ZVI Trading Corp. Employees' Money Purchase Pension Plan & Tr. v. Ross (In re Time Warner Inc. Sec. Litig.) - 9 F.3d 259 (2d Cir. 1993)

Rule:

A corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts. Undisclosed information is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available. If a reasonable investor would so regard the omitted fact, it is difficult to imagine a circumstance where the prior statement would not be rendered misleading in the absence of the disclosure.

Facts:

In June 1989, Time Inc. received a surprise tender offer for its stock from Paramount Communications. Time's directors declined to submit this offer to the shareholders and continued discussions that had begun somewhat earlier concerning a merger with Warner Communications Inc. Eventually, both companies agreed that Time would acquire all of Warner's outstanding stock, even though this acquisition would cause the latter to incur debt. Defendant Time Warner Inc., the entity resulted from the merger, found itself saddled with debt. It then embarked on a highly publicized campaign to find international strategic partners. Ultimately, defendant formed only two strategic partnerships. Faced with a multi-billion-dollar balloon payment on the debt, defendant was forced to seek an alternative method of raising capital which was a new stock offering that substantially diluted the rights of the existing shareholders. The announcement of the two offering proposals caused a substantial decline in the price of the company’s stock. Thus, plaintiff stock purchasers, ZVI Trading Corp. Employees' Money Purchase Pension Plan and Trust and Barry Zonon, brought a securities fraud class action under 15 U.S.C.S. §§ 78j(b), 78t(a) and state law against defendant corporation and its officers namely Steven J. Ross and N.J. Nicholas Jr. et al., alleging that defendants publicly misrepresented the status of ongoing strategic partnership discussions and failed to disclose consideration of a stock offering alternative that was later adopted to reduce debt and which diluted existing shareholder rights. The complaint referred to both attributed statements and those anonymously made. Defendants moved to dismiss under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure which was granted since the district court held that the complaint failed failure to adequately plead scienter and material misrepresentations or omissions. Plaintiffs appealed.

Issue:

Was the dismissal of plaintiff’s securities fraud class action for failure to adequately plead scienter and material misrepresentations or omissions proper?

Answer:

No.

Conclusion:

The court reversed the district court’s order and remanded the case for further proceedings with respect to attributed statements and omissions by defendants since the court found that plaintiffs' allegations concerning omissions and scienter were adequate to survive a motion to dismiss. The court added that having publicly promoted strategic alliances, defendants may have had a duty to disclose facts regarding other approaches that were under consideration, which would place the statements about strategic alliances in a materially different light. Thus, plaintiffs' pleadings with respect to omissions and scienter were sufficient. However, with respect to the anonymous statements, the court affirmed the dismissal because Fed. R. Civ. P. 9(b) required identification of the speaker of the fraudulent statements.