Corporate & Securities Law

By Jim Hamilton

Eight Days a Week is Not Enough to Show I Care Scienter

According to a 5th Circuit panel, statements and alleged omissions made by a company CEO prior to and during an issuer tender offer were not fraudulent. The CEO stated shortly before commencement of the offer that the company did not anticipate a dividend increase for nearly two years, but that the dividend policy remained "under review." Eight days after the end of the tender offer period, the company provided materials to its board proposing a change in dividend policy, recommending a 350 percent increase of the annual dividend on common stock and a 400 percent increase in the stock repurchase program.

Although the appellate court recognized that the dividend increase recommendation timing was "suspect," the panel concluded that the investors failed to provide facts sufficient to support a "cogent and compelling inference" that the statements were made intentionally or recklessly to mislead. "In fact," stated the court,"it is not clear that Appellees ever issued a materially misleading statement or omission of fact concerning the dividend policy. The close proximity of the dividend increase to the end of the tender offer, though it provides some support for an inference of scienter, is not sufficient, without more, to establish a strong inference of the requisite intent."

In the course of its Tellabs analysis, the appeals court stated that it could be inferred that the company "had not made a final decision concerning a change in the dividend policy during the tender offer period", and. accordingly, the officers "were thus truthfully stating that the policy was under review. This constitutes a plausible nonculpable explanation" of the defendants' actions, concluded the 5th Circuit. While recognizing that it was a "close question," the court held that the allegations raised "at most only a permissible inference of scienter."

Flaherty & Crumrine Preferred Income Fund Inc. v. TXU Corp.

Full post as published by Jim Hamilton's World of Securities Regulation on May 05, 2009 (boomark / email).