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In assessing whether a plaintiff reasonably relied on a representation, a court must consider the entire context of the transaction, including the sophistication of the parties, the content of written agreements, and the complexity and magnitude of the transaction. Where the plaintiff is a sophisticated investor and an integrated agreement between the parties does not include the misrepresentation at issue, the plaintiff cannot establish reasonable reliance on that misrepresentation.
One Communications Corp. ("OCC") alleged that Lightship Telecom LLC, a competitive local exchange carrier (together with Lightship Holding, Inc., a corporation holding all of Lightship Telecom's stock, "Lightship"), was operating in violation of its contracts and federal and state telecommunications laws and that the defendants-appellees, who are major shareholders, directors, and high-level employees of Lightship, made misrepresentations during the sale of the company to OCC's predecessor in interest, CTC Communications Group ("CTC"), that violated Sections 10(b), 15 U.S.C. § 78j(b), and 20(a), 15 U.S.C. § 78t(a), of the Securities Exchange Act of 1934, as well as state law. The district court dismissed its federal law claims and counterclaims, respectively with prejudice and declining to exercise jurisdiction over the remaining state law claims. OCC appealed.
Did the complaint sufficiently state a § 10(b) claim based on the alleged reliance by the predecessor on certain pre-agreement representations made by the carrier?
The court of appeals held that a merger agreement foreclosed any reliance by the predecessor on certain pre-agreement representations made by the carrier. Therefore, no § 10(b) claim could be brought based on those representations. The merger agreement clearly provided that it was integrated, and it sufficed to show that reliance on pre-agreement representations was unwarranted as a matter of law. The complaint failed to satisfy the standards set for particularity in the context of Generally Accepted Accounting Principles-related misstatements that were alleged to be fraudulent. The corporation's claim that a warranty was false, without providing an indication of what law was being broken by the carrier's billing practice, was conclusory and lacked particularity. The complaint did not plausibly allege that a representation was not violated by any alleged noncompliance with the carrier's interconnection agreement with another company.