BALDOCK, Senior Circuit Judge:
The Private Securities Litigation Reform Act of 1995 (PSLRA) states that a private plaintiff claiming an implied right of action for securities fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), must prove, among other things, "loss causation," i.e., that the defendant's material misrepresentation or omission "caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4). Of course in this Circuit, pleading practice requires that a plaintiff, as a precursor to proof, allege loss causation in the complaint "with sufficient
The sole issue presented here is whether Plaintiffs' TAC sufficiently alleges loss causation based upon a purported series of partially corrective disclosures of a recurring material omission, such that the district court abused its discretion in refusing to vacate its judgment of dismissal and grant Plaintiffs leave to amend.
In adjudicating the sufficiency of the TAC, we, like the district court, accept as true the TAC's well-pleaded factual allegations, but owe no allegiance to "unwarranted inferences, unreasonable conclusions, or arguments" drawn from those facts. Monroe v. City of Charlottesville, 579 F.3d 380, 385-86 (4th Cir.2009) (internal quotation marks omitted). We may consider as well other sources that courts ordinarily examine when ruling on a Rule 12(b)(6) motion to dismiss a securities fraud complaint, "in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Facts recited herein that are not contained within the four corners of the TAC are either found in documents referred to in the TAC or "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned," and thus properly subject to judicial notice under Fed.R.Evid. 201. See, e.g., Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir.2008) (considering stock analyst reports cited in the complaint in the context of a motion to dismiss); Greenhouse v. MCG Capital Corp., 392 F.3d 650, 655 n. 4 (4th Cir.2004) (taking judicial notice of published stock prices in the context of a motion to dismiss).
Penn is a publicly-owned corporation traded on the NASDAQ. Penn operates
Joint Appendix (JA) at A36. Deutsche Bank and Wachovia Securities committed to finance roughly $7 billion of the LBO. The LBO was set to close on or before June 15, 2008, subject to a 120-day extension in the event all state regulatory approvals had not been forthcoming. Under the terms of the LBO, the purchase price was to increase 1.49c for each day the closing was extended beyond June 15.
On the day of the LBO's announcement, Penn's common stock gained $11.98 to close at $62.12 per share, $4.88 below the agreed buyout price of $67 per share. On November 9, 2007, Penn filed with the Securities and Exchange Commission (SEC) a proxy statement which, among other things, detailed the terms of the LBO and the circumstances under which the LBO might be terminated. On December 12, 2007, Penn's shareholders voted to approve the LBO. At the end of 2007, Penn's shares were priced at $59.55, a $7.45 or approximately 11% discount off the buyout price. The price levels of Penn's stock throughout the latter half of 2007 reflected the market's initial view that the odds of the Penn buyout closing were favorable. But given the economic downturn of 2008 and, specifically, the turmoil in the credit markets, shareholder confidence that the buyout would close, as reflected in Penn's stock price, proved unsustainable. By March 20, 2008, the beginning date of Plaintiffs' class period, Penn's stock price had dropped to $40.58 per share, a $26.42 or nearly 40% discount off the buyout price.
According to a Lehman Brothers report dated April 1, 2008, just ten days after commencement of the class period, Penn's stock price following announcement of the LBO had fallen from a high of $63.68 on June 19, 2007 to a low of $38.76 on March, 10, 2008. Recognizing that the "target-friendly" terms of both the LBO and the lenders' debt commitment letter might lessen the buyers' and/or lenders' incentives to act aggressively against Penn in the event of disagreement or difficulty, Lehman Brothers nonetheless explained:
JA at A448 (emphasis added).
Lehman Brothers noted that over the first quarter of 2008, Penn's stock price had "fallen sharply despite the lack of negative news regarding the actual transaction." JA at A448. Lehman's further noted that "on March 25, 2008, Fortress publicly reaffirmed its commitment to complete and fund the acquisition by Summer 2008." JA at A448. Consistent therewith, the TAC alleges:
JA at A1007. Specifically, Penn issued seven press releases between March 20 and June 5, 2008, notifying the public of state regulatory approvals.
The problem, according to the TAC, was that while Penn continued to behave publicly throughout the class period as if the LBO would close, Penn was involved in private discussions with the buyers and financing institutions related to the renegotiation of the buyout price or the termination of the LBO. Based upon a host of inferences we need not detail here, the TAC alleges that by "at least March 20, 2008," Penn "knew or had reason to believe
The closing of the class period on June 15, 2008 is based on the TAC's allegation that "from June 16, 2008 through July 2, 2008," the day before Penn issued a press release announcing termination of the LBO, the truth surrounding Penn's ongoing material omission "leaked out to the market through a variety of leaks." JA at A1023 (capitalization omitted). Those leaks, which Plaintiffs claim individually constituted partially corrective disclosures of Penn's fraudulent press releases are identified in the TAC as follows:
See JA at A1018-22. On June 16, 2008, the day these purported leaks allegedly began to disclose Penn's fraud on the market, the price of Penn's stock opened at $44.18 per share. When the leaks concluded on June 25, 2008, the price of Penn's stock closed at $34.14 per share, down $10.04 or 22% from its June 16 opening. According to the TAC:
JA at A1022.
On July 3, 2008, before the market opened, Penn announced the termination of the LBO in a press release. Peter Carlino, Penn's Chief Executive Officer, commented that Penn's decision to enter into a settlement agreement followed "a thorough evaluation of a wide range of alternatives for consummating the transaction." JA at A678. The release stated that as part of the settlement agreement, Penn would receive $1.475 billion, consisting of a $225 million cash termination fee and the purchase of $1.25 billion of Penn's preferred stock due 2015 by affiliates of Fortress/Centerbridge, Deutsche Bank, and Wachovia Securities. Penn also announced
In contrast to the TAC's allegation that the market became aware of Penn's fraud through a series of partially corrective disclosures prior to July 3, 2008, Plaintiffs' SAC alleged the market became aware of such fraud upon Penn's July 3 press release announcing the LBO's termination. According to the SAC, Penn's ongoing material omission over the course of the class period proximately caused Plaintiffs economic harm when the artificially inflated price of Penn's shares fell after the truth about the ill-fated LBO became known on July 3. The district court, however, granted Penn's motion to dismiss the SAC based upon its failure to adequately plead loss causation. The court observed that Penn's stock price closed up 96¢ on July 3. That, said the court, proved fatal to the SAC's theory of loss causation and to Plaintiffs' securities fraud claim (a point on which we express no opinion). Plaintiffs did not challenge the district court's rationale for dismissal, only its decision to dismiss the SAC with prejudice. To that end, Plaintiffs filed a "motion for reconsideration" in which they sought leave to file their TAC. The court denied Plaintiffs' motion in a memorandum to counsel because "allowing Plaintiffs to replead would be futile." JA at A1158. The court reasoned:
JA at A1158. Plaintiffs timely appealed.
Plaintiffs assert the district court erred in denying what, in effect, was a postjudgment motion for leave to file their TAC. In Laber v. Harvey, 438 F.3d 404, 427 (4th Cir.2006) (en banc), we explained that a district court may not grant a postjudgment motion to amend the complaint unless the court first vacates its judgment pursuant to Fed.R.Civ.P. 59(e) or 60(b).
We review allegations of loss causation for "sufficient specificity," a standard largely consonant with Fed. R.Civ.P. 9(b)'s requirement that averments of fraud be pled with particularity.
To be sure, "the facts alleged in the complaint . . . need not conclusively show that the securities' decline in value is attributable solely to the alleged fraud rather than to other intervening factors." In re Mutual Funds Inv. Litig., 566 F.3d at 128; see also Lentell, 396 F.3d at 177 ("We do not suggest that plaintiffs were required to allege the precise loss attributable to Merrill's fraud. . . ."). What we do require the alleged facts to show is that the misrepresentation or omission was "one substantial cause of the investment's decline in value." In re Mutual Funds Inv. Litig., 566 F.3d at 128. Only then may we conclude that the complaint alleges the "necessary causal link" between the defendant's alleged fraud and the plaintiff's economic harm, or, in tort-related terms, that "the defendant's misrepresentation (or other fraudulent conduct) proximately caused the plaintiff's economic loss." Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Stated otherwise, the complaint must allege a sufficiently direct relationship between the plaintiff's economic loss and the defendant's fraudulent conduct. See Miller v. Asensio & Co., 364 F.3d 223, 232 (4th Cir.2004). "[I]f the connection is attenuated . . . a fraud claim will not lie. That is because the loss causation requirement—as with the foreseeability limitation in tort—is intended to fix a legal limit on a person's responsibility, even for wrongful acts." Lentell, 396 F.3d at 174 (internal quotation marks and citations omitted).
In Dura Pharm., Inc., the Supreme Court held a complaint asserting a violation of § 10(b) based upon a fraud on the market theory does not sufficiently allege loss causation simply by stating that the security price was artificially inflated at the time of purchase, because "an inflated purchase price will not itself constitute or proximately cause the relevant economic loss." Dura Pharm., Inc., 544 U.S. at 342, 125 S.Ct. 1627. The Court explained that if the purchaser sells "before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. [But] [i]f the purchaser sells later after the truth makes its way into the marketplace, an initially inflated purchase price might mean a later loss." Id.
Because the Supreme Court acknowledged the relevant truth may "leak out," subsequent decisions have recognized that neither a single complete disclosure nor a fact-for-fact disclosure of the relevant truth to the market is a necessary prerequisite to establishing loss causation (although either may be sufficient). See Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 230-31 (5th Cir.2009) (per curiam) (recognizing a series of partially corrective disclosures may suffice to establish loss causation). Rather, "loss causation may be pleaded on the theory that the truth gradually emerged through a series of partial disclosures and that an entire series of partial disclosures [prompted] the stock price deflation." Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 261 (5th Cir.2009); see also In re Williams Sec. Litig., 558 F.3d 1130, 1140 (10th Cir.2009) ("Any reliable theory of loss causation that uses corrective disclosures will have to show both that corrective information was revealed and that this revelation [prompted] the resulting decline in price."). The district court in this case properly recognized that because Plaintiffs' proposed TAC relies upon the cumulative effect of an alleged series of partially corrective disclosures to plead loss causation, the TAC must state facts that show (1) those disclosures gradually revealed to
Here, exposure of the fact that Penn fraudulently omitted from its prior press releases the truth about the ill-fated status of the LBO is the first requisite to adequately pleading loss causation. In other words, to sufficiently plead loss causation under a fraud on the market theory, the TAC must provide a basis on which to conclude the six alleged corrective disclosures issued between June 16 and June 25, 2008, inclusive, revealed "new facts" suggesting Penn had perpetrated a fraud on the market by omitting in its eight prior press releases related to state regulatory approvals any mention that the LBO would not close as written. Teachers' Ret. Sys., 477 F.3d at 187. Corrective disclosures must present facts to the market that are new, that is, publicly revealed for the first time, because, "if investors already know the truth, false statements won't affect the price."
Let us first consider the TAC's allegations that (1) on June 16 the market learned the Maine Harness Racing Commission cancelled a meeting scheduled to address the LBO, (2) on June 17 the market learned the Louisiana Gaming Control Board held a meeting without taking action on the LBO, and (3) on June 25 the market learned the Missouri Gaming Commission held a meeting without approving the LBO. Recall that on June 6, 2008, Penn and the buyers announced, consistent with the terms of the LBO, that they had extended the deal's closing until no later than October 13, 2008. Prior to June 16, the state regulatory approval process had been proceeding at a measured pace since March 20, 2008, with the latest approval occurring on June 5, 2008. Considered in context, what these alleged disclosures revealed is that three state regulatory boards or commissions, less than three weeks following a four month extension of the LBO's closing deadline, failed to address the LBO as previously planned. On their face, these disclosures do not suggest Penn, since March 20, 2008 or anytime thereafter during the class period, had been perpetrating a fraud on the market by failing to disclose in numerous press releases its knowledge about the status of the LBO. The three disclosures themselves did nothing to discount the
Plaintiffs argue these disclosures revealed much more than delays in the state regulatory approval process. The TAC concluded "[a]ll these hearings were canceled because Penn National failed to provide current financial information related to the buyout," which, according to Plaintiffs, meant Penn had stopped cooperating with state regulators, which in turn showed the buyout would not close. JA at A1019 (emphasis omitted). The only fact that the TAC alleges in support of its sweeping conclusion, however, relates to the Missouri review and is based on a selective account of a June 23, 2008 report from the internet publication thedeal.com: "The Missouri review, which arbs consider the most rigorous of the approval process, is at a standstill.[
But the news from Missouri did not appear in isolation. The website also reported the Illinois Gaming Board had tabled review of Penn's LBO at its May 19, 2008 meeting and requested "additional financial information on the transaction." JA at A972. The board placed the deal back on the agenda for a closed meeting to be held June 23 and 24. According to a board spokesperson quoted in the report: "The license review would not be up for final consideration unless the information the board sought had been provided. . . ." JA at A972 (emphasis added). The Illinois Gaming Board approved the Penn buyout on June 24, 2008. The June 23 report from thedeal.com, considered in its entirety, simply belies Plaintiffs' conclusory allegation that Penn had ceased cooperating with state regulators at the time delays in the state regulatory approval process were announced on June 16, 17, and 25. What the report reveals is that Missouri regulators, in light of changed market conditions and consequent doubts about the Penn buyout, were proceeding cautiously in seeking to ascertain the true status of the LBO.
Undoubtedly, news of regulatory delays from Missouri, as well as from Maine and Louisiana, did not bolster the market's already shaken confidence in the likelihood of the Penn buyout closing. Given the downturn in the gaming market, the credit crisis, the broader market's downward trend, and the consequent fact that many LBOs involving domestic targets were in trouble, the postponements did nothing to
The term unsustainable similarly characterizes the TAC's conclusion that the information contained in the June 24, 2008 analyst reports from Susquehanna and Oppenheimer constituted corrective disclosures of Penn's alleged fraud. The TAC simply alleges "Oppenheimer Analysts issued a research report stating `the markets have become increasingly convinced that the company's acquisition will not be completed.'" JA at A1021. That statement certainly does not imply that Penn had issued fraudulent press releases during the class period by failing to disclose what it supposedly knew about the LBO. And if that were not enough, news that the market had become convinced the LBO would not close as written was hardly novel. With the initial closing date having passed and the revised date looming, that Penn's stock was trading well below the buyout price of $67 per share said quite enough about the investment risk.
Meanwhile, the Susquehanna report, like the Lehman Brothers report three month prior, declined to predict the LBO's outcome given the continuing absence of facts directly related to the deal's prospects:
Lastly, the TAC alleges Penn's failure to issue a press release announcing the Illinois Gaming Board's approval of the LBO on June 24, 2008, disclosed to the market that Penn had misled the market into believing the LBO would close. This, according to the TAC, is because Penn issued press releases announcing all prior state regulatory approvals of the LBO. Plaintiffs essentially ask us to conclude that Penn's non-announcement of positive news—Illinois' approval of the LBO—constitutes a corrective disclosure. Plaintiffs have not pointed us to any decision that suggests a defendant's silence may constitute a corrective disclosure.
Plaintiffs argue that to sufficiently plead the first component of loss causation, i.e., exposure of the relevant truth, the six partially corrective disclosures identified in the TAC, considered holistically, "need only to alert investors to the fact the merger was off the table." Reply Brief at 4 (emphasis omitted). To that our response is two-fold. First, while we suppose such a factual disclosure about the LBO may reveal a part of the relevant truth because the falsity of the eight press releases necessarily depends on the fact Penn knew the deal was off, the disclosures identified in the TAC, as we have just seen, did not disclose to the market any such fact. Of course, one might posit that following the disclosures' dissemination "the market must have known" the deal was off. In re Williams Sec. Litig., 558 F.3d at 1138. Such sentiment seems particularly apropos in hindsight given the downward trend in Penn's stock price over the course of the disclosures and Penn public announcement of the LBO's termination very shortly thereafter. But—
Metzler Inv. GMBH, 540 F.3d at 1064 (internal citation omitted). Sentiment simply is not enough to sufficiently plead loss causation. Speculation and conjecture, even a well-educated guess, in the context of market prognostication does not suffice to establish a fact. Cf. id. at 1065 ("The TAC's allegation that the market understood the . . . disclosures as a revelation of. . . systematic manipulation . . . is not a `fact.'").
To be sure, the six purported corrective disclosures identified in the TAC alerted investors to the ever-mounting risk that the deal was unlikely to close. But this case is not about materialization of a concealed risk. Plaintiffs do not argue that "negative investor inferences" drawn from the disclosures "were a foreseeable materialization of the risk concealed" by Penn's fraudulent press releases.
Second, even assuming the six disclosures revealed that Penn knew the LBO would not close, the fact of such knowledge alone would still not suffice. To sufficiently plead loss causation, the TAC must have alleged facts suggesting something more. Specifically, the TAC must have alleged facts to show the disclosures revealed to the market something about the fraudulent nature of the press releases on which Plaintiffs purportedly relied to their detriment because only then could the press releases have caused Plaintiffs' economic loss. See Metzler Inv. GMBH, 540 F.3d at 1063. The fact that Penn knew sometime prior to June 16, 2008 that the deal would not close says nothing about its knowledge on or prior to June 6, 2008 when it issued the last of its eight press releases related to the state regulatory process. None of the TAC's six alleged corrective disclosures "even purport to reveal some thenundisclosed fact with regard to the specific misrepresentations alleged in the complaint." In re Omnicom Group, Inc. Sec. Litig., 597 F.3d at 511. The TAC fails to adequately plead loss causation because it does not allege facts that suggest Penn's fraudulent omissions over the course of eight press releases ever "`became generally known.'" Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 843 (7th Cir.2007) (rejecting the argument that "the precise fraud that resulted in the underlying transaction [need not] be the subject of a later corrective disclosure in order to satisfy loss causation").
Because the series of six partially "corrective" disclosures alleged in the TAC did not, gradually or otherwise, reveal to the market any undisclosed truth about Penn's undisclosed knowledge and resulting fraudulent omissions, any subsequent decline in Penn's share price cannot be attributed to those omissions. Accordingly, the judgment of the district court is
WYNN, Circuit Judge, concurring in the judgment:
I concur in the majority's judgment but write separately because I read Plaintiffs' complaint more broadly than the majority. While it is true that Plaintiffs make a securities fraud allegation based, at least in part, on press releases that Penn issued between March 20 and June 6, 2008, I believe that Plaintiffs claim more generally that Penn wrongly failed to disclose that the leveraged buyout would likely not close.
Nonetheless, even under my broader reading of the complaint, I agree with the majority's judgment that Plaintiffs' Third Amended Complaint founders. That is because the alleged corrective disclosures tell nothing of the alleged fraud, and, even assuming for the sake of argument that the alleged disclosures did reveal that the leveraged buyout would likely not close, the market had already come to that conclusion.
As the majority notes, the Third Amended Complaint alleges that Penn issued seven press releases between March 20 and June 5, 2008, notifying the public of state regulatory approvals. Further, on June 6, 2008, Penn issued an eighth press release announcing the extension of the leveraged buyout closing date by 120 days, from June 15 to October 13, 2008. The June 6 press release stated that the extension was necessary to secure regulatory approvals from Illinois, Indiana, Louisiana, Maine, and Missouri. Plaintiffs allege that while Penn behaved publicly, through these releases, as if the leveraged buyout would close, Penn was involved in private discussions with the buyers and financing institutions about the renegotiation or termination of the buyout.
The Third Amended Complaint also alleges more broadly that Penn failed to disclose that the buyout might not close. For example, in paragraph 34 Plaintiffs contend that "[d]uring the period from March 20, 2008 through June 15, 2008 inclusive, Defendants never informed or apprised the investing public of such material developments (ongoing termination and/or renegotiation discussions)." After explaining that the decision to terminate the buyout had likely occurred by May 2008, Plaintiffs allege, in paragraph 55, that "Defendants did not previously disclose the potential merger termination to the investing public or, in any way, indicate to the investing public that the Purchaser and/or banks were seeking to materially renegotiate the buyout price and/or terminate the previously announced, published and stockholder-approved cash buyout/merger agreement."
Additionally, in paragraph 57, Plaintiffs allege that "after months of undisclosed negotiations between the Defendants, Purchaser, the financing banks, as well as with each party's respective advisors and counsel, the parties waited until July 3, 2008 to finalize the Termination and Settlement Agreement. . . ." Plaintiffs contend in paragraph 61 that "Defendants deliberately elected not to disclose or apprise the investing public that the original buyout/merger agreement was ever in jeopardy or that termination or modification negotiations were taking place in order to keep Penn share prices artificially inflated." Per paragraph 62, Penn's "affirmative misrepresentations, along with the concealments of the ongoing negotiations and discussions . . . influenced Plaintiffs and the Class to retain and/or purchase additional Penn shares." Accordingly, per paragraph 65, "[b]y concealing material information concerning the termination negotiations, Defendants were artificially manipulating the open market price and obstructing the operation of the market as indices of the stock's true value. . . ."
Because of these and other allegations in the Third Amended Complaint, I believe that Plaintiffs claim more generally that Penn wrongly failed to disclose that the leveraged buyout would likely not close. I therefore diverge from the majority's suggestion that the alleged securities fraud is tied exclusively to the press releases that Penn issued between March 20 and June 6, 2008.
I agree with the majority that affirmative (mis)statements or half-truths can serve as the basis for 10b-5 liability. But so can omissions—that is, the failure to disclose material facts that the plaintiffs "ha[ve] the right to know." See, e.g., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151-153, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) ("It is no answer to urge that, as to some of the petitioners, these defendants may have made no positive representation or recommendation.
Nevertheless, even read more broadly to encompass Penn's general failure to disclose that the buyout would likely be terminated, the Third Amended Complaint still fails to successfully plead loss causation. To state a claim for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, a plaintiff must plead "(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 (that is, the economic loss must be proximately caused by the misrepresentation or omission)." Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 181 (4th Cir.2009) (internal quotation marks and emphasis omitted).
Regarding the last two elements, the Supreme Court, in Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), recently made clear that securities fraud suits are permitted "where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss." Id. at 346, 125 S.Ct. 1627. In other words, the alleged facts must show that the misrepresentation or omission was "one substantial cause of the investment's decline in value." In re Mutual Funds Inv. Litig., 566 F.3d 111, 128 (4th Cir.2009) (internal quotation marks omitted). Only then may we conclude that the complaint alleges the necessary causal link between the defendant's alleged fraud and the plaintiff's economic harm. See Dura Pharm., 544 U.S. at 346-47, 125 S.Ct. 1627. Therefore, as the majority notes, because the Third Amended Complaint relies upon the cumulative effect of a series of partially corrective disclosures to plead loss causation, it must state facts showing that those disclosures gradually revealed to the market the undisclosed truth about Penn's fraud and resulted in a decline of Penn's share price.
Plaintiffs allege that the following purported corrective disclosures leaked the truth onto the market: (1) Maine, Louisiana, and Missouri regulators failed to take action regarding the transaction in June 2008; (2) Illinois regulators approved the transaction in June 2008 but Penn failed to announce that approval in a press release; and (3) One brokerage firm suspended coverage of Penn's stock in June 2008, while another made negative comments regarding the likelihood of the merger's consummation. None of these events revealed in any way that Penn and other parties to the buyout were discussing terminating or restructuring the transaction.
The one regulatory approval and three regulatory board failures to act disclosed nothing other than that which Penn had already made clear, in the leveraged buyout agreement filed with the Securities and Exchange Commission and in Penn's June 6, 2008 press release: Penn sought regulatory approval for the buyout, and the regulatory approval process would not be completed by June 15, 2008. These regulatory events, therefore, did not reveal Penn's alleged fraud.
Further, one stock brokerage's suspension of coverage and another's negative
Oppenheimer Analysts issued a report indicating that "the markets have become increasingly convinced that the company's merger will not be completed." But that June 24, 2008 statement did not say anything other than that which Lehman Brothers had indicated in its April 1, 2008 report attached to Plaintiffs' Third Amended Complaint—that the deal was unlikely to be consummated, especially given general economic deterioration, credit market deterioration, and then-recent headlines about other distressed and cancelled leveraged buyouts. Lehman Brothers' April 1, 2008 report estimated the likelihood of the deal's closing to be between 21 and 32 percent. Not surprisingly, therefore, Penn's share price steadily declined from the time the buyout was announced to May 2008, the time of the alleged decision to renegotiate or terminate the deal.
In any event, neither the Oppenheimer report nor the Susquehanna announcement disclosed to investors that the parties were terminating or renegotiating the deal. Moreover, the Lehman Brothers report from April 1, 2008, among other things, indicates that the market had decided well before May 2008 that Penn's buyout would likely fall through.
Under these circumstances, the alleged corrective disclosures failed to disclose Penn's alleged fraud, and, even assuming for the sake of argument that the alleged disclosures did reveal that the leveraged buyout would likely not close, the market had already come to that conclusion. With their Third Amended Complaint, Plaintiffs therefore still fail to successfully plead loss causation. For this reason, I concur in the majority's judgment.
http://www.investordictionary.com/definition/risk-arbitrage (visited March 3, 2011); see also Black's Law Dictionary, 112 (8th ed.2004). The risk is that the buyout does not occur and what the arbitrageur anticipated does not materialize.