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holding that Plaintiff did not satisfy 9(b)'s particularity standard regarding claims including common law fraud based upon SEC filings and communications made by Defendants
Summary of this case from Panda Energy International, Inc. v. Calpine Corp.Opinion
Civil Action No. 3:02-CV-1442-L
September 5, 2003
MEMORANDUM OPINION AND ORDER
Before the court are Defendants' Motion to Dismiss, filed October 24, 2002; Defendant Hatchett's Motion to Dismiss, filed October 24, 2002; Defendant Douglas Foshee's Motion to Dismiss, filed October 24, 2002; and Defendant Cedric Burgher's Motion to Dismiss, filed October 24, 2002. On July 29, 2003, the court held a hearing on Defendants' various motions to dismiss. After careful consideration of the motions, Plaintiff's' response to the motions, Defendants' replies, arguments of counsel at the hearing, and the applicable authority, the court determines that it lacks subject matter jurisdiction over this case, and accordingly grants each Defendant's respective motion to dismiss. Alternatively, the court dismisses this action pursuant to Fed.R.Civ.P. 12(b)(6) because Plaintiff's fail to state a claim upon which relief can be granted. I. Factual and Procedural Background
The moving Defendants with respect to this motion are Halliburton Company ("Halliburton"), Richard Cheney, David Lesar, Ray Hunt, Robert Crandall, Charles Dibona, Lawrence Eagleburger, William Howell, James Landis Martin, Jay Precourt, Cecil Silas, Douglas Foshee, Jerry Blurton, Cedric Burgher, and Robert Charles Muchmore, Jr. (the "Director and Officer Defendants") (collectively, the "Halliburton Defendants").
This is a state law securities fraud action brought by certain individual shareholders of Halliburton stock against the company and the directors and officers of the company. Plaintiff's are Stephen S. Stephens and Lyle and Deanna J. Lionbarger, as trustees for the LW Deanna J. Lionbarger Family Trust. Defendants are Halliburton Company, certain of its officers and directors, and Terrence Hatchett, an individual auditor formerly with Arthur Andersen, Halliburton's former outside auditors. The facts giving rise to Plaintiff's' claims are as follows.
In particular, the officers and directors named in the lawsuit are Richard Cheney, Halliburton's Chief Executive Officer ("CEO") from 1995 to 2000; David J. Lesar, Chairman of the Board, President and CEO of Halliburton; Ray L. Hunt, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, Chairman of the Compensation Committee and a member of the Audit and the Management Oversight Committees; Robert L. Crandall, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, Chairman of the Nominating and Corporate Governance Committee and a member of the Audit, the Compensation, and the Management Oversight Committees; Charles J. Dibona, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, a member of the Compensation and the Management Oversight Committees; Lawrence S. Eagleburger, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, a member of the Audit, the Compensation, the Management Oversight, and the Nominating and Corporate Governance Committees; William R. Howell, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, Chairman of the Management Oversight Committee and a member of the Audit and the Compensation Committees; James Landis Martin, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, a member of the Nominating and Corporate Governance and the Management Oversight Committees; Jay A. Precourt, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, a member of the Compensation and the Management Oversight Committees; Cecil J. Silas, a member of Halliburton's Board of Directors who was, at all times relevant to Plaintiff's' claims, Chairman of the Audit Committee and a member of the Compensation and the Management Oversight Committees; Douglas L. Foshee, who was, at all times relevant to Plaintiff's' claims, Executive Vice-President and the Chief Financial Officer ("CFO") of Halliburton; Jerry H. Blurton, who was, at all times relevant to Plaintiff's' claims, Vice President and Treasurer of Halliburton; Cedric Burgher, who was, at all times relevant to Plaintiff's' claims, Vice President of Investor Relations for Halliburton; and Robert Charles Muchmore, Jr., who was, at all times relevant to Plaintiff's' claims, a Vice President, the Principal Accounting Officer, and the Controller of Halliburton.
Plaintiff's also initially named Arthur Andersen, Arthur Andersen LLP, and Andersen Worldwide (the "Andersen Defendants") as Defendants in this lawsuit; however, on September 16, 2002, Plaintiff's filed a notice of voluntary dismissal with respect to these Defendants, and on September 18, 2002, the court issued an order dismissing the Andersen Defendants from this lawsuit.
According to Plaintiff's' Complaint, Halliburton is in the business of providing consulting, engineering and construction services to energy, industrial and government customers worldwide. Until the late 1990's, Halliburton entered into contracts on a cost-plus basis, which provided for payment of all costs actually incurred, plus a small profit margin, In the late 1990's, Halliburton began entering into more fixed-price contracts. These types of contracts do not guarantee a profit margin in case of cost overruns or change orders, and required the company to negotiate with, or sue, its customers for additional payment in the event of cost overruns and change orders in work. The resulting disputes could take months or years to resolve.
Beginning in 1998, without making disclosures to its shareholders or investors, the Halliburton Defendants began recognizing revenue from unresolved and uncertain disputed claims on long-term construction projects on the assumption that its customers would pay the disputed amounts. Plaintiff's refer to Halliburton's practice of recognizing revenue from unresolved claims and change orders on long-term construction contracts without customer approval as the "undisclosed Change in Accounting Principle." Plaintiff's allege that as a result of the undisclosed change, Halliburton reported extra revenue of $89 million for Fiscal Year ("FY") 1998, $98 million for FY 1999, $113 million for FY 2000, and $234 million for FY 2001, in violation of Generally Accepted Accounting Principles ("GAAP"). Plaintiff's assert that as a result of Halliburton's alleged violation of GAAP, Halliburton reported financial results and financial statements for 1998, 1999, 2000, and 2001 that were materially false and misleading when made.
Plaintiff's filed this lawsuit on July 10, 2002, asserting state law claims against Defendants for common law fraud and civil conspiracy, and fraud in stock transactions and civil conspiracy under Tex. Bus. Com. Code Ann. § 27.01. Plaintiff's seek compensatory damages, punitive and exemplary damages in the amount of $200,000 per defendant, consequential damages, attorney's fees, expert witness fees, costs for copies of depositions, costs of court, all other damages permitted by law, and all other costs and expenses permitted by law. Defendants now move to dismiss Plaintiff's' Complaint pursuant to Rules 12(b)(1), 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.
II. Defendants' Motions to Dismiss
Defendants Terrence Hatchett, Douglas Foshee, and Cedric Burgher have filed separate motions to dismiss; however, each of their motions incorporates the arguments and grounds for dismissal set forth in the joint Defendants' Motions to Dismiss, including Defendants' jurisdictional challenge. Accordingly, the court will address the arguments raised in the joint Defendants' Motion to Dismiss; however, its rulings apply equally, as appropriate, to the individual motions to dismiss.
A. Dismissal Required: Lack of Subject Matter Jurisdiction
Plaintiff's bring this lawsuit pursuant to 28 U.S.C. § 1332(a)(1), which provides that "[t]he district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between citizens of different States." Id. Defendants contend that the court lacks subject matter jurisdiction in this case because Plaintiff's have failed to satisfy the amount in controversy requirement, and have failed to show complete diversity of citizenship. Defendants therefore move to dismiss Plaintiff's' Complaint pursuant to Fed.R.Civ.P. 12(b)(1).A motion to dismiss under Fed.R.Civ.P. 12(b)(1) challenges the subject matter jurisdiction of the federal court. Where, as here, a Rule 12(b)(1) motion is filed in conjunction with other Rule 12 motions, the court should consider the jurisdictional challenge before it addresses any attack on the merits. See Ramming v. United States, 281 F.3d 158,161 (5th Cir. 2001), cert, denied sub nom. Cloud v. United States, 536U.S. 960(2002). "This requirement prevents a court without jurisdiction from prematurely dismissing a case with prejudice." Id. When it appears that subject matter jurisdiction is lacking, the court must dismiss the action, as this is the "first principle of federal jurisdiction." Stockman v. Federal Election Comm'n, 138 F.3d 144, 151 (5th Cir. 1998) (citation omitted).
As the parties invoking federal jurisdiction, Plaintiff's bear the burden of proving that jurisdiction exists. See Ramming, 281 F.3d at 161. Each Plaintiff must satisfy the requisite jurisdictional amount. See Ard v. Transcontinental Gas Pipe Line Corp., 138 F.3d 596,600 (5th Cir. 1998). In determining a motion to dismiss for lack of subject matter jurisdiction, the court may consider (1) the complaint alone, (2) the complaint supplemented by undisputed facts evidenced in the record, or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts. Ramming, 281 F.3d at 161; see also Robinson v. TCI/US West Communications Inc., 117 F.3d 900,904 (5th Cir. 1997). Here, Defendants are asserting a "facial," rather than a "factual," attack on jurisdiction under Rule 12(b)(1). Therefore, the court need only consider the allegations in Plaintiff's' Complaint to determine whether subject matter jurisdiction exists.
The Fifth Circuit distinguishes between these two types of challenges to the court's subject matter jurisdiction. See Williamson v. Tucker, 645 F.2d 404, 412 (5th Cir.), cert, denied, 454 U.S. 897 (1981). When a defendant files a Rule 12(b)(1) motion unaccompanied by evidentiary materials, the court need only consider the sufficiency of the allegations in the complaint, because they are presumed to be true. Paterson v. Weinberger, 644 F.2d 521, 523 (5th Cir. 1981). If the jurisdictional allegations are sufficient, the complaint will not be dismissed. Id. On the other hand, a "factual" attack on the court's subject matter jurisdiction is made when the defendant submits affidavits, testimony, or other evidentiary materials to support assertions against subject matter jurisdiction. See id. In those cases, the Plaintiff must submit facts through some evidentiary method and prove by a preponderance of the evidence that the court has subject matter jurisdiction over the case. Id. In this case, Defendants did not submit any evidence to support their assertions concerning the subject matter allegations of Plaintiff's' Complaint. Therefore, the court determines that they are advancing only a facial challenge under Rule 12(b)(1).
1. Amount-in-Controversy Requirement
Defendants contend that Plaintiff's have failed to properly demonstrate that the amount in controversy exceeds the statutory minimum required for diversity jurisdiction, that is, $75,000. They contend that because the alleged compensatory damages are minimal at best, Plaintiff's must rely almost exclusively on their claims of punitive damages, which are vastly in excess of their claimed actual damages, to meet the amount-in-controversy requirement. Defendants acknowledge that claims of punitive damages and attorney's fees authorized by statute may be used to satisfy this requirement; however, they urge the court to reject Plaintiff's' claims for such damages, because they are likely inflated so as to meet the amount-in-controversy threshold. Plaintiff's disagree, contending that each has satisfied the amount-in-controversy requirement, since they not only seek compensatory and punitive damages, but also statutory attorney's fees under Tex. Bus. Com. Code Ann. § 27.01(e), which they expect will exceed $75,000.
Although Plaintiff's contend in their response brief, and argued at the hearing, that they expect to recover in excess of $75,000 in attorney's fees, their Complaint does not allege a specific amount for attorney's fees. See Pls.' Compl. at 42.
It is well-established that "unless the law gives a different rule, the sum claimed by the Plaintiff controls if the claim is apparently made in good faith." St. Paul Reinsurance Co. Ltd. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998) (quoting St. Paul Mercury Indemnity Company v. Red Cab Co., 303 U.S. 283, 288 (1938)); see also De Aguilar v. Boeing Co., 47 F.3d 1404,1408 (5th Cir.), cert, denied, 516 U.S. 865 (1995)). "To justify dismissal, `it must appear to a legal certainty that the claim is really for less than the jurisdictional amount.'" St. Paul Reinsurance Co., 134 F.3d at 1253 (quoting St. Paul Mercury Indemnity Company, 303 U.S. at 289)).
With the dismissal of the Andersen Defendants, Plaintiff's' Complaint now asserts claims under Texas law for statutory fraud, common law fraud and civil conspiracy against sixteen Defendants. Plaintiff's each seek to recover, in addition to compensatory damages, punitive damages against each Defendant in the amount of $200,000. Pls.' Compl. ¶ 4. In addition, because Tex. Bus. Com. Code Ann. § 27.01 entitles a prevailing party to receive attorney's fees, those fees are to be included in the amount in controversy. HD Tire Automotive-Hardware, Inc. v. Pitney Bowes, Inc., 227 F.3d 326,330 (5th Cir. 2000). As stated before, Plaintiff's each seek an award of $200,000 in punitive damages. Based on Plaintiff's' allegations of punitive damages alone, the amount-in-controversy requirement is satisfied. Defendants, however, urge the court to reject Plaintiff's' punitive damages allegations, contending that the amount pled vastly exceeds Plaintiff's' actual damages, and would require punitive damage awards based on a multiplier that is far higher than, and completely divergent from, the kinds of punitive damages awards that have been allowed in Texas.
Plaintiff's appear to have retreated from the $200,000 figure alleged in their Complaint, and now maintain that if each Plaintiff were to recover at a minimum $5,000 from each of the remaining sixteen Defendants in this suit, the jurisdictional amount would be met. See Pls.' Opp. to all Mots. to Dismiss at 5.
According to Plaintiff's' Complaint, Stephens purchased 500 shares of Halliburton stock at $21.11 per share on November 15, 2001. Pls.' Compl. ¶ 102. On January 24, 2002, the Lionbargers purchased 100 shares of Halliburton stock at $12.22 per share. Id. ¶ 105. The Complaint alleges that the price of Halliburton common stock decreased by 3.3 percent in value on May 29, 2002. Id. ¶ 117. There is no allegation in the Complaint of the actual amount of compensatory damages sought; however, Defendants contend that based on a decline in the value of the stock, Plaintiff's' actual damages are $348.32 for Stephens ($10,555 x .033 = $348.32) and $40.33 for the Lionbargers ($1,222 x .033 = $40.33). Plaintiff's do not dispute these figures, or that this amount accurately reflects their actual damages.
Plaintiffs' Complaint alleges that Stephens purchased his shares of stock on November 15, 2002; however, this date appears to be a typographical error. Plaintiff's' Complaint was filed in July 2002, nearly four months before the alleged date of the stock purchase. Defendants noted this discrepancy in their motion to dismiss, see Halliburton Motion to Dismiss at 4 n. 3, and Plaintiff's did not respond to the matter. The court therefore assumes that the correct date of the stock purchase was November 15, 2001, rather than November 15, 2002, as alleged in Plaintiff's' Complaint.
The court recognizes that given the paucity of Plaintiff's' actual damages, it is highly unlikely that Plaintiff's will recover the amount of punitive damages pled in their Complaint; however, as stated before, Plaintiff's also request, as part of their damages, reasonable and necessary attorney's fees under § 27.01 of the Texas Business and Commerce Code. While Defendants argue that Plaintiff's may not "gin up" the amount in controversy by asserting legal fees that vastly exceed the value of their claims, the court is not aware of, and Defendants do not cite, a case that recognizes a hard-and-fast rule of proportionality between an award of attorney's fees and the value of the claims asserted by a Plaintiff. At the hearing, the court questioned Defendants' counsel about Plaintiff's' claim of attorney's fees. Counsel seemed to downplay the issue, and commented:
[T]here [is not] a case [one] could try these days for less than $75,000 [that has] any degree of complexity to it at all. That makes the jurisdictional statute . . . meaningless. It would render it a nullity for all practical purposes, and that is not what Congress intended, and [that is] not what the statute is there for.
Hearing on Defendants' Motion to Dismiss, Transcript of Proceedings at 22. The court understands Defendants' position; however, reasonable and necessary attorney's fees authorized by statute are allowed as damages to be included in the value of a lawsuit. Until Congress changes the statute, or until the Supreme Court or the Fifth Circuit rules otherwise, this court is obligated to consider the value of the amount of attorney's fees. Given that this is a state law securities fraud case; that Plaintiff's assert three causes of action against sixteen Defendants; and that Plaintiff's seek compensatory damages, punitive damages, and statutory attorney's fees, the court, applying a common-sense approach, determines that Plaintiff's have stated sufficient facts to meet the jurisdictional threshold amount. See Allen V. RH Oil Gas Co., 63 F.3d 1326, 1336 (5th Cir. 1995). In any event, the court cannot say that it appears to a legal certainty that Plaintiff's' claims are really for less than the jurisdictional amount. The court must therefore reject Defendants' argument on this ground.
2. Diversity of Citizenship
The second requirement necessary to invoke federal jurisdiction under 28 U.S.C. § 1332 is that the controversy be between citizens of different States. Defendants contend that Plaintiff's have failed to meet this requirement because they allege claims against John Does 1-10, who are alleged to be "past or present directors, officers, managing agents, and/or other employees or agents of Halliburton, whose identities are currently unknown," Pls.' Compl. ¶ 24, without alleging the citizenship of these individuals. Defendants argue that the mere presence of the "John Doe" Defendants runs afoul of the requirement that Plaintiff's demonstrate complete diversity, and that Plaintiff's' conclusory allegation that, "on information and belief," the John Doe Defendants are diverse from Plaintiff's does not cure this defect. Plaintiff's respond that they have no intention of defeating complete diversity by naming nondiverse Doe defendants, and that, if it turns out that a Doe defendant is domiciled in Indiana or New Mexico, Plaintiff's would dismiss that party. The court agrees with Defendants that Plaintiff's have not met their burden of establishing diversity of citizenship between the opposing parties to establish federal jurisdiction.
The court notes that Plaintiff's' Complaint also names John Does 11-20 as defendants to this action. ¶ 38. According to the Complaint, "Defendant Does 11 through 20 are past or present partners, principals, officers, managing agents, and/or other employees or agents of [the Andersen Defendants], whose identities are currently unknown, but who committed, aided, abetted, participated in, and/or furthered the fraudulent acts, omissions, and scheme set forth below." Id. As previously stated, Plaintiff's voluntarily dismissed the Andersen Defendants from this lawsuit in September 2002; however, the notice of dismissal did not mention John Does 11-20. Although Defendants do not specifically address these John Doe defendants, the court's analysis and ruling with respect to fictitious defendants apply equally to these John Doe defendants.
Diversity jurisdiction is proper if each Plaintiff has a different citizenship from each defendant. Getty Oil Corp. v. Insurance Co. of N. Am., 841 F.2d 1254,1258 (5th Cir. 1988). "[T]he basis upon which jurisdiction depends must be alleged affirmatively and distinctly and cannot be established argumentatively or by mere inference." Id. (citing Illinois Cent. Gulf R.R. Co. v. Pargas, Inc., 706 F.2d 633, 636 n. 2 (5th Cir. 1983)). No where in their Complaint do Plaintiff's affirmatively and distinctly allege the citizenship of the John Doe Defendants, and, after poring over the Complaint and other documents it may consider, the court finds no affirmative statement that establishes the citizenship of the John Doe Defendants. Rather than set forth distinctive and affirmative allegations of the citizenship of these individuals, Plaintiff's seek to come in through the backdoor and allege that "on information and belief," Plaintiff's believe that the John Doe Defendants are not domiciled in any state as any Plaintiff. This approach and these allegations are simply insufficient to establish diversity of citizenship. This is nothing more than an attempt to establish diversity jurisdiction by default, which the court discusses in the next paragraph.
The Fifth Circuit has not yet addressed whether the presence of fictitious party defendants destroys diversity in cases directly commenced in federal court when jurisdiction is based on diversity of citizenship. In the absence of such authority, the court is persuaded by authority from the Seventh Circuit Court of Appeals, which has addressed the issue. The Seventh Circuit has determined that because diversity jurisdiction must be proved by a Plaintiff rather than assumed as a default, see Moore v. Gen. Motors Pension Plans, 91 F.3d 848, 850 (7th Cir. 1996) (citing Pollution Control Indus, of Am. v. Van Gundy, 21 F.3d 152,155 (7th Cir. 1994)), the court may not presume that John Doe defendants are diverse with respect to the Plaintiff. Moore, 91 F.3d at 850. Since the existence of diversity jurisdiction cannot be determined without knowledge of every defendant's place of citizenship, "John Doe" defendants are ordinarily not permitted in federal diversity suits. See Howell v. Tribune Entm't Co., 106 F.2d 215, 218 (7th Cir. 1997) (citing Moore, 91 F.3d at 850; United States Fire Ins. Co. v. Charter Fin. Group, Inc., 851 F.2d 957, 958 n. 3 (7th Cir. 1988); 14 Charles Alan Wright, Arthur R. Miller Edward H. Cooper, Federal Practice and Procedure § 3642, pp. 144-46 (2d ed. 1985)).
There are, however, exceptions to this general rule. One exception is if the "John Does" are merely nominal parties, irrelevant to diversity jurisdiction. Howell, 106 F.3d at 218. Also, naming a John Doe defendant does not defeat the named defendant's right to remove a diversity case if its citizenship is diverse from that of the Plaintiff. Id.; see also 28 U.S.C. § 1441(a). One other quasi-exception is that the domicile of a fugitive defendant will be taken to be his domicile before he fled. Howell, 106 F.2d at 218 (citing Lloyd v. Loeffler, 694 F.2d 489, 490 (7th Cir. 1982). None of these exceptions applies in this case.
First, Plaintiff's' Complaint, as previously stated, indicates that the John Doe defendants are necessary parties, as they are alleged to have "committed, aided, abetted, participated in, and/or furthered the fraudulent acts, omissions, and scheme" set forth in the Plaintiff's' Complaint. Pls.' Compl. ¶ 24. Second, this action was initially commenced in federal court, rather than removed from state court. Third, this action does not involve a defendant who is a fugitive from justice. As Plaintiff's have wholly failed to affirmatively and distinctly establish the citizenship of the John Doe Defendants, their presence in this case defeats diversity jurisdiction.
In reaching this conclusion, the court rejects Plaintiff's' invitation to apply language in the removal statute, 28 U.S.C. § 1441(a), which authorizes the courts to ignore the citizenship of defendants sued under fictitious names for purposes of removal, and hold that the presence of John Doe Defendants does not defeat diversity for cases initially brought in federal court. No such provision, however, is contained in 28 U.S.C. § 1332(a). As noted in Wright, Miller Cooper, in 1988 Congress amended Section 1441(a) as a means to curtail the practice of Plaintiff's naming fictitious defendants in a state court action to destroy diversity, thereby preventing the defendant from exercising the right of removal. Charles Alan Wright, Arthur R. Miller, Edward H. Cooper, 14 Federal Practice Procedure § 3642 (3d ed. 1998) (citing Judicial Improvements and Access to Justice Act of 1988, Pub.L. 100-702 § 1016(a), 10 Stat. 4669 (1988). "The Judicial Improvements and Access to Justice Act was limited to removal jurisdiction, however, and it did not address the effect of the presence of Doe defendants on the original subject matter jurisdiction of the federal courts." Id. Had Congress intended for courts to ignore the citizenship of defendants sued under fictitious names for purposes of determining diversity in cases commenced in federal court, it could have expressly so stated in the statute, or could have amended the statute in 1988. Absent such authority, the court declines Plaintiff's' invitation to hold that the diversity statute (that is, 28 U.S.C. § 1332) authorizes courts to ignore the citizenship of defendants sued under fictitious names for purposes of establishing diversity.
Finally, the court addresses Plaintiff's' contention that they could voluntarily dismiss a John Doe defendant if they later discover that such defendant is nondiverse. First, diversity of citizenship must exist at the time the action is commenced. See Doleac ex rel. Doleac v. Michalson, 264 F.3d 470, 477 (5th Cir. 2001); Coury v. Prot, 84 F.2d 244 (5th Cir. 1996). Second, while the court can drop a nondiverse party whose presence is not essential to the suit to preserve and perfect diversity jurisdiction, Aetna Cas. Sur. Co. v. Hillman, 796 F.2d 770, 774 (5th Cir. 1986), Plaintiff's here, as stated before, do not allege, and, the Complaint does not indicate, that the Doe defendants are nonessential parties. The court therefore rejects this argument.
For the reasons herein stated, the court determines that Plaintiff's have failed to establish complete diversity between the parties, and, therefore, has failed to demonstrate that the court has subject matter jurisdiction over the case.
B. Dismissal Required for Failure to Adequately Plead Fraud
1. Plaintiff's' Complaint Fails to Satisfy Rules 9(b)
Even if it is determined that the court has subject matter jurisdiction, Plaintiff's' claims must be dismissed, because Plaintiff's' Complaint fails to meet the pleading requirements of Fed.R.Civ.P. 9(b). When a complaint asserts claims of fraud, Rule 9(b) requires that the allegations of fraud be pled with particularity. Rule 9(b) states that "[i]n averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other conditions of the mind of a person may be averred generally." The Fifth Circuit adheres to a strict interpretation of Rule 9(b), requiring "a Plaintiff pleading fraud 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." Herrmann Holdings, Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 564-65 (5th Cir. 2002) (quotations omitted). Recently, the Fifth Circuit has commented that the Rule 9(b) standard is the same as the stringent pleading requirements set out in the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(1). See ABC Arbitrage Plaintiff's Group v. Tchuruk, 291 F.3d336,349 5th Cir. 2002); Nathenson v. Zonagen, Inc., 267 F.3d 400, 410 n. 9; Williams v. WMX Tech., Inc., 112 F.3d 175, 178 (5th Cir. 1997).
A dismissal for failure to satisfy the requirements of Rule 9(b) is a dismissal on the pleadings for failure to state a claim. Epic Healthcare Mgmt. Group, 193 F.3d at 308; Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1017 (5th Cir. 1996); Shushany v. All-waste, Inc. 922 F.2d 517, 520 (5th Cir. 1993). Therefore, in deciding such motions, the court must accept the factual allegations set forth in the complaint as true and must draw all reasonable inferences in favor of the Plaintiff. See Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). In addition, the complaint should not be dismissed unless it appears beyond doubt that the Plaintiff can prove no set of facts which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995).
Under Texas law, the elements of common law fraud are: (1) a material representation was made; (2) it was false when made; (3) the speaker either knew it was false when made, or made it without knowledge of its truth; (4) the speaker made it with the intent that it should be acted upon; (5) the party acted in reliance; and (6) the party was injured as a result. Ernst Young, LLP v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573,577 (Tex. 2001); Formosa Plastics Corp. USA v. Presidio Eng'rs Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998); Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 723 (Tex. 1990). The elements of statutory fraud under § 27.01 of the Texas Business and Commerce Code are essentially identical to the elements of common law fraud, except that 27.01 does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex.App.-Waco 2000, pet. denied) (citation omitted). To establish a claim of statutory fraud under § 27.01, a Plaintiff must allege facts which show: (1) a false representation of a past or existing material fact; (2) made with the intent to induce another person to enter into a contract; (3) which was relied upon by that person in entering the contract. Tex. Bus. Com. Code Ann. § 27.01(a); Cf. Scott v. Sebree, 986 S.W.2d 364, 371 (Tex.App.-Austin 1999, pet. denied) (real estate transaction); see also U.S. Quest, Ltd. v. Kimmons, 228 F.3d 399, 406 (5th Cir. 2000).
Here, Plaintiff's purport to assert claims under § 27.01 for Defendants' alleged fraud in stock transactions and civil conspiracy, although the statute does not expressly provide a cause of action for civil conspiracy.
A Plaintiff may also establish statutory fraud under this statute by showing a false promise to do an act, when the false promise is material and made without the intention of completing it. See Tex. Bus. Com. Code Ann. § 27.01. Plaintiff's' Complaint does not allege that Defendants made any false promises in connection with Plaintiff's' purchase of Halliburton stock.
Although not raised by the parties, the court observes that Plaintiff's' Complaint wholly fails to allege facts which show that Defendants induced Plaintiff's into entering into a contract for the sale of stock. "Section 27.01 only applies to misrepresentations of material fact made to induce another to enter into a contract for the sale of land or stock." Plunkett, 27 S.W.3d at 611. Plaintiff's' Complaint merely alleges that Stephens purchased 500 shares of Halliburton common stock in November 2001, and that the Lionbargers purchased 100 shares of Halliburton common stock in January 2002. See Pls.' Compl. ¶¶ 102, 105. Plaintiff's' Complaint is devoid of allegations which indicate that they entered into a contract for the purchase of stock, or that Defendants' induced them to purchase their Halliburton stock. Because Plaintiff's' Complaint fails to allege facts which indicate that they were induced into entering into a contract to purchase their stock, Plaintiff's have failed to state a claim under § 27.01 of the Texas Business and Commerce Code, and dismissal of this claim is appropriate under Fed.R.Civ.P. 12(b)(6). Having determined that Plaintiff's have failed to state a claim for statutory fraud under § 27.01 of the Texas Business and Commerce Code, the court now considers whether Plaintiff's' Complaint sufficiently alleges fraud under Texas common law.
Plaintiff's' Complaint alleges that Defendants engaged in financial fraud from 1998 into 2002, in that they made material misrepresentations relating to Halliburton's financial condition and the value of Halliburton's securities with respect to various communications, including press releases, and SEC filings. According to Plaintiff's, Defendants press releases, financial statements and audit reports were false and misleading for essentially two reasons. First, Plaintiff's allege that the financial statements included revenue "which was not probable and could not be reliably estimated" in violation of GAAP. Pls.' Compl. ¶¶ 58,65,77,91,109. Second, Plaintiff's allege that Defendants failed to disclose Halliburton's "Change in Accounting Principle" in its various communications and SEC filings, and did not attempt to justify the change, explain why it was preferable, or disclose the effect of the change on net income. Id.
In particular, Plaintiff's complain about the following communications and SEC filings made on behalf of Halliburton: Financial Statements and Reports for the year 1998, including an Audit Report dated January 25, 1999 and the 1998 10-K Annual Report; Financial Statements, Reports and Press Releases for the year 1999, including, Press Releases dated July 22 and October 21, 1999, and January 27, 2000; 10-Q Quarterly Reports dated August 13, and November 15, 1999; an Audit Report dated January 27, 2000, and the 1999 10-K Annual Report; Financial Statements, Reports and Press Releases for the year 2000, including, Press Releases dated July 26 and October 24, 2000, and January 20, 2001; 10-Q Quarterly Reports dated August 10, and November 19, 2000; an Audit Report dated January 30, 2001, and 2000 10-K Annual Report; Financial Statements, Reports and Press Releases for the year 2001, including, Press Releases dated April 26, July 25, and October 23, 2001, and January 23, 2002; 10-Q Quarterly Reports dated May 11, August 9, and November 8, 2001; an Audit Report dated January 23, 2002, and the 2001 10-K Annual Report.
Plaintiff's' first theory of financial fraud revolves around Defendants' alleged violations of GAAP in the reporting of unbilled receivables that Halliburton expected to receive from claims with. customers involving amounts due for cost overruns and change orders. In this regard, Plaintiff's allege that Halliburton's financial statements included speculative revenue from unresolved claims and change orders that had not yet been approved by customers, and that this revenue "was not probable and could not be reliably estimated." Pls.' Compl. ¶¶ 50, 65, 77, 91, 109. These allegations, like the vast majority of allegations asserted in Plaintiff's' Complaint, are based on "information and belief." Fraud may be pled on information and belief when the facts relating to the alleged fraud are peculiarly within the perpetrator's knowledge; however, this exception should not be mistaken for a license to base claims of fraud on speculation and conclusory allegations. See Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). "Even where allegations are based on information and belief, the complaint must set forth a factual basis for such belief." United States ex rel. Thompson v. Columbia HCA/Healthcare Corp., 125 F.3d 899,903 (5th Cir. 1997).
Here, while replete with allegations based on information and belief, Plaintiff's' Complaint is devoid of allegations that provide a factual basis for that belief. For example, Plaintiff's allege that, on information and belief, beginning in or about the fourth quarter of 1998, and without making disclosures to its shareholders or investors, Defendants "changed, caused a change in, and/or went along with the Change in Accounting Principle so as to report at least $89 million of revenues to cover disputed, unresolved cost overruns on long-term construction projects, on the undisclosed and speculative assumption that its customers would pay the disputed amounts." Pls. Comp. ¶ 49. They further allege, on information and belief, that because of the Change in Accounting Principle, "Halliburton reported unbilled receivables of $98 million for the year ended December 31, 1999, unbilled receivables of $ 113 million for the year ended December 31, 2000, and unbilled receivables of $234 million for the year ended December 31, 2001, based on unapproved and disputed cost overruns, change orders, and unresolved claims, without disclosing the Change in Accounting Principle to book speculative revenue on unresolved claims and change orders not approved by its customers." Id. ¶ 50. Continuing, Plaintiff's allege that "[t]he undisclosed Change in Accounting Principle and the revenue recognition arising therefrom violated [GAAP] because such revenues were not probable and could not be reliably estimated." Id. Plaintiff's' Complaint, however, provides no factual basis for Plaintiff's belief that Defendants treatment of unresolved claims and change orders was based on speculation, rather than reasonable expectations, or that the revenue reported from unresolved claims and change orders "was not probable and could not be reliably estimated." Similarly, Plaintiff's allege, on information and belief, that Defendants knew at all relevant times, or recklessly failed to learn that the Halliburton communications and financial statements were not in conformity with GAAP and/or were materially false and misleading; however, they fail to allege facts to support their belief that Defendants knew, or had a reason to believe, that their treatment of the unresolved claims and change orders violated GAAP. These are merely two examples of Plaintiff's' pleading technique regarding allegations made on information and belief. Based on this pleading deficiency alone, the court determines that Plaintiff's' Complaint fails to satisfy the pleading requirements of Rule 9(b).
Plaintiff's' Complaint also fails to plead with particularity facts explaining why the SEC filings and communications were false or misleading. For example, Plaintiff's' Complaint alleges that Halliburton's SEC filings, including financial statements and audit reports, as well as press releases during the relevant time period were false and misleading, because they include unresolved claims and change orders as revenue instead of losses; however, the Complaint alleges no facts which indicate that the revenue reported was in fact wrong, that it was false, or made without any basis or foundation. Plaintiff's' belief that certain revenue should have been reported as a loss, rather than income, and their speculation about why Halliburton reported unresolved claims and change orders in this manner, does nothing to explain why the financial statements were false or fraudulent. In other words, Plaintiff's' Complaint alleges no facts which explain what made the reported income merely speculative, rather than a probable expectation. Plaintiff's allegations of fraud are therefore insufficient to satisfy the heightened pleading requirements of Rule 9(b).
Plaintiff's second theory of financial fraud is based on Defendants' alleged failure to disclose its Change in Accounting Principle in its financial statements in violation of GAAP. Although not alleged as such, Plaintiff's essentially assert a theory of fraud by nondisclosure. "Silence is equivalent to a false representation where circumstances impose a duty to speak and one deliberately remains silent." Lesikar v. Rappeport, 33 S.W.3d 282, 299 (Tex. App-Texarkana2000, pet. denied) (citing Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 435 (Tex. 1986)). Thus, for there to be actionable nondisclosure fraud, there must be a duty to disclose. Id. There are four situations in which a duty to disclose may arise: (1) where there is a special or fiduciary relationship; (2) where one voluntarily discloses partial information, but fails to disclose the whole truth; (3) where one makes a representation and fails to disclose new information that makes the earlier representation misleading or untrue; and (4) where one makes a partial disclosure and conveys a false impression. Id. Plaintiff's' Complaint does not allege that Defendants had a duty to disclose under either of these situations.
Plaintiff's' Complaint alleges that Defendants were obligated to disclose the Change in Accounting Principle under Accounting Principles Board Opinion ("APB") No. 20. See Pls.' Compl. ¶¶ 54-57. Defendants acknowledge that Halliburton did not include the Change in Accounting Principle in the financial statements and reports for the year 1998. Assuming that APB No. 20 imposed on Halliburton a duty to disclose its Change in Accounting Principle, Plaintiff's have not pleaded any of the four situations previously stated, or facts from which one could reasonably infer that any of the four situations is present. Accordingly, Plaintiff's' theory of fraud based on nondisclosure necessarily fails.
3. Conspiracy
Plaintiff's also allege a claim against Defendants for civil conspiracy, contending that they conspired jointly and severally to misrepresent Halliburton's financial condition for the purpose of influencing and manipulating the market for Halliburton securities, so as to artificially inflate the price paid and received in all purchases and sales thereof. A civil conspiracy is a combination by two or more persons or entities to accomplish an unlawful purpose, or a lawful purpose by unlawful means. Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983); Lesikar, 33 S.W.3d at 318. The elements of a civil conspiracy are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. Massey v. Armco Steel Co., 652 S.W.2d at 934; Lesikar, 33 S.W.3d at 318. The court has determined that Plaintiff's have failed to plead with sufficient particularity facts to state a claim for fraud, and, therefore, have failed to state a claim upon which relief can be granted. It is well-settled that if the fraud claim fails, the fraud-based conspiracy claim also fails. Askanase v. Fatjo, 130 F.3d 657, 676 (5th Cir. 1997). Accordingly, dismissal of Plaintiff's' conspiracy claim is appropriate.
3. Insufficient Pleading With Respect to Burgher, Foshee, and Hatchett
Defendants Burgher, Foshee and Hatchett filed separate motions to dismiss, contending that Plaintiff's' Complaint fails to plead with particularity any facts which demonstrate their involvement in Halliburton's alleged financial fraud. The court agrees. Indeed, Plaintiff's' Complaint does not allege with specificity the time, place, circumstances, or content of these Defendants' alleged misrepresentations, facts demonstrating their involvement in the alleged fraud, or otherwise show in what way they are culpable in the alleged fraud. Plaintiff's' Complaint with respect to these Defendants is woefully deficient under the Rule 9(b) standard, and dismissal is appropriate
4. Amendment of Pleading
The court notes that Plaintiff's have requested an opportunity to amend their Complaint, if the court finds it to be deficient. The decision to allow amendment of pleadings is within the sound discretion of the court. Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir. 1994). In determining whether to allow an amendment of the pleadings, the court considers the following: undue delay in the proceedings, undue prejudice to the opposing parties, timeliness of the amendment, and futility of the amendment. See Foman v. Davis, 371 U.S. 178, 182 (1962); Chitimacha Tribe of Louisiana v. Harry L. Laws Co., Inc., 690 F.2d 1157 , 1163 (5th Cir. 1982). The court determines that allowing Plaintiff's to replead would be inappropriate for the reasons herein stated.
At the hearing, the court inquired of Plaintiff's' counsel what additional facts could be pled to satisfy the pleading deficiencies, and counsel was unable to state how he would replead the case or what new allegations he would make to cure the pleading defects. Rather than state how he would replead to correct certain deficiencies, Plaintiff's' counsel stated on several occasions that Plaintiff's had sufficiently pleaded their case, and offered to replead only if the court found it necessary.
Counsel's message to the court was unequivocal — he believed that he had adequately pleaded his case, and no further amendment was necessary. The court interprets these statements to mean that Plaintiff's were standing on the sufficiency of the allegations in their Complaint, that Plaintiff's could add nothing to the existing allegations, and that Plaintiff's would amend only if the court so ordered. Even after certain deficiencies were pointed out to him, counsel was unable to provide the court any details with respect to how he would amend Plaintiff's' pleading to overcome the deficiencies and meet the strict requirements of Rule 9(b). Counsel did not articulate any facts and wholly failed to inform the court how he would amend the pleadings, other than to make additional general and conclusory statements. As stated before, Rule 9(b) requires that fraud be pled with particularity. Based on what the court heard from Plaintiff's' counsel at the hearing, even if the court were to allow Plaintiff's' pleadings to be amended, it would not move them any farther down the road toward their destination. The court determines that allowing amendment under these circumstances would be futile.
Moreover, allowing a party to amend when no specific information has been provided to the court to indicate how the pleading deficiencies will be corrected only causes unnecessary delay, interferes with the court's ability to manage and control its docket, and prolongs the inevitable — dismissal of the complaint. Under these circumstances, the court sees nothing to be gained by allowing an amendment to the pleadings. See, e.g., Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir. 2003) (district court did not abuse its discretion in denying leave to amend where Plaintiff's were unable to articulate additional facts to state a claim for securities fraud); McKinney v. Irving Indep. Sch. Dist., 309 F.3d 308, 315 (5th Cir. 2002) (district court did not abuse its discretion in denying Plaintiff's leave to amend their complaint when Plaintiff's were unable to state how amendment would cure pleading deficiencies).
III. Conclusion
For the reasons herein stated, the court determines that Plaintiff's have failed to demonstrate that complete diversity of citizenship exists between the parties, and, therefore, have failed to convince the court that it has subject matter jurisdiction over this case. Moreover, even if subject matter jurisdiction exists, Plaintiff's have failed to plead their fraud claims with particularity, and have not shown that the pleading defects can be cured by amendment. Accordingly, Defendants' Motion to Dismiss is granted; Defendant Hatchett's Motion to Dismiss is granted; Defendant Douglas Foshee's Motion to Dismiss is granted; and Defendant Cedric Burgher's Motion to Dismiss is granted. This action is hereby dismissed without prejudice for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1), and, alternatively, dismissed without prejudice for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6).
It is so ordered