UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
April 11, 2012
DEAN FREDERICK, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PENSION AND RETIREMENT GROUP, TEAMSTERS LOCAL 807 LABOR MANAGE- MENT FUND, LOCAL 138 PENSION TRUST FUND, CITY OF WESTLAND POLICE AND FIRE RE- TIREMENT SYSTEM, PLAINTIFFS, BOARD OF TRUSTEES OF CITY OF FORT LAUDERDALE GENERAL EMPLOYEES' RE- TIREMENT SYSTEM, PLAINTIFF-APPELLANT,
MECHEL OAO, IGOR V. ZYUZIN, STANISLAV A. PLOSCHENKO, VLADIMIR A. POLIN, DEFENDANTS-APPELLEES.*FN2
Appeal from the United States District Court for the Southern District of New York (Sullivan, Judge).
Bd. of Trs. of City of Fort Lauderdale Gen. Emps.' Ret. Sys. v. Mechel OAO, et al.
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court's Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation "summary order"). A party citing a summary order must serve a copy of it on any party not represented by counsel.
2 At a stated term of the United States Court of Appeals for the Second Circuit, held at the 3 Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on 4 the 11th day of April, two thousand twelve.
PRESENT: DEBRA ANN LIVINGSTON, RAYMOND J. LOHIER, JR., Circuit Judges, JED S. RAKOFF, District Judge.*fn1
UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED, AND DECREED 25 that the judgment entered on August 10, 2011 is AFFIRMED.
26 Plaintiff-Appellant, the Board of Trustees of the City of Fort Lauderdale General Employees' 27 Retirement System ("Plaintiff"), appeals from the district court's dismissal of its putative securities 28 class action against the Defendants-Appellees ("Defendants"), which include the Russian mining 29 and metallurgy corporation Mechel OAO ("Mechel") as well as Igor V. Zyuzin ("Zyuzin"), 30 Stanislav A. Ploschenko ("Ploschenko"), and Vladimir A. Polin ("Polin") (collectively "Individual 1 Defendants").*fn3 Plaintiff alleges that it purchased American Depository Receipts (ADRs) 2 corresponding to shares of Mechel when Mechel's stock price was inflated as a result of 3 misrepresentations regarding the reasons for a recent period of extremely high profits. Specifically, 4 Plaintiff alleges that Mechel informed investors that its prosperity was due to the prevailing high 5 prices for its products throughout the world, when in reality it was due to a variety of illegal 6 anticompetitive practices. Plaintiff brought suit against Mechel and the Individual Defendants, who 7 are alleged to have been officers of Mechel during the relevant period, under Section 10(b) of the 8 Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and 9 also sued the Individual Defendants under Exchange Act Section 20(a), 15 U.S.C. § 78t(a), alleging 10 control person liability. The district court dismissed Plaintiff's Second Amended Complaint 11 ("SAC") pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that it failed adequately to plead scienter 12 against any Defendant. We presume the parties' familiarity with the remaining underlying facts, the 13 procedural history, and the issues on appeal and revisit those topics below only as necessary to 14 facilitate this discussion.
15 We affirm largely for the reasons articulated in the district court's well-reasoned and 16 thorough opinion.*fn4 Plaintiff contends that the district court erred in declining to conclude that the 17 SAC adequately pleads scienter on a motive and opportunity theory. We disagree. The SAC's 18 assertions, taken as true, demonstrate merely the existence of motives that are "generally possessed 1 by most corporate directors and officers," which are insufficient to withstand a motion to dismiss.
2 Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001). With regard to the allegation that Zyuzin 3 pledged a significant percentage of his personal interest in Mechel as collateral for Mechel's debts, 4 it may be possible-we need not decide-that in some circumstances a corporate officer who has 5 pledged personal assets as collateral for the debts of the corporation may have a cognizable motive 6 to commit fraud. Here, however, the SAC fails to provide any details regarding the agreements 7 whereby Zyuzin allegedly pledged a portion of his Mechel stock as collateral. In the absence of 8 such details, the SAC has failed to plead with particularity that the risk Zyuzin faced as a result of 9 the pledge of his Mechel stock was any different than the risk he, or any other Mechel shareholder, 10 faced simply as a result of stock ownership: the risk that poor business performance by Mechel 11 would result in a substantial investment loss, including the possible elimination of all shareholder 12 equity should Mechel undergo bankruptcy. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 13 U.S. 308, 313 (2007) ("The PSLRA [Private Securities Litigation Reform Act] requires plaintiffs 14 to state with particularity . . . the facts evidencing scienter . . . ."). As we have held, the risk of 15 investment loss common to all shareholders is insufficient to create a legally cognizable motive to 16 commit fraud. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1131 (2d Cir. 1994) ("[S]tock 17 ownership does not provide sufficient motive to sustain the pleading burden under Rule 9(b).").
18 Plaintiff also contends that the district court erred by failing to conclude that the SAC 19 adequately pleads scienter on a "core operations" theory. In Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 20 1989), we found scienter to be adequately pled where the complaint alleged that an officer of In-flight 21 Services, Inc. ("In-flight") had made statements indicating that "[s]ales to the People's Republic of 22 China [("PRC")] . . . are . . . an important new source of revenue" for the company, id. at 10 (first 1 alteration and first omission in original), but In-flight later was forced to write down a substantial 2 amount of inventory when the PRC's regulations-which had existed at the time In-flight was touting 3 the importance of its sales to customers in the PRC-prevented sales being made to that country, see 4 id. at 11. We reasoned that "the . . . complaint alleges facts from which one can reasonably infer that 5 sales to the PRC were to represent a significant part of In-flight's business. These facts give rise to 6 a strong inference that the defendants, who the . . . complaint alleges were directors of In-flight, had 7 knowledge of the PRC restrictions, since the restrictions apparently eliminated a potentially 8 significant source of income for the company." Id. at 13.
9 Cosmas was decided prior to the enactment of the PSLRA, and we have not yet expressly 10 addressed whether, and in what form, the "core operations" doctrine survives as a viable theory of 11 scienter. But cf. Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000) ("When all is said and done, we 12 believe that the enactment of [the PSLRA] did not change the basic pleading standard for scienter 13 in this circuit . . . ."). Nor need we do so here. Even assuming arguendo that the "core operations" 14 doctrine survived the PSLRA's enactment without alteration,*fn5 the facts in this case are far removed 15 from those in Cosmas. Here, the bulk of the allegations of illegal conduct center around findings 16 by Russia's Federal Antimonopoly Service ("FAS") that Mechel engaged in anticompetitive 17 practices with regard to a limited number of interactions with two or three customers. There is no 18 indication in the SAC that orders from these customers constituted as "significant [a] part of 1 [Mechel's] business," Cosmas, 886 F.2d at 13, as did the transactions at issue in Cosmas, in which 2 orders from the PRC accounted for $5 million of the company's $6 million worth of backlog 3 purchase orders, id. at 11.*fn6 Accordingly, even assuming Cosmas continues in unabated vitality, it 4 does not apply here.
5 Because the SAC fails to plead scienter against any Defendant, the district court properly 6 dismissed the action as against all Defendants. Furthermore, because a violation of Exchange Act 7 Section 20(a) must be predicated on an underlying primary violation, the inadequacy of the SAC's 8 allegations of scienter requires the conclusion that its allegations of control-person liability also fail.
9 See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). To the extent Plaintiff raises 10 other arguments with respect to the judgment below, we have considered them and reject them as 11 meritless.*fn7
1 Accordingly, for the foregoing reasons, the judgment of the district court is AFFIRMED.
2 FOR THE COURT:
3 Catherine O'Hagan Wolfe, Clerk