UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2011
May 10, 2012
CITY OF OMAHA, NEBRASKA CIVILIAN EMPLOYEES' RETIREMENT SYSTEM, CITY OF OMAHA POLICE AND FIRE RETIREMENT SYSTEM, PLAINTIFFS-APPELLANTS, CITY OF PONTIAC GENERAL EMPLOYEES' RETIREMENT SYSTEM, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
CBS CORPORATION, LESLIE MOONVES, FREDERIC G. REYNOLDS, SUSAN C. GORDON, SUMNER REDSTONE, DEFENDANTS-APPELLEES, JOSEPH R. IANNIELLO, DEFENDANT.
Appeal from a judgment of the United States District Court for the Southern District of New York (P. Kevin Castel, Judge) dismissing appellants' amended and second amended complaints for failure to state a claim, pursuant to Fed. R. Civ. P. 12(b)(6).
City of Omaha, Neb. Civilian Emps.' Ret. Sys. v. CBS Corp.
Argued: March 14, 2012
Before: WINTER, RAGGI, Circuit Judges, and RAKOFF, District Judge.*fn1
Appellants argue that they stated a claim for securities
fraud by alleging that the
CBS Corporation, and individuals associated therewith, delayed
interim impairment testing of the corporation's intangible assets despite indicia that
such a test was necessary at an earlier date. We affirm.
Plaintiffs City of Omaha, Nebraska Civilian Employees' Retirement System and 20 City of Omaha Police and Fire Retirement System appeal from Judge Castel's dismissal 21 of their amended and second amended complaints for failure to state a claim, pursuant to 22 Fed. R. Civ. P. 12(b)(6). The two complaints asserted claims for relief against defendants 23 CBS Corp., Leslie Moonves, Frederic G. Reynolds, Susan Gordon, and Sumner Redstone 24 under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), see 25 15 U.S.C. §§ 78j(b), 78t(a), and S.E.C. Rule 10b-5, see 17 C.F.R. § 240.10b-5. We 26 assume the parties' familiarity with the facts and record of prior proceedings, which we 27 reference only as necessary to explain our decision to affirm.
1 Though plaintiffs' 77-page second amended complaint is replete with broad 2 references to misrepresentations regarding CBS's revenue and the value of CBS's assets 3 in early- to mid-2008, the asserted basis for plaintiffs' securities fraud claims is quite 4 limited.*fn2 On October 10, 2008, CBS announced that it was performing an interim 5 impairment test on its existing goodwill, and that, as a result, CBS expected to incur a 6 non-cash impairment charge during the third quarter of approximately $14 billion.
7 Plaintiffs allege that defendants knew about the facts that led CBS to perform an interim 8 impairment test much earlier than October 2008, so CBS should have performed the test 9 and disclosed its results during the first or second quarter of 2008--that is, no later than 10 June 30, 2008. Thus, plaintiffs submit, defendants' statements about CBS's goodwill and 11 its general financial condition during the first and second quarters of 2008 were 12 knowingly or recklessly false.*fn3
13 We review a judgment of dismissal "de novo, accepting all
14 allegations in the complaint[s] as true and drawing all reasonable
15 [plaintiffs'] favor." S.E.C. v. Gabelli, 653 F.3d 49, 57 (2d Cir.
2011) (alterations, internal
16 quotation marks, and citation omitted). To survive dismissal, a
complaint must "allege a
17 plausible set of facts sufficient 'to raise a right to relief
above the speculative level.'"
Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt.
LLC, 595 F.3d
2 86, 91 (2d Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)).
3 This requires plaintiffs to plead "factual content that allows the court to draw the 4 reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. 5 Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949 (2009). Moreover, complaints of securities 6 fraud are subject to the heightened pleading requirements of Fed. R. Civ. P. 9(b) 7 (requiring circumstances constituting fraud to be stated with particularity), and the Private 8 Securities Litigation Reform Act, see 15 U.S.C. § 78u-4(b)(1) (requiring, inter alia, that 9 complaint "specify each statement alleged to have been misleading" and explain why 10 statement is misleading); id. § 78u-4(b)(2) (requiring that facts supporting requisite 11 scienter be pleaded with particularity). See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 12 493 F.3d 87, 99 (2d Cir. 2007).
13 Applying these principles here, we affirm for substantially the reasons stated in the 14 district court's thoughtful and thorough opinions. See City of Omaha, Neb. Civilian 15 Emps.' Ret. Sys. v. CBS Corp., No. 08 Civ. 10816 (PKC), 2011 WL 2119734 (S.D.N.Y. 16 May 24, 2011); City of Omaha, Neb. Civilian Emps.' Ret. Sys. v. CBS Corp., No. 08 Civ. 17 10816 (PKC), 2010 WL 1029290 (S.D.N.Y. Mar. 16, 2010). That conclusion is reinforce 18 by Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011), which had not yet been 19 decided at the time of the district court's decisions.
20 The Fait plaintiffs also claimed that various statements concerning goodwill were 21 false and misleading due to defendants' failure to conduct timely interim impairment 22 testing. Id. at 108, 110. We rejected the argument, reasoning that the "plaintiff's 23 allegations regarding goodwill d[id] not involve misstatements or omissions of material 24 fact, but rather misstatements regarding . . . opinion." Id. at 110 (observing that, 1 "[e]stimates of goodwill . . . are not matters of objective fact."). Relying in part on 2 Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), we held that in this specific 3 context, a plaintiff must "plausibly allege that defendants did not believe the statements 4 regarding goodwill at the time they made them" to plead a material misstatement or 5 omission. Fait v. Regions Fin. Corp., 655 F.3d at 112.*fn4 Though Fait involved claims 6 under Sections 11 and 12 of the Securities Act of 1933, see 15 U.S.C. §§ 77k, 77l, the 7 same reasoning applies under Sections 10(a) and 20(b) of the 1934 Act, as these claims 8 all share a material misstatement or omission element. See Fait v. Regions Fin. Corp., 9 655 F.3d at 109; Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337 (2d Cir. 2011) 10 (reviewing elements of Section 10(b) claims).*fn5
11 In urging otherwise, plaintiffs here, as in Fait, place considerable reliance on the 12 Financial Accounting Standards Board's Statement of Financial Accounting Standards 13 ("SFAS") No. 142, which "requires that goodwill be tested for impairment annually, or 14 'more frequently if events or changed circumstances indicate that the asset might be 15 impaired.'" Fait v. Regions Fin. Corp., 655 F.3d at 110. Plaintiffs maintain that the 16 second amended complaint contains a number of factual allegations suggesting CBS's 17 general financial deterioration during the first and second quarters of 2008, thereby 18 plausibly demonstrating that proper application of SFAS No. 142 "mandated that 19 Defendants perform an interim test of the value of goodwill" in the first or second quarter 20 of 2008. Appellants' Br. at 11. We are not persuaded.
1 As the second amended complaint acknowledges, SFAS No. 142 requires interim 2 goodwill impairment testing only where "events or changes in circumstances . . . indicate 3 that it is more likely than not that the book value of a reporting unit exceeds its fair 4 value." Second Am. Compl. ¶ 74. That complaint, however, contains only conclusory 5 statements, not factual allegations, to support plaintiffs' contention that, at some point 6 before October 10, 2008, defendants had knowledge of events or circumstances which 7 would have required them to reach the conclusion that SFAS No. 142's "more likely than 8 not" standard had been met with regard to any of CBS's reporting units -- Television, 9 Radio, Outdoor, Publishing, and Interactive. See generally Ashcroft v. Iqbal, 129 S. Ct. 10 at 1949 (2009); accord Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009). Plaintiffs' 11 allegations regarding the downward trajectory of CBS's overall market capitalization, 12 declining advertising revenues for some CBS reporting units, analysts' expectations 13 regarding the media business environment, and CBS's own anticipation of an economic 14 slowdown may suggest that CBS expressed overly optimistic views regarding its overall 15 business outlook.*fn6 But these allegations, even viewed in combination, do not plausibly 16 demonstrate that defendants knew, nor even had reason to know, at any specific time 17 during this period that it was more likely than not that interim impairment testing would 18 reveal that the goodwill of any specific reporting unit was overvalued.
19 Moreover, even if the second amended complaint did plausibly plead that 20 defendants were aware of facts that should have led them to begin interim impairment 21 testing earlier, such pleading alone would not suffice to state a securities fraud claim after
Fait. Plaintiffs' second amended complaint is devoid even of
conclusory allegations that
defendants did not believe in their statements of opinion regarding
CBS's goodwill at the
time they made them. See Fait v. Regions Fin. Corp., 655 F.3d at
112. In sum, we
conclude that plaintiffs here have at most pleaded defendants'
failure to comply with
Generally Accepted Accounting Principles, rather than their
commission of securities
fraud, see id., and thus, that plaintiffs' Section 10(b), Rule
10b-5, and Section 20(a)
claims against defendants were properly dismissed by the district
8 Finally, we note that the second amended complaint alleges that the market for 9 CBS stock is highly efficient and incorporates into share price all publicly available 10 information. As mentioned briefly above, appellants' complaint alleges two primary 11 indicia as to why CBS should have been aware that impairment testing of its intangible 12 assets was necessary in early 2008. First, they cite the widening gap between CBS's 13 book value and the company's market capitalization, calculated by multiplying the 14 number of outstanding shares by the closing price of the stock. They note that CBS's 15 book value exceeded its market capitalization by $3.2 billion at the end of 2007 and that 16 gap expanded to $8.8 billion at the end of the first quarter of 2008, and that the gap 17 continued to grow until the impairment charge was assessed. In addition, appellants point 18 to the decline in CBS's advertising revenue and various analysts' negative outlook on the 19 advertising market. The allegations concerning advertising revenue are based on market 20 data released by third parties, media reports, and statements made by CBS.*fn7
1 Plaintiffs conceded at oral argument that all of the information alleged to constitute 2 "red flags" calling for interim impairment testing--in particular, the difference between 3 CBS's book value and market capitalization, the declines in advertising revenues, and the 4 expectations of analysts regarding the media business's environment--were matters of 5 public knowledge. Also known to the public at pertinent times was that CBS's last 6 impairment test occurred as a part of the 2007 year-end financial reporting, before the 7 appearance of the "red flags." According to the second amended complaint's own 8 allegations, therefore, CBS's market price would at all pertinent times have reflected the 9 need for, if any, or culpable failure to undertake, if any, interim impairment testing.
10 Under those circumstances, the second amended complaint does not allege in a plausible 11 fashion that the market price of CBS stock was inflated by a fraud in failing to undertake 12 interim impairment testing. That being the case, the second amended complaint does not 13 sufficiently allege reliance upon a fraudulently inflated price. See Basic Inc. v. Levinson, 14 485 U.S. 224, 247 (1988) ("Any showing that severs the link between the alleged 15 misrepresentation and . . . the price . . . will be sufficient to rebut the presumption of 16 reliance. For example, if petitioners could show that the 'market makers' were privy to 17 the truth . . . , and thus that the market price would not have been affected by [the alleged] 18 misrepresentations, the causal connection could be broken: the basis for finding that the 19 fraud had been transmitted through market price would be gone.")
20 In light of this conclusion, we need not and do not reach defendants' alternative 21 argument regarding scienter.
22 For the foregoing reasons, the district court's judgment is AFFIRMED.