Opinion
Civ. No. 3:97-CV-0924-L.
April 5, 2000.
MEMORANDUM OPINION AND ORDER
Before the court is HFS Defendants' Motion to Dismiss, filed November 10, 1997. Defendants HFS, Incorporated ("HFS or Defendant"), John D. Snodgrass ("Snodgrass"), Robert W. Pittman ("Pittman") and Stephen P. Holmes ("Holmes") move to dismiss Plaintiffs' Amended Class Action Complaint ("Complaint"), filed September 19, 1997, pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6) and sections 21D(b)(3)(A) and 21E(c)(1)(B) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78u-4(b)(3)(A) and 15 U.S.C. § 78u-5(c)(1)(B), as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Plaintiffs oppose the motion, arguing that they have adequately pled each of their claims to survive dismissal. After careful consideration of the motion, response, reply, the supplemental filings submitted by both parties, and the applicable law, the court, for the reasons that follow, grants Defendant's Motion to Dismiss.
Plaintiffs' claims against Defendants Snodgrass, Pittman and Holmes, as well as the other individual defendants named in Plaintiffs' Complaint, have been dismissed pursuant to a Stipulation of Settlement, filed January 19, 1999 and Final Judgment and Order of Dismissal, filed August 12, 1999. The only remaining Defendant in this lawsuit is HFS, Inc.
I. Factual and Procedural Background
Defendant HFS is a Delaware corporation with its principal place of business in Parsippany, New Jersey. Plaintiffs are a class of persons who purchased or otherwise acquired common stock of Amre, Inc. ("Amre") during the period between February 28, 1996 and January 16, 1997. During the class period, Snodgrass, Pittman and Holmes were officers and directors of HFS, or its wholly owned subsidiary Century 21 Real Estate Corporation ("Century 21 Real Estate"). In particular, Snodgrass was President, Chief Operating Officer and a director of HFS, as well as chairman of Century 21 Real Estate's Board of Directors; Pittman was a director of HFS, and managing partner and Chief Executive Officer of Century 21 Real Estate; and, Holmes was the Executive Vice President and Chief Financial Officer of HFS. In addition, all three served as directors of Amre, with Snodgrass serving as chairman of the board.
Plaintiffs allege that prior to filing bankruptcy in January 1997, Amre marketed and sold home improvement services and remodeling products, such as vinyl siding, windows, patios, and swimming pools. On October 17, 1995, Amre entered into a license agreement with Century 21 Real Estate and TM Acquisition Corporation ("TMAC"), wholly owned subsidiaries of HFS. Under that agreement, Amre was granted an exclusive 20-year license to market its products and services under the name "Century 21 Home Improvements" ("Century 21"). Plaintiffs allege that the agreement also provided for HFS to designate certain of its officers, namely Snodgrass, Pittman and Holmes, to serve on Amre's Board of Directors. Plaintiffs assert that HFS, through these representatives, participated in the day-to-day operations of Amre. Plaintiffs allege that in addition to the license agreement, Amre entered into two separate agreements with HFS — a Preferred Stock Agreement and Credit Agreement. Under those agreements, HFS agreed to extend Amre a line of revolving credit in the amount of $4 million, and to purchase 300,000 shares of Amre's Senior Convertible Preferred Stock.
Prior to its license agreement with Century 21 Real Estate and TMAC, Amre operated under a license agreement with Sears Roebuck Co. ("Sears") and marketed its products and services under the Sears name for thirteen years until its license expired on December 31, 1995. Amre's operation under the Century 21 name, however, was not successful. On January 17, 1996, just over a year after it began operating under the Century 21 name, Amre declared bankruptcy. Plaintiffs allege that during the class period, representatives of Amre and Defendant made false or misleading statements regarding Amre's business dealings with HFS, Amre's transition to the Century 21 name, consumer response to the Century 21 name, and HFS's support of Amre. These alleged misrepresentations, according to Plaintiffs, caused an artificial inflation in the price of Amre's stock. Plaintiffs filed this lawsuit on April 23, 1997, alleging claims against Defendant and Amre representatives under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Plaintiffs also allege a claim for negligent misrepresentation under state law. On September 19, 1997, Plaintiffs filed their Amended Class Action Complaint ("Plaintiffs' Complaint"), and Defendants now move to dismiss Plaintiffs' Complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b) and Section 21D(b) of the Exchange Act.
II. Applicable Legal Standards A. Standard for Motion to Dismiss
A motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) "is viewed with disfavor and is rarely granted." Lowrey v. Texas AM University System, 117 F.3d 242, 247 (5th Cir. 1997). The court cannot dismiss Plaintiffs' claims under Rule 12(b)(6) unless it appears beyond doubt that they can prove no set of facts entitling them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.2d 910, 913-14 (N.D. Tex. 1998) (" Coates I"). In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). The court, however, will not accept conclusory allegations in the complaint as true. Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982), cert. denied, 459 U.S. 1105 (1983); Robertson v. Strassner, 32 F. Supp.2d 443, 445 (S.D. Tex. 1998); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp.2d 618, 621 (N.D. Tex. 1998).
B. Standard for Pleading Securities Fraud
To survive dismissal, Plaintiffs must have alleged facts that show they are entitled to relief on their substantive cause of action. Plaintiffs assert a claim pursuant to Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j, as amended by the PSLRA. Section 10(b) of the Exchange Act makes it unlawful for a person to:
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 [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j(b). In relevant part, Rule 10b-5 makes it unlawful for any person, directly or indirectly, to:
make any untrue statement of 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 . . . in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. To state a claim for securities fraud in violation of section 10(b) and Rule 10b-5, a plaintiff must allege (1) a misrepresentation or omission; (2) of a material fact; (3) made with the intent to defraud; (4) on which the plaintiff relied; and (5) which proximately caused the plaintiffs injury. Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994); Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir. 1990). In cases such as this, where a plaintiff alleges a "fraud on the market" theory, it is not necessary for the plaintiff to prove individual reliance on the false or misleading statement. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1112-14 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990); Coates I, 26 F. Supp.2d at 914 n. 1; Zuckerman, 4 F. Supp.2d at 621. Instead, a plaintiff may show that he indirectly relied on the statements by relying on the integrity of the market price of the stock. Id.
C. Rule 9(b) Requirements
Because section 10(b) claims are fraud claims, the plaintiff must also satisfy the pleading requirements imposed by Fed.R.Civ.P. 9(b). Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994); Tuchman, 14 F.3d at 1067. Rule 9(b) requires certain minimum allegations in a securities fraud case, namely, the specific time, place, and contents of the false representations, along with the identity of the person making the false representation and what the person obtained thereby. Melder, 27 F.3d at 1100; Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993). This application of the heightened pleading standard of Rule 9(b) provides defendants with fair notice of the plaintiffs' claims, protects them from harm to their reputation and goodwill, reduces the number of strike suits, and prevents plaintiffs from filing baseless claims and then attempting to discover unknown wrongs. Melder, 27 F.3d at 1100; Tuchman, 14 F.3d at 1067.
D. Particularity Requirements of the PSLRA
The PSLRA has further reinforced this particularity requirement with respect to pleading securities fraud claims. Coates I, 26 F. Supp.2d at 914. The PSLRA provides that
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.15 U.S.C. § 78u-4(b)(1). A plaintiff alleging securities fraud must, therefore, not only allege the time, place, identity of the speaker, and content of the alleged misrepresentation, but also explain why the challenged statement or omission is false or misleading. Williams, 112 F.3d at 179. To satisfy Rule 9(b) and the PSLRA, a plaintiff must plead facts and avoid reliance on conclusory allegations. Tuchman, 14 F.3d at 1067; Coates I, 26 F. Supp.2d at 915.
E. Scienter Requirement
In addition to the aforementioned pleading requirements, plaintiffs asserting securities fraud claims must allege facts demonstrating scienter. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996); Tuchman, 14 F.3d at 1068; Zuckerman, 4 F. Supp.2d at 622. Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976); Lovelace, 78 F.3d at 1018. To adequately plead scienter, the plaintiff must set forth specific facts to support an inference of fraud. Lovelace, 78 F.3d at 1018; Tuchman, 14 F.3d at 1068. The PSLRA requires that "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). When a complaint fails to plead scienter in conformity with the PSLRA, dismissal is required. 15 U.S.C. § 78u-4(b)(3)(A); Coates v. Heartland Wireless Communications, Inc., 55 F. Supp.2d 628, 634 (N.D. Tex. 1999) (" Coates II"). A plaintiff may plead scienter by alleging facts to show that a defendant had both motive and opportunity to commit fraud, Branca v. Paymentech, Inc., No. CIV. A. 3:97-CV-2507-L, 2000 WL 145083, at *5 (N.D. Tex. Feb. 8, 2000), or by pleading facts which identify circumstances indicating Defendants' conscious or reckless behavior, so long as the totality of the allegations raises a strong inference of fraudulent intent. Zuckerman, 4 F. Supp.2d at 623; Robertson, 32 F. Supp.2d at 447.
III. Analysis
Defendant contends that Plaintiffs' Complaint is deficient because it lacks the factual specificity required under Rule 9(b) and the PSLRA, and additionally because Plaintiffs have not adequately pleaded facts raising a strong inference of scienter. The court addresses each of these contentions below separately.
A. Particularity Requirements of Rule 9(b) and the PSLRA
Plaintiffs allege that during the class period, Defendant and Amre representatives made false and misleading statements concerning consumer response to the Century 21 name, Amre's expected financial results, Amre's bank of sales leads, and HFS's support of Amre. Plaintiffs also allege that Amre representatives failed to disclose material negative information such as lack of proper training and supervision in Amre's telemarketing department, the telemarketing department's massive turnover rate, lower closing rates, lack of interest by Century 21 real estate agents in referring customers to Amre, increased marketing expenses, lack of profitability, and Amre's need for outside financing. Defendant contends that the statements which Plaintiffs allege as false or misleading are nothing more than general expressions of optimism which are not actionable under the federal securities laws. Defendant further contends that because Amre's optimistic statements were accompanied by cautionary warnings, and alerted the market that the Century 21 transition was risky and uncertain, there can be no liability under § 10(b) based on these statements. Defendant also contends that Plaintiff's Complaint contains only conclusory allegations of securities fraud, and, therefore, fails to satisfy the stringent pleading requirements of Rule 9(b) and the PSLRA.
At a minimum, Rule 9(b) requires allegations of the particulars of time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby. Shushany, 992 F.2d at 521, Plaintiffs argue that they have met this pleading burden by alleging with particularity those statements which they contend were false and misleading. While the court agrees with Plaintiffs that they have alleged by time, place, content and speaker numerous statements allegedly made by representatives of Defendant and Amre in various press releases, Securities and Exchange Commission ("SEC") filings, and in other contexts, the court finds that the majority of the statements, which Plaintiffs contend were false or misleading, has not been pled with sufficient particularity to satisfy the requirements of Rule 9(b). With respect to the statements identified by Plaintiffs in ¶¶ 51, 56, 58, 61, 63, 65, 66, 67, 68, 70, 87, 89 and 90 of Plaintiffs' Complaint, Plaintiffs have either failed to identify the speaker of the alleged fraudulent statement, failed to specifically identify the false or misleading statement, or attempt to use group pleading to allege fraud. Because Plaintiffs have failed to identify the person making the alleged misrepresentation in each of the aforementioned paragraphs, the court finds that Plaintiffs have failed to satisfy the heightened pleading standard required by Rule 9(b). Moreover, Plaintiffs have failed to allege facts which indicate that the statements identified in those paragraphs were false or misleading when made, or that they were made with fraudulent intent. The court, therefore, concludes that with respect to statements contained in ¶¶ 51, 56, 58, 61, 63, 65, 66, 67, 68, 70, 87, 89 and 90 of Plaintiffs' Complaint, Plaintiffs have not sufficiently alleged facts to support a claim under Section 10(b) because they have not satisfied the strict pleading requirements of Rule 9(b) or the PSLRA.
Complaint at ¶¶ 48, 50, 60, 73, 76, 77, 78, 79, 80, 82, 83, and 84.
Under the group pleading doctrine, a plaintiff may rely on a presumption that statements in prospectuses, press releases, and other company generated documents are the collective work of those individuals directly involved in the company's daily management. Branca, 2000 WL 145083, at *7. In Branca, the court declined to recognize group pleading as a viable means to plead fraud under the PSLRA. See Branca, 2000 WL 145083, at *8 (group pleading is inconsistent with the PSLRA's requirement that plaintiffs plead specific facts as to each act or omission by the defendant).
With respect to the statements identified by Plaintiffs in ¶¶ 48, 50, 60, 73, 76, 77, 78, 79, 80, 82, 83, and 84 of Plaintiffs' Complaint, the court finds that Plaintiffs have satisfied the pleading requirements of Rule 9(b) by alleging the time, place, content and speaker of the statements which they allege were false or misleading. These alleged misrepresentations concern consumer response to the Century 21 name, Amre's expected financial results, Amre's bank of sales leads, and HFS's support of Amre. The court addresses each in turn.
1. Consumer Response to the Century 21 Name
Plaintiffs allege that during the class period, Amre representatives made statements that management was "encouraged" and "pleased" by customer receptivity to the Century 21 Home Improvements name ("the Century 21 name" or "name"), that Amre had proved that the Century 21 name worked, that Amre was able to market its products under the name, that Amre's bank of sales leads had increased under the name, and that Amre's bank of sales leads was at higher levels than before transition to the Century 21 name. Plaintiffs allege that these statements were false or misleading because at the time the statements were made, representatives of both Defendant and Amre knew of adverse facts tending to undermine the accuracy of the statements, including knowledge that consumer response to the Century 21 name was poor. Defendant contends that any statements by Amre's representatives that they were "encouraged" or "pleased" by customer receptivity are not actionable under the federal securities laws because such statements were no more than general expressions of optimism. Plaintiffs respond that general expressions of optimism and statements of opinion or belief are actionable, if such statements are made with no reasonable basis. In support of their position, Plaintiffs cite In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990). The court first observes that, unlike this case, Apple Computer was reviewed under a summary judgment standard. As a result, the plaintiffs were required to present evidence establishing a genuine issue of material fact as to each element of their claim. ld. at 1112-13. The court in that case concluded that genuine issues of material fact existed regarding certain optimistic statements made by defendants because plaintiffs presented evidence that at the time the statements were made, defendants knew of adverse facts tending to undermine defendants' expressions of optimism. Id. at 1115. Here, Plaintiffs allege no facts to support its conclusory assertion that Amre's management did not have a reasonable basis for being "encouraged" or "pleased" by consumer response to the Century 21 name. While Plaintiffs argue that consumer response to the Century 21 name was poor, they allege no facts to support this conclusion. Although Plaintiffs assert that Amre was experiencing problems with its telemarketing department, and a lack of interest in referrals to Amre from Century 21 real estate agents, these facts do not support Plaintiffs' conclusion that consumer response to the Century 21 name was poor. Arguably, that Amre experienced an increase in revenues during the class period, as well as an increase in the number of leads in Amre's lead bank, undermines Plaintiffs' argument that there was no basis for statements by Amre representatives that management was encouraged or pleased by consumer response to the Century 21 name. Plaintiffs have wholly failed to allege facts which indicate that Amre representatives knew or should have known of adverse information tending to undermine statements that they were encouraged or pleased by customer response to the Century 21 name.
Complaint at ¶¶ 48, 50, 56, 60, 61, 63, 76, and 78.
To state a claim for securities fraud, Plaintiffs must allege, inter alia, a misstatement or omission of a material fact. Williams, 112 F.3d at 177. A fact is material in the context of a § 10(b) claim if there is a substantial likelihood that a reasonable investor would consider it significant in making the decision to invest, such that it alters the total mix of information available about the proposed investment. Basic Inc. v. Levinson, 485 U.S. 224, 231-232 (1988); Rubinstein v. Collins, 20 F.3d 160, 168 (5th Cir. 1994). The court agrees with Defendant that the statements made by Amre representatives that management was encouraged and pleased by customer receptivity to the Century 21 name were merely expressions of optimism, and too vague to be material. See Greebel v. FTP Software, Inc., 194 F.3d 185, 207 (1st Cir. 1999); In re Mobile Telecommunication Technologies Corp. Sec. Litig., 915 F. Supp. 828, 834 (S.D. Miss. 1995). Securities "[a]nalysts . . . rely on facts in determining the value of a security, not mere expressions of optimism from company spokesmen." Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993). Plaintiffs allege that statements by Amre representatives that they had proved to themselves that Century 21 name generated consumer interest in their products and, therefore, sales leads, and that they had proved that the Century 21 name worked were false and misleading because of poor consumer response. The court finds that these statements are more akin to commercial puffery than representations of material facts. See In re Mobile Telecommunication Technologies Corp. Sec. Litig., 915 F. Supp. at 834; San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 811 (2d Cir. 1996). The court finds that Plaintiffs have failed to satisfy the particularity requirements of the PSLRA because they have not alleged sufficient non-conclusory facts which indicate that the statements by Amre representatives were false or misleading.
2. Amre's Expected Financial Results
Plaintiffs allege that statements accompanying Amre's quarterly reports, which characterized Amre's disappointing financial results as "expected" and "anticipated," were false or misleading because Amre had not expected a decline in revenues due to poor consumer response. Plaintiffs contend that representatives of Defendant and Amre knew or should have known the statements were false or misleading because Amre was experiencing undisclosed problems concerning its marketing activities. Specifically, Plaintiffs allege that Amre's telemarketing department lacked proper training and supervision, that the telemarketing department experienced a massive turnover rate, that the constant hiring of new employees resulted in a poorly trained and inexperienced telemarketing staff, lower closing rates, and higher costs, and that Amre's sales force of field agents was lax in keeping appointments with potential customers. Defendant responds that investors were made aware of the problems concerning Amre's telemarketing department through Amre's SEC filings, and that any statements concerning Amre's expected results are shielded under the "bespeaks caution" doctrine. The court finds that the "bespeaks caution" doctrine is not applicable to the statements identified by Plaintiffs concerning Amre's expected financial results because the statements are not predictions, but statements of existing fact. Griffin v. GK Intelligent Systems, Inc., No. Civ.A. H-98-3847, 1999 WL 1425407, at *4 (S.D. Tex. Oct. 26, 1999). As a result, the "bespeaks caution" doctrine is of no assistance to Defendant as to those statements.
Complaint at ¶¶ 52-54.
Under the "bespeaks caution" doctrine, if a defendant adds a cautionary statement to a predictive statement, then the statement may not be actionable as a matter of law. Zuckerman, 4 F. Supp.2d at 624 (citing Rubinstein v. Collins, 20 F.3d 160, 166 (5th Cir. 1994)). If a statement, however, is false by failure to fully disclose information, a duty arises to speak the full truth when a defendant undertakes the duty to say anything. Zuckerman, 4 F. Supp.2d at 625.
Complaint at ¶¶ 50, 60 and 76.
While Plaintiffs do not dispute the accuracy of Amre's reported quarterly financial results, they argue that Amre's statements concerning the results were misleading because Amre had not expected consumers to respond poorly to the Century 21 name. Therefore, according to Plaintiffs, the disappointing financial results could not have been expected by Amre representatives. Plaintiffs, however, allege no facts to show that the statements concerning Amre's expected or anticipated financial results were false or misleading, or that representatives of Defendant or Amre had knowledge of adverse information tending to undermine the accuracy of those statements. Plaintiffs contend that statements about Amre's "expected" transitional revenue declines, when evaluated in context, give rise to section 10(b) liability because they created the impression that revenue declines were the normal downturns one would expect when adopting a new brand name, and did not reveal that poor consumer response was a significant reason for the declines. Plaintiffs attempt to plead fraud based on the premise that Defendants knew of, but intentionally concealed, material information about consumer response to the Century 21 name. This premise, however, is weakened by Plaintiff's failure to plead specific facts which indicate that consumers responded poorly to the Century 21 name. In addition, Plaintiffs have failed to allege facts which show conscious misbehavior by representatives of Defendant or Amre. As a result, the court finds that Plaintiffs cannot state a claim for securities fraud based on the statements of Amre representatives regarding their "expected" or "anticipated" financial results.
3. Amre's Bank Leads
Plaintiffs contend that certain statements made by Amre's management concerning the number of sales leads generated under the Century 21 name were false or misleading because leads after Amre switched to the Century 21 name were a lower quality than the pie-switch leads. Plaintiffs, however, allege no facts to show that the statements concerning the sales leads were false or misleading when made. Plaintiffs contend that Defendants were required to disclose all material facts about the leads, including their quality. Plaintiffs, however, cite no authority to support their position. The court has scrutinized the allegations concerning Amre's bank leads in light of the pleading requirements of § 10(b) and finds that Plaintiffs have failed to allege facts sufficient to state a claim under § 10(b) of the Exchange Act based on the statements concerning Amre's bank leads.
See Plaintiffs' Complaint at ¶¶ 60, 76, 79, and 87.
4. HFS's Support of Amre
Plaintiffs contend during a telephone conference with analysts held on October 31, 1996, Snodgrass made false and misleading statements concerning the HFS's continued support of Amre. During that conversation, Plaintiffs allege that Snodgrass made statements that HFS had a strong commitment to Amre, that HFS was committed to the success of Amre, that it was in the common interest of HFS and Amre that Amre be successful, that HFS had consistently supported Amre financially and he saw no change in that strategy. Plaintiffs contend that these statement were false or misleading because the relationship with Amre was not strong, that HFS was not committed to helping Amre find a solution to its capital needs, that HFS never intended to contribute a significant amount of cash to or buy a big stake in Amre, and that HFS was unwilling to provide Amre with the additional capital that the company needed to complete its transition to the Century 21 name. Plaintiffs, however, allege no facts to support these conclusory allegations. Plaintiffs plead no facts which indicate that these statements were false, or that Snodgrass had knowledge at the time he made the statements of adverse information tending to undermine the accuracy of the statements. Plaintiffs plead no facts which indicate that HFS intended to terminate its relationship with Amre, or that HFS had no intention of assisting Amre find solutions to its capital needs. Because Plaintiffs have failed to allege facts which indicate that statements concerning HFS's support of Amre were false or misleading, Plaintiffs have failed to comply with the PSLRA, and, therefore, cannot state a claim under § 10(b) of the Exchange Act based on these statements.
B. Scienter Requirement
Plaintiffs contend that Defendant acted with scienter in (1) failing to disclose adverse facts about consumer response to the Century 21 name, and (2) expressing its commitment to Amre. Plaintiffs, however, fall to allege with particularity facts to support a strong inference that Defendants acted recklessly or with fraudulent intent. The PSLRA requires a complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Plaintiffs have wholly failed to adduce the kind of circumstantial evidence that would indicate conscious fraudulent behavior or recklessness.
1. Motive and Opportunity
Plaintiffs contend that Amre was motivated to misrepresent consumer response to the Century 21 name because it wanted to sell approximately 1.1 million shares of its common stock for its own account. Plaintiffs further allege that Amre's officers and directors were motivated to engage in misrepresenting consumer reaction to the Century 21 name to preserve their own positions and perquisites as officers or directors of Amre, and to inflate the price of Amre common stock so that they could profit from their own sale of the stock during the class period. Plaintiffs, however, allege no facts which indicate that the HFS Defendants purchased or sold stock during the class period. While Plaintiffs contend in their response to Defendant's motion to dismiss that HFS sold stock during the period, Plaintiffs' Complaint does not allege facts to show that HFS sold any stock during the class period. Plaintiffs' Complaint simply alleges that HFS's stock was "included in the Amre September offering," not that HFS's stock was actually sold. Plaintiffs also allege that HFS was motivated to engage in the alleged misconduct because it wanted to sell its Amre common stock at a high price, and wanted to ensure a merger with PHH Corporation. The court, however, finds that Plaintiffs' general allegations of motive are insufficient to plead scienter for a § 10(b) claim.
Complaint at ¶¶ 114, 115.
Complaint at ¶ 126.
2. Conscious Misbehavior or Recklessness
Throughout the Complaint, Plaintiffs state in conclusory fashion that Defendants "knew," "should have known," "were reckless" in not knowing, and "falsely" stated particular facts. This type of conclusory recitation "fails to provide the specific facts upon which an inference of conscious behavior may be based." Melder, 27 F.3d at 1102. Here, Plaintiffs have pleaded no facts indicating that at the time the allegedly false statements were made, Defendants had actual knowledge of contradictory facts, and thus their Complaint does not state a claim for securities fraud. See Tuchman, 14 F.3d at 1069; Coates I, 26 F. Supp.2d at 920. Similarly, rote and conclusory allegations of recklessness do not support an inference of intent to defraud. Melder, 27 F.3d at 1103-04; Coates II, 55 F. Supp.2d at 641. Plaintiffs contend that HFS, Snodgrass, Pittman and Holmes acted with scienter in misrepresenting that HFS's relationship with Amre was strong and that there was no foreseeable change in HFS support for Amre. In their response to Defendant's motion to dismiss, Plaintiffs assert that after Amre declared bankruptcy, the financial press reported statements by Henry Silverman, HFS chairman and Chief Executive Officer, that he did not think the business was executed well, and that he did not think they could control their cost of doing business. See Plaintiffs' Brief in Opposition to Defendants' Motions to Dismiss, at p. 36. Plaintiffs further contend that Mr. Silverman stated that he never intended to contribute significant cash or buy a big stake in Amre. Id. The court, however, is unpersuaded. First, Plaintiffs have not alleged this in their Complaint and second, even if these statements were contained in Plaintiffs' Complaint, they would be an impermissible attempt to allege fraud by hindsight, that is, to seize upon disclosures in later reports and allege that they should have been made in earlier ones. Coates II, 55 F. Supp.2d at 635. Plaintiffs have not adequately pleaded scienter through these allegations.
IV. Plaintiffs' Remaining Claims 1. Section 20(a) Claim
Plaintiffs' second claim alleges violations of section 20(a) of the Exchange Act. This section defines controlling person liability, providing that:
[e]very person, who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extend as such controlled person. . . .15 U.S.C. § 78t(a). Where a primary violation by the "controlled person" has not been adequately pleaded, the court should also dismiss a section 20(a) claim. Coates I, 26 F. Supp.2d at 923. As Plaintiffs have failed to adequately plead a violation of Amre, the alleged controlled person, Plaintiffs' section 20(a) claim must also be dismissed. Id.; Coates II, 55 F. Supp.2d at 645.
2. Negligent Misrepresentation Claim
As the court has dismissed Plaintiffs' federal claims, the court now dismisses Plaintiffs' state law claim for negligent misrepresentation without prejudice. Pursuant to 28 U.S.C. § 1367(c)(3), the court is authorized to dismiss state law claims without prejudice when it has dismissed all claims over which it has original jurisdiction. Accordingly, the court in its discretion dismisses Plaintiffs' state law claims without prejudice.
V. Conclusion
In light of the court's ruling, the question arises whether Plaintiffs should be allowed to amend. 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. Harty L. Laws Co., Inc., 690 F.2d 1157, 1163 (5th Cir. 1982).
Plaintiffs have now had two opportunities to plead this lawsuit. Two bites at the apple is more than adequate opportunity to plead an action, if one exists, under the applicable law. The court believes that permitting a third pleading attempt would be an inefficient use of the parties' and the court's resources, would cause unnecessary and undue delay, and would be futile. For the reasons stated herein, the HFS Defendants' Motion to Dismiss Plaintiffs' amended class action complaint is granted. Plaintiffs' federal claims are hereby dismissed with prejudice, and Plaintiffs' state-law claims are dismissed without prejudice. Judgment will be entered by separate document.
It is so ordered this 31st day of March, 2000.