Rosenfarb v. AOL, Inc. et al
Filing
41
O[PINION & ORDER granting 34 Defendants' February 1, 2013 Motion to Dismiss. The Clerk of Court shall enter Judgment for the defendants. (Signed by Judge Denise L. Cote on 8/19/2013) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE AOL, INC. REPURCHASE OFFER
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LITIGATION
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12 Civ. 3497 (DLC)
OPINION & ORDER
APPEARANCES
For Lead Plaintiff Barbara Keeling:
Daniel W. Krasner
Peter C. Harrar
Beth A. Landes
Wolf Haldenstein Adler Freeman & Herz LLP
270 Madison Ave.
New York, NY 10016
For Defendants AOL, Inc., Tim Armstrong, and Arthur T. Minson:
Jonathan M. Moses
Adam M. Gogolak
Michael J. McDuffie
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
DENISE COTE, District Judge:
This case concerns the sale on April 9, 2012, by defendant
AOL, Inc. (“AOL”) of a portfolio of patents to Microsoft
Corporation for $1.056 billion in cash.
At its heart, the
Amended Complaint alleges that AOL, along with defendants Tim
Armstrong, AOL’s CEO, and Arthur T. Minson, its CFO, knew the
details of the sale long before it was publicly announced,
allowing the company to carry out a stock repurchase program
under which it bought approximately 14.8 million shares of its
own stock.
When the billion dollar sale was announced, AOL’s
stock went up 43% in a single day.
The plaintiff alleges that
she and others who sold AOL stock during a class period running
from August 11, 2011 to April 9, 2012, suffered a significant
loss in that they sold at a price that was artificially deflated
by defendants’ failure to disclose information about the patent
sale and misleading statements that implied that no such sale
was imminent.
Before the Court is defendants’ motion to dismiss.
For the
reasons stated below, the motion to dismiss is granted.
BACKGROUND
The following facts are as alleged in plaintiff’s Second
Amended Securities Class Action Complaint (the “Complaint”).
AOL, a pioneering internet services provider, was founded in
1985, became a publicly traded company in 1992, and merged with
Time Warner in 2001.
In 2009, Time Warner spun off AOL, which
again became an independent publicly traded company.
During the
spinoff, Armstrong and others at AOL negotiated with Time Warner
to allow AOL to retain a valuable portfolio of patents covering
a wide range of internet-based activities, many of them dating
back to AOL’s early years as an internet pioneer.
After the
spinoff, AOL carried this portfolio of patents on its books at
$4 million.
2
In 2011, the market for internet technology patents like
AOL’s began heating up.
On June 30, 2011, after conducting an
auction, Nortel sold its patent portfolio to a consortium of
other technology companies for $4.5 billion.
An article in
Bloomberg noted the broader implications, observing that the
deal had “woken up the world to what IP means and how companies
think about ways of monetizing intellectual property.”
Around
the same time, Google acquired Motorola Mobility for $12.5
billion, a purchase that the Complaint says was driven in
substantial part by Google’s desire to access Motorola’s “trove”
of patents.
This trend of high valuations of technology patents
was well-known and widely reported.
The Complaint quotes an
April 9, 2012 New York Times article that later referred to the
period’s “patent frenzy” as an “arms race among the industry’s
giants.”
Meanwhile, in the summer of 2011, AOL saw its stock price
slump after announcing “dismal” second-quarter earnings.
Believing AOL was undervalued, on August 11, 2011, management
and the board announced a stock repurchase program, under which
AOL was authorized to purchase up to $250 million worth of its
own stock.
The Complaint alleges that by the time the stock
repurchase program was announced, defendants “had already
committed to a plan to sell AOL’s valuable Patent Portfolio” and
that “Microsoft was the . . . inevitable purchaser.”
3
In the fall of 2011, AOL’s board authorized the sale of the
patents, and Armstrong contacted Steve Ballmer, the CEO of
Microsoft, “to spur Microsoft’s long-held interest in acquiring
the Patent Portfolio and to close the deal.”
In various public
statements made during the fall, however, including a third
quarter earnings call and various SEC filings, AOL did not
disclose any impending patent sale, mentioning only in its 10-Qs
that it would “consider divesting of additional assets or
product lines.”
Meanwhile, the company continued to tout its
repurchase program, arguing publicly that its stock was
undervalued.
AOL attracted the attention of an activist investor,
Starboard Value LP (“Starboard”), which owned 5.2% of the
outstanding stock.
In December 2011, Starboard began sending
letters to AOL’s board indicating that the company’s stock was
underpriced and making suggestions about steps that could be
taken to increase its value.
On February 24, 2012, Starboard
sent a letter to AOL’s board highlighting the value of the
company’s “foundational” patent portfolio and suggesting that
steps be taken to monetize it.
Starboard speculated that the
portfolio could fetch “in excess of $1 billion of licensing
income if appropriately harvested and monetized.”
This letter,
the Complaint says, caused “wider attention and speculation”
about the patent portfolio, “including as to its value.”
4
AOL responded to Starboard’s letter the same day, agreeing
that it had a valuable patent portfolio and pointing out that
“several months ago, prior to Starboard’s first letter, the AOL
Board of Directors authorized the start of a process, and hired
advisors, to realize the value of these non-strategic assets.”
The market did not react to this news.
In fact, AOL’s stock
price fell on Friday February 24, and fell further the following
Monday.
Experts in the field spent the next month actively
debating the value of the patent portfolio, with some estimating
that it was worth not more than $290 million, and others, like
Starboard, placing its value at roughly $1 billion.
Armstrong,
for his part, publicly praised AOL’s patents at a conference on
March 13, calling them “extremely valuable” “beachfront property
in East Hampton” and classing the portfolio as among the “top
three” in the marketplace.
On March 22, AOL opened an auction for the sale of the
patent portfolio, which lasted until April 5 and reportedly
included bids from Facebook, Goldman Sachs, Amazon, eBay, and
Google.
On April 9, AOL announced the results of the auction:
the patents had been sold to Microsoft for $1.056 billion in
cash.
The announcement had an immediate effect on the company’s
valuation, with the stock rising 43% in a single day.
The Amended Complaint alleges that the auction process was
a sham, and that the terms of the sale to Microsoft were known
5
to company insiders long before the auction took place.
According to the Complaint, defendants kept the deal secret so
that they could buy stock under the repurchase program at a
discounted price.
The 43% rise in the stock’s value after the
sale was announced, the Complaint alleges, reflects the true
value of the stock, and the degree to which the plaintiff and
others like her were harmed by the defendants’
misrepresentations.
The key source for this secret deal theory is Mark
Stephens, who writes a blog called “I, Cringely” under the
pseudonym Robert X. Cringely.
Mr. Stephens speculated in a blog
post on April 12, 2012, that the auction was a ruse designed to
conceal the fact that Microsoft and AOL had long ago agreed to
the terms of the sale, which itself was merely the latest
chapter in the resolution of an anti-trust suit in 2003.
According to Stephens, the 2003 settlement did not resolve AOL’s
patent infringement claims against Microsoft, and the deal to
acquire the patent portfolio was motivated by Microsoft’s desire
to avoid a suit by AOL for infringement of those same patents.
While the Complaint points out that Stephens is a “well-known
technology journalist,” it does not indicate that Stephens has
ever worked at AOL or Microsoft, and the blog post itself does
not cite any source at all for its version of events, even a
confidential one.
6
Plaintiff Rosenfarb filed her complaint on May 3, 2012,
alleging that defendants AOL, Armstrong, and Minson had
committed fraud in violation of Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b)
and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5,
and that defendants Armstrong and Minson were liable as control
persons under Section 20(a) of the Exchange Act, 15 U.S.C.
§ 78t(a).
After motion practice, the Court appointed Barbara
Keeling lead plaintiff on August 10, 2012.
Lead plaintiff
Keeling filed an amended complaint on September 28, and on
October 26, defendants AOL, Armstrong, and Minson filed a motion
to dismiss.
That motion became fully submitted on December 14,
and on January 8, 2013, the Court granted Keeling’s request for
leave to file a second amended complaint and denied the motion
to dismiss as moot.
Keeling filed the second amended complaint
on January 18, and on February 1, defendants filed a renewed
motion to dismiss.
DISCUSSION
In considering a motion to dismiss, a court must accept as
true all allegations in the complaint and draw all reasonable
inferences in the plaintiff’s favor.
F.3d 82, 94 (2d Cir. 2013).
Rothstein v. UBS AG, 708
In the context of a securities
class action, a court may consider not only the complaint
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itself, but also “any written instrument attached to the
complaint, statements or documents incorporated into the
complaint by reference, legally required public disclosure
documents filed with the SEC, and documents possessed by or
known to the plaintiff and upon which it relied in bringing the
suit.”
ASTI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98
(2d Cir. 2007).
To survive a motion to dismiss, the plaintiff must provide
the grounds on which her claim rests “through factual
allegations sufficient ‘to raise a right to relief above the
Id. (quoting Bell Atl. Corp. v. Twombly,
speculative level.’”
550 U.S. 544, 555 (2007)).
In other words, “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) (quoting Twombly, 550 U.S. at
570).
Securities fraud claims are also subject to the heightened
pleading requirements of Federal Rule of Civil Procedure 9(b)
and the Private Securities Litigation Reform Act (“PSLRA”).
Rule 9(b) requires that “in alleging fraud or mistake, a party
must state with particularity the circumstances constituting
fraud or mistake.”
Fed. R. Civ. P. 9(b).
To satisfy this
requirement, the complaint must “(1) specify the statements that
the plaintiff contends were fraudulent, (2) identify the
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speaker, (3) state where and when the statements were made, and
(4) explain why the statements were fraudulent.”
at 99.
ASTI, 493 F.3d
“Allegations that are conclusory or unsupported by
factual assertions are insufficient.”
Id.
Under the PSLRA, securities fraud plaintiffs alleging an
untrue statement of material fact or an omission of a material
fact necessary to make statements not misleading must
specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the
statement or omission is made on information and
belief, the complaint shall state with particularity
all facts on which that belief is formed.
15 U.S.C. § 78u-4(b)(1).
A plaintiff must therefore “do more
than say that the statements . . . were false and misleading;
[she] must demonstrate with specificity why and how that is so.”
Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004).
Plaintiff alleges that defendants violated § 10(b) of the
Exchange Act.
The SEC rule implementing that section makes it
unlawful to “make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading.”
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b-5(b); see also
To succeed on a claim brought under § 10b,
a plaintiff must therefore show (1) a material misrepresentation
or omission, (2) scienter, (3) a connection with the purchase or
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sale of a security, (4) reliance, (5) economic loss, and (6)
loss causation.
Kleinman v. Elan Corp., plc, 706 F.3d 145, 152
(2d Cir. 2013) (citing Dura Pharmaceuticals v. Broudo, 544 U.S.
336, 341-42 (2005)).
Defendants argue that plaintiff has failed to adequately
plead a material misstatement or omission, scienter, and loss
causation.
The motion to dismiss is granted as to the first
ground identified by the defendants.
As a result, it is
unnecessary to reach their arguments regarding scienter and loss
causation.
I.
Material misstatement or omission
A statement or omission 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.”
Starr v. Georgeson S’holder, Inc., 412 F.3d 103, 110 (2d Cir.
2005) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32
(1988)).
To support an allegation that statements or omissions
are materially misleading, plaintiffs “must demonstrate with
specificity why and how that is so.”
Rombach, 355 F.3d at 174.
If an allegation regarding a statement or omission “is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed.”
U.S.C. § 78u-4(b)(1).
10
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The Complaint identifies numerous public disclosures by
AOL, Armstrong, and Minson during the class period as materially
misleading, either because they failed to mention an impending
sale of the patent portfolio or because they misleadingly
created the impression that no such sale was imminent.
The fact
that the patent portfolio would soon be sold was material, the
plaintiff argues, because of the sale’s effect on the company’s
liquidity.
In particular, the plaintiff relies on several
pieces of information that she argues were known to company
insiders and should have been disclosed: (1) that defendants
“had already committed to a plan to sell AOL’s valuable Patent
Portfolio and had selected Microsoft as purchaser;” (2) that
AOL’s board had given authorization to sell the patent
portfolio; (3) that Microsoft had been conducting “due
diligence” on the Patent Portfolio; (4) that Armstrong had
contacted Microsoft CEO Steve Ballmer “to close out Microsoft’s
long-anticipated plan to acquire the Patent Portfolio;” and (5)
that AOL “was actively pursuing the sale of its Patent Portfolio
. . . for more than $1 billion.”
The Complaint fails to adequately plead a material
misstatement or omission.
First, much of the information
plaintiff argues should have been disclosed was in fact made
public during the class period, before AOL’s stock skyrocketed
at the announcement of the actual sale.
11
It was well known that
AOL had retained a valuable patent portfolio after being spun
off from Time Warner, and that the market for such patents was
heating up in the spring and summer of 2011, making them
increasingly valuable.
The Nortel and Motorola Mobility
transactions, both cited in the Complaint, indicated that groups
of tech patents could sell for well in excess of $1 billion.
That AOL’s Patent Portfolio in particular might be
extremely valuable was also known to the market.
AOL
specifically disclosed in numerous public filings before and
during the class period that its patents were “among [its] most
valuable assets,” and Armstrong referred to AOL’s Patent
portfolio, several weeks before it was sold, as “extremely
valuable” “beachfront property in East Hampton” that was among
the “top three” in the marketplace.
The activist investor
Starboard publicly speculated that the Patent Portfolio might be
worth as much as $1 billion, while some others placed its value
lower, at roughly $290 million.
Thus, information disclosed to
the public by AOL and other information prominently discussed in
the press both before and during the class period render
implausible any suggestion that the public was not aware that
AOL possessed an extremely valuable patent portfolio.
It is
also obvious that the reasonable investor would not have
interpreted the $4 million value at which AOL carried the
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patents on its books as an official estimate of the price they
would fetch if sold. 1
The market was also well aware during the class period that
AOL was actively working to sell its Patent Portfolio.
In
February 2012, after Starboard sent its letter criticizing AOL
for not monetizing its patent portfolio, the company disclosed
that its board had already “authorized the start of a process,
and hired advisors, to realize the value of these non-strategic
assets.”
In March, Armstrong explained that the company had
“kicked off a process . . . because of the interest in IP and
patents and [because] we had a lot of incoming interest in AOL’s
patent portfolio.”
None of these disclosures provoked a
reaction from the market; it was not until AOL disclosed that
Microsoft would buy the patents for $1 billion that the stock
price spiked.
In light of the significant mix of information available to
the public about the value of AOL’s patents and the possibility
that they might be sold, the Complaint boils down to an
allegation that the auction was a sham and that the information
defendants possessed and withheld from the market was not mere
preliminary negotiations about a possible transaction, but
rather a final deal with set terms, including a known buyer and
1
Indeed, AOL explained in its 10-K filings that, for accounting
purposes, it “does not recognize the fair value of internally
generated intangible assets.”
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sale price, established long before the April 9 announcement
that had such a dramatic effect on AOL’s stock.
Plaintiff has
not, however, pleaded facts sufficient to raise this theory
above the speculative level.
Under the PSLRA, a complaint that is based on information
and belief cannot survive a motion to dismiss unless it states
with particularity facts that are sufficient to support the
belief in question.
2000).
Novak v. Kasaks, 216 F.3d 300, 312 (2d Cir.
The facts in the Complaint are simply not sufficient to
support the belief that AOL and Microsoft reached a secret deal
for the patent portfolio and jointly orchestrated a sham auction
to cover up the $1 billion transaction so that AOL could
repurchase a portion of its own stock.
First, the Cringely blog post is not itself sufficient to
support the belief that there existed a secret deal between AOL
and Microsoft.
In the context of a confidential source, the
Second Circuit has explained that a complaint must describe such
a source “with sufficient particularity to support the
probability that a person in the position occupied by the source
would possess the information alleged.”
Novak, 216 F.3d at 314.
While Stephens is of course not a confidential source, the
Complaint nevertheless fails to provide any basis on which it
could be inferred that he would possess access to information
about a secret deal between AOL and Microsoft.
14
Indeed, neither
the Complaint nor the blog post alleges that Stephens had either
first or second hand knowledge of the matters in question.
Plaintiff argues that the Complaint does not rely on Mr.
Stephens as a confidential insider source, but rather uses his
blog merely to “provide context and insight” and “amplify”
background information.
Mr. Stephens’s post, plaintiff
explains, was not based on inside information, but rather was an
inference drawn from public information, such as Microsoft’s
familiarity with some of the patents in the portfolio 2 and the
previous litigation between Microsoft and AOL.
Setting aside the blog post as a factual source, the
remaining allegations in the Complaint simply provide no basis
for an assertion that AOL and Microsoft reached a secret deal
for the sale of the patents months before the auction was
conducted.
First, the Complaint points out that in the press
release announcing the sale, Microsoft’s General Counsel
acknowledged that his company had been “following” the patent
portfolio for years and “analyzing [it] in detail for several
months.”
Second, the Complaint alleges that in the fall of
2011, Armstrong called Microsoft CEO Steve Ballmer “to spur
Microsoft’s long-held interest in acquiring the Patent Portfolio
and to close the deal.”
Third, the Complaint points out that a
2
AOL purchased Netscape Communications, the source of some of
the patents, from Microsoft in 1998.
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law firm publicly claimed that it began assisting AOL “when [it]
began a program three and a half years ago to monetize patents
through strategic patenting.”
This information does not support the inference that AOL
and Microsoft agreed to a secret, $1 billion transaction and
then managed to hide it by engaging in a highly-publicized sham
auction.
It is unsurprising that a company like Microsoft would
“follow” or “analyze” a patent portfolio as valuable as the one
at issue here, especially during a time of intense activity in
the patent market.
The bare fact that a law firm began
assisting AOL with “strategic patenting” in connection with
general efforts to “monetize patents” three and a half years
before the auction also does not support the theory that AOL and
Microsoft had reached a secret deal in the fall of 2011.
The
Complaint does not allege that Microsoft was ever given access
to nonpublic information, nor does it allege any facts
supporting the theory that the $1.056 billion purchase price was
set before the auction took place.
The allegation that
Armstrong placed one telephone call to Ballmer to “close the
deal” is recklessly made without any factual support. 3
3
In response to the defendants’ motion, the plaintiff identifies
only an April 9, 2012 press report regarding Armstrong’s
description of the sale process as the source for the
allegation. But, in that article, Armstrong described the
process as a “full blown dynamic auction” in which the final
buyer was not selected until April 5. Regarding his telephone
16
Plaintiff’s reliance on Item 303 of SEC Regulation S-K, 17
C.F.R. § 229.303(a)(1), is also unavailing.
Item 303 requires
registrants to identify “any known trends or any known demands,
commitments, events or uncertainties that will result in or that
are reasonably likely to result in the registrant’s liquidity
increasing or decreasing in any material way.”
Id.
The SEC’s
interpretive release regarding Item 303 explains that disclosure
is required only “where a trend, demand, commitment, event or
uncertainty is both presently known to management and reasonably
likely to have material effects on the registrant’s financial
condition.”
Securities Act Release No. 6835, 43 SEC Docket 1330
(May 18, 1989); Litwin v. Blackstone Group, L.P., 634 F.3d 706,
716 (2d Cir. 2011).
As explained, the Complaint does not allege
sufficient facts to support the theory that the terms of the
patent sale were “presently known to management” before the
auction, and defendants did in fact disclose that the patent
portfolio was a valuable asset that might be sold.
In sum, the Complaint fails to plead with the requisite
particularity that there was any material fact that AOL failed
to disclose.
Of course, AOL did not disclose that it had
reached a deal to sell the patent portfolio to Microsoft for a
call to Ballmer, Armstrong said he had made the call to alert
him “of the decision to sell the patents.” No fair reading of
the article suggests that a call was made to “close” a secret
deal in advance of the auction.
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set purchase price of more than $1 billion, but the Complaint
does not adequately allege that these “facts” even existed.
Complaint’s conspiracy theory is mere speculation.
The
It contains
no well plead allegations that render the theory plausible on
its face.
See Twombly, 550 U.S. at 570.
CONCLUSION
Defendants’ February 1, 2013, motion to dismiss is granted.
The Clerk of Court shall enter Judgment for the defendants.
SO ORDERED:
Dated:
New York, New York
August 19, 2013
____________________________
DENISE COTE
United States District Judge
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