Opinion
Civil Action No. 99-3831 CONS CASES, SECTION: "R" (5).
September 19, 2000.
ORDER AND REASONS
Before the Court is defendants McDermott International, Inc., Daniel R. Gaubert, and Roger Tetrault's motion to dismiss plaintiffs' consolidated amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. For the following reasons, the Court grants defendants' motion.
I. Background
Plaintiffs complain in this class action lawsuit that the value of their stock dropped when McDermott International, Inc. announced that one of its subsidiaries, The Babcock Wilcox Company ("BW"), was experiencing escalating settlement demands from asbestos claimants. For years, BW has been subject to thousands of personal injury claims relating to asbestos-containing materials that BW had used as insulation in commercial boiler systems it designed and constructed. In response, BW adopted a strategy in the 1980s to settle asbestos claims before the claimants filed suit in an effort to resolve claims quickly and keep costs per claim relatively low. By the end of 1999, McDermott had settled more than 340,000 claims on terms that were generally within the limits of BW's insurance policies.
McDermott asserts in its motion that it has regularly disclosed the estimated financial impact of these ongoing asbestos claims and the anticipated insurance coverage in its filings with the Securities and Exchange Commission. In its annual report for the fiscal year ending March 31, 1997, McDermott disclosed to investors that after analyzing its asbestos claims history, it estimated BW's liability for pending and future asbestos claims to be more than $1 billion, with estimated insurance recoveries of about $900 million. (Defs.' Mem. Supp. Mot. Dismiss, Ex. 1 at 65.) McDermott also cautioned,
Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, changes in estimates could result in a material adjustment to operating results for any fiscal quarter or year and the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
( Id., Ex. 1 at 65.)
The following year, in its annual report for fiscal year 1998, McDermott again analyzed its asbestos claims history and noted that "[t]he number of claims in fiscal year 1998 declined from previous years' levels and was consistent with management's expectations." ( Id., Ex. 2 at 67.) McDermott then projected "a continuing decline in the number of claims in fiscal year 1999." ( Id., Ex. 2 at 67.) It also amended its earlier caution, adding that changes in estimates could occur "within the next year should expected declines in the number of claims not occur." ( Id., Ex. 2 at 67.) (emphasis added).
As events unfolded, the expected reduction in claims did not materialize, which McDermott disclosed on May 21, 1999 in its annual report for fiscal year 1999. McDermott explained: "By the end of fiscal year 1999, [management] concluded that its forecast decline in claims in the next fiscal year was not likely." ( Id., Ex. 3 at 69.) As a result, McDermott increased its estimate of liability by $817 million, bringing the total estimate to $1.562 billion, with estimated insurance recoveries of $1.367 billion. ( Id., Ex. 3 at 69.) Given these revised estimates, McDermott projected an additional $85.2 million insurance shortfall, which it reported as a nonrecurring, pretax charge against income. This charge eliminated over $1.62 per share in earnings. ( Id., Ex. 3 at 69; Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 5.) McDermott's "revised forecast" included "management's expectation that new claims will conclude within the next thirteen years, that there will be a significant decline in new claims received after four years, and that the average cost per claim will continue to increase only moderately." (Defs.' Mem. Supp. Mot. Dismiss, Ex. 3 at 69.) McDermott also revised its caution again. It warned:
Future costs to settle claims, as well as the number of claims, could be adversely affected by changes in judicial rulings and influences beyond McDermott's control. Accordingly, changes in the estimates of future asbestos products liability and insurance recoverables and differences between the proportion of any additional asbestos products liabilities covered by insurance, and that experienced in the past could result in material adjustments to the results of operations for any fiscal quarter or year, and the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
( Id., Ex. 3 at 70.) McDermott reiterated this caution in its first quarterly report for the next fiscal year (April, May, June 1999), filed on August 11, 1999. ( Id., Ex. 4 at 11.)
Two months later, in October 1999, McDermott retained the law firm Kirkland Ellis to help analyze its options for responding to the asbestos claims, including restructuring. That same month, The Times Picayune published an article on October 17, 1999 in which a McDermott spokesman, Don Washington, expressed optimism about the company's prospects. The column discussed Wall Street's "lack of respect" for McDermott, the low marks given McDermott stock, and that money managers were dumping the stock en masse. Apparently confronted with this information, Mr. Washington said, "We always think the price should be higher. We continue to be very optimistic. There's a whole lot going on with this company." (Defs.' Reply Brief, Ex. B at 1.)
The following month, McDermott announced on November 11, 1999, in connection with the release of its second quarter financial results, that BW had "recently" experienced "an increase in amounts demanded for settlement of certain [asbestos] claims." ( Id., Ex. 5 at 2.) In the second quarterly report, McDermott further explained that it was "evaluating this development to determine if it is representative of the amounts required to settle these types of claims in the future and its overall impact on the estimates and forecasts of BW's ultimate exposure for non-employee asbestos claims." ( Id., Ex. 10 at 32.) McDermott warned that if these demands could not be negotiated "down to historical levels," BW's ultimate exposure could increase, which could, in turn, adversely impact McDermott's financial position and business prospects. ( Id., Ex. 10 at 32.) McDermott explained that it "may be forced to accept higher settlement amounts, begin litigating such claims or take other available courses of action." ( Id., Ex. 10, at 32.) Although it took no new asbestos-related charge, McDermott's stock price, which had been trending down for months, dropped significantly over a two-day period. ( Id. at 5; Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 7-8.)
On February 22, 2000, McDermott issued a press release announcing that BW filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, "because it offers the only viable legal process by which it can seek to determine and comprehensively resolve asbestos liability claims." (Defs.' Mem. Supp. Mot. Dismiss, Ex. 6 at 1.) The release further noted: "In recent months, settlement demands from claimants' lawyers have spiked to levels dramatically above the historical pattern. BW's effort to negotiate the increases down to tolerable levels has been unsuccessful, which has precipitated today's filing." ( Id., Ex. 6 at 3.) In an Informational Brief filed the same day, BW stated that "[u]ncertainty about the scope and impact of the increased demands contributed, in the fall of 1999, to the deferral of bank financing that would have provided BW with cheaper credit and more flexibility, both financially and operationally, than prior bank financing." (Pls.' Mem. Opp'n Mot. Dismiss at 12; Consol. Am. Compl. ¶ 37.)
McDermott subsequently filed its annual report for fiscal year 2000 on March 29, 2000. In that report, McDermott noted:
Beginning in the third quarter of calendar 1999, BW experienced a significant increase in the amount demanded by several plaintiffs' attorneys to settle certain types of asbestos products liabilities claims. These increased demands significantly impaired BW's ability to continue to resolve its asbestos products liability through out-of-court settlements. As a result, BW undertook the bankruptcy filing because it believes that a Chapter 11 proceeding offers the only viable legal process through which it and its subsidiaries can seek a comprehensive resolution of their asbestos liability.
(Defs.' Mem. Supp. Mot. Dismiss, Ex. 9 at 27.)
On December 21, 1999, Plaintiffs brought this class action on behalf of persons who purchased McDermott stock between May 21, 1999 (when McDermott added $817 million to its estimated asbestos liability) and November 11, 1999 (when McDermott warned of increased settlement demands). Plaintiff sued McDermott, Roger Tetrault, chairman of the board of directors and chief executive officer of McDermott, and Daniel R. Gaubert, McDermott's chief financial officer. Plaintiffs claim that the investing public was "shocked" by McDermott's November 11th announcement that negative settlement trends could adversely affect BW's future prospects. They further assert that McDermott's estimates of BW's asbestos liability must have been "continually understated" throughout the class period and that defendants should have disclosed the real exposure to investors.
II. Discussion
A. Rule 12(b)(6)
In a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must accept all well-pleaded facts as true and view the facts in the light most favorable to the plaintiff. See Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996); American Waste Pollution Control Co. v. Browning-Ferris, Inc., 949 F.2d 1384, 1386 (5th Cir. 1991). Dismissal is warranted if "it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle him to relief." Piotrowski v. City of Houston, 51 F.3d 512, 514 (5th Cir. 1995) (quoting Leffall v. Dallas Indep. Sch. Dist., 28 F.3d 521, 524 (5th Cir. 1994)). In deciding whether dismissal is warranted, the Court will not accept conclusory allegations in the complaint as true. See Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982). A motion to dismiss for failure to plead fraud with the particularity required by Rule 9(b) is treated as a motion for failure to state a claim under Rule 12(b)(6). See United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 901 (5th Cir. 1997) (citing Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir. 1996)).
B. Standards for Pleading Securities Fraud
1. Section 10(b) Elements
To survive a motion for dismissal, plaintiffs must allege facts entitling them to relief for their substantive cause of action. Section 10(b) of the Securities Exchange Act of 1934 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). 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. Accordingly, to state a claim for securities fraud in violation of section 10(b) and Rule 10b-5, a plaintiff must allege "(1) a misstatement 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 plaintiff's injury." Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997) (citing Cyrak v. Lemon, 919 F.2d 320 (5th Cir. 1990)).
When a plaintiff alleges a "fraud on the market" theory, it is not necessary for him to prove individual reliance on the false or misleading statement. See, e.g., Branca v. Paymentech, Inc., 2000 WL 145083, at *3 (N.D. Tex. Feb. 8, 2000); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.2d 910, 914 n. 1 (N.D. Tex. 1998). Instead, it is sufficient to show that plaintiff indirectly relied on the statements by relying on the integrity of the market price of the stock. See Branca, 2000 WL 145083, at *3; Zuckerman v. Foxmeyer Health Corp., 4 F. Supp.2d 618, 621 (N.D. Tex. 1998).
2. Rule 9(b) Requirements
As section 10(b) claims are fraud claims, a plaintiff must also satisfy the heightened pleading requirements imposed by Federal Rule of Civil Procedure 9(b). See Fed.R.Civ.P. 9(b) ("In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."). See also Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994) (noting application of Rule 9(b) to securities fraud claims); Tuchman, 14 F.3d at 1067 (same). 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. See FED. R. Civ. P. 9(b). See also Melder, 27 F.3d at 1100 (citing Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993)). This heightened pleading standard serves an important screening function in securities fraud suits. It "provides defendants with fair notice of the plaintiffs' claims, protects defendants 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 (quoting Tuchman, 14 F.3d at 1067).
3. PSLRA's Requirements
The Private Securities Litigation Reform Act of 1995 ("PSLRA") also imposes pleading requirements on plaintiffs in securities fraud actions. It provides:
[T]he 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). Once again, a plaintiff must plead specific facts and avoid reliance on conclusory allegations. Tuchman, 14 F.3d at 1067; Coates, 26 F. Supp.2d at 915.
4. Scienter
In addition, a plaintiff asserting securities fraud claims must allege facts that demonstrate scienter "because not every misstatement or omission in a corporation's disclosures gives rise to a Rule 10b-5 claim." Tuchman, 14 F.3d at 1068. See also Lovelace, 78 F.3d at 1018; Branca, 2000 WL 145083, at *4 Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 1381 n. 12 (1976). See also Lovelace, 78 F.3d at 1018. In Tuchman, the Fifth Circuit held that the scienter element of a securities fraud claim may be satisfied by
proof that the defendant acted with severe recklessness, which is "limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it."Tuchman, 14 F.3d at 1067 (quoting Shushany, 992 F.2d at 521). Accordingly, to plead scienter adequately, a plaintiff must set forth specific facts to support an inference of fraud. Lovelace, 78 F.3d at 1018; Tuchman, 14 F.3d at 1068. "A plaintiff may not rely on boilerplate or conclusory allegations to satisfy its pleading obligations." RGB Eye Assocs., P.A. v. Physicians Resource Group, 1999 WL 980801, at *4 (N.D. Tex. Oct. 27, 1999) (citing cases).
Moreover, 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). While courts debate what this PSLRA standard for pleading scienter means, the Fifth Circuit has observed, in dicta, that the PSLRA "adopted" the Second Circuit's approach. Williams, 112 F.3d at 177-78. Furthermore, all of the district courts in this Circuit that have addressed this issue have adopted the Second Circuit's approach. See, e.g., Branca, 2000 WL 145083, at *5 (Lindsay, J.); Coates v. Wireless Communications, Inc., 55 F. Supp.2d 628, 642 (N.D. Tex. 1998) (Fitzwater, J.); Robertson v. Strassner, 32 F. Supp.2d 443, 447 (S.D. Tex. 1998); Zuckerman, 4 F. Supp.2d at 623 (Mahoney, J.); STI Classic Fund v. Bollinger Indus., Inc., 1996 WL 866699 (N.D. Tex. Nov. 12, 1996) (Buchmeyer, J.). Under this approach, a plaintiff may satisfy the heightened pleading requirement by alleging facts showing a motive to commit fraud and a clear opportunity to do so, or by identifying circumstances indicating conscious or reckless behavior by defendants, so long as the totality of allegations raises a strong inference of fraudulent intent. See Tuchman, 14 F.3d at 1068; Robertson, 32 F. Supp.2d at 447. When a complaint fails to plead scienter in conformity with the PSLRA, the Court must dismiss it. 15 U.S.C. § 78u-4 (b)(3)(A).
c. Plaintiffs' Claims Under Section 10(b) and Rule 10b-5
Defendants argue three alternative bases why plaintiffs' claims should be dismissed. First, plaintiffs fail to plead with particularity any facts supporting their claim that statements made by defendants were false or misleading when they were made. Second, plaintiffs fail to plead particularized facts sufficient to give rise to a strong inference that defendants acted with scienter with respect to each alleged misstatement or omission. Third, defendants' forward looking statements are entitled to safe harbor protections, and plaintiffs fail to plead facts showing defendants made these statements with actual knowledge of their falsity. The Court will address each in turn.
1. Particularity of Falsity
a. Conclusory Allegations
Defendants first argue that plaintiffs fail to plead why certain statements were false when they were made. Instead, defendants assert, the complaint merely couples quotations from McDermott SEC filings, press releases, and newspaper reports with conclusory allegations of fraud. While plaintiffs insist McDermott "continually failed to disclose the increase in settlement demands of asbestos claimants" and the consequent effect on defendants' financial condition in documents filed with the SEC during the class period, (Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 6), they fail to allege any contemporaneous facts to indicate that defendants' statements were false when made. Instead, they simply reiterate conclusorily that McDermott knew during the class period it was facing a dramatic increase in settlement demands without specifying who knew, what they knew, and when they knew it. See Williams, 112 F.3d at 178 ("Directly put, the who, what, when, and where must be laid out before access to the discovery process is granted."). Mere rote conclusions, however, fail to satisfy the requirements of Rule 9 (b). See, e.g., Melder, 27 F.3d at 1103-04.
The only arguably contemporaneous assertion that plaintiffs offer is a McDermott spokesman's optimistic comments quoted in The Times Picayune on October 17, 1999. These comments, however, were printed in a column discussing Wall Street's "lack of respect" for McDermott, the low marks given McDermott stock, and that money managers were dumping the stock en masse in recent months when other oil patch stocks were performing better. Apparently confronted with this information, McDermott's spokesman Don Washington said, "We always think the price should be higher. We continue to be very optimistic. There's a whole lot positive going on in this company." (Defs.' Reply Brief, Ex. B at 1.) This vague, general statement did not purport to evaluate McDermott's asbestos exposure. Moreover, its general sentiment of optimism is mere puffery and does not give rise to a federal securities claim. See Greebel v. FTP Software, Inc., 194 F.3d 185, 207 (1st Cir. 1999) (characterizing "upbeat statements of optimism" as "puffing" and "not actionable"); In re Advanta Corp. Secs. Litig., 180 F.3d 525, 538 (3d Cir. 1999) (finding "general statements of optimism" to be puffery that does not alter a reasonable investor's view of the total mix of information and "do[es] not give rise to a federal securities claim"); In re Burlington Coat Factory Secs. Litig., 114 F.3d 1410, 1427 (3d Cir. 1997) (finding forward looking statements that are general and non-specific not to be actionable); Lasker v. New York State Elec. Gas Corp., 85 F.3d 55, 59 (2d Cir. 1996) ("Broad general statements" are "precisely the type of `puffery' that this and other circuits have consistently held to be inactionable."). Cf. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000) (statement that the inventory situation was "in good shape" or "under control," although broad, held to be actionable because it went to the heart of plaintiffs' complaint); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 283 (3d Cir. 1992) (statements (1) that loan loss reserves were "adequate," "adequately maintained," "strong," and "solid," (2) that the loan portfolio was "well secured," "well collateralized," and of a high "quality," (3) that the loan-to-value ratio was "good," (4) that loan management and underwriting practices were "conservative," "basic," "careful," "good," "prudent," and "cautious," and (5) that quality was "high," while level of bad loans was "low" held to be actionable because they went to the heart of plaintiffs' complaint).
b. Fraud by Hindsight
The only facts plaintiffs point to as indicia that defendants' statements were false are (1) defendants' "admission" that as of the third quarter 1999 BW had experienced a significant increase in the amount demanded to settle asbestos claims, (2) inferences arising from BW's retention of Kirkland Ellis in October 1999, and (3) inferences arising from and "admissions" made in connection with BW's February 2000 bankruptcy. Critically, these events occurred after the disclosures upon which plaintiffs purport to sue, and courts have routinely rejected fraud by hindsight. See, e.g., Acito v. Imcera Group, Inc., 47 F.3d 47, 53 (2d Cir. 1995) ("Mere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud."); Melder, 27 F.3d at 1101 n. 8 (rejecting allegations of fraud by hindsight); DiLeo v. Ernst Young, 901 F.2d 624, 628 (7th Cir. 1990) (same). Furthermore, with the exception of the McDermott spokesman's statement quoted in The Times Picayune, all of the statements plaintiffs characterize as false address McDermott's financial results for reporting periods that ended before the events plaintiffs assert precipitated fraud. Specifically, the annual report for fiscal year 1999 and the first quarterly report for fiscal year 2000 address periods before the third quarter of calendar 1999 — when, by even plaintiffs' account, BW first experienced a spike in settlement demands. ( See Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 1-2.) No duty to report these increased asbestos demands could have arisen until management determined they were a trend. See In re Scholastic Corp. Secs. Litig., 2000 WL 91939 (S.D.N.Y. Jan. 27, 2000) (allegation that management had initial reports of declining book sales was inadequate to plead a trend that should have been disclosed). Plaintiffs fail to allege any facts that suggest when these third quarter increases became recognizable as a trend or when defendants first discerned that a trend existed. Moreover, McDermott disclosed the third quarter spike in settlement demands in the regular quarterly report for the third calendar quarter, which was timely filed within 45 days after the close of the quarter. (Defs.' Mem. Supp. Mot. Dismiss, Ex. 10 at 31-32.)
(1) Defendants' "Admission"
The crux of plaintiffs' complaint is that defendants have admitted that BW faced a significant increase in settlement demands during the third quarter of calender 1999. (Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 1-2.) Plaintiffs assert that this "powerful" admission "undisputedly proves that defendants' disclosures during the Class period were materially false and misleading." ( Id. at 2.) Plaintiffs nevertheless fail to assert facts indicating why any challenged statement was false at the time it was made.
Even when bad news follows closely on the heels of positive statements, a plaintiff must plead specific facts showing why the positive statements were false when they were made. See 15 U.S.C. § 78u-4 (b)(1). While temporal proximity may provide some circumstantial factual support of scienter, it is not sufficient to prove the falsity of the statements at the time they were made. See, e.g., Arazie v. Mullane, 2 F.3d 1456, 1467-68 (7th Cir. 1993) ("[T]emporal proximity between positive statements stressing a firm's strengths and announcements of poor economic performance do[es] not create an inference that the earlier statements were fraudulent."); DiLeo, 901 F.2d at 627 (holding even large losses do not give rise to inference of fraud). Again, plaintiffs appear to accept that defendants' experienced the spike in settlement demands in the third quarter of calendar 1999. This is the position plaintiffs take in their brief, although the consolidated amended complaint alleges that McDermott knew of changing claims trends and failed to disclose this information in the annual report issued May 21, 1999 and in the first quarter 2000 report. Plaintiffs, however, allege no specific facts to indicate that the statements about McDermott's claims experience in the two reports were untrue. Further, plaintiffs do not point to any contemporaneous statements by defendants, except for The Times Picayune article (which the Court has found to be general puffery and not actionable), that are inconsistent with McDermott's admitted claims experience for the third calendar quarter of 1999.
McDermott cautioned investors throughout the class period that BW's liability could be affected by circumstances beyond McDermott's control and that ultimate losses could differ materially from the amounts forecast in the financial statements. Indeed, the cautions became more pronounced over time. Although plaintiffs acknowledge these cautions, they assert defendants knew they were already facing a dramatic increase in settlement demands when they made them. (Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 6.) Plaintiffs point to a warning in the first fiscal quarterly report issued August 11, 1999. They argue that even though the report covered April-June 1999, it was issued on August 11, which is in the third calendar quarter. Plaintiffs then bootstrap the August 11 warning to McDermott's subsequent statement on November 11, 1999 that it had recently experienced an increase in settlement demands in the third quarter to argue that McDermott had to know by August that its warnings were really a reality. Plaintiffs not only fail to allege particular facts showing that defendants had such knowledge on August 11, but the circumstances also cut against such an inference. August 11 is only about the middle of the third calendar quarter, and plaintiffs have posited no reason why defendants are chargeable with knowledge of results for the entire quarter at a point in time when the quarter was only half over. The information at issue did not involve a single, discreet event; instead it involved experience with numerous claims. Plaintiffs offer no reason to suppose that all of the claims information for the quarter was available and in a form to be analyzed by August 11 or that by August 11 the claims picture was such that McDermott did not need the rest of the quarter to come to a conclusion that it was experiencing an adverse trend. Plaintiffs' argument that defendants "had to known that claims results had spiked by August 11 is supported by neither contemporaneous facts nor business reality.
The absence of such facts makes plaintiffs' reliance on Huddleston v. Herman MacLean and Rubinstein v. Collins misplaced. See Rubinstein v. Collins, 20 F.3d 160, 171 (5th Cir. 1994) ("To warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable event to happen when they have already occurred is deceit. Id. (quoting Huddleston v. Herman MacLean, 640 F.2d 534, 544 (5th Cir. 1981))). While it may be deceit to warn of a possibility that already happened, that proposition presumes the party providing the warning knew the untoward event had occurred. Here, plaintiffs plead no facts to indicate that McDermott knew that its claims history had changed for the worse when it warned that future claims costs could be adversely affected by influences beyond its control. Accordingly, merely pointing to defendants' warnings and then juxtaposing them with later disappointing results (or observations thereof) does not satisfy plaintiffs' pleading burden. See, e.g., In re Advanta Corp. Secs. Litig., 180 F.3d at 538 ("Rule 10b-5 liability does not attach merely because' [a]t one time the firm bathes itself in a favorable light' but' [l]ater the firm discloses that things are less rosy. Rather, the plaintiff must demonstrate that the loss was attributable to the defendant's fraudulent conduct." (citing DiLeo, 901 F.2d at 627)); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994) ("[M]isguided optimism is not a cause of action, and does not support an inference of fraud."); Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (dismissing complaint that "seized upon disclosures made in later annual reports and alleged that they should have been made in earlier ones"); In re Donald Trump Secs. Litig., 793 F. Supp. 543, 556 (D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993) ("The fact that a projection or estimate turned out to be incorrect, standing alone, does not even raise an inference that the statement was fraudulent when made.")
(2) Bankruptcy Counsel
To buttress their assertion that defendants' knew their statements were false, plaintiffs posit BW's retention of Kirkland Ellis in October 1999. They assert that this retention is, in and of itself, "powerful evidence that the truth concerning BW's asbestos problems . . . was concealed during the Class Period." (Pls.', Mem. Opp'n Defs' Mot. Dismiss at 13 n. 8.) BW's mere retention of counsel, however, does not give rise to any inference that McDermott's earlier statements regarding BW's asbestos liability were false at the time they were made. Moreover, that a company may consider courses of action before it eventually makes a decision and publicly discloses its intentions is not fraud. See Fant v. Perelman, 1999 WL 199078 (S.D.N.Y. Apr. 9, 1999) (agreeing company surely considered the details of possible restructuring before it was announced, but rejecting inference company had committed fraud by not disclosing details earlier). Furthermore, McDermott repeatedly disclosed to investors, before and during the class period, that BW faced significant risks if the claims experience worsened. Indeed, McDermott disclosed a substantial increase in its estimate of BW's total liability for asbestos claims at the start of the class period, well before it retained Kirkland Ellis.
(3) Bankruptcy
Defendants filed for bankruptcy in February 2000, four months after the close of the third calendar quarter and nine months after the beginning of the class period. Plaintiffs argue that the temporal proximity of the bankruptcy "strongly supports plaintiffs' allegation that the truth concerning BW's problems was concealed during the Class Period." (Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 13 n. 7.) As already explained, however, mere temporal proximity, even in a bankruptcy context, is insufficient to conclude that defendants knew there statements were false at the time. See e.g., In re Criimi Mae, Inc. Secs. Litig., 94 F. Supp.2d 652, 662 (D. Md. 2000) (finding plaintiff's reliance on the discrepancy between optimistic statements and a bankruptcy filing amounted to fraud by hindsight); Brogren v. Pohlad, 933 F. Supp. 793, 801-02 (D. Minn. 1995) (officers of bankrupt company under no duty to disclose general business risks and dismissing claims as fraud by hindsight); In re Donald Trump Secs. Litig., 793 F. Supp. at 556 (Although casino ultimately filed bankruptcy, plaintiffs' allegations were fraud by hindsight.). This is especially true when plaintiffs assert that defendants knew the increased settlement demands were a trend, not an isolated "spike."
With respect to the "admissions" plaintiffs proffer from BW's bankruptcy, the statements merely acknowledge that in hindsight there was a dramatic increase in settlement claims in the fall of 1999. The quoted statements do not specify when that dramatic increase occurred or even when defendants realized the dramatic increase was a trend. Merely asserting the "fall of 1999" is insufficient because it is too broad a period of time. To allege that defendants knew their earlier statements were false, plaintiffs must identify a date prior to each statement when defendants knew facts to the contrary. Accordingly, plaintiffs fail to plead that defendants knew their statements were false.
2. Scienter
Alternatively, defendants argue that plaintiffs failed to plead particularized facts sufficient to give rise to a strong inference that defendants acted with scienter with respect to each alleged misstatement or omission.
a. Motive and Opportunity
Defendants argue that plaintiffs failed to adequately plead motive and opportunity. The Court agrees. Plaintiffs allege that McDermott's motive to commit securities fraud was that it wanted to access the $600 million in cash held by J. Ray McDermott. (Plaintiffs do not allege why McDermott desired access to this money.) To "access" that cash, McDermott had to acquire the outstanding 35% minority interest in that company. The Complaint then charges that to obtain the requisite financing, McDermott had to use fraud to conceal BW's "true state of affairs." (Consol. Am. Compl. ¶ 8.) The flaw in this logic, however, is that to acquire the outstanding stock McDermott had to borrow $525 million in cash on which it had to pay interest. Accordingly, the transaction did not net McDermott $600 million in cash. Moreover, at the time the loan agreement was executed in June 1999, McDermott had already publicly disclosed that it had added $817 million to its estimates of BW's asbestos liability, and there are no facts suggesting that bankruptcy was impending at that time.
Furthermore, a corporate acquisition, in and of itself, does not provide a legally sufficient basis for scienter. Such transactions are routine corporate events, and the "courts reject motive theories that would almost universally permit an inference of fraud." RGB Eye Assocs., 1999 WL 980801, at *9. "Rule 9(b) jurisprudence, and now the PSLRA, seeks to eliminate as a predicate for a securities fraud claim allegations of motive that would effectively eliminate the state of mind requirement. Accordingly, assertions that would almost universally be true . . . are inadequate of themselves to plead motive." Coates, 55 F. Supp.2d at 644 (citing Melder, 27 F.3d at 1102). See also In re Cendant Corp. Secs. Litig., 76 F. Supp.2d 539, 548 (D.N.J. 1999) (pleading generalized motive to support stock price "which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter" (quoting Chill v. General Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996))); In re PETsMART Secs. Litig., 61 F. Supp.2d 982, 999 (D. Ariz. 1999) (mere allegation that executives hoped to acquire third parties using the company's stock as currency "is wholly insufficient"). Cf. Rothman v. Gregor, 220 F.3d 81, 93 (2d Cir. 2000) (rejecting assertion that "desire to consummate any corporate transaction cannot ever be a motive for securities fraud").
b. Conscious Misbehavior
As defendants' motive is not apparent, plaintiffs can allege scienter only under the more stringent standard of conscious misbehavior or recklessness. Plaintiffs argue they adequately pled conscious misbehavior or recklessness by reasserting that their complaint contains detailed allegations establishing defendants' "actual" knowledge or reckless disregard of the falsity of their statements at the time they were made. As already explained, however, plaintiffs have not alleged specific facts indicating that defendants knew their statements were false when made. While plaintiffs aver that the Court must accept their allegations as true for the purposes of this motion to dismiss, the Court is not obliged to accept conclusory allegations as true. See Kaiser Aluminum Chem. Sales, Inc., 677 F.2d at 1050. Therefore, the Court finds that plaintiffs have failed to plead particularized facts sufficient to give rise to a strong inference that defendants acted with scienter with respect to each alleged misstatement or omission.
3. Safe Harbor
McDermott's third alternative argument is that its forward looking statements are protected by the safe harbor provisions of the PSLRA and are, therefore, inactionable. Under the PSLRA, a forward looking statement is not actionable unless the speaker made it with "actual knowledge" that it was "false or misleading," if it is "identified as a forward looking statement" and is "accompanied by meaningful cautionary statements" and if it is "immaterial." 15 U.S.C. § 78u-5 (c)(1)(A)-(B).
While Plaintiffs assert that the cautionary statements in the annual report for fiscal year 1999 and the first quarterly report for the next fiscal year are actionable because defendants knew the statements were false, as already explained, specific facts are not alleged indicating that defendants knew the statements were false at the time they made them. Moreover, "[u]nder the `bespeaks caution' doctrine, if a defendant adds a cautionary statement to the predictive statement, then the statements may not be actionable as a matter of law." Zuckerman, 4 F. Supp.2d at 624 (citing Rubinstein, 20 F.3d at 166-67).
Plaintiffs also argue that defendants' disclosure of future risk was not a forward looking statement within the meaning of the safe harbor provision. The definition of a forward looking statement, however, includes "a statement of future economic performance" or "any statement of the assumptions underlying or relating to [that] statement." 15 U.S.C. § 78u-5 (i)(C)-(D). Accordingly, defendants' disclosure of future risks are forward looking statements because they address the underlying assumptions of the economic forecasts.
Plaintiffs further argue that because defendants did not explicitly identify the cautionary statements as forward looking, they do not qualify for safe harbor protection. The statute, however, does not require an explicit identification. The meaning of statements about future risk was forward looking, and that is sufficient. See, e.g., In re Advanta Corp. Secs. Litig., 180 F.3d at 536 (interpreting statement as forward looking); Harris v. IVAX Corp., 998 F. Supp. 1449, 1453 (S.D. Fla. 1998), aff'd, 182 F.3d 799 (11th Cir. 1999) (finding statement to be forward looking because the meaning was that good times were ahead).
Finally, plaintiffs argue that a jury could consider the McDermott statements carried in The Times Picayune on October 17, 1999 to be material, which precludes safe harbor protection. As the Court has already explained, however, those statements are mere puffery. "Such statements, even if arguably misleading, do not give rise to a federal securities claim because they are not material." In re Advanta Corp. Secs. Litig., 180 F.3d at 538. See also Leventhal v. Tow, 48 F. Supp.2d 104, 113-14 (D. Conn. 1999).
D. Plaintiffs' Claims Under Section 20(a)
Defendant also moves to dismiss plaintiffs' claims against the individual defendants under section 20(a) of the Securities Exchange Act of 1934 because plaintiffs have failed to plead a "primary" violation under section 10(b) and Rule 10b-5. Section 20(a), codified at 15 U.S.C. § 78t(a) (1994), provides: "Every 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 extent 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 will dismiss a section 20(a) claim. See, e.g., Calliot v. HFS, Inc., 2000 WL 351753, at *9 (N.D. Tex. Mar. 31, 2000). Therefore, as plaintiffs have failed to adequately plead a violation by McDermott, the controlled person, the Court dismisses plaintiffs' section 20(a) claim.
E. Opportunity to Amend
Although section 78u-4(b)(3)(A) of the PSLRA states that "[i]n any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) are not met," there is nothing in this language that restricts the Court's discretion whether to grant leave to amend. The decision to allow amendment of the pleadings is with the sound discretion of the Court. See Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir. 1994); Branca, 2000 WL 145083, at *12. In determining whether to allow an amendment of the pleadings, the Court considers undue delay, undue prejudice, timeliness of the amendment, and futility of the amendment. See Forman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227 (1962); Chitimacha Tribe of La. v. Harry L. Laws Co., 690 F.2d 1157, 1163 (5th Cir. 1982); Branca, 2000 WL 145083, at *12.
Having considering these factors, the Court finds that further amendment would be futile. First, the Court notes that plaintiffs have already had more than one bite at the apple. Plaintiffs originally filed four different complaints (99-CV-3831, 00-CV-0073, 00-CV-0234, and 00-CV-0539), which this Court consolidated. After consolidating these cases, the Court ordered plaintiffs to file a consolidated amended complaint, which afforded them a second bite at the apple. While drafting their consolidated amended complaint, plaintiffs sought and obtained an additional 30 days to review BW's bankruptcy filings and to substantiate their claims. Second, plaintiffs have not presented or suggested in their pleadings or at oral argument that there are any additional facts that they have not pled that would cure the defects that the Court has analyzed. Therefore, the Court dismisses plaintiffs' complaint with prejudice because another 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.
III. Conclusion
For the foregoing reasons, the Court grants defendants' motion to dismiss with prejudice.
New Orleans, Louisiana, this 19th day of September, 2000.