Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 05 C 2602 & 05 C 2927-William T. Hart, Judge.
The opinion of the court was delivered by: Evans, Circuit Judge.
Before MANION, ROVNER, and EVANS, Circuit Judges.
In this consolidated appeal, we review two cases arising out of a fraud that occurred at a New York subsidiary of defendant Tribune Company. Certain employees at the subsidiary falsely boosted the circulation figures of two newspapers, Newsday and the Spanish-language Hoy, increasing the amount that they were able to charge advertisers and, in turn, inflating revenues. Tribune, along with an independent auditor, ultimately discovered and publicly disclosed the fraud, which resulted in a $90 million charge against earnings. Our first case is a securities class action brought by purchasers of Tribune common stock against Tribune, four of its executive officers, and five employees of Newsday and Hoy. Our second case is an ERISA class action brought by participants in Tribune's pension plans that held shares in an employee stock ownership plan (ESOP) against the alleged plan fiduciaries. The district court (Judge William T. Hart) dismissed both cases with prejudice. They are now before us on the plaintiffs' appeals.
Because the same events underlie the allegations in both complaints, some common facts can be discussed up front. Tribune is a media and entertainment company engaging in newspaper publishing (e.g., the Chicago Tribune, the Los Angeles Times), television and radio broadcasting (e.g., Superstation WGN), and other entertainment ventures (e.g., the Chicago Cubs-at least for the time being). Tribune's publishing segment purportedly generates more than 70 percent of its total revenues, which exceeded $5 billion annually during the years immediately prior to these lawsuits. At that time, Newsday operated as a New York subsidiary of Tribune, and Hoy was a division of Newsday. These are just 2 of the at least 11 daily newspapers that fall under Tribune's umbrella. The Audit Bureau of Circulations (ABC), an independent nonprofit monitoring organization, conducts annual audits of each newspaper's paid circulation figures. The results of its audits are used to determine how much advertisers pay for their ads to appear in a newspaper.
At least as early as 2001, Newsday and Hoy overstated their circulation figures. Schemes such as phony hawking programs, false affidavits that understated returns and overstated net sales, and directions to subordinates to pay distributors for bogus deliveries of newspapers were employed. In addition, many copies of the two papers were merely dumped, or delivered to people who had not paid for them. The overstated circulation numbers resulted in Newsday and Hoy charging higher advertising rates than would have been charged otherwise. The true circulation of Newsday and Hoy was roughly 80 percent and 50 percent, respectively, of what was reported.
Starting in February 2004, advertisers filed lawsuits alleging that Newsday and Hoy had overstated circulation. On February 11, 2004, Tribune issued a press release stating that Raymond Jansen (Newsday's publisher from 1994 to 2004 and a named defendant in our securities case) had issued a statement that the lawsuit filed the previous day against Newsday and Hoy was "completely without merit," the allegations contained in it were "false," and the source of the allegations was no more than "a disgruntled former employee." Notwithstanding Newsday's denial, Tribune, together with ABC, started its own internal investigation of the paid circulation figures. Shortly after the advertisers' lawsuit was filed, the SEC, the U.S. Attorney's Office for the Eastern District of New York, the U.S. Attorney's Office for the District of Connecticut, and the Connecticut Attorney General's Office began investigations.*fn1
In June 2004, Tribune's investigation revealed that the circulation figures for Newsday and Hoy had in fact been inflated. On June 17, 2004, Newsday issued a press release stating that the September 2003 circulation figures for Newsday and Hoy were overstated and that both publications "expect to make significantly smaller adjustments to their March 2004 circulation figures." That day, Tribune's stock closed at $47.27 per share, up from $46.78 the day before.*fn2 On June 18, it closed at $46.81.
In a July 14, 2004, press release, Tribune stated that an investigation revealed that further adjustments would be made to the September 2003 and March 2004 circulation figures for Newsday and Hoy and that there were also misstatements for 2001 and 2002. Tribune also noted that its second quarter results included a $35 million charge related to an anticipated settlement of the advertisers' lawsuits. Dennis FitzSimons (Tribune's chairman and CEO since 2003 and a named defendant in both of our cases) is quoted as saying that "we moved aggressively to address circulation misstatements at Newsday and Hoy[.]" On July 15, Tribune's stock closed at $42.00 per share, down from $43.12 the day before.
On July 30, 2004, Tribune filed its second quarter 10-Q report with the SEC. There, Tribune reiterated the results mentioned in the July 14 press release, including the $35 million charge. Tribune also stated that it would continue to defend the lawsuits and evaluate the adequacy of the $35 million reserve. Tribune said that Newsday and Hoy had been censured by ABC, that SEC and criminal investigations were underway, and that Tribune was cooperating with the investigations.
On September 10, 2004, Tribune issued a press release that disclosed the true circulation numbers. It also stated that the cost to settle the advertisers' lawsuits would be increased by $45 to $60 million, which would be included in the third quarter results. The same day, ABC announced that it expected to complete its audit of the circulation issues in a month. It noted that the audit had taken longer than expected because of the "depth and complexity of circulation irregularities identified and quantified by the audit process[.]" On September 13, Tribune stock closed at $39.72 per share. On November 30, however, Tribune's stock closed at $43.37-$0.25 higher than before the July 15 announcements.
After similar complaints against Tribune and its employees based on these events were filed, the district court consolidated the various cases. Pursuant to the Private Securities Litigation Reform Act of 1995 (PSLRA), the court appointed a lead plaintiff and lead counsel in the securities case. At that point, an amended consolidated class action complaint was filed. Subsequently, the lead plaintiff filed a second lawsuit, adding two defendants who had not been named in the first complaint as well as several allegations. The district court granted a motion to consolidate the two suits and for leave to file a second amended complaint. The proposed plaintiff class consists of people who purchased Tribune common stock between January 24, 2002, and September 10, 2004.
The PSLRA does not apply to the ERISA case, in which a consolidated amended ERISA complaint was filed. The proposed plaintiff class there consists of participants in Tribune's sponsored retirement plans whose individual accounts held shares in the ESOP at any time from December 31, 2002, to October 28, 2005 (the date the complaint was filed).
In a comprehensive memorandum opinion and order, the district court dismissed both complaints with prejudice. Hill v. The Tribune Co., Nos. 05 C 2602, 05 C 2927, 06 C 0741, 2006 WL 2861016 (N.D. Ill. Sept. 29, 2006). As always, we review a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) de novo, taking all factual allegations as true and drawing all reasonable inferences in favor of the plaintiffs. Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 594 (7th Cir. 2006), rev'd on other grounds, 127 S.Ct. 2499 (2007) (Makor I). We will address the securities case and the ERISA case separately, in that order.
The securities complaint asserts two claims. The first claim arises under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. It is brought against Tribune, four of its executive officers (the Tribune individual defendants),*fn3 and certain employees of Newsday and Hoy (the Newsday-Hoy individual defendants).*fn4 In a typical § 10(b) private action, a plaintiff must prove (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. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S.Ct. 761, 768 (2008).
The second securities claim arises under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). It is brought against all of the individual defendants and contends that the Tribune individual defendants are "controlling persons" of the Newsday-Hoy individual defendants. Section 20(a) states that "[e]very person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person[.]" Id. Thus, to state a claim under § 20(a), a plaintiff must first adequately plead a primary ...