The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge
MEMORANDUM OPINION AND ORDER
Sharankishor Desai ("Desai"), acting on behalf of himself and other similarly situated individuals (collectively "Plaintiffs"), has filed a three-count Amended Class Action Complaint ("Complaint") that charges eleven individual defendants*fn1 with securities fraud. During the Class Period (April 30 through October 24, 2008) Plaintiffs were common stockholders of General Growth Properties, Inc. ("General Growth"), a publicly traded real estate investment company. All defendants were officers or directors of General Growth.
Plaintiffs now face Defendants' motions to dismiss for failure to state a claim under Fed. R. Civ. P. ("Rule") 12(b)(6) and for failure to plead securities fraud with particularity under Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA," 15 U.S.C. §78u-4(b))*fn2 . For the reasons described here, Defendants' motion is granted in part and denied in part.
Because the allegations in the Complaint are by their nature highly fact-specific, and because analyzing Defendants' motion to dismiss requires detailed scrutiny of those factual allegations, this opinion can best recount most of the relevant facts while addressing particular disputes. At this juncture it is enough to explain the case's basic factual underpinnings.
Simply put, Plaintiffs allege that General Growth carried a debt load of over $27 billion at the beginning of the Class Period, with over $1.5 billion of that debt coming due by November 2008--at a time when the nation was in the midst of a profound credit crisis. Plaintiffs assert that General Growth's ability to refinance that debt was a matter of corporate survival, and if the marketplace had learned it would be unable to do so, General Growth's stock price would have tumbled, forcing it into bankruptcy. As it turned out, that is exactly what happened: General Growth did fail to refinance its debt, its stock price fell precipitously and it filed for bankruptcy in April 2009.
Plaintiffs allege that Defendants*fn3 artificially inflated the stock price during the Class Period by various means. For example, Plaintiffs say that Defendants failed to disclose that General Growth would not be able to refinance its maturing debt and, indeed, materially misrepresented General Growth's ability to do so. Notwithstanding those misrepresentations, Plaintiffs allege that General Growth's stock price began to slide, so much so that Defendants began to be hit with margin calls that forced them to liquidate significant portions of their own individual holdings in General Growth. At the same time, Defendants are alleged to have continued misrepresenting the company's ability to refinance its debt.
Plaintiffs further allege that former General Growth CEO and Board Chairman Bucksbaum, without the knowledge of its general investors, personally loaned at least $100 million to Chief Financial Officer Freibaum and Chief Operations Officer Michaels to help them avoid or forestall forced liquidation of their stock on margin calls. Those loans purportedly violated General Growth's ethics policy, and Plaintiffs assert that the failure to disclose those loans to the marketplace artificially elevated the price of General Growth stock.
Plaintiffs also allege that Defendants petitioned the SEC to include General Growth on a list of companies protected from "short-selling." Defendants then assertedly engaged in insider trading at artificially inflated prices immediately after implementation of the short-selling ban.
Count I of the Complaint is based on Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act," Sections 78a et seq.) and the SEC's Rule 10b-5(b) (17 C.F.R. §240.10b-5). In essence Count I charges that Defendants made misleading statements about General Growth's ability to refinance its future debt obligations and that if Plaintiffs had known the truth, they would not have purchased their shares at the inflated prices they paid or would not have purchased them at all.
Count II is also based on Exchange Act Section 10(b), but it is further based on SEC-promulgated Rules 10b-5(a) and (c). That count concerns Defendants' alleged scheme to sell shares of stock at inflated prices. Just what acts are alleged in Complaint Count II is disputed by the parties and will be addressed later.
Count III alleges violations of Exchange Act Section 20(a).
That count charges Defendants with "control person" liability for their alleged control of various reports, statements and public filings that General Growth disseminated to the marketplace during the Class Period.
When deciding a motion to dismiss under the PSLRA, "the court must treat the pleaded facts as true and 'draw all reasonable inferences in favor of the plaintiff'" (Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 705 (7th Cir. 2008) ("Tellabs III")).*fn4 When a plaintiff alleges that a defendant "made an untrue statement of material fact," "the complaint shall specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading" (Section 4(b)(1)). It must also "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" (i.e., "scienter")(Section 4(b)(2)). Complaints that fail to meet those pleading requirements are subject to dismissal (Section 4(b)(3)(A)).
Plaintiffs have alleged in Count I that each individual Defendant made various untrue and actionable statements of material fact. Defendants counter that many of those statements are not actionable because they are protected under the PSLRA's safe harbor provisions (1) for forward-looking statements and (2) for present-tense assumptions underlying such forward-looking statements.
Safe Harbor Under the PSLRA
There are "two independent prongs" to the PSLRA's Section 5(c)(1) safe harbor provision--subsections (A) and (B)*fn5 (Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 371 (5th Cir. 2004)). Those two prongs are separated by the disjunctive "or," so that a person is not liable with respect to a forward-looking statement if (emphasis added):
(A) the forward-looking statement is--
(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or
(B) 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.
Before turning to whether particular statements are protected, this opinion must first address some threshold issues raised by the parties. For example, Plaintiffs argue that the safe harbor provision of Subsection (A) does not protect forward-looking statements that are accompanied by meaningful cautionary language if the forward-looking statements were known by the person making those statements to be false at the time they were made. Defendants urge the opposite, pointing principally (though not exclusively) to this statement in Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir. 1999): [I]f a statement is accompanied by "meaningful cautionary language," the defendants' state of mind is irrelevant.
That position has also been espoused by numerous district court decisions here and elsewhere, stating for example that for purposes of Subsection (A) "proof of knowledge of the falsity of a forward-looking statement is 'irrelevant' when the statement is accompanied by meaningful cautionary language" (In re Midway Games, Inc. Sec. Litig., 332 F. Supp. 2d 1152, 1168 (N.D. Ill. 2004) (citing cases, including the above-quoted language from Harris); see also Miller v. Champion Enters. Inc., 346 F.3d 660, 672 (6th Cir. 2003)).
That notion seems strongly counterintuitive. On close analysis, it is not at all directly supported by this piece of legislative history relied on by Harris in reaching its conclusion (H.R. Conf. Rep. 104-369, at 44 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 743 (emphasis added)):
The first prong of the safe harbor requires courts to examine only the cautionary statement accompanying the forward-looking statement. Courts should not examine the state of mind of the person making the statement.
What is missed by the conclusion stated in Harris, and in the like conclusions by other courts, is that the just-underlined words in the Conference Report make it clear that the mindset referred to there is that of the person making the cautionary statement, and not that of the author of the forward-looking statement that is charged as a deliberate falsehood.*fn6
That being so, are we really to believe that Congress, in the course of tightening the standards of pleading and proof in private lawsuits claiming securities violations, intended to immunize deliberate liars from liability to those who invested in securities on the strength of such lies and suffered major losses? That would appear to subvert the long-established principles of fraud-based liability.
Yet this Court also finds itself compelled to answer "Yes" to what should have seemed a rhetorical question calling for a "No" response. Although analysis shows the language that has been quoted from the Conference Report is really beside the mark in that regard, the unambiguous language of Section 5(c)(1)(A)(i) itself dictates that outcome--it requires only a forward-looking statement (whether true or false) plus an accompanying meaningful cautionary statement. In an effort to escape that result, Plaintiffs cite this dictum in No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 937 n.15 (9th Cir. 2003):
[I]t is arguable that a strong inference of actual knowledge has been raised, thus, excepting these statements from the safe harbor rule altogether.
But that just seems to be the product of incredulity at such a result, rather than a reasoned conclusion, and this Court cannot in good conscience follow the Ninth Circuit's lead.
In sum, under the literal language of the safe harbor statute the author of any forward-looking statement--even though a deliberate falsehood--is insulated from liability so long as that statement is accompanied by some meaningful cautionary statement. Hence the proper inquiry is limited to (1) whether allegedly misleading statements were indeed forward-looking and (2) whether they were accompanied by meaningful cautionary statements. And because the charged statements must be looked at one by one to see whether they can properly be characterized as forward-looking, while cautionary statements can provide across-the-board insulation from liability, it is logical to turn to the latter issue first.
1. Meaningful Cautionary Statements
Plaintiffs argue that the PSLRA's safe harbor protections cannot apply in this case because the statements that Defendants identify as cautionary were not "meaningful." Plaintiffs' primary objections are that the cautionary statements (1) were "merely broad, redundant, boilerplate warnings," (2) failed to change over time to reflect specific problems that General Growth was experiencing in its attempts to obtain financing and (3) warned of adverse events that had already occurred. With a single exception explained a bit later, none of those arguments prevails.
It will be remembered that safe harbor protection forecloses liability for forward-looking statements that are "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement" (Section 5(c)(1)(A)(i)). To determine whether a statement was accompanied by meaningful cautionary language, courts consider cautionary statements that either accompanied the forward-looking statement or were incorporated by reference (Silverman v. Motorola, Inc., No. 07 C 4507, 2008 WL 4360648, at *12 (N.D. Ill. Sept. 23)). And when plaintiffs invoke a fraud-on-the-market theory, as here, they "must acknowledge that all public information is reflected in the [stock] price" (Asher v. Baxter Int'l Inc., 377 F.3d 727, 732 (7th Cir. 2004)(emphasis in original)). Thus cautionary statements contained in SEC filings, so long as they were available when the purportedly misleading statements cited by Plaintiffs were made, were absorbed into the market and may be considered by this Court in determining whether the oral statements at issue were accompanied by meaningful cautionary language (id.).
Cautionary language is meaningful "if it puts an investor on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward" (Stavros v. Exelon Corp., 266 F. Supp. 2d 833, 843 (N.D. Ill. 2003) (internal quotation marks omitted)). Cautionary language must therefore be "substantive and tailored to the specific predictions made in the allegedly misleading statement" (Johnson v. Tellabs, Inc., 262 F. Supp. 2d 937, 952-53 (N.D. Ill. 2003)).
But that language need not expressly refer to the risk that ultimately caused the projection to differ from the results (Harris, 182 F.3d at 807), for "prevision" on the part of defendants is not required (Asher, 377 F.3d at 732). Nor does the PSLRA require the "most helpful caution" that is possible (id. at 734 (emphasis in original)). Identification of the principal contingencies that could cause actual results to differ from projections is sufficient (id.). That said, however, "'boilerplate' warnings won't do; cautions must be tailored to the risks that accompany the particular projections" (id. at 732).
Defendants have identified numerous documents that they maintain contained meaningful cautionary language that should bring into play the safe harbor protections afforded by the PSLRA. And examination of those statements confirms that they do contain such language. Hence forward-looking statements made after the issuance of those cautionary statements are sheltered by the safe harbor--that is, so long as the cautionary statements remain "meaningful" (more on this subject later).
General Growth's February 27, 2008 Form 10-K, which was filed before the beginning of the Class Period and was available throughout, contained specific and detailed discussions of the risk factors associated with the company's ability to refinance its maturing debt. To begin with, its subsection entitled "Our substantial indebtedness could adversely affect our financial health and operating flexibility" acknowledged General Growth's "substantial amount of indebtedness" and explained that one of the potential consequences of that indebtedness was "[l]imiting our ability or increasing the costs to refinance indebtedness."
Furthermore, the Form 10-K subsection entitled "We may not be able to obtain capital to refinance debt or make investments, or obtain such capital on favorable or acceptable terms" stated (emphasis added):
[W]e are primarily dependent on external financing to fund our business. Our access to debt or equity financing depends on investors' willingness to lend to or invest in us and on conditions in the capital markets in general. The willingness to lend to or invest in us is in turn effected [sic] by a number of factors, including our current level of indebtedness and limitations on our ability to service debt.
In addition, we and other companies in the real estate industry have experienced less favorable terms for bank loans and capital markets financing from time to time. Beginning in the third quarter of 2007, significant market deterioration which originated in the sub-prime residential mortgage market began extending to the broader real estate credit markets, which has resulted in a tightening of lender standards and terms and increased concerns of an overall market recession in 2008. Given our substantial amount of indebtedness and the significant deterioration in the credit markets, there can be no assurance that we will be able to refinance our debt or obtain additional financing on satisfactory terms. In addition, our ability to refinance our debt on acceptable terms will likely be constrained further by any future increases in our aggregate amount of outstanding debt. However, we intend to fund future development costs at least in part through receipt of excess proceeds from refinancing activities, which will increase our outstanding debt. Further, if market conditions or other factors lead our lenders to perceive an increased relative risk of our defaulting on a particular loan or loans, such lenders may seek to hedge against such risk which could negatively effect [sic] the price of our stock and decrease our ability to obtain certain types of financing.
Similar statements warning that there was no assurance that General Growth could obtain refinancing on satisfactory terms were repeated elsewhere in the document.
Later the April 29, 2008 Press Release (one of the documents that Plaintiffs allege contained actionable misstatements) referred readers to that Form 10-K, where important risk factors had been identified that could cause results to differ materially from the forward-looking statements made in the release. Then during an April 30, 2008 Earnings Conference Call, General Growth's Director of Investor Relations Tim Goebel began the call by noting that it would include forward-looking statements and explained that "[a]ctual results may differ materially from the future operations suggested by these forward-looking statements due to various risks and uncertainties." While that statement may not have been as specific as the Form 10-K, Goebel specifically incorporated the cautionary statements contained in General Growth's most recent SEC filings by stating, "Please consult documents General Growth Properties, Inc. has filed with the SEC, specifically the most recent Forms 10-K and 10-Q for a detailed discussion of these risks and uncertainties."
Next General Growth's May 8, 2008 Form 10-Q warned that "there can be no assurance that we can obtain such refinancing or additional capital on satisfactory terms." And later the August 8, 2008 Form 10-Q similarly warned that "[c]ontinued economic weakness, including in the retail, credit and housing markets, could further effect [sic] the Company's expected operating results and access to capital" and added:
In the event that we are unable to refinance our debt on a timely basis and on acceptable terms, we will be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including additional asset or equity sales, further deferring or curtailing of planned expenditures, or considering less attractive sources of capital for refinancing.
Most of the statements identified in the Complaint as false and misleading expressly incorporated at least one of those cautionary statements by reference. And even where some statement did not do so expressly, those cautionary statements were publicly available at the time the statement was made. Although Plaintiffs contend unpersuasively that General Growth's cautionary statements were mere boilerplate that failed to give rise to the safe harbor protection, those statements (1) were really substantive rather than pro forma and (2) identified the principal contingencies that thereafter led to the sharp decline in General Growth's stock price.
While prescience is not required under the PSLRA's safe harbor provision, General Growth's cautionary statements were in fact entirely anticipatory of Plaintiffs' claims. General Growth identified the exact risks that have been identified in Plaintiffs' Complaint--those posed by General Growth's potential inability to refinance its maturing debt. To call those statements "boilerplate" borders on the farcical. So to the extent that this opinion hereafter finds that the statements alleged to be false and misleading were forward-looking, those statements were--with a single exception discussed later--accompanied by meaningful precautionary language that suffices to invoke the safe harbor provisions of the PSLRA barring liability.
Plaintiffs also complain that General Growth's cautionary statements did not change over time to reflect the specific problems it was having obtaining financing. To determine whether cautionary language is "meaningful," Asher, 377 F.3d at 734-35--the only case Plaintiffs cite for that argument--has indeed said that it may be relevant in certain cases for courts to investigate whether the cautionary language changed over time. But Asher does not establish a bright-line rule that would eliminate safe harbor protection for a company that clearly discloses the important risk factors but does not later update its investors in real time about its various successes and failures in seeking refinancing for its debt.*fn7 Indeed Asher, id. makes clear:
The statute calls for issuers to reveal the "important factors" [that could cause actual results to differ materially from those in the forward-looking statement] but not to attach probabilities to each potential bad outcome, or to reveal in detail what could go wrong; as we have said, that level of detail might hurt investors (by helping rivals) even as it improved the accuracy of stock prices.
That limitation, however, has its own limits. As the later discussion reflects, the so-called "Metz Declaration" has confirmed that by September 15, 2008 the real estate financing well had really run dry in terms of the type and scope of refinancing that was essential to General Growth's viability. At that point, then, it could be found that what had earlier qualified as meaningful cautionary statements were no longer truly meaningful (see Tellabs I, 437 F.3d at 599-600, citing Asher),*fn8 and that would effectively eliminate the Section 5(c)(1)(A)(i) shelter for post-September-15 knowingly false forward-looking statements.
Because the cautionary statements did identify the important risk factors--those indicating that General Growth may not have been able to refinance its debt--all of its forward-looking statements except those referred to in the preceding paragraph were accompanied by meaningful cautionary language and are thus protected by the PSLRA's safe harbor. So the next step in the analysis is to evaluate whether the allegedly false or misleading statements were or were not forward-looking--and thus were or were not protected.
2. Which Statements Are Sheltered by the Safe Harbor?
Under the PSLRA a forward-looking statement is defined to include (Section 5(i)(1)(A) to (C)):
(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, ...