Rand-Heart of New York, Inc. v. James P. Dolan, 812 F.3d 1172

Background

Rand-Heart sued Dolan Company (and CEO James P. Dolan) on behalf of purchasers of Dolan securities for the period Aug. 1, 2013–Jan. 2, 2014, alleging violations of § 10(b) and § 20(a) based on omissions about DiscoverReady (a Dolan subsidiary) and its largest client, Bank of America.
In May–June 2013 Bank of America suspended new work and raised concerns about Dolan’s finances; DiscoverReady’s board authorized marketing DiscoverReady for sale; Bank of America work declined sharply thereafter.
On Aug. 1, 2013 Dolan issued financial results and a Form 10-Q disclosing large losses, cautioning about covenant breaches and uncertain cash flow, while also forecasting double-digit growth for DiscoverReady but warning of “lumpiness” in quarterly results.
On Nov. 12, 2013 Dolan’s 10-Q disclosed revenue decline tied to reduced work from DiscoverReady’s largest customer and linked that decline to the customer’s evaluation of Dolan’s financial condition; stock price dropped substantially in mid-November.
On Jan. 2, 2014 Dolan announced a Chief Restructuring Officer; stock fell again and Dolan later filed chapter 11 in March 2014.
The district court dismissed the complaint for failure to state a claim (insufficient scienter and loss causation) and denied leave to amend; the Eighth Circuit reversed in part and affirmed in part.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether complaint pleads scienter under § 10(b)/Rule 10b-5	Dolan acted with severe recklessness by omitting that (1) Bank of America suspended colocation talks and (2) Bank demanded restructuring and stopped work — facts so obvious Dolan must have known	Dolan disclosed company-wide financial distress and warned of potential covenant breaches and lumpiness; no motive shown and cautionary disclosures negate scienter	Reversed: allegations (especially loss of Bank of America work and board action to market DiscoverReady) support a strong inference of severe recklessness sufficient to plead scienter
Whether forward-looking statements (Aug. 1) are protected by safe harbor	Statements were material and defendants had actual knowledge they were misleading; safe-harbor inapplicable	Statements were forward-looking and accompanied by cautionary language in 2012 Form 10-K and 2013 10-Q	Court: safe harbor does not protect these statements — cautionary language was boilerplate and inadequate; statements could have been known to be misleading
Whether omissions required disclosure (duty to disclose Bank of America developments)	Omissions rendered Dolan’s public statements misleading given DiscoverReady’s dependence on Bank of America and the board’s decision to market DiscoverReady	Dolan had publicly disclosed financial problems and warned of lumpiness and covenant risk; thus no additional disclosure required	Reversed on omission claim: facts alleged (significant loss of Bank work, board action) make the omission severe recklessness and actionable
Loss causation for post-November 12 declines (Nov. 12–Jan. 2)	Fraud-on-the-market: November disclosures were partial; full revelation occurred Jan. 2 with appointment of CRO, causing further price drop	January disclosure did not reveal new corrective facts; it elaborated on previously disclosed restructuring — mid-November drop already reflected the corrective disclosure	Affirmed in part: district court correctly held plaintiff failed to allege loss causation for declines after Nov. 12; Jan. 2 disclosure was not a corrective disclosure of earlier misrepresentations

Key Cases Cited

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (establishing Rule 10b-5 standards for misstatements and omissions)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for pleading scienter—collective inquiry and competing inferences)
In re K-Tel Intern., Inc. Sec. Litig., 300 F.3d 881 (8th Cir. 2002) (definitions of scienter and severe recklessness)
Minneapolis Firefighters’ Relief Ass’n v. MEMC Elec. Materials, Inc., 641 F.3d 1023 (8th Cir. 2011) (duty to disclose and interplay with cautionary statements)
Basic Inc. v. Levinson, 485 U.S. 224 (standard that silence is not misleading absent duty to disclose)
In re Amdocs Ltd. Sec. Litig., 390 F.3d 542 (8th Cir. 2004) (when cautionary language can render omissions immaterial)
Julianello v. K-V Pharm. Co., 791 F.3d 915 (8th Cir. 2015) (safe-harbor for forward-looking statements analysis)
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (loss-causation and proximate-cause analogy)
McAdams v. McCord, 584 F.3d 1111 (8th Cir. 2009) (pleading loss and causal connection)
Schaaf v. Residential Funding Corp., 517 F.3d 544 (8th Cir. 2008) (requirement that plaintiff tie price declines to corrective disclosures)
Katyle v. Penn Nat. Gaming, Inc., 637 F.3d 462 (4th Cir. 2011) (corrective disclosure must reveal new facts)
Meyer v. Greene, 710 F.3d 1189 (11th Cir. 2013) (not all bad news is corrective for loss causation)
In re Williams Sec. Litig.-WCG Subclass, 558 F.3d 1130 (10th Cir. 2009) (corrective disclosure must relate back to misrepresentation)
Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645 (8th Cir. 2001) (motive and opportunity in scienter analysis)