses across the country." (Pl. Mem. 20) But, as defendants point out, the market is comprised of more than ordinary investors; it is also comprised of market professionals, such as Avalon, and Avalon apparently had little trouble scouring these courthouses to gather information for its report on the RAL litigation which sparked this lawsuit against Block. (Compl. ¶ 68) Additionally, plaintiffs themselves characterize defendants' misstatements concerning the RAL litigation as "oblique" and "cryptic," and they allege that some of these misstatements were "buried" in "obscure portions of certain of the Company's public filings." (Pl. Mem. 5, 22, 23) Plaintiffs' argument that these "oblique" and "cryptic" misstatements entered the market with greater intensity than did numerous articles in such nationally-recognized publications as The New York Times makes no sense. See, supra, notes 2, 3.

  Plaintiffs' claim is undermined also by the theory upon which it is based — namely, fraud-on-the-market theory — because the market price of a stock is presumed to reflect "all publicly available information." Basic, 485 U.S. at 246 (emphasis added). Plaintiffs cannot use this presumption to argue that the market price reflected defendants' purported misstatements but not the true statements contained in Block's press releases and SEC filings or, more importantly, in the numerous articles from such publications as The New York Times. See, supra, notes 2, 3. If the market absorbed all public information, then it must have absorbed all the information available from the articles published in newspapers from coast to coast and the press releases and SEC filings of Block.

  Finally, plaintiffs' claim that defendants should have reserved at least $1 billion for potential liability from the RAL litigation is meritless. "When contingent or speculative events are at issue, the materiality of those events depends on `a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.'" Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (quoting Basic, 485 U.S. at 238). As discussed above, Block has enjoyed repeated success in the RAL litigation over the last decade. The probability that Block would face significant liability from the RAL litigation during the Class Period was small, which means that defendants' silence or limited discussion of the RAL litigation during that time was immaterial.

  On these facts, no reasonable juror could find "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Halperin, 295 F.3d at 357 (internal quotation marks omitted). The "total mix" of available information included the very information plaintiffs claim was concealed. Accordingly, plaintiffs have failed to plead materiality, and defendants' motion to dismiss plaintiffs' claim under Section 10(b) and Rule 10b-5 is granted.

  B. Section 20(a) Claim

  Plaintiffs have brought a second claim under Section 20(a) of the Exchange Act, alleging that defendants Ernst, Cotroneo, Salizonni, Engel, Givens, Wenich, and Petrie ("Individual Defendants") were "controlling persons" of Block and caused Block to engaged in the underlying fraud alleged in plaintiffs' Section 10(b) claim. "To make out a prima facie case under Section 20(a) of the Exchange Act, a plaintiff must show a primary violation [here, the alleged Rule 10b-5 violations] by the controlled person . . . and control of the primary violator by the targeted defendant [here, the individual defendants], and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person." Ganino, 228 F.3d at 170 (bracketed text in original); see also Marcus v. Frome, 275 F. Supp.2d 496, 503 (S.D.N.Y. 2003) (holding that individual defendant could not be culpable as controlling person under section 20(a) because plaintiff had failed to establish primary violation of controlled entity under section 10(b)). For the reasons explained above, plaintiffs fail to state a claim under Section 10(b) and Rule 10b-5 because they fail to plead scienter and materiality, and therefore Individual Defendants could not be held liable as controlling persons "because the allegations of the underlying liability of the controlled entity are insufficient." Marcus, 275 F. Supp.2d at 503. Accordingly, defendants' motion to dismiss plaintiffs' second claim under Section 20(a) is granted.

  IV.

  "[I]t is often appropriate for a district court, when granting a motion to dismiss for failure to state a claim, to give the plaintiff leave to file an amended complaint." Van Buskirk v. The New York Times Co., 325 F.3d 87, 91 (2d Cir. 2003). "[A] court granting a 12(b)(6) motion should consider a dismissal without prejudice when a liberal reading of the complaint gives any indication that a valid claim might be stated." Id. (internal quotation marks omitted). In particular, regarding claims of fraud, "[p]laintiffs whose complaints are dismissed pursuant to Rule 9(b) are typically given an opportunity to amend their complaint." Olsen, 136 F.3d at 276; see also Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986). "Where . . . plaintiffs specifically request leave to amend in the event that the court is inclined to dismiss on Rule 9(b) grounds, the failure to grant leave to amend is an abuse of discretion unless the plaintiff has acted in bad faith or the amendment would be futile." Caputo, 267 F.3d at 191; see also Luce, 802 F.2d at 56-57 (finding abuse of discretion where plaintiff requested leave to amend and court refused).

  Plaintiffs have not requested leave to amend, and for good reason. Each of plaintiffs' claims fails on grounds that cannot be remedied by amendment. No amount of repleading could overcome the legal effect of the public information available to plaintiffs more than two years before they filed this action. Indeed, plaintiffs would have to do more than merely amend their complaint; they would have to erase numerous press articles, court filings, press releases and SEC filings. Further, this case already features six complaints, including two amended complaints. For these reasons, amendment would be futile.

  * * *

  For the reasons set forth above, defendants' motion to dismiss is granted and plaintiffs' complaint is dismissed.

  SO ORDERED.


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