Case Information
*1 09-1815-cv(L), 09-2324-cv(CON) In re One Communications Corp.
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT AMENDED SUMMARY ORDER Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court’s Local Rule 32.1.1. W hen citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation “summary order”). A party citing a summary order must serve a copy of it on any party not represented by counsel.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on th the 18 day of Junе, two thousand ten.
PRESENT:
AMALYA L. KEARSE,
ROBERT D. SACK,
DEBRA ANN LIVINGSTON
Circuit Judges . One Communications Corp, as successor in interest to CTC
Communications Group, Inc., and CTC Communications Acquisition,
Plaintiff-Counter-Defendant-Appellant , -v.- Nos. 09-1815-cv, 09-2324-cv JP Morgan SBIC LLC, Sixty Wall Street SBIC Fund, L.P.,
The Megunticook Fund II, L.P., The Megunticook Side Fund II,
L.P., Kevin O’Hare, Jeffrey Koester, Mellon Investor Services
LLC, as nominal defendant,
Defendants-Appellees ,
Verizon New England Inc., as defendants on a Declaratory
Judgment Claim, Northern New England Telephone Operations
LLC, Telephone Operating Company of Vermont LLC,
Defendants-Counter-Claimants-Appellees ,
Stockholder Representative Committee, on behalf of Certain
Former Stockholders of Lightship Holding, Inc.,
Plaintiff-Counter-Defendant-Appellee . *2 N ICHOLAS W. L OBENTHAL (John M. Teitler, Alan S. Rabinowitz, Paul Ettori, on the brief ; Mark S. Resnick, The Resnick Law Group P.C., Boston, MA, of counsel ), Teitler & Teitler, LLP, New York, NY, for Plaintiff-Counter-Defendant-Appellant .
J AYNE S. R OBINSON , (K. Ann McDonald, Brett G. Canna, on the brief ) Robinson & McDonald LLP, New York, NY, for Defendants- Appellees JP Morgan SBIC LLC and Sixty Wall Street SBIC Fund, L.P., and for Plaintiff-Counter-Defendant-Appellee .
P AUL E. S UMMIT (Ira K. Gross, Phillip Rakhunov, on the brief ), Sullivan & Worcester LLP, Boston, MA, for Defendants-Appellees The Megunticook Fund II, L.P. and The Megunticook Side Fund II, L.P.
D AVID B. M ACK (Sean T. Carnathan; Michael H. Ferenсe, Jonathan Kurta, Schenzi Ross Friedman Ference LLP, New York, NY, on the brief ), O’Connor, Carnathan and Mack LLC, Burlington, MA, for Defendants-Appellees Kevin O’Hare and Jeffrey Koester. Appeals from a March 31, 2009 judgment and a May 1, 2009 order of the United States District Court for the Southern District of New York. UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED, AND DECREED that the judgment and order of the district court are AFFIRMED.
Plaintiff-Counter-Defendant-Appellant One Communications Corp. (“OCC”) appeals from a March 31, 2009, judgment and a May 1, 2009 order of the United States District Court for the Southern District of New York (Swain, J. ), dismissing its federal law claims and counterclaims, respectively with prejudice and declining to exercise jurisdiction over the remaining state law claims. OCC argues 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 оf *3 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. We assume the parties’ familiarity with the underlying facts, procedural history, and specification of the issues оn appeal.
We review a district court's dismissal of a complaint pursuant to Rule 12(b)(6)
de novo
. The
court accepts all well-pleaded allegations in the complaint as true, drawing all reasonable inferences
in the plaintiff's favor. In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must
allege a plausible set of facts sufficient “to raise a right to relief above the speculative level.”
Bell
Atl. Corp. v. Twombly
,
In order to state a claim under § 10(b) and Rule 10b-5, which implements it, “[a] plaintiff
must allege that in connection with the purchase or sale of securities, the defendant, acting with
scienter, made a false material representation or omitted to disclоse material information and that
plaintiff’s reliance on defendant’s conduct caused plaintiff injury.”
Operating Local 649 Annuity
Trust Fund v. Smith Barney Fund Mgm’t LLC
,
In addition, the complaint must provide “particular allegations giving rise to a strong
inference of scienter” — “that the defendant acted with the required state of mind.”
ECA & Local
134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co.
,
OCC argues with regard to the allegations in its complaint (1) that certain pre-agreement representations made by Lightship and its officers and directors may be the foundation of a § 10(b) claim and were false, (2) that, in any event, the representations in the merger agreement between Lightship and CTC were false and that it so adequately pled in the complaint, (3) that there were post-agreement representations that were not considered by the district court, and (4) that the sellers acted with scienter throughout.
With respect to the pre-agreement representations allegedly made by Lightship, we conclude
that the merger agreement foreclosed any reliance by CTC on those representations and that
therefore no § 10(b) claim may be brought based on them. The merger agreement itself contained
*5
both a merger clause, section 10(c), and a separate provision, section 6(d), specifically disclaiming
the ability of CTC to rely on representations or warranties that were “inconsistent with or in additiоn
to the representations and warranties” set forth in the agreement. 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
magnitudе of the transaction.
Emergent Capital Investment Mgm’t, LLC v. Stonepath Group, Inc.
,
OCC identifies a number of representations and warranties within the merger agreement itself that it claims are misrepresentations actionable under § 10(b). One of the representations at issue, section 4(h) of the agreement, warranted that Lightship’s financial statements accurately reflected the comрany’s financial condition and were prepared in accordance with Generally Accepted Accounting Principles (GAAP). In its complaint, OCC states: “The Lightship representations, warranties and covenants set forth in the Merger Agreement, including those [in section 4(h)], were false at the time the Merger Agreement was executed. They remained false throughout the remaining diligence period, and they were false at the time the transaction closed.”
We agree with the district court that this insufficiently pleads the fraudulence of the
representation in section 4(h). The complaint sets forth no information as to how or why the books
of account hаd not been maintained in accordance with sound business practice, what provisions of
GAAP were being violated by the financial statements, how the alleged billing discrepancy was a
liability of the type required by GAAP to be recorded on the balance sheet, why any misbilling was
not in the ordinary course of business, and how Lightship’s internal cоntrols and procedures were
not being followed. Although OCC argues that fraudulently inflating revenue is inherently not
sound business practice or GAAP-compliant, Lightship was actually collecting the revenue for
which it was allegedly over-billing and was recording it appropriately. OCC has thus failed to allege
that the
accounting
was fraudulent or to providе any information as to why the allegedly inflated
figure for earnings before interest, taxes, depreciation and amortization (“EBITDA”) was an instance
of accounting fraud. The complaint fails to satisfy the standards this Court has set for particularity
in the context of GAAP-related misstatements that are alleged to be fraudulent.
See, e.g.
,
ECA
, 553
F.3d at 196, 199-200 (noting that allegations of a particular GAAP violation may state a securities
fraud claim in conjunction with evidence of corresponding fraudulent intent);
In re Carter-Wallace,
Inc. Sec. Litig.
,
The complaint also points to section 4(i) of the merger agreement as constituting a violated warranty: “Section 4(i) of the Merger Agreement addressed legal complianсe. In this section, LHI represented that except as set forth on a Schedule 4(i), the company had complied in all material respects and was currently in compliance in all material respects with all applicable laws.” Like the allegations with respect to section 4(h), this is insufficiently specific. To say that this warranty is false without providing an indication of what law was being broken by Lightship’s billing practice *7 is conclusory and lacks particularity. Although OCC does allege in the complaint that the provision of VNXX service was prohibited by law in the relevant states, it fails to identify which named defendants were even aware of VNXX service violatiоns, much less that any defendant had the required scienter. Similarly, in paragraph 94, the complaint alleges that sections 4(e)(i), 4(e)(ii), and 4(e)(iii) make various representations about compliance with permits and licensing requirements. The complaint does not allege with which requirements Lightship was not in compliance, merely that the representations are false. This fails to satisfy the strict pleading requirements of a § 10(b) claim.
Section 4(e)(v), which OCC also identifies as a misrepresentation, according to the complaint “provided that as of the closing date, none of the Lightship Companies had any liability to any affiliate of Verizon Communications, Inc. for CABS-related billing of intercarrier compensation.” The actual provision states that “[a]s of the Closing Date, none of the Lightship Companies has any Liability: (A) to any Affiliate of Verizon Communications, Inc. related to billing for CABS with respect to any intra-LATA toll traffic terminating on Lightship’s UNE-P lines, or (B) to any CLEC related to switched access charges in its non-UNE-P access bills to other CLECs for UNE-P feature group D access charges associated with its local interconnection arrangements.” As all parties agree, the misrepresentations alleged here are not related to intra-LATA toll traffic or UNE-P lines, so the provision is irrelevant.
Section 5(c), which contains pre-closing covenants, required Lightship to refrain from taking various actions that would delay the closing or adversely impact the transaction. It also required Lightship to disclose any knowledge of a breached representation acquired between execution and closing. OCC asserts that this section constitutes a misrepresentation by Lightship but fails to specify with particularity which portions of section 5(c) were misrepresentations and why.
Finally, the complaint cites section 4(k)(iii) as a misrepresentation. 4(k)(iii) relates to Lightship’s compliance with contracts , and hence the allegations about improper billing under Lightship’s Maine Inter-Connection Agreement with Verizon (“ICA”) — the only interconnection agreement OCC alleges was violated — could be considered to be pled with sufficient particularity to explain why 4(k)(iii) was a misrepresentation. We nonetheless agree with the district court that 4(k)(iii) does not apply to the Verizon agreement. The provision reads in part:
(iii) All of the Contracts set forth on Schedule 4(k)(i) and (ii) are valid, in full force and effect and binding upon the applicable Lightship Company party thereto . . . and the applicable Lightship Company is not in material default under any such Contract, nor, to Holding’s Knowledge, does any condition exist that . . . would constitute a material default under any such Contract.
It is uncontested that the ICA does not appear on Schedule 4(k)(i). Section 4(k)(ii) specifies that Schedule 4(k)(ii) consists of two CDs, on which the ICA does not appear. Granted, the printed language of Schedule 4(k)(ii) both directs the reader to the CDs and includes a paragraph stating that “all of Lightship’s interconnection agreements with Verizon have expired,” noting thаt those ICAs were being operated on a month-to-month basis. Contrary to OCC’s argument, however, this paragraph is most logically interpreted as explaining why the ICAs are being excluded from Schedule 4(k)(ii), rather than including them: if Schedule 4(k)(ii) were read to include the ICAs, then the language of Section 4(k)(ii) is incomplete and incorrect. Morеover, Section 4(k)(iii) specifies that the contracts in schedules (i) and (ii) are valid, in full force and effect, and binding, which would contradict the description of the Verizon ICAs as expired. In order to give full effect to all of the language of the contract, therefore, Schedule 4(k)(ii) is most appropriately read to exсlude the Verizon ICAs. We therefore conclude that the complaint does not plausibly allege that the representation in Section 4(k)(iii) was violated by any alleged noncompliance with the ICAs.
As for the further disclosure of financial data by Lightship to CTC between the signing of
the merger agreement and the closing of the transaсtion, OCC argues that the merger clauses do not
operate to bar reliance on post-signing disclosure.
See, e.g.
,
Dresner v. Utility.com, Inc.
, 371 F.
Supp. 2d 476, 496 & n.10 (S.D.N.Y. 2005). We need not decide here whether post-agreement
representations are distinguishable from pre-agreement representations in this case because we find
that OCC has failed adequately to allege scienter with respect to this portion of the claim. OCC has
offered nothing more than speculation and vague allegations as to the knowledge and involvement
of defendants JP Morgan SBIC LLC, Sixty Wall Street SBIC Fund, L.P., The Megunticook Fund
II, L.P., and The Megunticook Side Fund II, L.P. With regard to the asserted misrepresentations,
merely pleading the involvement оf outside directors Matlack and Oppenheimer, appointed by these
entities, is insufficient. With respect to the corporate officers O’Hare and Koester, we conclude that
OCC’s allegations fail the test laid out in
Tellabs
: with the allegations assessed holistically, the
inference that the corporate officers were deliberately inflating their revenue via improper billing
practices is not “cogent and at least as compelling” as the inference that they reasonably believed
that they were billing properly and appropriately reporting their EBITDA, particularly given that
Verizon had never objected to the bills.
Tellabs
,
Section 20(a) of the 1934 Act makes “controlling persons” jointly and severally liable with
controlled persons to any person to whom the controlled person is liable for securities fraud. 15
U.S.C. § 78t(a);
Boguslavsky v. Kaplan
,
Finally, this Court “review[s] a district court’s decision to decline supplemental jurisdiction
over pendent state law claims for abuse of discretion.”
WWBITV, Inc. v. Vill. of Rouses Point
, 589
F.3d 46, 49 (2d Cir. 2009). If all of a plaintiff’s federal claims are dismissed, a district court is well
within its discretion to decline to assert supplemental jurisdiction over any state law claims, as it did
here.
Id.
at 52;
see also Marcus v. AT&T Corp.
,
All arguments not otherwise discussed in this summary order are found to be moot or without merit.
For the foregoing reasons, the March 31, 2009 judgment and May 1, 2009 order of the district court are hereby AFFIRMED.
FOR THE COURT: Catherine O’Hagan Wolfe, Clerk