Plaintiff-appellant Boca Raton Firefighters and Police Pension Fund (the "Fund"), a putative class representative of similarly situated purchasers of McGraw-Hill stock between October 21, 2004 and March 11, 2008, alleges that defendants-appellees McGraw-Hill Companies, Inc., and two of its corporate officers (collectively, "McGraw-Hill") violated federal securities laws by making false and misleading statements about the operations of Standard & Poor's Ratings Services ("S&P"), a subunit of McGraw-Hill. In essence, the Fund alleges that officers of McGraw-Hill made public statements about the honesty and integrity of S&P's credit-ratings services while knowing that its ratings method was basically a sham. The Fund brought claims under Section 10(b) of the Securities Exchange Act of 1934, see 15 U.S.C. § 78j(b),
In an order dated March 30, 2012, the District Court dismissed the Fund's complaint under Rule 12(b)(6). The Court's analysis is succinct and worth quoting in full:
Dist. Ct. Op. 2-3.
On appeal, the Fund contests each aspect of the District Court's opinion. With regard to the Fund's purported failure to allege actionable false or misleading statements, the Fund argues that McGraw-Hill's statements about its objectivity were not mere puffery, that it adequately pleaded misleading statements regarding McGraw-Hill's surveillance, and that McGraw-Hill's financial reports were misleading. With regard to scienter, the Fund argues that a plethora of pleaded facts supply a strong inference of scienter on the part of McGraw-Hill. We assume the parties' familiarity with the facts and procedural history of this case.
We review de novo "the dismissal of a complaint under Rule 12(b)(6), accepting all factual allegations as true and drawing all reasonable inferences in favor of the plaintiff." ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "[C]ourts must consider the complaint in its entirety," assessing "whether all of the facts alleged, taken collectively, give rise" to the required inferences. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23 (2007).
Additionally, a complaint alleging a violation of § 10(b) and Rule 10b-5 must also satisfy the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the rules set out in the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). See 15 U.S.C. § 78u-4(b); Tellabs, 551 U.S. at 321. Under Rule 9(b), allegations of fraud must be "state[d] with particularity." Fed. R. Civ. P. 9(b). "To satisfy this requirement the plaintiff must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (internal quotation marks omitted). Moreover, the PSLRA requires that "securities fraud complaints `specify' each misleading statement; that they set forth the facts `on which [a] belief' that a statement is misleading was `formed'; and that they `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005) (quoting 15 U.S.C. § 78u-4(b)(1), (2)).
Section 10(b) "prohibit[s] the full range of ingenious devices that might be used to manipulate securities prices," but it does not reach mere "instances of corporate mismanagement." Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977). As the Supreme Court has explained, a contrary understanding of § 10(b) would "bring within the Rule a wide variety of corporate conduct traditionally left to state regulation," thus "posing a danger of vexatious litigation which could result from a widely expanded class of plaintiffs under Rule 10b-5." Id. at 478-79. To prevail on their claim that McGraw-Hill violated § 10(b) and Rule 10b-5, the Fund must prove "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309, 1317 (2011) (quotation marks omitted). At issue in this appeal are the first two of these elements.
Having reviewed the pleadings de novo,
Id. (internal quotation marks omitted; alteration in original). However, we will not credit mere business "puffery," which we have defined in this context as "statements [that] are too general to cause a reasonable investor to rely upon them." Id. at 206. For instance, generalizations about a company's business practices and integrity may be "so general that a reasonable investor would not depend on [those statements]." Id.
The statements alleged in the Fund's complaint regarding McGraw-Hill's integrity and credibility and the objectivity of S&P's credit ratings are the type of mere "puffery" that we have previously held to be not actionable. For instance, in a conference call in October 2004 to discuss McGraw-Hill's quarterly financial results, a McGraw-Hill representative asserted that S&P's recently posted code of practices and procedures "underscores our own dedication towards transparent and independent decision-making process." App'x 136-37 (¶ 253). In another conference call in July 2006, McGraw purportedly claimed that "[t]he integrity, reliability and credibility of S&P has enabled us to compete successfully in an increasingly global and complex market, and that is true today and we are confident it will be so in the future." Id. at 191-92 (¶ 302).
The Fund argues that these statements are distinguishable from the "puffery" we identified in ECA because McGraw-Hill's statements were "directly related" to its credit-ratings service and were not "about the general integrity of McGraw-Hill as a company." Appellant's Br. 48. The "puffery" designation, however, stems from the generic, indefinite nature of the statements at issue, not their scope. See City of Omaha, Neb. Civilian Emps.' Ret. Sys. v. CBS Corp., 679 F.3d 64, 67 (2d Cir. 2012) (distinguishing "matters of objective fact" from "misstatements regarding opinion" (internal quotation marks and alteration omitted)). Otherwise, we would "bring within the sweep of federal securities laws many routine representations made by investment institutions." ECA, 553 F.3d at 206. In short, no reasonable purchaser of McGraw-Hill common stock would view statements such as these as meaningfully altering the mix of available information about the company.
We also agree with the District Court's conclusion that the complaint's allegations with respect to McGraw-Hill's oversight and surveillance procedures "fall short of the PSLRA's particularity threshold." Dist. Ct. Op. 2 (citing 15 U.S.C. § 78u-4(b)). Indeed, the 280-page complaint consists in large part of large block quotations with italicized text, followed by a passage that reads "[t]he statements referenced in [the preceding paragraphs] were each materially false and misleading when made for the reasons set forth in ¶ 256 and the factual detail contained throughout this Complaint."
As we explained above, a complaint alleging a violation of Rule 10b-5 must (1) meet the four-part requirement
Lastly, the Fund argues that McGraw-Hill's statements about its earnings were actionable, even though literally true, because they did not acknowledge the long-term unsustainability of its business model. See Appellant Br. 52-60. This argument is easily rejected. Whatever the scope of the responsibility not to make statements that constitute "half-truths," that surely does not apply to the reporting of unmanipulated corporate earnings. See In re Int'l Bus. Machs. Corp. Sec. Litig., 163 F.3d 102, 108 (2d Cir. 1998) (noting that a report about current dividends "contain[ed] no long-term guarantee or assurance that the dividend will be paid at a specific level for a foreseeable time"). To the extent that investors might impute a positive corporate outlook from omissions in earnings reports, we have explained that general expressions of corporate optimism are "too indefinite to be actionable under the securities laws." Id. As the Sixth Circuit succinctly observed, "[i]t is clear that a violation of federal securities law cannot be premised upon a company's disclosure of accurate historical data." In re Sofamor Danek Group, Inc., 123 F.3d 394, 401 n.3 (6th Cir. 1997).
Given the lack of actionable false or misleading statements, we need not proceed any further, though we also agree with the District Court's assessment that the complaint failed to "`state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Dura Pharms., 544 U.S. at 345 (quoting 15 U.S.C. § 78u-4(b)(2)(A)). As it is understood in this context, scienter refers to "a mental state embracing intent to deceive, manipulate, or defraud" investors. Matrixx Initiatives, 131 S. Ct. at 1323 (quotation marks omitted).
The Fund's complaint left the District Court to determine on its own initiative how and why the other alleged facts in the 280-page complaint might show a strong inference of scienter, thus falling far short of the particularity required in fraud claims brought under § 10(b) and Rule 10b-5. This defect is especially problematic here, where the underlying theory of securities fraud vacillates within the complaint. For instance, the complaint criticizes S&P for being more focused on "pragmatic business decision[s]" than serving the interests of those who relied on its ratings, App'x 99 (¶ 172), and that its business practices reflected a "scheme to pursue market share at all costs," id. at 104 (¶ 181). Elsewhere, executives are alleged to have defrauded McGraw-Hill investors by acting "to the benefit of the Company." Id. at 112 (¶ 209). These statements would seem to negate—not support—a strong inference of intent to defraud McGraw-Hill investors.
In the end, the complaint relies on an assumption that McGraw-Hill executives were prescient, understanding not only the weaknesses of the services they were offering but also the imminent detrimental effect that those weaknesses would have on the company's stock price once the financial markets collapsed. See, e.g., App'x 26 (¶ 12), id. at 172 (¶ 284). This is a prescience that the complaint does not adequately demonstrate. Whatever the failings of S&P's business model, the well-pleaded factual allegations do not give rise to a strong inference that McGraw-Hill executives misled investors about S&P's services in an effort to artificially inflate McGraw-Hill's stock price.
We have considered the Fund's arguments on appeal and find them to be without merit. Accordingly, for the reasons stated above, we
Moreover, for the reasons stated above, the Appellant's motion for judicial notice (dated August 10, 2012) is
in connection with the purchase or sale of any security.