Oklahoma Firefighters Pension and Retirement System v. Neustar, Inc. et al
Filing
41
MEMORANDUM OPINION re: Defts' Motion to Dismiss. Signed by District Judge James C. Cacheris on 01/27/15. (pmil, )
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
IN RE NEUSTAR SECURITIES
LITIGATION
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M E M O R A N D U M
1:14cv885(JCC/TRJ)
O P I N I O N
This matter is before the Court on Defendants’
Neustar, Inc. (“Neustar”), Lisa A. Hook (“Hook”), Paul S.
Lalljie (“Lalljie”), and Steven J. Edwards (“Edwards”) 1
(collectively “Defendants”) Motion to Dismiss.
[Dkt. 30.]
For
the following reasons, the Court will grant the motion.
I. Background
This case concerns the bidding process to win a
lucrative government contract.
Neustar, a communications data
processing company, is the Local Number Portability
Administrator (“LNPA”).
(Am. Compl. [Dkt. 23] ¶ 1, 21.)
Number
portability allows telephone customers to retain their phone
number if they switch telephone service providers.
(Id.)
Neustar, as the LNPA, manages the Number Portability
Administration Center (“NPAC”), a large central data registry
1
Hook, Lalljie, and Edwards are referred to as the “Individual Defendants."
1
that includes essentially all of the wireline and wireless
telephone numbers in the United States and allows numbers to be
transferred from one service provider to another.
(Id.)
Neustar’s predecessor won the only open-bidding process for this
contract.
(Id. ¶ 37.)
As such, it has been the sole LNPA since
the NPAC was created in 1997.
been extended three times.
to expire in July 2015.
(Id.)
(Id.)
Neustar’s contract has
The current extension is set
(Id. ¶ 71.)
The counter-party to the NPAC contract is North
American Portability Management LLC (“NAPM”), which represents
all of the telecommunications service providers in the United
States.
(Id. ¶ 30.)
The Federal Communications Commission
(“FCC”) has plenary authority over number portability, but is
not a party to the LNPA contract.
(Id. ¶ 34.)
Rather, the FCC
has delegated authority to the North American Numbering Council
(“NANC”), which then reviews and oversees NAPM’s management of
the NPAC contracts.
(Id.)
In 2010, the FCC put the wheels in motion to solicit
requests for proposals (“RFPs”) to select the next LNPA.
43.)
(Id. ¶
As relevant here, the RFPs were due on April 5, 2013.
(Id. ¶ 50.)
On April 17, 2013 NAPM unexpectedly announced that,
with the FCC’s approval, it was extending the deadline for the
submission of proposals to April 22, 2013.
(Id.)
Neustar
released a press release on the deadline extension the next day.
2
(Id. ¶ 101.) 2
In the press release, Edwards, senior vice
president of Data Solutions, stated:
Neustar successfully submitted its proposal
on April 5, 2013, which was the deadline
previously announced by the NAPM.
The RFP
process has been a matter of public record
since May 2011, was subject to a robust
public comment process, and the deadline for
submission of responses was published 60
days in advance of the filing deadline. The
process was designed to promote competition
and
provided
interested
parties
with
sufficient time to meet the submission
requirements. Neustar filed its response in
a timely manner and in accordance with the
RFP
submission
requirements.
We
remain
confident in the strength of our proposal
and the value to be gained by the industry
and consumers if we are awarded the contract
to continue in July 2015 as the local number
portability administrator.
(Id. ¶ 102) (emphasis in original).
Telcordia, a division of
Ericsson, submitted its bid on April 22.
(Id. ¶ 52.)
On April 24, Neustar wrote to the FCC regarding the
RFP deadline extension, which it filed on the agency’s public
docket.
(Id. ¶ 55; Pl.’s Opp. [Dkt. 37] at 4.)
Neustar stated
that extending the deadline after it had already submitted its
bid “perversely favor[ed] bidders unable to meet the deadline”
and “raises the risk that aspects of its confidential bid have
been disclosed to other bidders prior to the extended deadline,
2
This press release, as well as all other releases referenced in this
Memorandum Opinion, were signed by Lalljie, Neustar’s senior vice president
and chief financial officer, and were filed with the SEC the same day as
release as an exhibit to a Form 8-K Current Report. (Am. Compl. [Dkt. 23] ¶¶
101, 108, 121, 129, 140.)
3
including potentially through inadvertent disclosure, which
would seriously prejudice Neustar.”
(Id.)
The decision,
Neustar argued, “gives rise to concerns about the ability of one
or more bidders to obtain favorable action based on undisclosed
communications with the NAPM or with regulators.”
(Id. ¶ 56.)
Hook, Neustar’s president and CEO, disclosed the April
24 letter to the FCC in her opening remarks on the May 2 first
quarter earnings conference call, 3 “emphasizing our concern that
extending the deadline was inconsistent with the industry’s and
the FCC’s commitment to manage a transparent and timely RFP
process.”
(Id. ¶ 111.)
She then stated “we are confident in
the strength of our proposal and it remained unchanged after the
deadline extension.”
(Id.)
Later in the call, Hook stated that
Neustar “delivered a strong proposal to renew the NPAC
contract.”
(Id.)
She closed the call by reiterating that
Neustar “submit[ted] a compelling proposal to renew the NPAC
contract.”
(Id.)
On the same day as the call, Neustar released
a press release on its 2013 first quarter financial results.
(Id. ¶ 108.)
In the press release, Hook stated: “We submitted
our proposal for the NPAC contract in early April, and we remain
confident in our ability to provide world class [sic] service to
the communications industry.”
(Id. ¶ 109.)
3
Lalljie and Neustar’s head of investor relations participated in this
earnings call and all subsequent earnings calls hereinafter referenced.
Compl. ¶¶ 111, 117, 123, 133, 142.)
4
(Am.
On July 23, 2013 NAPM announced a delay in the LNPA
selection timeline.
(Id. ¶ 58.)
NANC would submit its
recommendation to the FCC by November, and the FCC would make a
final selection in January 2014.
(Id.)
Seven days later, on
July 30, Hook acknowledged this delay on Neustar’s second
quarter earnings call, but stated that “[w]e remain confident
that our NPAC proposal is thorough, compelling and supported by
the proven track record of value we provide to our clients and
consumers and businesses we serve.”
(Id. ¶ 117.)
Soon thereafter, NAPM, unsatisfied with the April
bids, asked Telcordia and Neustar to submit their best and final
offers (“BAFO”).
(Id. ¶ 60.)
The deadline was in September,
and both companies met the deadline.
(Id. ¶ 61.)
However, on
October 21, 2013, Neustar privately wrote to NAPM, delivering an
unsolicited second BAFO and asking NAPM to consider it in place
of its September bid.
(Id. ¶ 63.)
On October 30, Hook reiterated her confidence in
Neustar’s ability to continue as the LNPA.
In the third quarter
earnings press release, she stated: “We have continued to
position ourselves for a successful NPAC renewal.”
(Id. ¶ 122.)
On the third quarter earnings call, she told participants that
“[w]e continue to believe that our capabilities and outstanding
track record set us apart from other bidders for the next NPAC
contract.”
(Id. ¶ 123.)
Just a few short days later, on
5
November 3, Neustar privately renewed its request to submit a
second BAFO.
(Id. ¶ 67.)
Still without an answer, Hook wrote a letter to the
FCC and NAPM dated January 15, 2014, asking them to consider
Neustar’s second BAFO.
(Id. ¶ 74.)
Hook followed the letter
with a call to FCC Chairman Tom Wheeler on January 21.
(Id.)
On January 23, Neustar disclosed the call and first letter in a
redacted letter filed on the FCC’s docket.
(Id.)
Public
viewers of the letter only saw the redaction notice.
(Id.)
One
day later, NAPM rejected Neustar’s request to consider the
second BAFO.
(Id. ¶ 80.)
On January 29, Neustar issued three press releases
after the close of trading: (1) one announcing its financial
results for both year end and the fourth quarter of 2013; (2)
one announcing an update on the LNPA selection process; and (3)
one announcing a share repurchase program.
(Id. ¶ 129.)
LNPA update press release disclosed that:
[t]hroughout
the
NPAC
administrator
selection
process,
Neustar
has
fully
responded to each deadline and request.
In
April 2013, Neustar submitted an initial
proposal
according
to
the
process
and
subsequently responded to the North American
Portability Management LLC’s (NAPM) request
for a revised submission.
In October 2013,
the company requested the opportunity for
all bidders to submit additional revised
proposals.
Together with that request, the
company also submitted a revised proposal.
On
January
24,
2014,
the
company
was
6
The
notified that its October
would not be considered.
(Id. ¶ 130.)
2013
proposal
Hook stated in the press release that “[w]e
believe that given our track record in innovating to meet the
industry’s needs, as well as our exceptional stewardship of the
NPAC, we are the logical choice to be the local number
portability administrator over the next contract period.”
(Id.
¶ 131.)
That same day, Neustar hosted a conference call to
discuss its financial results and the status of the NAPM
contract selection process.
Defendants revealed for the first
time the existence of the October BAFO, its attempts to have the
FCC and NAPM re-open bidding to consider it, and that it had
been “returned unopened,” i.e., not considered.
(Id. ¶ 132.)
When asked by an analyst why the second proposal was necessary,
Hook answered:
I think that we can all sharpen our pencils
on overall value. As I said in my prepared
remarks,
multiple
rounds
are
always
important in complex negotiations. We think
that there should be particular attention
paid here to transition, costs and risk for
all members of the industry, as well as a
focus on the transition to IP, which is
becoming
more
and
more
urgent.
Any
transition wouldn’t necessarily disrupt that
innovation.
(Id. ¶ 133.)
The price of Neustar stock dropped by almost
twenty percent, from $43.75 at the close of trading on January
7
29 to $35.11 per share at the close of trading January 30. 4
(Id.
¶ 139.)
On February 12, 2014 Neustar filed a formal petition
asking the FCC to submit additional bids.
(Id. ¶ 87.)
One
month later, Neustar wrote to NANC asking it to delay its
recommendation, offering $50 million credit on the existing LNPA
contract.
(Id. ¶ 91.)
On April 16, Neustar released a press
release on its first quarter earnings for 2014.
(Id. ¶ 140.)
In the release, Hook stated that “[w]e are competing vigorously
in the LNPA vendor selection process, and will continue to
advocate strongly that we are the logical choice to remain as
administrator, which we believe is beneficial to the industry
and consumers alike.”
(Id. ¶ 140.)
That same day, Neustar held
a conference call on its first quarter financial results and the
status of the NAPM contract renewal process.
During the call,
Hook stated:
[w]e have participated in the LNPA vendor
selection
process,
confident
that
an
objective appraisal of our qualifications to
continue managing the NPAC and the value of
our proposal should place us in a strong
position for a renewal of the contract.
We
continue to advocate that an additional
round of bidding is necessary to evaluate
objectively qualified vendors, and to ensure
that the NPAC Contract will be awarded to
4
Lead Plaintiff alleges that this price decline is statistically significant.
Trading volume on January 30, 2014 was 7,734,300 shares, more than 15 times
the average daily volume of 489,685 shares during the immediately preceding
12 months. (Am. Compl. ¶ 139.)
8
the vendors that offers [sic] the best value
proposition to the industry and to American
consumers.
(Id. ¶ 142.)
Lalljie, Neustar’s senior vice president and chief
financial officer, stated on the call that “we have made it
abundantly clear that we are the logical choice to provide this
service.
We’ve been doing it with excellence for 17-plus years,
and we fully expect that we will continue to do this into the
future.”
(Id. ¶ 143.)
On June 6, 2014, it was inadvertently disclosed that
NANC recommended Telcordia’s bid for the NAPM contract to the
FCC.
(Id. ¶ 92.)
Neustar disclosed this in a press release on
June 9, 2014, the first business day after the information was
leaked.
(Id. ¶ 93.)
The stock lost another eight percent in
value.
Oklahoma Firefighters Pension and Retirement System
filed suit in this Court on July 15, 2014.
[Dkt. 1.]
On
September 15, Indiana Public Retirement System (“Lead
Plaintiff”) moved to be appointed lead plaintiff and its
attorneys lead counsel [Dkt. 2], which this Court granted.
[Dkt. 11.]
Lead Plaintiff filed the amended complaint, alleging
three causes of action: (1) violations of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and
Securities and Exchange Commission (“SEC”) Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5, against Neustar
9
(Am. Compl. ¶¶ 193-204); (2) identical violations, as against
the Individual Defendants (Id. ¶¶ 205-216); and (3) violations
of section 20(a) of the Securities Exchange Act of 1934, 15
U.S.C. § 78t(a), as against the Individual Defendants (Id. ¶¶
217-219).
The proposed class period is from April 19, 2013 to
June 6, 2014.
(Id. at 1.)
Neustar and the Individual
Defendants have moved to dismiss, arguing Lead Plaintiff has
failed to plead any actionable statements, failed to plead facts
raising a strong inference of scienter, and failed to plead loss
causation.
(Defs.’ Mem. in Supp. [Dkt. 32] at 11-28.)
Having
been fully briefed and argued, this motion is ripe for
disposition.
II. Legal Standard
“A motion to dismiss under Rule 12(b)(6) tests the
sufficiency of a complaint[.]”
Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir.
1992) (citation omitted).
The Supreme Court has stated that in
order “[t]o survive a motion to dismiss, a [c]omplaint 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 Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)).
“A claim has facial
plausibility when the pleaded factual content allows the court
to draw the reasonable inference that the defendant is liable
10
for the misconduct alleged.”
Id.
The issue in resolving such a
motion is not whether the non-movant will ultimately prevail,
but whether the non-movant is entitled to offer evidence to
support his or her claims.
“Determining whether a complaint states a plausible
claim for relief [is] . . . a context-specific task that
requires the reviewing court to draw on its judicial experience
and common sense.”
Iqbal, 556 U.S. at 679 (citations omitted).
To survive a motion to dismiss, a plaintiff’s complaint must
demand more than “an unadorned, the-defendant-unlawfully-harmedme accusation.”
555.
Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at
Legal conclusions couched as factual allegations are not
sufficient.
Twombly, 550 U.S. at 555.
Hence, a pleading that
offers only “formulaic recitation of the elements of a cause of
action will not do.”
at 557.
Iqbal, 556 U.S. at 678; Twombly, 550 U.S.
Nor will a complaint that tenders mere “naked
assertion[s]” devoid of “further factual enhancement.”
Iqbal,
556 U.S. at 678; Twombly, 550 U.S. at 557.
Moreover, the plaintiff does not have to show a
likelihood of success on the merits.
Rather, the complaint must
merely allege – directly or indirectly – each element of a
“viable legal theory.”
Twombly, 550 U.S. at 562-63.
11
III. Analysis
A. 10b and 10b-5 violations
The elements of a cause of action under Section 10(b)
of the Securities Exchange Act and SEC Rule 10b-5 promulgated
thereunder are:
(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).
Lead Plaintiff challenges the following statements:
•
Neustar’s April 19, 2013 press release, in which Edwards
expresses confidence in the strength of Neustar’s proposal;
•
Neustar’s May 2, 2013 press release and earnings call, in
which Hook expresses confidence in the strength of
Neustar’s proposal and discusses the appearance of
impropriety in the unexpected extension of the RFP
deadline;
•
The July 2013 earnings call, in which Hook expresses
confidence in Neustar’s positioning to win the contract;
12
•
The October 30, 2013 earnings call and press release, in
which Hook describes Neustar’s positioning to win the
contract;
•
The January 29, 2013 earnings call and press release, in
which Hook disclosed the existence of the October BAFO and
discussing the bidding process for the contract;
•
The April 16, 2013 earnings call and press release, in
which Hook and Lalljie expressed why Neustar was the
“logical choice” to continue as LNPA.
Defendants argue that Lead Plaintiff has failed to
adequately plead elements one (and by implication, three), two,
and six.
1. Loss Causation
The Court turns first to loss causation, as this case
presents a question as to whether there has been a realization
of any loss.
Loss causation is an essential element of a cause
of action for securities fraud under Section 10b and Rule 10b-5,
requiring plaintiff to plead and prove that the “act of omission
of the defendant alleged to violate this chapter cased the loss
for which the plaintiff seeks to recover damages.”
15 U.S.C. §
78u-4(b)(4).
A plaintiff must plead loss causation “with sufficient
specificity to enable the court to evaluate whether the
necessary causal link exists” between the material
13
misrepresentations or omissions and the economic loss.
Teachers’ Ret. Sys. of LA v. Hunter, 477 F.3d 162, 186 (4th Cir.
2007).
A plaintiff does not have to allege the precise loss
attributable to a defendant’s fraud, but rather that the
misrepresentation or omission was “one substantial cause of the
investment’s decline in value.”
Katyle v. Penn Nat’l Gaming,
Inc., 637 F.3d 462, 472 (4th Cir. 2011) (citation and internal
quotation marks omitted).
Plaintiff argues that Defendants’ statements of
confidence “concealed the significant, escalating risk caused by
Defendants’ calculated strategy to overbid and bank solely on
technical, non-price qualifications in an effort to preserve the
premium associated with Neustar’s incumbent, monopoly status.”
(Pl.’s Opp. at 2.)
Stated differently, Plaintiff alleges that
Defendants’ statements concealed the risk that Neustar would not
win renewal of the NAPM contract.
yet materialized.
However, this risk has not
Though the NAPC has recommended the FCC award
the contract to Telcordia, the FCC has not yet made a final
determination.
(See Defs.’ Mem. in Supp. at 25.)
risk may never materialize.
And such a
On November 7, 2014, the FCC sought
public comment on Neustar’s February 2014 formal petition to
submit additional bids.
(Id. at 8.)
While there is a chance
that Neustar may not be awarded the NAPM contract, there is
still a possibility that it will, in fact, win the contract.
14
Therefore, Lead Plaintiff has failed to sufficiently plead loss
causation.
2. Actionable Statements
a. Puffery
Defendants argue that the statements at issue are
puffery.
In the alternative, Defendants argue they are forward-
looking statements that are entitled to protection under either
or both the Private Securities Litigation Reform Act’s (“PSLRA”)
safe harbor and the bespeaks caution doctrine.
(Defs.’ Mem. in
Supp. at 11-20.)
Pursuant to the PSLRA, the complaint must aver “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) (2004); see Nolte v.
Capital One Fin. Corp., 390 F. 3d 311, 315 (4th Cir. 2004).
“Indefinite statements of corporate optimism, also
known as puffery, are generally non-actionable, as they do not
demonstrate falsity.”
Carlucci v. Han, 886 F. Supp. 2d 497, 522
(E.D. Va. 2012) (citations and internal quotation marks
omitted).
Furthermore, courts are likely to find puffery
immaterial, as a matter of law, because such statements are
15
a certain kind of rosy affirmation commonly
heard from corporate managers and familiar
to the marketplace — loosely optimistic
statements that are so vague, so lacking in
specificity, or so clearly constituting the
opinions of the speaker, that no reasonable
investor could find them important to the
total mix of information available.
In re Cable & Wireless, PLC Sec. Litig., 321 F. Supp. 2d 749,
766-67 (E.D. Va. 2004); see Raab v. Gen. Physics Corp., 4 F.3d
286, 289-90 (4th Cir. 1993) (“‘Soft,’ ‘puffing’ statements ...
generally lack materiality because the market price of the share
is not inflated by vague statements predicting growth.
The
whole discussion of growth is plainly by way of loose prediction
. . . [n]o reasonable investor would rely on these statements,
and they are certainly not specific enough to perpetrate a fraud
on the market.”).
Here, Neustar’s statements are puffery and thus cannot
give rise to securities fraud.
All of the statements at issue
relate to Neustar and its officers’ confidence in its position
in the market.
These “loosely optimistic” statements are vague
enough that no reasonable investor would find them dispositive
in the total mix of information available in deciding what
stocks to purchase.
As the Fourth Circuit stated:
[a]nalysts and arbitrageurs rely on facts in
determining the value of a security, not
mere expressions of optimism from company
spokesmen.
The
market
gives
the
most
credence to those predictions supported by
specific statements of fact, and those
16
statements are, of course, actionable if
false or misleading. However, projections of
future performance not worded as guarantees
are generally not actionable under the
federal securities laws.
Raab, 4 F.3d at 289-90 (citation and internal quotation marks
omitted).
That is because “[p]redictions of future growth . . .
will almost always prove to be wrong in hindsight.”
Id. at 290.
Indeed, if Hook and other corporate officers were to refrain
from such statements of confidence, or take a pessimistic
outlook on the company’s future, stockholders might well
question the company’s prospects under current leadership.
See
Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) (“People in
charge of an enterprise are not required to take a gloomy,
fearful or defeatist view of the future; subject to what current
data indicates, they can be expected to be confident about their
stewardship and the prospects of the business that they
manage.”) (citation and internal quotation marks omitted).
Other courts have found similar statements puffery.
See Boca Raton Firefighters and Police Pension Fund v. Bahash,
506 F. App’x 32, 37 (2d Cir. 2012) (holding the following
statement puffery: “The integrity, reliability and credibility
of [the defendant] 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.”); San Leandro
Emergency Med. Plan. v. Philip Morris Co., Inc., 75 F.3d 801,
17
807, 811 (2d Cir. 1996) (holding not actionable statements that
the company “expect[ed] ... another year of strong growth in
earnings per share”); Hillson Partners Ltd. P’ship v. Adage,
Inc., 42 F.3d 204, 213-14 (4th Cir. 1994) (finding the following
statement a belief or opinion about uncertain future
performance: “[the company] is on target toward achieving the
most profitable year in its history”) (citing Raab, 4 F.3d at
290); In re Federal-Mogul Corp. Sec. Litig., 166 F. Supp. 2d
559, 563 (E.D. Mich. 2001) (stating that statements like “[w]e
continue to demonstrate the viability of our growth strategy”
“[w]e continue to enhance our position as a leader in the
automotive industry” and “the Company is on target to achieve
projected ‘synergies' and cost savings” are the sort of “vague
statements predicting growth” that are puffery); In re Caere
Corporate Sec. Litig., 837 F. Supp. 1054, 1058 (N.D. Cal. 1993)
(finding the following statement not actionable under the
securities laws: “[The company is] ‘well positioned’ for
growth.”); Colby v. Hologic, Inc., 817 F. Supp. 204, 211 (D.
Mass. 1993) (finding the following forward-looking statement too
vague to be actionable: “Prospects for long term growth are
bright.”)
Therefore, Lead Plaintiff has failed to demonstrate
that these statements were material, failing to satisfy elements
one and three of a cause of action under Section 10(b) and Rule
18
10b-5.
See Plymouth Cnty. Ret. Ass’n v. Primo Water Corp., 966
F. Supp. 2d 525, 548 (M.D.N.C. 2013) (stating the goal of the
securities laws are primarily to regulate declaratory statements
of fact) (quoting Malone v. Microdyne Corp., 26 F.3d 471, 479
(4th Cir. 1994)).
b. Forward-looking statements
Defendants also argue that the statements are
protected by the PSLRA’s safe harbor provision and the
judicially-created doctrine of bespeaks caution.
Under the
PSLRA, a forward-looking statement is defined as:
(A) . . .
(B) a statement of the plans and objectives
of
management
for
future
operations,
including plans or objectives relating to
the products or servicers of the issuer;
(C)
a
statement
of
future
economic
performance, including any such statement
contained in a discussion and analysis of
financial condition by the management or in
the results of operations included pursuant
to the rules and regulations of the [SEC];
(D)
any
statement
of
the
assumptions
underlying or relating to any statement
described in subparagraph (A), (B), or (C);
. . .
15 U.S.C. § 78u-5(i)(1)(B)-(D).
A forward-looking statement is
subject to safe harbor when it is identified as such and
accompanied by “meaningful cautionary language identifying
factors that could cause actual results to differ materially
19
from those in the forward-looking statement,” immaterial, or the
plaintiff fails to prove that the statement was false. 5
15
U.S.C. § 78u-5(c)(1)(A)-(B).
The statements at issue are forward-looking, as they
concern the “plan and objectives of management for future
operations,” namely, Neustar’s objective of being awarded the
new NPAC contracts and continuing as LNPA after June 2015.
See
Marsh Grp. v. Prime Retail, Inc., 46 F. App’x 140, 147 (4th Cir.
2002) (stating that the statements about future dividend
payments are forward-looking because they relate to “future
economic performance”) (citing 18 U.S.C. § 78u-5(i)(1)(D)).
noted above, the statements are immaterial.
As
Therefore, they
fall within the PSLRA’s safe harbor.
Even if the statements were material, however, they
are accompanied by meaningful cautionary language.
Neustar’s
2012 10-K stated in boldface that the NAPM contracts “represent
in the aggregate a substantial portion of our revenue, are not
exclusive, and could be terminated or modified in ways
unfavorable to us.
These contracts are due to expire in June
5
Subsection (B) states the statement is entitled to safe harbor if the
plaintiff fails to prove that the forward-looking statement
(i) if made by a natural person, was made with actual knowledge by that
person that the statement was false or misleading; or
(ii) if made by a business entity; was-(I) made by or with the approval of an executive officer of that
entity; and
(II) made or approved by such officer with actual knowledge by
that officer that the statement was false or
misleading.
15 U.S.C. § 78u-5(c)(1)(B).
20
2015 and we may not win a competitive procurement.”
(Defs.’
Mem. in Supp. at 15; Defs.’ Mem. in Supp., Ex. 4, at 19.) 6
The
press releases also state that “the Company cannot assure you
that its expectations will be achieved or that any deviations
will not be material.”
(Id.)
Additional language in the press
releases advised of potential unforeseen risks.
warnings were given during the earnings calls.
Supp. at 14-15.)
(Id.)
Similar
(Defs.’ Mem. in
Therefore, even if the statements were
material, there was sufficient cautionary language to put
investors on notice that there were risks associated with the
RFP process for the NAPM contract.
Additionally, Lead Plaintiff has failed to plead facts
showing that Neustar and the Individual Defendants knew the
statements were false.
Lead Plaintiff points to several events
that it contends are indicative of falsity.
First, Lead
Plaintiff argues that Defendants knew that the unexpected
extension of the bid deadline from April 5 to April 22
6
Generally, a district court does not consider extrinsic materials when
evaluating a complaint under Rule 12(b)(6). It may, however, consider
“documents incorporated into the complaint by reference.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); see also Blankenship
v. Manchin, 471 F.3d 523, 526 n.1 (4th Cir. 2006). In addition, the court
may consider documents attached to the defendant’s motion to dismiss if those
documents are central to the plaintiff’s claim or are “sufficiently referred
to in the complaint,” so long as the plaintiff does not challenge their
authenticity. Witthohn v. Fed. Ins. Co., 164 F. App’x 395, 396–97 (4th Cir.
2006). Each of the press releases referenced by Lead Plaintiff stated that
“more information about risk factors, uncertainties, and other potential
factors that could affect the company’s business and financial results is
included in its filings with the [SEC], including, without limitation . . .
the 10-K.” (Defs.’ Mem. in Supp., Exs. 10, 11, 12.) Therefore, the Court
will also consider the 10-K in deciding this motion.
21
“seriously prejudiced Neustar’s competitive standing.”
Compl. ¶ 16.)
(Am.
Specifically, Defendants knew or recklessly
disregarded that
Neustar’s pricing reflected its monopolistic
and incumbent position, that it was possible
for the LNPA to earn a reasonable profit at
significantly lower prices, and that the
extension
of
the
submission
deadline
permitted
Telcordia
or
other
potential
competitors to structure a bid that was
priced significantly lower than Neustar’s
proposal.
(Id. ¶ 51.)
However, Defendants filed a letter on the FCC’s
public docket expressing their concerns about the RFP extension
and disclosed that letter in the May earnings call.
There is no
reason to believe that despite the deadline extension, Neustar
would not still remain confident in its position.
Furthermore,
an expression of confidence is best characterized as an opinion.
“In order to plead that an opinion is a false factual statement
under [Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083
(1991)], the complaint must allege that the opinion expressed
was different from the opinion actually held by the speaker.”
Nolte, 390 F.3d at 315.
There is nothing in the complaint to
suggest that Defendants subjectively believed the April/May 2013
statements of confidence were false.
Second, Lead Plaintiff alleges that Neustar submitted
the October BAFO because it knew that it had been underbid by
Telcordia’s September BAFO and that statements about its
22
confidence in its proposal (“We have continued to position
ourselves for a successful NPAC renewal” and “[w]e continue to
believe that our capabilities and outstanding track record set
us apart from other bidders for the next NPAC contract”) were
therefore false.
(Am. Compl. ¶¶ 122, 123.)
In support of this
position, they point only to Neustar’s submittal of the bid and
circumstantial evidence that later came to light about
Telcordia’s pricing. 7
Again, these statements of confidence are
best characterized as opinions.
As before, there is not enough
information in the complaint to draw the inference that
Defendants subjectively believed the statements were false when
they were made.
Therefore, the statements qualify for
protection under the PSLRA’s safe harbor.
Turning next to the bespeaks caution doctrine, it
appears that this doctrine has been applied, but not
specifically adopted, in the Fourth Circuit.
See Gasner v. Bd.
of Supervisors of the Cnty. of Dinwiddie, Va., 103 F.3d 351, 362
(4th Cir. 1996) (Murnaghan, J. dissenting) (stating that
majority erroneously applied the bespeaks caution doctrine and
canvassing case law); see also Cohen v. USEC Inc., 70 F. App’x
679, 686 (4th Cir. 2003) (affirming case on grounds other than
bespeaks caution).
However, other district courts in this
7
This is insufficient to demonstrate the statements were false.
III.A.3, infra, regarding scienter.
23
See Section
circuit have applied the doctrine, and this Court will do so
here.
“Under the so-called ‘bespeaks caution’ doctrine, claims
of securities fraud are therefore subject to dismissal if
cautionary language in the offering document negates the
materiality of the alleged misrepresentations or omissions.”
In
re USEC Sec. Litig., 190 F. Supp. 2d 808, 823 (D. Md. 2002)
(quoting Gasner, 103 F.3d at 358), aff’d on other grounds,
Cohen, 70 F. App’x at 688; see also Plymouth Cnty. Retirement
Ass’n, 966 F. Supp. 2d at 548 (“However, dismissals based on the
bespeaks caution doctrine are appropriate when the complaint
attempts to turn economic forecasts or corporate goals into
actionable misrepresentations.”) (citations and internal
quotation marks omitted).
As noted earlier, there was sufficient cautionary
language to warn investors of the risks Neustar faced,
specifically the non-renewal of the NAPM contract.
Therefore,
these statements are not actionable under the bespeaks caution
doctrine as well.
See In re USEC, 190 F. Supp. 2d at 823
(stating the prospectus was replete with cautionary language,
including “There are a number of risks associated with the
development and commercialization of [defendant’s technology],
... and any of these could have a material adverse effect on the
Company's financial or competitive position.”).
24
In sum, even if Lead Plaintiff could identify a
cognizable risk that has materialized as a result of Defendants’
statements, thereby satisfying the element of loss causation,
Lead Plaintiff’s claims must still fail because the statements
at issue are both puffery and forward-looking under the PSLRA
and the bespeaks caution doctrine.
3. Scienter
Lead Plaintiff has also failed to make the requisite
showing of scienter.
In order to satisfy the scienter
requirement, the plaintiff must establish that defendants made
the false or misleading statements with an “intention to
deceive, manipulate, or defraud.”
Oklahoma Firefighters Pension
& Retirement Sys. v. K12, Inc., No. 1:14-CV-108 AJT/JFA, 2014 WL
5780936, at *2 (E.D. Va. Nov. 5, 2014) (quoting Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (citation
omitted)).
A plaintiff must “state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind.”
15 U.S.C. § 78u-4(b)(1); see
Tellabs, 551 U.S. at 313-14.
In order to satisfy that requirement, a plaintiff must
allege in its complaint facts that show that a defendant had
actual knowledge that a forward-looking statement was false at
the time it was made. See 15 U.S.C. § 78u–5(c)(1)(B); In re
CIENA Corp. Sec. Litig., 99 F. Supp. 2d 650, 659 (D. Md. 2000).
25
The “actual knowledge” requirement may be satisfied by a showing
of “recklessness.”
Matrix Capital, 576 F.3d at 181 (“Pleading
recklessness is sufficient to satisfy the scienter
requirement.”).
A “reckless” act is defined as an act that is
“so highly unreasonable and such an extreme departure from the
standard of ordinary care as to present a danger of misleading
the plaintiff to the extent that the danger was either known to
the defendant or so obvious that the defendant must have been
aware of it.”
Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d
338, 343 (4th Cir. 2003) (citation and internal quotation marks
omitted).
Overall, in order to satisfy the scienter requirement,
the alleged facts must raise a “strong inference” that the
required level of scienter accompanying the alleged material
misrepresentation is “at least as likely as any plausible
opposing inference.”
Matrix Capital, 576 F.3d at 181 (quoting
Tellabs, 551 U.S. at 322-24).
“[T]he reviewing court must ask:
When the allegations are accepted as true and taken
collectively, would a reasonable person deem the inference of
scienter at least as strong as any opposing inference?”
181.
Id. at
Moreover, “corporate liability derives from the actions of
its agents.”
omitted).
Id. at 182 (citation and internal quotation marks
If a plaintiff alleges corporate fraud, the plaintiff
“must allege facts that support a strong inference of scienter
26
with respect to at least one authorized agent of the
corporation.”
Id.
To the extent a plaintiff alleges fraud
claims against individual defendants, the plaintiff must allege
facts supporting a strong inference of scienter as to each
defendant.
Id. (citations and internal quotation marks
omitted).
Here, Lead Plaintiff has not pled facts showing that
any defendant, corporate or otherwise, acted with actual
knowledge that the statements were false or had a reckless
disregard for the truth in making the statements.
As stated
earlier, Lead Plaintiff points to the April RFP deadline
extension by the FCC and the October BAFO as circumstantial
evidence of scienter.
As to the RFP extension, as noted earlier
Neustar is allowed to remain optimistic about its business
prospects.
There is nothing to show that at the time the
deadline was extended, Neustar or any of its corporate officers
subjectively believed that they were not confident in their
ability to win contract renewal.
The October BAFO presents a closer question.
From
Lead Plaintiff’s version of events, the only reason that Neustar
submitted a second BAFO is because they knew that Telcordia
submitted a lower bid and Neustar’s statements of confidence
belied its fear that it would lose the contract.
assumptions underlie this theory.
27
Several
First, such an allegation
means that a source leaked confidential information to Neustar
in violation of the RFP process and applicable rules and
regulations.
This is possible, but it is speculative.
Lead
Plaintiff points to March reports in the Capitol Forum 8 to
suggest that there was, in fact, such a leak.
64, 65.)
(Am. Compl. ¶¶
However, the Capitol Forum reports were published in
March, well after the brief window in September and October in
which Neustar would have had to learn of the confidential bid
and then prepare a lower bid.
Second, to reach such a conclusion, Lead Plaintiff
would have the Court rely on anonymous sources cited in the
Capitol Forum as stating the October BAFO came in “just under
Telcordia’s bid.”
such reports.
(Am. Compl. ¶ 66.)
The Court cannot credit
“To the extent that a newspaper article
corroborates plaintiff's own investigation and provides detailed
factual allegations, it can — at least in combination with
plaintiff's investigative efforts — be a reasonable source of
information and belief allegations.”
In re McKesson HBOC, Inc.
Sec. Litig., 126 F. Supp. 2d 1248, 1272 (N.D. Cal. 2000).
Such
newspaper articles should only be credited if they are
8
According to Lead Plaintiff, the Capitol Forum is “a highly regarded
subscription news service that provides comprehensive news coverage of
competition policy as well as in-depth market and political analysis of
specific transactions and investigations.” (Am. Compl. ¶ 64 n.3.) The
Capitol Forum had approximately 500 subscribers in March 2014, though the
number of readers was probably less as subscribers could designate multiple
individuals to receive the report. (Id.)
28
“sufficiently particular and detailed to indicate their
reliability.”
Id.
Here, Lead Plaintiff points to allegations
in the amended complaint as corroborating the Capitol Forum
report.
(Pl.’s Opp. at 11.)
Yet the Amended Complaint appears
to incorporate the allegations from the Capitol Forum, without
any evidence that Lead Plaintiff has taken an independent
investigation of its own.
Compl. ¶ 68.)
(Compare Pl.’s Opp. at 11 with Am.
Put differently, it appears Lead Plaintiff used
the Capitol Forum reports to detail its allegations in the
Amended Complaint and then holds out the Amended Complaint as
corroboration for the allegations.
Such circularity does not
qualify as corroboration.
Furthermore, the Court is not satisfied that the
Capitol Forum possess sufficient indicia of reliability, even if
it could be construed as corroborating Lead Plaintiff’s version
of events.
See Cozzarelli v. Inspire Pharm., Inc., 549 F.3d
618, 625 (4th Cir. 2008) (“While we must accept plaintiffs'
factual allegations as true, the Supreme Court in Tellabs held
that we should not decide the issue of scienter by viewing
individual allegations in isolation. Rather, we must examine the
facts as a whole[.]”) (citation omitted).
The Court knows
nothing about the Capitol Forum beyond what Lead Plaintiff
represents and has no way to assess the credibility of anonymous
sources quoted in the article, whether the sources have personal
29
knowledge of the events described, and whether the sources were
in a position to learn of such events personally.
See In re
Trex Co., Inc. Sec. Litig., 454 F. Supp. 2d 560, 573 (W.D. Va.
2006) (“A confidential witness' testimony can be used in
pleading under the PSLRA so long as the testimony involves facts
of which the witness had personal knowledge.
Because the
confidential witness must have personal knowledge, the testimony
cannot be based on hearsay . . . Also, the plaintiffs must
sufficiently allege that the confidential witness was in a
position to know the facts related.”)
Therefore, it is
inappropriate for the Court to give substantial credit to the
anonymous sources in the Capitol Forum.
See In re McKesson
HBOC, Inc., 126 F. Supp. 2d at 1272 (“Conclusory allegations of
wrongdoing are no more sufficient if they come from a newspaper
article than from plaintiff's counsel.”).
Finally, Lead Plaintiff’s position also assumes that
Neustar knew that price would ultimately be the determinative
factor in awarding the contract.
case.
This is not necessarily the
As Defendants note, the RFP stated “[t]echnical and
[m]anagement criteria when combined are significantly more
important than the cost criterion alone.”
at 3; Am. Compl. ¶ 68.)
(Defs.’ Mem. in Supp.
The RFP also stated that “[c]ost may
become determinative” only “[i]f Respondents’ [t]echnical and
[m]anagement merits are not significantly disparate.”
30
(Defs.’
Mem. in Supp. at 3; Am. Compl. ¶ 68.)
Leaving aside that
Defendants ultimately will not select the contract, it is not
outside the realm of possibility that Defendants would make a
strategic, albeit misguided choice, to highlight their technical
and management capabilities as the incumbent at the expense of
cost.
An equally plausible inference arising from Neustar’s
actions surrounding the October BAFO is its desire to protect
its competitive advantage by submitting another proposal in what
was already an irregular RFP process.
Such an inference is more
compelling than the inference that Defendants acted with intent
to mislead or deceive.
Cozzarelli, 549 F.3d at 626.
Lead Plaintiff has not shown that any of the
Individual Defendants knew that the statements were false or
that they acted with recklessness.
Neustar acted with scienter.
As such, it cannot show that
Therefore, Lead Plaintiff has
failed to prove that any defendant acted with scienter.
B.
Section 20(a) Control Person Claims
Section 20(a) of the Exchange Act imposes liability on
each person 9 who “controls any person liable under any provision
of this chapter.”
15 U.S.C. § 78t(a). Because the complaint
fails to withstand a Rule 12(b)(6) motion with respect to the
predicate violation of § 10(b), it also fails with respect to
9
“The term ‘person’ means a natural person, company, government, or political
subdivision, agency, or instrumentality of a government.” 15 U.S.C. § 78c(9).
31
the § 20(a) claims.
Matrix, 576 F.3d at 192.
Therefore, the
section 20(a) claims against Hook, Edwards, and Lalljie are also
dismissed.
IV. Conclusion
For the foregoing reasons, the Court will grant
Defendants’ motion to dismiss.
January 27, 2015
Alexandria, Virginia
An appropriate order will issue.
/s/
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
32
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