United States District Court for the District of Columbia
July 16, 2004.
In Re: US OFFICE PRODUCTS SECURITIES LITIGATION. TODD SEMON, et al., Plaintiffs,
JONATHAN LEDECKY and U.S. OFFICE PRODUCTS CO., Defendants.
The opinion of the court was delivered by: RICARDO URBINA, District Judge
GRANTING THE DEFENDANTS' MOTIONS TO DISMISS
This matter comes before the court on the defendants' motions
to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and
12(b)(6), and the Private Securities Litigation Reform Act of
1995 ("PSLRA"). The plaintiffs bring suit against defendants
United States Office Products ("USOP") and its former Chief
Executive Officer Jonathan Ledecky ("Ledecky") for damages
arising out of a strategic restructuring carried out by USOP.
Because the plaintiffs do not state with particularity facts
giving rise to a strong inference that the defendants acted with
an intent to deceive, do not state with particularity the
circumstances constituting fraud or mistake and do not have
standing for one of the counts, the plaintiffs fail to state a
claim upon which relief can be granted. Accordingly, the court
grants the defendants' motions to dismiss the plaintiffs' consolidated and amended class action complaint.
A. Factual History
The plaintiffs bring this action on behalf of themselves and
other USOP stockholders who purchased or otherwise acquired USOP
common stock and/or employee stock options through business
transactions with USOP between June 5, 1997 and September 2, 1998
(the "Class Period") and who suffered a loss as a result of the
alleged conduct of the defendants. Am. Compl. ("Compl.") ¶ 1. In
1997, USOP was one of the world's largest suppliers of office
products and business services. Def. USOP's Mot. to Dismiss
("USOP Mot.") at 4. From its initial public offering in February
1995 through 1997, USOP grew by utilizing a "roll-up" strategy,
that is, growth through the acquisition or merger with smaller
companies. Id. Frequently, USOP would fund these acquisitions
by using its own stock, which had the added benefit of allowing
USOP to utilize the "pooling" method of accounting for the
acquisitions. Compl. ¶ 19. The pooling method of accounting
allows a purchasing company to avoid recording goodwill paid for
acquisitions and instead allows the historical costs of the
separate companies' assets and liabilities to be combined and
become the recorded amounts of the combined company's assets and
liabilities. Id. ¶ 27. During the class period, USOP completed
22 transactions under the pooling method. Id. ¶ 7.
In September 1997, the investment firm of Clayton, Dubilier &
Rice ("CD&R") approached USOP with an investment proposal
involving a sale and repurchase of stock, and a spin-off of parts
of USOP. Id. ¶ 88. USOP's Board of Directors ("the Board"),
however, decided at a October 1, 1997 meeting not to pursue the
CD&R proposal. Id. In a November 5, 1997 press release, USOP announced the promotion of Thomas Morgan
to President and Chief Executive Officer, replacing Ledecky.
Id. ¶ 23. Despite record reported earnings in its fiscal year
1997 fourth quarter, and its fiscal year 1998 first quarter,
USOP's stock price fell substantially between October of 1997 and
December of 1997. USOP Mot. at 5. In the Board's opinion, the
decline in stock price was mainly due to investor difficulty in
valuing USOP stock because of the company's enormous
diversification. Id. To combat this, on December 17, 1997, the
Board authorized USOP to re-enter discussions with CD&R regarding
another investment proposal. Am. Compl. ¶ 88. The Board explained
that they re-entered negotiations with CD&R because Ledecky had
informed them that he intended to step down from the position and
because CD&R was willing to invest the same amount it proposed in
September, despite the drop in USOP's stock price. Id. ¶ 48;
USOP Mot. at 6.
On January 12, 1998, the Board decided to enter into a
strategic restructuring plan with CD&R. Compl. ¶ 63; USOP Mot. at
6. The central features of the restructuring plan entailed
spinning off 4 divisions of USOP and CD&R investing $270 million
in exchange for 24.9% of the shares of the restructured USOP.
Id. In order to obtain a large enough block of shares for CD&R,
the Board proposed that USOP engage in a $1 billion stock buyback
of 37 million shares at $27 per share. Compl. ¶ 62; USOP Mot. at
6. In the event that USOP shareholders collectively tendered more
than 37 million shares, each shareholder's tender would be
prorated. USOP Mot. at 7.
On January 13, 1998, USOP issued a press release outlining the
restructuring. Compl. ¶ 64. In the press release, USOP disclosed
that as a result of the transactions contemplated by the
restructuring plan, it would have to reclassify several prior
acquisitions under the "purchase" method of accounting rather than the more favorable "pooling"
method. Id. ¶ 67. The press release also disclosed that the
effect of the accounting reclassifications would be to
substantially lower earnings for the next two quarters. Id;
USOP Mot. at 8. On May 28, 1998, USOP shareholders overwhelmingly
approved the restructuring plan, which was completed on June 10,
1998. Compl. ¶ 92; USOP Mot. at 9. Unfortunately for USOP, the
restructuring did not have the desired effect on its stock price.
From June 10, 2003, the date the restructuring was complete,
until two days before the amended complaint was filed, the stock
price declined from $25.50 to $4.85. Compl. ¶¶ 100, 103. After
the drop in stock price, the plaintiffs brought suit alleging
that several prior financial disclosures and statements by
Ledecky were false and misleading because USOP and Ledecky formed
the intent to enter into a deal with CD&R earlier in 1997, knew
that entering into the restructuring would cause USOP to have to
restate earnings, and intentionally concealed their intentions in
order to artificially keep the stock price high. See generally
B. Procedural History
On April 12, 1999, the Judicial Panel on Multi-district
Litigation transferred six actions pending in the Southern
District of New York to this court for coordinated or
consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407.
On July 29, 1999, the plaintiffs filed their amended complaint,
asserting violations of sections 10(b) and 14(a) of the
Securities Exchange Act of 1934 ("the Exchange Act"); breach of
contract; and violations of sections 12(2) and 11 of the
Securities Act of 1933 ("the Securities Act"). After the
defendants filed their initial motion to dismiss, the court
stayed the case on several occasions due to bankruptcy filings,
MDL transfers and mediation efforts. Subsequently, the defendants
filed renewed motions to dismiss. The court now turns to those
motions. III. ANALYSIS
A. Legal Standard for a Rule 12(b)(6) Motion to Dismiss
A Rule 12(b)(6) motion to dismiss tests the legal sufficiency
of a complaint. Browning v. Clinton, 292 F.3d 235, 242 (D.C.
Cir. 2002). The complaint need only set forth a short and plain
statement of the claim, giving the defendant fair notice of the
claim and the grounds upon which it rests. Kingman Park Civic
Ass'n v. Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003) (citing
FED R. CIV. P. 8(a)(2) and Conley v. Gibson, 355 U.S. 41, 47
(1957)). "Such simplified notice pleading is made possible by the
liberal opportunity for discovery and the other pre-trial
procedures established by the Rules to disclose more precisely
the basis of both claim and defense to define more narrowly the
disputed facts and issues." Conley, 355 U.S. at 47-48 (internal
quotation marks omitted). It is not necessary for the plaintiff
to plead all elements of his prima facie case in the complaint,
Swierkiewicz v. Sonoma N.A., 534 U.S. 506, 511-14 (2002), or
"plead law or match facts to every element of a legal theory."
Krieger v. Fadely, 211 F.3d 134, 136 (D.C. Cir. 2000) (internal
quotation marks and citation omitted).
Accordingly, "the accepted rule in every type of case" is that
a court should not dismiss a complaint for failure to state a
claim unless the defendant can show beyond doubt that the
plaintiff can prove no set of facts in support of his claim that
would entitle him to relief. Warren v. District of Columbia,
353 F.3d 36, 37 (D.C. Cir. 2004); Kingman Park, 348 F.3d at
1040. Thus, in resolving a Rule 12(b)(6) motion, the court must
treat the complaint's factual allegations including mixed
questions of law and fact as true and draw all reasonable
inferences therefrom in the plaintiff's favor. Macharia v.
United States, 334 F.3d 61, 64, 67 (D.C. Cir. 2003); Holy Land
Found. for Relief & Development v. Ashcroft, 333 F.3d 156, 165
(D.C. Cir. 2003); Browning, 292 F.3d at 242. While many well-pleaded
complaints are conclusory, the court need not accept as true
inferences unsupported by facts set out in the complaint or legal
conclusions cast as factual allegations. Warren, 353 F.3d at
39; Browning, 292 F.3d at 242.
B. Legal Standard for a Rule 9(b) Motion to Dismiss
Rule 9(b) requires that a pleader state with particularity the
circumstances constituting fraud or mistake. FED. R. CIV. P.
9(b). Rule 9(b)'s particularity requirement ensures that the
opponent has notice of the claim, prevents attacks on his
reputation where the claim for fraud is unsubstantiated, and
protects him against a strike suit brought solely for its
settlement value. Shields v. Wash. Bancorp., 1992 WL 88004, at
*4 (D.D.C. Apr. 7, 1992); see also Kowal, 16 F.3d at 1279 n. 3
(observing that Rule 9(b) aims to prevent a claim filed as a
"pretext for the discovery of unknown wrongs" (citation
omitted)); Vicom, Inc. v. Harbridge Merch. Servs., 20 F.3d 771,
777-78 (7th Cir. 1994) (recognizing that Rule 9(b) is largely
designed to give each opponent notice of his purported role in
the alleged fraud); DiVittorio v. Equidyne Extractive Indus.,
Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) (same).
Because the rule is chiefly concerned with the elements of
fraud, the circumstances that the claimant must plead with
particularity include matters such as the time, place, and
content of the false misrepresentations, the misrepresented fact,
and what the opponent retained or the claimant lost as a
consequence of the alleged fraud. United States ex rel. Totten
v. Bombardier Corp., 286 F.3d 542, 551-52 (D.C. Cir. 2002);
United States ex rel. Joseph v. Cannon, 642 F.2d 1373, 1385
(D.C. Cir. 1981). In other words, Rule 9(b) requires that the
pleader provide the "who, what, when, where, and how" with
respect to the circumstances of the fraud. DiLeo v. Ernst &
Young, 901 F.2d 624, 627 (7th Cir. 1990), cert. den'd,
498 U.S. 941 (1990) (requiring the pleader to provide the equivalent of a "first paragraph of
any newspaper story"). Following the same line of reasoning, a
pleading subject to Rule 9(b) scrutiny may not rest on
information and belief, but must include an allegation that the
necessary information lies within the opponent's control,
accompanied by a statement of the facts on which the pleader
bases his claim. Kowal, 16 F.3d at 1279 n. 3.
That said, Rule 9(b)'s particularity requirement does not
abrogate Rule 8's general requirements that a pleading contain a
short and plain statement of the claim, and that each averment be
simple, concise, and direct. Id. at 1278 (citing Cannon, 642
F.2d at 1385); FED. R. CIV. P. 8. Rule 9(b) simply requires the
pleader to provide a higher degree of notice by adequately
alleging all of the requisite elements for the cause of action
invoked. Alicke v. MCI Communications Corp., 111 F.3d 909, 912
(D.C. Cir. 1997); Schaller Tel. Co. v. Golden Sky Sys., Inc.,
298 F.3d 736, 746 (8th Cir. 2002). Additionally, while the court
must take as true all allegations of material fact and construe
them in the light most favorable to the pleader in resolving a
Rule 9(b) challenge, the pleader nevertheless must satisfy his
burden by stating with particularity the supporting factual
allegations for his claim. Kowal, 16 F.3d at 1278 (citing Wool
v. Tandem, 818 F.2d 1433, 1439 (9th Cir. 1987)); Shields, 1992
WL 88004, at *7; see also One-O-One Enters., Inc. v. Caruso,
668 F. Supp. 693, 697-99 (D.D.C. 1987), aff'd, 848 F.2d 1283
(D.C. Cir. 1988) (explaining that the pleader must allege with
particularity the alleged fraud to survive a Rule 9(b) motion).
Finally, "[c]onclusory allegations that a defendant's actions
were fraudulent and deceptive are not sufficient to satisfy
9(b)." Shekoyan v. Sibley Int'l Corp., 217 F. Supp.2d 59, 73
(D.D.C. 2003); see also In re Rockefeller Ctr. Props. Inc. Sec.
Litig., 311 F.3d 198, 216 (3d Cir. 2002) (noting that courts are
not required to credit a complaint's bald assertions, legal conclusions or "legal conclusions draped in the
guise of factual allegations")
Where a pleading does not satisfy the heightened requirements
of Rule 9(b), the court should freely grant leave to amend. See
Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996)
(recognizing that courts almost always grant leave to amend to
cure deficiencies in pleading fraud). Accordingly, the court
should reserve dismissal with prejudice for "extreme situations
where the pleader has had the opportunity to cure any
deficiencies but either has not or cannot do so." Shields, 1992
WL 88004, at * 5.
C. The Court Dismisses Count I For Failure To Allege Facts Giving
Rise to a Strong Inference that the Defendants Acted With
1. Legal Standard for Stating a Claim for Securities Fraud Under
Securities and Exchange Commission ("SEC") Rule 10b-5,
promulgated under Section 10(b) of the Exchange Act, "prohibits
fraudulent activities in connection with securities
transactions." Novak v. Kasaks, 216 F.3d 300
, 305 (2d Cir.
2000). "To state a claim for securities fraud under Rule 10b-5, a
plaintiff must allege that the defendant knowingly or recklessly
made a false or misleading statement of material fact in
connection with the purchase or sale of a security, upon which
plaintiff reasonably relied, proximately causing his injury."
Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C.
Cir. 1994). Stated differently,
[A] plaintiff must allege (1) a material misstatement
or omission, (2) made with scienter (an intent to
deceive), (3) made in connection with the purchase of
sale of a security, (4) furthered by the use of the
mails or a national securities exchange, and (5) upon
which plaintiff detrimentally relied.
IDT Corp. v. eGlobe Inc., 140 F. Supp.2d 30, 33 (D.D.C. 2001)
(citing Kowal, 16 F.3d at 1276). Finally, a claim under
Rule 10b-5 must also satisfy Rule 9(b)'s requirement that the
plaintiff state the circumstances constituting fraud with
particularity. Kowal, 16 F.3d at 1277-79 (holding that a Rule 10b-5 claim must be stated with particularity); In re
Baan, 103 F. Supp.2d at 12 (same).
In 1995, Congress enacted the PSLRA to "prevent abusive and
meritless lawsuits." H.R. Conf. Rep. No. 104-369 at 31 (1995).
Toward that end, the PSLRA amended the Securities Exchange Acts
of 1933 and 1934 to require that "with respect to each act or
omission alleged to violate the chapter, state with particularity
facts giving rise to a strong inference that defendant acted with
the required state of mind." 15 U.S.C. § 78u-4(b)(2). Courts have
described § 78u-4(b)(2) as requiring that a plaintiff must plead
with particularity facts that establish a "strong inference" of
scienter. E.g., Levitt v. Bear Stearns & Co., Inc.,
340 F.3d 94, 104 n. 2 (2d Cir. 2003); In re Baan Co. Sec. Litig.,
103 F. Supp.2d 1, 19 (D.D.C. 2000). "There is no consensus among the
courts as to how a `strong inference' of scienter may be
established, and our Circuit has yet to rule on the issue." In
re Baan, 103 F. Supp.2d at 19. The "most lenient standard"
permissible under the PSLRA, however, is the Second Circuit's
recognition that a plaintiff may plead scienter by alleging
specific facts that either (1) constitute strong circumstantial
evidence of conscious or reckless behavior or (2) establish a
motive and opportunity to commit fraud. In re Digital Island
Sec. Litig., 357 F.3d 322, 328-29 (3d Cir. 2004); Rombach v.
Chang, 355 F.3d 164, 176 (2d Cir. 2004); Phillips v. LCI Int'l,
Inc., 190 F.3d 609, 620 (4th Cir. 1999). The court concludes
that regardless of which standard is adopted in this circuit, the
plaintiffs in this case have not satisfied even the most lenient
standard of demonstrating scienter.
2. The Plaintiff's Allegations
The crux of the plaintiff's argument on Count I is that Ledecky
and USOP concealed an agreement to enter a restructuring plan
with CD&R for at least 6 months until the plan was publically
announced. Compl. ¶¶ 31-32; Pls.' Opp'n at 3. The plaintiffs
argue that as a result of the concealment, several of the defendants' press releases,
public statements and financial filings were false and
artificially inflated the price of USOP's stock because the
defendants knew that they were not entitled to use pooling
accounting. Id. ¶¶ 20-24, 53-61. The plaintiffs further claim
that even after the defendants announced the restructuring, they
continued to misrepresent the benefits of and the costs of
proceeding with the restructuring, which also artificially
inflated USOP's stock price. Id. ¶¶ 61-91
The plaintiffs make a host of allegations that they believe
provide evidence that the defendants knowingly or recklessly
misrepresented facts regarding earnings before the restructuring
occurred. First, the plaintiffs note that under SEC Staff
Accounting Bulletin ("SAB") No. 96, if a corporation undertakes a
stock repurchase or spin-off of a substantial amount of assets
within six months of a transaction accounted for under the
pooling method of accounting, the SEC presumes that the stock
repurchase or spin-off was planned at the time of the completion
of the transaction. Compl. ¶ 107; Pls.' Opp'n at 4. Second, the
plaintiffs note that the defendants are familiar with pooling
accounting. Compl. ¶ 107. Third, the plaintiffs state that a
director of CD&R did not respond to inquiries by Mail Boxes Etc.
when it put itself up for sale. Id. ¶¶ 43, 107. Fourth, the
plaintiffs point out that USOP acquired Mail Boxes Etc. during
the period of time the defendants claim they broke off talks with
CD&R. Compl. ¶¶ 50, 107. Fifth, the plaintiffs note that on
December 16, 1997, the defendants claimed that "nothing had
changed" at USOP. Id. at 54. Sixth, the plaintiffs assert that
the defendants' factual assertions regarding the timing of its
decision to engage in the restructuring plan are implausible
because of the speed at which the defendants completed the
restructuring plans. Id. ¶ 107. Seventh, the plaintiffs assert
that the timing and scope of Ledecky's negotiations with CD&R are suspicious. Compl. ¶ 107. Eighth, the plaintiffs' claim that the
December 24, 1997 filing of Form 8-K contained false statements.
Id. Finally, the plaintiffs allege that the defendants did not
disclose the range of substantial restructuring costs until after
the consummation of the restructuring. Id.
3. The Plaintiffs' Allegations Do Not Give Rise To a Strong
Inference of Scienter
As noted, the plaintiffs' claim on Count I turns on the
allegation that the defendants had secretly agreed to enter into
the restructuring plan with CD&R well before the actual
publically announced decision on January 13, 1998. The plaintiffs
assert that "singularly and collectively," the facts they set
forth give rise to a strong inference of the defendants'
fraudulent intent. Pls.' Opp'n at 10. The court concludes that
the plaintiffs' assertions do not establish strong circumstantial
evidence that the defendants acted with scienter.*fn1
Rather, the plaintiffs simply make bare and conclusory assertions
of fraudulent intent. The court examines each of the plaintiffs'
allegations in turn.
a. SAB 96 and the Defendants' Knowledge of Pooling Accounting
It is true that because of the SEC's accounting presumption
under SAB 96, the defendants' execution of the restructuring plan
required them to restate earnings from 1997. USOP Mot. Ex. H. As a result of the SEC's presumption, after the
defendants announced the restructuring, Generally Accepted
Accounting Principles ("GAAP") prohibited USOP from using the
pooling method of accounting for several of its acquisitions in
1997 and required USOP to restate earnings using the purchase
method of accounting. Compl. ¶¶ 67, 77-78; Pls.' Opp'n at 4.
Thus, argue the plaintiffs, the SEC's presumption constitutes
evidence of the defendants' intention to enter into the
restructuring plan earlier than it disclosed. Compl. ¶ 107; Pls.'
Opp'n at 11-22. The plaintiffs, however, provide no caselaw to
support their proposition that "[t]he presumption that a
reacquisition of treasury stock (or announcement thereof) within
six months of consummation of a business combination was a
planned transaction that was part of the combination plan is
rebuttable, not conclusive." Pls.' Opp'n at 14 (emphasis in the
original). On the other hand, the defendants cite persuasive
authority that SAB 96 is "merely an arbitrary bright-line
accounting rule." USOP Mot. at 33 (citing C.R.A. Realty Corp. v.
Tri-South Invs., 738 F.2d 73, 76 (2d Cir. 1984)) (noting that
the SEC's presumption that insider profits resulting from
short-swing trades must be disgorged does not indicate actual
intent of the insider); Allis-Chalmers Mfg. Co. v. Gulf Western
Indus., Inc., 527 F.2d 335, 347 (7th Cir. 1995) (same). Because
the burden of pleading lies with the plaintiffs, the court does
not consider the defendants' restatement of earnings required by
SAB 96 as supporting a strong inference of scienter. Levitt,
340 F.3d at 104 n. 2; In re Baan Co. Sec. Litig., 103 F. Supp.2d
at 19. Moreover, a "mere publication of inaccurate accounting
figures or failure to follow GAAP, without more, does not
establish scienter." Abrams v. Baker Hughes, Inc.,
292 F.3d 424, 432 (5th Cir. 2002); In re Baan Co. Sec. Litig.,
103 F. Supp.2d at 20 (same). Accordingly, the fact that the defendants
had to restate earnings pursuant to an SEC rule does not give
rise to a strong inference of scienter.
The defendants' knowledge of pooling accounting also does not
support any inference regarding the defendants' scienter. As the
plaintiffs themselves admit, the pooling method of accounting and
the purchase method of accounting "are not alternatives." Pls.'
Opp'n at 12 (citing Accounting Principles Board Opinion No. 16).
In other words, if in 1997 the defendants did not intend to enter
into the restructuring plan, they were required to use pooling
accounting for their business acquisitions from June through
December 1997. The defendants' knowledge of pooling accounting
would be relevant only if the court assumed the fact the
proposition is offered to prove, namely, that the defendants had
secretly already decided to enter into the restructuring
agreement with CD&R in 1997. The court concludes that the mere
fact that the defendants were familiar with pooling accounting
does not support any inference of scienter. Levitt, 340 F.3d at
104 n. 2; In re Baan Co. Sec. Litig., 103 F. Supp.2d at 19.
b. The Failure of CD&R to Respond to Mail Boxes Etc.'s Inquiries;
Completion of the Mail Boxes Etc. Merger and the Consolidated
Capital Initial Public Offering
The plaintiffs contend that CD&R's lack of interest in
purchasing Mail Boxes Etc. is suspicious because CD&R owned a
significant portion of Mail Boxes Etc.'s chief competitor, and
eventually acquired Mail Boxes Etc. through its investment in
USOP. Compl. ¶ 43. The plaintiffs argue that because CD&R did not
respond to Mail Boxes Etc.'s inquiries regarding a possible
strategic partnership, CD&R must already have intended to enter
into the restructuring plan with USOP. Id.; Pls.' Opp'n at
The court disagrees. All the plaintiffs have done is state a
historical fact that CD&R did not respond to Mail Boxes Etc.'s
inquiry and then assert that CD&R did not respond because they were already in negotiations with the defendants. From that
fact and bare assertion, the plaintiffs take the further leap
that the defendants intentionally misrepresented the timing of
their discussions with CD&R. Compl. ¶ 43; Pls.' Opp'n at 23 n.
19. "[A] pleading technique that couples a factual statement with
a conclusory allegation of fraudulent intent is insufficient to
support the inference that the defendants acted recklessly or
with fraudulent intent." Rombach, 355 F.3d at 176 (internal
quotations omitted); see also In re Navarre Corp. Sec. Litig.,
299 F.3d 735, 742 (8th Cir. 2002) (holding that a "mere
allegation" of fraud is insufficient to survive a motion to
dismiss pursuant to the PSLRA). The plaintiffs do not any allege
any facts that set forth circumstantial evidence of intent such
as who at USOP and CD&R hatched the plot to intentionally conceal
the restructuring plan, when the conspiracy was formed, or
specific instances where the defendants agreed with CD&R to keep
their negotiations secret. Thus, the court concludes that the
failure of CD&R to respond to Mail Boxes, Etc.'s inquiry is not
probative of scienter. Rombach, 355 F.3d at 176
Next, the plaintiffs assert that the defendants kept ongoing
negotiations with CD&R secret because if they admitted that they
were still in talks with CD&R, Mail Boxes Etc. would back out of
the merger with USOP due to both the unavailability of pooling
accounting and the fact that Ledecky wished to leave USOP to
focus on other ventures such as Consolidated Capital. Compl. ¶
107. These allegations add nothing to the plaintiffs' case. Once
again, the plaintiffs simply make factual statements and then
conclusorily assert that the defendants concealed negotiations
with CD&R. For the same reasons as in the above paragraph, the
court does not consider these allegations probative of scienter.
Rombach, 355 F.3d at 176; In re Navarre, 299 F.3d 742. c. The Defendants' December 16, 1997 Denial of Any Change at the
Company; the Subsequent Speed At Which the Defendants' Negotiated
the Restructuring; the Orchestration of the Timing and Scope of
Negotiations with CD&R by Ledecky
In a December 16, 1997 conference call with securities analysts
and investors which was prompted by a drop in USOP's stock price,
the defendants indicated that nothing had changed at USOP and
that USOP had no plans to lower earnings estimates. Compl. ¶ 57.
The defendants state that on December 17, 1997, the Board
authorized management to renew discussions with CD&R regarding
restructuring. USOP Mot. Ex. A-14 at 17. The plaintiffs argue
that the defendants must already have had the restructuring plans
in place because according to the defendants recitation of the
facts most of the restructuring plan was devised in
approximately four weeks. Pls.' Opp'n at 23-27. The plaintiffs
note that the defendants claim that details of the restructuring
plan were negotiated between December 17, 1997 and January 13,
1998. Compl. ¶¶ 49, 107. The plaintiffs then suggest that the
speed at which the defendants purport to have negotiated the
restructuring is implausible and demonstrates the defendants'
deceit. Id. ¶ 107; Pls.' Opp'n at 24-25. The plaintiffs also
allege that if a hiatus in the CD&R negotiations actually
occurred, it must have been at the direction of Ledecky, not the
Board. Id. at 25.
The court fails to see how these allegations give rise to a
strong inference of scienter. First, the defendants' December 16,
1997 denial of any change at the company would only be indicative
of fraud if the court assumed that the defendants were lying
about the date it decided to enter into the restructuring. The
plaintiffs' allegation, once again, is simply a factual statement
coupled with a conclusory allegation that the defendants acted
with fraudulent intent. This pleading technique is insufficient
to adequately allege scienter. Rombach, 355 F.3d at 176.
Similarly, the plaintiffs point to several occasions where
Ledecky made statements of his intent to remain with USOP and to not sell shares of USOP as
examples of false and misleading representations. E.g., Compl.
¶¶ 53-55, 58-59, 71, 84. These statements also fail to give rise
to a strong inference of scienter because the plaintiffs simply
assert that Ledecky acted with fradulent intent. None of the
facts on their own support a conclusion of false motives. For
instance, the plaintiffs take exception to Ledecky's statement
that "U.S. Office Products remains a top priority for me moving
forward. I continue to own all of my original stock and stock
options, and remain confident about the Company's prospects."
Compl. ¶ 53. The plaintiffs do not allege any facts that would
demonstrate that, at the time of the statement, Ledecky did not
consider USOP to be a priority or that he, in fact, had sold some
of his original shares. Rather, the plaintiffs that argue that
because Ledecky ultimately did sell some of his shares and leave
USOP, his statement was false and misleading. Courts have
uniformly rejected this pleading of "fraud by hindsight." In re
Rockefeller Center Props., 311 F.3d at 225; Novak, 216 F.3d at
309. Like USOP's December 16, 1997 denial of any change at the
company, Ledecky's statements would only be false and misleading
if the court assumed that Ledecky had already decided to enter
into the restructuring plan with CD&R the very fact Ledecky's
statements are offered to prove. These allegations are not
probative of scienter. Rombach, 355 F.3d at 176.
The plaintiffs' assertion regarding the speed with which the
defendants negotiated, documented, and sought necessary approvals
for the restructuring also does not evidence a strong inference
of scienter. The plaintiffs simply claim that the defendants'
version of the facts that the defendants negotiated the
restructuring over a four week period is "dubious." Compl ¶ 49;
Pls.' Opp'n at 25. The plaintiffs suggestion that the defendants
are lying about the speed in which they were able to negotiate
the restructuring, without more, is complete speculation. A claim of securities fraud cannot rest on such speculation.
Rombach, 355 F.3d at 176; Phillips, 190 F.3d at 615; In re
Comshare Inc. Sec. Litig., 183 F.3d 542, 553 (6th Cir. 1999).
For instance, in Phillips, a case where the 4th Circuit
affirmed the dismissal of a Rule 10b-5 claim, the transaction at
issue was a $4.4 billion merger. Phillips, 190 F.3d at 612. In
that case, the court indicated that the merger was negotiated
over a three-week period. Id. at 612-13. Moreover, the
defendants never claimed that every aspect of the restructuring
was finalized by January 13, 1998. In fact, the defendants'
January 13, 1998 Press Release specifically disclosed that the
restructuring was "subject to a number of conditions, including
financing, approval of USOP shareholders, receipt of regulatory
approval, and completion of certain business reviews by CD&R."
USOP Opp'n Ex. A-8 at 2. Thus, the fact that the defendants claim
to have negotiated some or most of the restructuring over a four
week period is not probative of scienter.
Finally, the plaintiffs claim that the "much more plausible
scenario" is that if there actually was a hiatus in the
defendants' negotiations with CD&R between October and December
of 1997, "it was done at the direction of Ledecky" because "[h]e
knew that if he allowed discussions between CD&R and USOP to
continue uninterrupted before consummation of the [Mail Boxes
Etc.] acquisition in November 1997, [Mail Boxes Etc.] would have
the right to terminate the Merger Agreement." Pls.' Opp'n at 25.
Again, the plaintiffs' sheer speculation and conclusory
allegation that Ledecky orchestrated a false hiatus in the
negotiations between USOP and CD&R is insufficient to support a
strong inference of scienter. Kalnit v. Eichler, 264 F.3d 131,
140 (2d. Cir. 2001); Phillips, 190 F.3d at 615; In re
Comshare, 183 F.3d at 553.
d. The Restatement of Earlier Financial Information
The plaintiffs next point to the fact that USOP restated
financial information contained in the December 24, 1997 Form 8-K. Compl. ¶ 107; Pls.' Opp'n at 29.
The plaintiffs allege that USOP, in its March 12, 1998 Form 8-K,
reversed the increased net income for fiscal year 1997 that was
reported in the December 24, 1997 Form 8-K and that the
defendants disclosed the costs of the restructuring only after
the restructuring was consummated. Pls.' Opp'n at 28-30.
According to the plaintiffs, the defendants purposefully did not
report the costs of the restructuring plan in the December 24,
1997 Form 8-K because the defendants wished to falsely portray
the restructuring as a positive corporate development. Compl. ¶
Once again, the plaintiffs employ circular reasoning. The
restatement of financial earnings would only be fraudulent if the
defendants had already formed an intent to engage in the
restructuring as of December 24, 1997. But, in a failed attempt
to "prove" the defendants' intent, the plaintiffs only point to
the fact that the defendants restated financial information.
Thus, the plaintiffs' allegations that the restatement of
financial information is evidence of fraud is purely conclusory
and does not support a strong inference of scienter. Kalnit,
264 F.3d at 140; Phillips, 190 F.3d at 615; In re Comshare,
183 F.3d at 553.
e. Disclosure of Restructuring Costs Immediately Following
Consummation of the Restructuring
Finally, the plaintiffs assert that the defendants disclosed
the true costs of the restructuring only after the deal was
consummated. Compl. ¶ 107; Pls.' Opp'n at 36. In addition, the
plaintiffs claim that the timing of the disclosure is evidence of
scienter because projections of the cost of the restructuring
"must have been prepared by USOP and CD&R in advance of the
execution of the investment agreement." Compl. ¶ 68. According to
the plaintiffs, the failure to disclose the costs of the
restructuring earlier misled investors because once the costs were disclosed, the defendants had to restate
financial information by lowering previous earnings statements.
Compl. ¶ 67. Plainly, the proposition that the defendants "must
have" prepared and deliberately withheld from the public a cost
analysis of the restructuring is completely speculative and
conclusory, and does not support evidence of scienter. Kalnit,
264 F.3d at 140; Phillips, 190 F.3d at 615; In re Comshare,
183 F.3d at 553. Moreover, "mere allegations that statements in
one report should have been made in earlier reports do not make
out a claim of securities fraud." In re Comshare, 183 F.3d at
553 (quoting Acito v. IMCERA Group, Inc., 47 F.3d 47
, 53 (2d
D. The Court Dismisses Count III of the Complaint For Failure to
Plead Fraud With Particularity
The plaintiffs also bring claims under section 14(a) of the
Exchange Act and SEC Rule 14a-9, which prohibit solicitation of a
proxy by a statement that contains a false or misleading fact or
the omission of a material fact that makes any portion of the
statement misleading. 15 U.S.C. § 78n(a); 17 C.F.R. § 240.14a-9.
"To prevail on a Section 14(a) claim, a plaintiff must show that
(1) a proxy statement contained a material misrepresentation or
omission which (2) caused the plaintiff's injury and (3) that the
proxy solicitation . . . was an essential link in the
accomplishment of the transaction." 295 F. Supp.2d 75, 81-82
(D.D.C. 2003) (internal quotations omitted). In a
non-precedential opinion, the 3rd Circuit concluded that the
heightened pleading standard of the PSLRA applied to 14(a)
claims, but no other circuit has so held. 2003 WL 21246539, at *6
(3d Cir. May 30, 2003). Furthermore, although the District of
Columbia Circuit has not addressed the issue, many courts have
held that when a Section 14(a) claim sounds in fraud, Rule 9(b)
applies. Shapiro v. UJB Financial Corp., 964 F.2d 272
, 287 (3d
Cir. 1992); Union of Needletrades, Indus. & Textiles Employees v. May
Dep't Stores Co., 26 F. Supp.2d 577, 583 (S.D.N.Y. 1997);
Hershey v. MNC Financial Corp., 774 F. Supp. 367, 375 n. 9 (D.
Md. 1991). The court agrees that because the plaintiffs'
allegations with regard to Count III sound in fraud, Rule 9(b)'s
requirement of particularity applies.
In the instant case, the plaintiffs allege that the proxy
statement is materially misleading because (1) it did not
disclose the full financial impact of the restructuring; (2) the
defendants provided a false reason for the restructuring; (3) the
defendants' reference to a hiatus in negotiations with CD&R was
false; and (4) the defendants failed to file Schedule 3.01(d) to
the Investment Agreement between USOP and CD&R, which provided
information about potential reductions in the exercise price of
warrants to be issued to CD&R. Compl. ¶¶ 85-91. The defendants
counter by asserting that all of the plaintiffs' allegations are
conclusory and unparticularized. USOP Mot. at 48-52; Def.
Ledecky's Mot. to Dismiss at 23 26.
The defendants are correct. With regard to the claim that the
defendants did not disclose the full impact of the restructuring,
instead of pleading the "who, what, when, where, and how" of the
fraudulent scheme, the plaintiffs simply resort to stating that
the "[d]efendants must have prepared projections and forecasts as
to the financial impact of the Restructuring[.]" Compl. ¶ 87.
Similarly, the plaintiffs' statements that "the reasons for the
Restructuring were materially false and misleading, as defendants
knew" and "[t]he representations in the Proxy Statement as to the
postponement of CD&R's investment in the Company were similarly
false because there was no hiatus in negotiations with CD&R" are
nothing more than "conclusory allegations that the defendants'
actions were fradulent." Compl. ¶ 90; Shekoyan, 217 F. Supp.2d
at 73. Accordingly, the plaintiffs fail to satisfy the
requirements of Rule 9(b) with respect to count III. Id.; In re Rockefeller Ctr., 311 F.3d at 216. As far as the
defendants' allegations regarding the omission of Schedule
3.01(d), the price of CD&R's warrants would only be reduced if
USOP later issued securities that it was required to, but did not
disclose on Schedule 3.01(d). USOP Mot. Ex. A-14 at B-34. The
plaintiffs did not allege that USOP participated in any
transactions it was supposed to disclose on the Schedule 3.01(d),
therefore, the omission of Schedule 3.01(d) does not support a
violation of Rule 14a-9.
E. The Court Dismisses Count IV Because the Plaintiffs Lack
Plaintiffs Raven's Woods and De Sio assert that former
shareholders of Mail Boxes Etc. have a claim for breach of
contract because the defendants failed to inform them that the
Mail Boxes Etc./USOP merger would not qualify for use of the
pooling of interests method of accounting. Compl. ¶¶ 119-131.
Like the plaintiffs allegations of securities fraud, this count
is premised on the assumption that at the time of the merger, the
defendants and CD&R had already decided to enter into the
restructuring agreement. The defendants argue that former
shareholders of a company that is merged out of existence do not
have standing to bring individual claims against the surviving
corporation. USOP Opp'n at 53-54.
The plaintiffs do not dispute the fact that the parties to the
merger contract were Mail Boxes Etc. and USOP, not the individual
shareholders of Mail Boxes Etc. Compl. ¶ 120. Neither party
directs the courts attention to, and the court's own research has
not revealed, any caselaw on the issue of whether shareholders of
a non-surviving corporation may commence a direct action for
breach of a merger contract against a surviving corporation.
Generally, however, "[w]hen an injury to corporate stock falls
equally upon all stockholders, then an individual stockholder may
not recover for the injury to his stock alone, but must seek
recovery derivatively in behalf of the corporation." Cowin v. Bresler,
741 F.2d 410, 414 (D.C. Cir. 1984) (quoting Bokat v. Getty Oil
Co., 262 A.2d 246, 249 (Del. 1970)). Moreover, allegations of
misdeeds such as the ones plaintiffs Raven's Wood and De Sio
advance in Count IV are properly actionable under laws
prohibiting securities fraud, such as SEC Rule 10-b which
"prohibits fraudulent activities in connection with securities
transactions." Novak, 216 F.3d at 305. Plaintiffs Raven's Wood
and De Sio purport to bring Count IV of the complaint on behalf
of all former Mail Boxes Etc. shareholders. Compl. ¶ 17(c).
Accordingly, the court dismisses court IV for failure to state a
claim on which relief can be granted. Warren, 353 F.3d at
F. The Court Dismisses Counts V and VI for Failure to Plead Fraud
In Count V, the plaintiffs allege that the defendants violated
section 12(a)(2) of the Securities Act by soliciting the sale of
a security by means of a prospectus that misrepresents or omits
material facts. 15 U.S.C. § 77l(a)(2). In Count VI, the
plaintiffs allege that the defendants violated Section 11 of the
Securities Act by disseminating a registration statement that
contained false and misleading statements and failed to state
material facts. 15 U.S.C. § 77k. Moreover, Counts V and VI
"repeat[ed] and reallege[d]" all previous paragraphs in the
complaint "as if fully set forth herein." Compl. ¶¶ 132, 144.
Again, the D.C. Circuit has never stated whether Rule 9(b)'s
requirement of particularity applies to claims of violation of
Sections 11 and 12(a)(2) of the Securities Act. Several circuits,
however have applied the particularity requirements of Rule 9(b)
to Section 11 and 12(a)(2) claims that sound in fraud. Rombach, 355 F.3d at 170 (applying
Rule 9(b) to claims brought under Section 11 and 12(a)(2) that
are "premised on averments of fraud"); Falkowski v. Imation
Corp., 309 F.3d 1123, 1133 (9th Cir. 2002) (same); Melder v.
Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir. 1994) (same); Shapiro
v. UJB Fin. Corp, 964 F.2d 272, 288 (3d Cir. 1992) (same). Once
it is established that Rule 9(b) applies to claims under Sections
11 and 12(a)(2), it is clear why the court must dismiss the
plaintiffs' claims. By now the plaintiffs' allegations in Counts
V and VI are a familiar refrain. The plaintiffs do not add any
more particularized facts that would support a finding of fraud.
Count V alleges that the prospectus portion of the registration
statement was false and misleading because the defendants "knew
at the time they filed the Registration" that they were going to
enter into the restructuring with CD&R, but withheld the
information from the plaintiffs. Compl. ¶ 138. Similarly, Count
VI simply states that the registration statement contained untrue
statements of material fact. Id. ¶ 145. The mere recasting of
the fact-deficient allegations in Counts I and III of the
complaint does not satisfy Rule 9(b)'s requirement of
particularity for the plaintiffs' claims under Sections 11 and
12(a)(2). Because Counts V and VII simply realleged all of the
preceding paragraphs in the complaint and did not add any new
specific facts, the court dismisses Counts V and VI of the
complaint. Kowal, 16 F.3d at 1278.
G. The Court Dismisses Counts II and VII Due to the Absence of a
Finally, Counts II and VII of the complaint assert claims
against Ledecky under Section 20(a) of the Exchange Act and
Section 15 of the Securities Act pursuant to Ledecky's alleged
status as a control person over USOP. Compl. ¶¶ 112, 151. Both of
these claims are predicated on an underlying primary violation of
securities law by a controlled person. Rombach, 355 F.3d at 177-78. Because the court has dismissed all of the claims
against USOP, there can be no violation of Section 20(a) or
Section 15. Id. Accordingly, the court dismisses all claims
against Ledecky as well. Warren, 353 F.3d at 37.
For the foregoing reasons, the court grants the defendants'
motions to dismiss. An order consistent with this Memorandum
Opinion is separately and contemporaneously issued this 16th day
of July, 2004.