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Semerenko v. Cendant Corp.

    Brief Fact Summary. A class of investors (Class) (Plaintiff) claimed that Cendant Corp. (Cendant) (Defendant) and its officers, directors and accountant made misstatements about Cendant in the midst of a tender offer for shares of American Bankers Insurance Group, Inc. (ABI) common stock that falsely inflated the price at which Cendant bought its shares and once revealed, the merger was defunct and the Class sustained a succeeding loss as a result of the inaccurate statements.

    Synopsis of Rule of Law. (1) In order to demonstrate that the purported misstatement was stated “in connection with” the buying or selling of a security, a plaintiff needs to demonstrate the dispersion methods and the significance of the purported misstatement, in an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market.
    (2)A plaintiff satisfactorily pleads that the purported misstatement was relied on where the plaintiff pleads that the market price of the concerned securityincluded the purported misstatement, that the plaintiff relied on that price when buying the security, and that the plaintiff was purposefully misdirected by the misstatement, in an action under § 10(b)  of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market.
    (3) A plaintiff adequately pleads loss causation where the plaintiff pleads that the inflated market price of the security bought by plaintiff was triggered by the purported misstatement, andonce truth of the security’s value was disclosed, that a loss followed, when the truth of the security’s value was disclosed. n an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which involves the public dissemination of an alleged misrepresentation into an efficient securities market.

    Facts. A class of investors (Class) claimed that Cendant Corp. (Cendant) and its directors, officers, and accountant made misstatements regarding Cendant throughout a tender offer for shares of American Bankers Insurance Group, Inc. (ABI) common stock resulting in falsely raising the price the Class bought its shares of ABI,and when disclosed, the misstatements triggered the expiration of the merger contract and a ensuing loss for the investors. In early 1998, Cendantprovided a competing tender offer for ABI at $58 per share and in accordance with its tender offer, Cendant filed with the Securities Exchange Commission (SEC) a Schedule l4D-l that exaggerated its earnings in previous financial reporting periods. American International Group, Inc. (AIG) reacted by making an identicaltender offer and Cendant changed its offer to $67 per share. Cendantproceeded to engage in a merger agreement with ABI. On April 15, 1998, Cendant declared that its previous financial reports were not dependable as a result of accounting abnormalities found, and that the abnormalities were present in just one unit, accounting for less than a third of Cendant’stake-homerevenue. On the heels of the declaration, ABI stock price declined about 11%. Afterwards, Cendant continued to state that it planned on finishing the ABI merger. In July 1998, Cendantdisclosed that the April declaration contained errors, stating that the true revenue loss would be double the amount initially reported, and that more abnormalities in other units have been found.Cendantdistributedadditional press releases along with an audit report, more press releases and an audit report that specified there had been fraudulent financial reportingin August 1998. Following the filing of the audit with the SEC the ABI common stock price fell further. Cendant filed an amended Form 10-K for 1997 in September of 1998declaring losses of $217.2 million, instead of profits of $55.5 million, and the price of ABI dropped yet again. Finally in October 1998, Cendant and ABI reported that they were ending the merger. ABI stock plummeted once again, this time the investors filed suit under § 10(b) of the Securities Exchange Act of 1934 (Act) and Rule 10b-5 thereunder. The district court dismissed the action for failure to state a claim, clarifying that the complaint did not establish that the Class’s buying of ABI common stock was not done in connection with the making of the purported misstatement s, that the Class relied on the misstatement s, and that the Classendured a loss as the proximate result of the allegedmisstatement s. The court of appeals granted review.

    Issue. (1) In order to demonstrate that the purported misstatement was stated “in connection with” the buying or selling of a security, does a plaintiff need to demonstrate the dispersion methods and the significance of the purported misstatement, in an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market?
     (2) Does a plaintiff satisfactorily plead that the purported misstatement was relied on where the plaintiff pleads that the market price of the concerned security included the purported misstatement, that the plaintiff relied on that price when buying the security, and that the plaintiff was purposefully misdirected by the misstatement, in an action under § 10(b)  of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market?
    (3) Does a plaintiff adequately plead loss causation where the plaintiff pleads that the inflated market price of the security bought by plaintiff was triggered by the purported misstatement, and once truth of the security’s value was disclosed, that a loss followed, when the truth of the security’s value was disclosed, in an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which involves the public dissemination of an alleged misstatement  into an efficient securities market?

    Held. (Alarcon, J.) (1) Yes. In order to demonstrate that the purported misstatement was stated “in connection with” the buying or selling of a security, a plaintiff needs to demonstrate the dispersion methods and the significance of the purported misstatement, in an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market. The proper standard is one that takes into account the context in which the purported misstatement was made and in cases like the one here, necessitates proof of the significance of the misstatement and how it was dispersed. With standards like this it does not matter if the misstatements were made with the intent to influence the investment choice of market participants. This standard of making certain that investors attain full and fair disclosure of significant information in connection with their securities transaction choices furthers the purpose of § 10(b) and Rule 10b-5. The Classmerely has to demonstrate that the misstatements were significant when dispersed, that they were dispersed to the public through a medium on which reasonable investors would depend and that it was done so in a reckless fashion, under this standard. The purported misstatements being made in the context of a proposed merger and tender offer is no defense due to the information at issue with a tender offer may be significant to persons who trade securities of the target company. This court, though, fails to resolve if the “in connection with” requirement is fulfilled in the instant case-the matter will be remanded to the district court for a determination like that.
    (2) Yes. A plaintiff satisfactorily pleads that the purported misstatement was relied on where the plaintiff pleads that the market price of the concerned security included the purported misstatement, that the plaintiff relied on that price when buying the security, and that the plaintiff was purposefully misdirected by the misstatement, in an action under § 10(b)  of the Securities Exchange Act, and Rule 10b-5 thereunder, which includes the public dispersion of a purported misstatement into an efficient securities market. Whether the Class’s complaint claims ample facts to support the reliance component is the next issue. As found in certain cases, like those involving the fraud-on-the-market theory, if the plaintiff bought or sold securities in an efficient market then there is a rebuttable presumption of reliance. This is actually a set of three distinct presumptions: (1) the purported misstatements are included in the market price of the security, (2) that the market price of the security was actually relied upon by plaintiff as an indicator of its worth, and (3) that by relying on the market price of the security the plaintiff acted reasonably in doing so. However, the fraud-on-the-market theory of reliance generatesmerely a presumption, and a defendant may rebut by raising any defense to actual reliance, like demonstrating that the market failed to respond to the purported misstatements or by proving that, when making an investment decision, that the plaintiff failed to actually rely on the market price, or that the plaintiff demonstrating unreasonable reliance. In this case, the Class has adequately pleaded the component of reliance regarding some of the purported misstatements. For the Class members who bought shares previous to March 1998 it was reasonable to rely upon the purported misstatements dated previous to March 1998. Cendant’s contention that, as a matter of law, it is unreasonable to rely on information regarding a tender offer or a merger before the transaction is finalized, was rejected as well. Providing the information is significant to an investor’s choice, the investor should not be hindered from reasonably relying on that information by the provisional nature of the transaction.  Due to pleading that the market price of ABI was exaggerated as a result of the purported misstatements, the Class members who bought shares of ABI common stock between March and April 15, 1998, purportedamplefacts to fulfill the component of reliance. While it is true that ABI’s stock market price included information regarding AIG’s tender offer, it is unreasonable to assume that it failed to include information regarding a possible acquisition by Cendant.  So, the presence of a competing tender offer failed to affect the Class’s reliance on the purported misstatements, yet the Class did not demonstrate that it was within reason for its members to rely on Cendants’ reports and statements succeeding the April 15, 1998 disclosure of discrepancies in its accounting. This is because by this time Cendant had warned investors not to rely upon its previous reports and statements and that remedialstatementinstantly caused the precedingmisstatements thereafter irrelevant as a matter of law. Still, the Class could have reasonably relied on the purportedmisstatements that were involved in the April 15, 1998 statement, where Cendant’s financial situation and plans to restate its 1997 revenue were misrepresented. Cendant alleges that the “bespeaks caution” doctrine forces the statements made in the April 15 announcement irrelevant due to them being supplemented by significant deterrent language. Seeing as the bespeaks doctrine only applies to forward-looking statements, the Class and the SEC argue that it is not applicable here due to the statement of concern relating to verifiable historical and present facts rendering it not forward-looking. The misstatements in the April 15 declaration were not supplemented by satisfactorily cautionary indications to warn against the perils of relying on exact numbers acknowledged in the declaration, irrespective of if the statements were forward-looking or not. A singular, broad warning was issued in the declaration relating to the risk that the declaration’s calculations may be different than those formulated by the Audit Committee, which fails to satiate the requirements of the bespeaks caution doctrine. In the absence of a more comprehensive clarification of the reasons that the calculations could be inappropriate a reasonable investor could be agreeable to rely on the declaration’sexact calculations relating to the restatement. Thus, the Class could rely on the projected restatement declared by Cendant on April 15 of 1998 butonly until Cendantpublicized the restatement revision.
    (3) Yes. A plaintiff adequately pleads loss causation where the plaintiff pleads that the inflated market price of the security bought by plaintiff was triggered by the purported misstatement, and once truth of the security’s value was disclosed, that a loss followed, when the truth of the security’s value was disclosed, in an action under § 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder, which involves the public dissemination of an alleged misstatement  into an efficient securities market.  Lastly, with regard to loss causation, the Class claimed ample facts to back an implication that the misstatements were the proximate cause of the Class’s loss because the loss causation requirement is satiated whenthere is a satisfactory casual connection betwixt the loss and purported misstatement when the claimed loss incorporates the buying of a security at a price exaggerated by the purported misstatement. An investor must prove that the purported misstatements proximately rendered the actual fiscal loss that they are alleging in an action under § 10(b) and Rule 10b-5. In this case, the Class argues that it bought shares of ABI common stock at a price exaggerated as a result of the misstatements, and that it endured a loss once the truth was disclosed and ABI stock price returned to its true worth. Presuming the accusations are true, and including all reasonable inferences in a light most favorable to the Class, then the Class is authorized to provide proof to back its allegation. Cendant’s contention that ABI’s price was sustained not by AIG’s misstatements but rather by its tender offer is denied due to the Class period protects persons who bought ABI shares previous to both events. It cannot be said for persons who bought ABI stock following that time period, the AIG tender offer bid and the authorization of the merger contract were satisfactory to annihilate the causal nexus betwixt the purported misstatements and the false exaggeration of the ABI stock price. So not every interfering event is adequate to ruin the chain of causation but because it is reasonable to deduce that the misstatements could have been a significant factor in the ABI price inflation, other influencing elements will not hinder recovery. One could reasonably deduce that the ending of the merger agreement was due in large part to the disclosure of a fraud, especially taking into consideration the steep drop in both the prices of ABI and Cendant. Vacated and remanded.

    Discussion. Here, the courtstressed that it had not determined if the complaint had fulfilled the “in connection with†obligation, instead simply establishing the standard for the district court to follow on remand. The “in connectionwith†obligation is multifaceted, as showcased here. Many lower courts have interpreted this obligation as necessitating some connection between the fraud and the buying or selling of a security. The trouble has been in classifying how close the connection must be. Numerous courts require a presentation of reliance and loss of causation/ proximate cause, where plaintiffs must also demonstratethe “in connection with†component.



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