In re: Omnicom Group, Inc. Securities Litigation, No. 08-0612 (2d Cir. 2010)

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08-0612-cv In re: Omnicom Group, Inc. Securities Litigation 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2008 4 (Argued: May 5, 2009 5 6 Decided: March 9, 2010) Docket No. 08-0612-cv - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 IN RE: OMNICOM GROUP, INC. SECURITIES LITIGATION 33 the Southern District of New York (William H. Pauley III, Judge) 34 granting defendants motion for summary judgment. 35 court held that defendants were entitled to summary judgment on 36 plaintiffs claims under Section 10(b) of the Securities Exchange 37 Act of 1934 and Rule 10b-5 because plaintiffs failed to show loss NEW ORLEANS EMPLOYEES RETIREMENT SYSTEM, Plaintiff-Appellant, PHILIP SZANTO, DR. JOSEPH S. FISHER, M.D. PROFIT SHARING PLAN, on behalf of itself and all others similarly situated, DIANEE GLYNN, on behalf of herself and all others similarly situated, RICHARD LEHAN, PETER PETER KIM , EDWARD KAIMINSKI, SUSAN BLACK, MATT BRODY, AMY HOFFMAN, ROBERT E. GARREN, and ALAN MIRKEN, Consolidated-Plaintiffs, v. OMNICOM GROUP, INC., JOHN WREN and RANDALL J. WEISENBURGER, BRUCE CRAWFORD and PHILIP J. ANGELASTRO, Consolidated-Defendants-Appellees. - - - - - - - - - - - - - - - - - - - - - - - - - - - - B e f o r e: FEINBERG, WINTER, and CABRANES, Circuit Judges. Appeal from an order of the United States District Court for 1 The district 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 causation. We affirm. JOHN P. COFFEY, Bernstein Litowitz Berger & Grossmann LLP, New York, New York, for Plaintiff-Appellant and the Certified Class. PETER A. WALD (Jeff G. Hammel, Latham & Watkins LLP, New York, New York; Janey Mallow Link, Latham & Watkins LLP, Chicago, Illinois, of counsel; Abid R. Qureshi, Latham & Watkins LLP, Washington, D.C., of counsel, on the brief) Latham & Watkins LLP, New York, New York, for Defendants-Appellees. WINTER, Circuit Judge: The New Orleans Employees Retirement System, the lead 21 plaintiff in this class action, appeals from Judge Pauley s grant 22 of summary judgment dismissing its complaint alleging securities 23 fraud in violation of Section 10(b), 15 U.S.C. § 78j(b), against 24 Omnicom Group, Inc. and its managers. 25 that appellant proffered no evidence sufficient to support a 26 finding of loss causation. 27 The district court held For the reasons set forth below, we affirm. 28 BACKGROUND 29 Given the procedural posture of this matter, an appeal from 30 a grant of summary judgment dismissing a complaint, we construe 31 the evidence in the light most favorable to the plaintiff, 32 drawing all reasonable inferences and resolving all ambiguities 33 in [its] favor. 34 F.3d 214, 217 (2d Cir. 2006). 35 a) The Seneca Transaction Colavito v. N.Y. Organ Donor Network, Inc., 438 2 1 Omnicom is a large global marketing and advertising holding 2 company. 3 Communicade, to invest in internet marketing and advertising 4 companies. 5 in 2000. 6 than-temporary impairment[s], and thus non-reportable, a 7 position that was reviewed without exception by Arthur Andersen. 8 Around 1996, Omnicom began using its subsidiary, The value of the internet companies began to decline Omnicom determined that these losses were not other- During the first quarter of 2001, Omnicom entered into a 9 transaction with Pegasus Partners II, L.P., a Delaware private 10 equity firm, that created a new company, Seneca, owned by both 11 Omnicom and Pegasus. 12 stated that the objective of the Seneca transaction was to 13 maximize consolidation and other strategic opportunities among 14 companies in the currently depressed e-services consulting and 15 professional services marketplace. 16 involved Omnicom s transfer to Seneca of $47.5 million in cash 17 and its Communicade subsidiary, whose sole assets were the 18 internet companies, and Pegasus s promise to transfer a total of 19 $25 million in cash, $12.5 million up front and $12.5 million 20 when Seneca requested it. 21 Seneca s non-voting preferred stock, while Pegasus received all 22 of Seneca s common stock. 23 no gain or loss from this transaction because it was exchanging 24 the internet companies, purported to be worth $277.5 million, and 25 $47.5 million in cash for preferred stock of equivalent value. 26 Appellant alleges that the accounting for the Seneca In a press release, Omnicom and Pegasus The Seneca transaction Omnicom received $325 million in Omnicom reported that it would incur 3 1 transaction was fraudulent, a claim we assume to be true, albeit 2 one that is disputed. 3 viewed Pegasus s willingness to invest $25 million in Seneca as 4 support for Omnicom s valuation of the internet companies at 5 $277.5 million, there is evidence that, despite the 6 representations that Pegasus would immediately transfer $12.5 7 million to Seneca, it instead transferred only $100 to Seneca, 8 while transferring the $12.5 million to a Pegasus holding 9 company. While Omnicom s auditors, it is claimed, Appellant argues that this fact, which was not 10 disclosed to the market in any of the news articles that 11 appellant relies on, raises doubts about Omnicom s valuation of 12 the assets transferred to Seneca. 13 Appellant also claims that Omnicom misrepresented the value 14 of its Seneca stock to its auditors at the end of 2001. To 15 conceal the decline in the value of Seneca s assets, Omnicom is 16 said to have arranged for Seneca, rather than Omnicom, to buy a 17 technology license from Live Technology Holdings, Inc., one of 18 Seneca s investee companies. Seneca would then sell the license 19 to Omnicom for $75 million. The $75 million would nearly offset 20 Seneca s yearly losses. 21 b) Publicly Available Information About the Seneca Transaction 22 Several news articles at or near the time reported the 23 Seneca transaction and suggested that it was an attempt to move 24 the internet companies, whose value was deteriorating, off 4 1 Omnicom s books.1 2 into 2002.2 3 statistically significant drop in value at or near the time of 4 these news reports. 5 Indeed, observers expressed these views well However, Omnicom s stock never experienced any On June 5, 2002, Omnicom filed a Form 8-K disclosing that 6 Robert Callander, an outside director and Chair of Omnicom s 7 Audit Committee, had resigned from its board of directors on May 8 22, 2002. 9 Callander s resignation, appellant argues that it was because of Although the Form 8-K did not disclose the reason for 10 Callander s concern over the accounting of the Seneca 11 transaction. 12 review of the Seneca transaction by a separate accounting firm, 13 his handwritten notes on a copy of Omnicom s 2001 Form 10-K, his 14 request for Seneca s financial statements, questions he asked Appellant relies on Callander s request for a 1 On May 7, 2001, Advertising Age published an article stating that the Seneca transaction was seen by some as a way for Omnicom to get struggling stocks off of its books. Debra Aho Williamson, The Fairy Tale Ends; Interactive 100 Stumbles After Dot-Com Business Blows Away, Advertising Age, May 7, 2001, at S1. InternetNews.com featured an article about the Seneca transaction on June 26, 2001, in which it stated that [t]he merger comes out of a complicated effort by ad agency group Omnicom to lessen its losses in the interactive sector, by sharing its stakes in Agency.com and other I-shops with a private equity firm, Pegasus Partners. Christopher Saunders, Seneca to Absorb Agency.com, InternetNews.com, June 26, 2001. Later, on September 17, 2001, an article in Fortune stated that [Omnicom s CEO John] Wren is just cleaning up the mess from his last big foray into untapped market terrain: the Internet, and that Wren is now getting all the Net assets off Omnicom s books by shoveling them into a private holding company called Seneca. Patricia Sellers, Rocking Through the Ad Recession: Omnicom Is Defying the Madison Avenue Slump Thanks to Its CEO s Aggressive, Contrarian Strategy, Fortune, Sept. 17, 2001, at 145. 2 In May 2002, New Media Agencies reported that if Omnicom hadn t entered into the Seneca transaction, it might have faced the prospect of having to accept sizeable write-offs in the value of its [internet] investments and, in the case of Agency.com, it would have had to deduct its share of the increasing losses from the profit that Omnicom would hope to report for 2001. How Omnicom Detached its Internet Ventures But Still Kept its Options Open, New Media Agencies Financial Intelligence, May 2002, at 2-1. 5 1 during audit committee meetings, and his request for advice 2 regarding his responsibilities from a Columbia Business School 3 professor. 4 resigned the same day that the board rejected his suggestion that 5 the audit committee review Omnicom s proposal to reacquire two of 6 the internet companies recently transferred to Seneca. 7 Appellant also relies on the fact that Callander On June 6, 2002, Omnicom s stock price declined as rumors 8 circulated that The Wall Street Journal would be publishing a 9 negative article about accounting issues at Omnicom. That same 10 day, Salomon Smith Barney issued a report noting an article 11 circulated on Briefing.com which speculated that The Wall Street 12 Journal was set to break a potentially negative story about 13 accounting issues at Omnicom. 14 report also expressed the belief that Callander resigned because 15 his relationship with other board members had become 16 increasingly strained and counter-productive, noting that [h]ad 17 Mr. Callander complained about or disagreed with something in 18 particular, Omnicom would have had to disclose it. 19 next day, June 7, 2002, UBS Warburg published a report stating 20 that [w]e believe that [Callander s] resignation has more to do 21 with fit than actual auditing improprieties, but note that the 22 director who headed the audit committee has given fuel to 23 concerns with auditing irregularity. 24 Joint App. at 1566. However, the Id. The Id. at 1570. On June 10, 2002, The Wall Street Journal published a short 25 article in which it stated that Callander quit the board after 26 expressing concerns about the creation of an entity that houses 6 1 Omnicom s Internet assets, and, in particular, his 2 unhapp[iness] with Omnicom management s limited disclosure to 3 the audit committee about the entity that holds many of Omnicom s 4 former Internet assets. 5 Leading the News: Omnicom Director Quits Due to Entity Concerns, 6 Wall St. J., June 10, 2002, at B4. 7 that Callander left due to some broader corporate governance 8 concerns, but quoted Omnicom s Chairman as reassuring investors 9 that there is no issue with Seneca. Vanessa O Connell & Jesse Eisinger, The article further suggested Id. 10 Late on June 11, 2002, the Financial Times published an 11 article describing Omnicom s investors post-Enron concerns 12 about disclosure. 13 Shares Wobble Amid Disclosure Fears, Fin. Times, June 11, 2002. 14 It acknowledged that there is no suggestion of impropriety, 15 still less any breaking of the rules, but noted that, 16 nonetheless, industry executives and analysts were still 17 concerned with Omnicom s methods of calculating organic growth. 18 Id. 19 the Seneca transaction, which the article stated had been 20 described as a clever ploy and very skillful financial 21 engineering, but the article stated that there is no suggestion 22 of impropriety or rule-breaking. Richard Tomkins & Christopher Grimes, Omnicom The article also stated that investors were concerned with Id. 23 On June 12, 2002, The Wall Street Journal published the 24 rumored article on Omnicom that discussed Callander s resignation 25 and the Seneca transaction. 26 Unadvertised Deals: At an Ad Giant, Nimble Financing Fuels Rapid Vanessa O Connell & Jesse Eisinger, 7 1 Growth -- But Omnicom s Web Stakes Spark Board Controversy; A 2 Question of Disclosure -- The Impact of Acquisitions, Wall St. 3 J., June 12, 2002, at A1. 4 resigned amid questions about how the company handled a series 5 of soured Internet investments, that [h]e questioned whether 6 something wasn t being disclosed to the board about the initial 7 off-loading of the problematic investments and the proposal to 8 buy two Internet firms, that he had voiced doubts about 9 Seneca s purpose for months, and that he had concerns that 10 management had engaged in transactions without running it 11 through the board. 12 further discussing the Seneca transaction, the article stated 13 that it allowed the company to avoid the possibility of writing 14 down the value of its investments in some of the online firms. 15 Id. 16 because instead of just walking away from these [Internet 17 investments] and taking a write-off, we said we believe that 18 Pegasus, through Seneca, could restructure the assets and make 19 them valuable again. 20 (alteration in original). The article stated that Callander had Id. (internal quotation marks omitted). In It quoted Omnicom s CEO as saying that Seneca was smart Id. (internal quotation marks omitted) 21 The article also quoted Omnicom s general counsel, who 22 stated that he had told Callander that the board had not approved 23 Seneca. 24 unnamed venture wasn t called Seneca then, so the word hadn t 25 shown up in automated searches of board minutes, even though the 26 transaction had been approved. Id. This information was mistaken because the still- Id. (internal quotation marks 8 1 omitted). 2 statements by two accounting professors, one who thought that 3 Seneca raises a red flag, and one who said, [y]ou really have 4 to wonder where this fair value is coming from in this 5 environment, in this area. 6 omitted). 7 Furthermore, the June 12 article referred to Id. (internal quotation marks The June 12 article also raised questions about Omnicom s 8 general accounting practices. For example, the article stated 9 that [i]n the wake of the collapse of Enron Corp., investors are 10 demanding clearer and simpler financial statements from big 11 companies, putting particular pressure on serial acquirers with 12 tangled webs of deals. 13 aggressive means than its competitors to calculate the critical 14 statistic of how much of its growth it generates from existing 15 operations. 16 over Seneca [between Callander and management] signals new 17 concern about the financial side of the Omnicom juggernaut. 18 In addition, it suggested that Omnicom may have a cash flow 19 problem because if cash spent on acquisitions is subtracted, the 20 company has a negative cash flow, further noting that Omnicom 21 has sharply increased its borrowing lately. 22 June 12 article discussed Omnicom s use of earn-out payments in 23 its deal structures, stating that [w]ith such a high volume of 24 acquisitions, Omnicom s obligations to make future earn-out 25 payments amount to a substantial potential liability . . . . Id. Id. It noted that Omnicom uses a more The article also claimed that [t]he clash 9 Id. Id. Finally, the 1 [that Omnicom does not] carry . . . on its balance sheet. 2 Id. Later that day, Omnicom held a telephone conference to 3 reassure investors. 4 that there was no dissent among the board members, but 5 acknowledged that Mr. Callander s reasons [for resigning from 6 the board] were presented accurately as in The Journal this 7 morning. 8 9 During the conference, Omnicom s CEO stated A number of articles and analyst reports also responded to the June 12 article, some of which suggested that the article 10 raised questions about Omnicom s accounting practices. 11 example, a Reuters article that day stated that Omnicom was 12 forced to play defense on Wednesday amid questions about its 13 accounting, and suggested that Omnicom s management s 14 credibility was harmed by the June 12 article. 15 UPDATE 1-Omnicom Defends Accounting as Stock Plunges, Reuters, 16 June 12, 2002. 17 said Callander s resignation was the result of a 18 misunderstanding: that he was told, erroneously, that the board 19 had not approved the creation of Seneca when it [sic] fact it 20 had. 21 that Omnicom scrambled yesterday to repair damage caused by a 22 newspaper article critical of its accounting practices. Stuart 23 Elliott, Omnicom Shares Tumble 20%, N.Y. Times, June 13, 2002, at 24 C11. 25 13, 2002, stated that [i]nvestors concerns focus on whether or Id. For Adam Pasick, Nonetheless, the article also noted that Omnicom A New York Times article on June 13 also suggested Similarly, an analyst report from Lehman Brothers on June 10 1 not the assets should have been written down either at the time 2 of the transaction or at the end of last year, yet it noted that 3 yesterday s Wall Street Journal article did not bring up any 4 substantial new issues. 5 stated that [t]he questions now being asked are about whether 6 the [Seneca] deal was entirely at arm s length, whether it was 7 adequately disclosed and whether there might still be some 8 lingering potential liabilities that might come back to haunt 9 Omnicom in the future. 10 11 On June 21, 2002, a Campaign article Bob Willott, Omnicom Could Stand Test of WSJ Allegations, Campaign, June 21, 2002. However, some analyst reports and news articles also 12 indicated that the June 12 article did not raise any new factual 13 issues and suggested that the market s negative reaction was due 14 to the article s negative tone and innuendo in the post-Enron 15 market. 16 Good News: No New News in WSJ Article, June 12, 2002; Richard 17 Morgan, Hatchet Job, TheDeal.com, June 14, 2002; Bear Stearns, 18 Omnicom Group (OMC-62.30) - Buy: Follow Up On WSJ Article, June 19 13, 2002; SalomonSmithBarney, Omnicom Group Inc. (OMC): Comments 20 on Management Meeting, June 13, 2002; SalomonSmithBarney, Omnicom 21 Group Inc. (OMC): Comments on WSJ Article, June 12, 2002; Richard 22 Tomkins, Omnicom Slides on S&P s Move to Cut Outlook, Fin. Times, 23 June 13, 2002; UBS Warburg, Global Equity Research: Omnicom Group 24 (OMC), June 13, 2002. 25 See, e.g., Merrill Lynch, FlashNote, Omnicom Group Inc.: In the two days following the June 12 article, Omnicom s 11 1 stock dropped over twenty-five percent relative to trading prices 2 and activity in the market and the industry. 3 Omnicom announced that its new auditor, KPMG, reviewed the 4 accounting for the Seneca transaction and had not recommended any 5 changes, Omnicom s stock increased substantially relative to the 6 industry and the market. 7 c) The Present Action 8 9 However, after On June 13, 2002, as Omnicom s closing price fell, appellant and other plaintiffs filed this action. On May 19, 2003, 10 appellant filed an amended complaint, which appellees moved to 11 dismiss. 12 dismissing claims involving Omnicom s organic growth calculations 13 and its earn-out and put-out liabilities, but denied the motion 14 with regard to the Seneca transaction. 15 The district court granted appellees motion in part, The complaint made three allegations of fraud concerning the 16 Seneca transaction. First, it alleged that Omnicom should have 17 written down the value of the internet companies before engaging 18 in the Seneca transaction. 19 accounting of the Seneca transaction was fraudulent because 20 Omnicom failed to appropriately value the internet companies. 21 Third, it alleged that Omnicom should have accounted for Seneca s 22 losses after the Seneca transaction occurred because Omnicom 23 controlled Seneca. 24 loss in value of the internet companies and the failure to 25 reflect that loss on Omnicom s books. Second, it alleged that the Each allegation, therefore, focused on the 12 1 The class action complaint invoked the rebutable presumption 2 of shareholder reliance established in Basic, Inc. v. Levinson, 3 485 U.S. 224, 241-42 (1988). 4 actively traded company and that the market for its shares 5 promptly reflected public information about the company. 6 It alleged that Omnicom was an In July 2005, appellant moved to certify a class consisting 7 of all persons and entities who purchased or otherwise acquired 8 the securities of Omnicom from February 20, 2001 through June 11, 9 2002 and who were damaged thereby. 10 Appellant s Br. at 24. The district court certified the class on April 30, 2007. 11 After extensive discovery and in response to appellees 12 motion for summary judgment, appellant proffered, inter alia, a 13 report of its expert witness, Dr. Scott D. Hakala. 14 prepared an event study analysis and was prepared to testify that 15 the investing public s initial reactions to the partially 16 corrective disclosures in June 2002 were tied to the news of 17 Omnicom s inappropriate accounting for investments in Internet- 18 related entities and not to other news during that time period. 19 Joint App. at 1221. 20 feared that Omnicom s transfers of its Internet investments 21 created the potential for losses and hidden liabilities and/or 22 had allowed Omnicom to hide losses in the past. 23 803. 24 25 26 27 Dr. Hakala He claimed that [i]nvestors legitimately Joint App. at Dr. Hakala also stated that: [T]he declines from June 5 to June 13, 2002, would not have occurred on those dates had Defendants not previously engaged in the fraudulent scheme alleged by Plaintiffs. The 13 1 2 3 4 5 6 information revealed in that time period constituted a partial revelation of information about this scheme. Id. at 793-94 (internal citation omitted). On January 29, 2008, the district court granted appellees 7 motion for summary judgment. 8 Litig., 541 F. Supp. 2d 546 (S.D.N.Y. 2008). 9 in a thorough and well-reasoned opinion, held that appellant had 10 failed to proffer sufficient evidence that the fraud alleged -- 11 the Seneca transaction -- caused the drop in stock price that 12 damaged the class. 15 The district court, We agree. 13 14 See In re Omnicom Group, Inc. Sec. DISCUSSION a) Standard of Review We review the grant of summary judgment de novo. Lawrence 16 v. Cohn, 325 F.3d 141, 147 (2d Cir. 2003). Summary judgment is 17 only appropriate if the record shows that there is no genuine 18 issue as to any material fact and that the movant is entitled to 19 judgment as a matter of law. 20 Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). 21 of fact is genuine if the evidence is such that a reasonable 22 jury could return a verdict for the nonmoving party. 23 v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 24 the record, we constru[e] the evidence in the light most 25 favorable to the nonmoving party and draw[] all inferences and 26 resolv[e] all ambiguities in favor of the nonmoving party. 27 v. Sheet Metal Workers Int l Ass n, 498 F.3d 152, 155 (2d Cir. Fed. R. Civ. P. 56(c); see also 14 An issue Anderson In looking at Doro 1 2007). Nonetheless, summary judgment is appropriate where a 2 defendant: 3 4 5 6 7 8 9 10 11 12 13 Burke v. Jacoby, 981 F.2d 1372, 1379 (2d Cir. 1992); see also 14 Anderson, 477 U.S. at 248-49. 15 b) The Section 10(b) Claims 16 has moved for summary judgment on the ground that undisputed facts reveal that the plaintiff cannot establish an essential element of the claim, on which element the plaintiff has the burden of proof, and the plaintiff has failed to come forth with evidence sufficient to permit a reasonable juror to return a verdict in his or her favor on that element . . . . To sustain a claim under Section 10(b), appellant must show 17 (i) a material misrepresentation or omission; (ii) scienter; 18 (iii) a connection with the purchase or sale of a security[;] 19 (iv) reliance by the plaintiff(s); (v) economic loss; and (vi) 20 loss causation. 21 42 (2005). 22 ground that appellant failed to proffer sufficient evidence to 23 show loss causation. 24 Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341- The district court granted summary judgment on the Use of the term loss causation is occasionally confusing 25 because it is often used to refer to three overlapping but 26 somewhat different concepts. 27 the particular plaintiff or plaintiff class relied upon -- or is 28 refutably presumed to have relied upon -- the misrepresentation. 29 ATSI Commc ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d It may be used to refer to whether 15 1 Cir. 2007). 2 causation to refer to this element. 3 544 U.S. at 341-42; Emergent Capital Inv. Mgmt., LLC v. Stonepath 4 Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) ( Like reliance, 5 transaction causation refers to the causal link between the 6 defendant s misconduct and the plaintiff s decision to buy or 7 sell securities. ). 8 9 Generally, however, courts use the term transaction See, e.g., Dura Pharms., Loss causation may also refer to the requirement that the wrong for which the action was brought is a but-for cause or 10 cause-in-fact of the losses suffered, also a requirement for an 11 actionable Section 10(b) claim. 12 see also 15 U.S.C. § 78u-4(b)(4) ( In any private action arising 13 under this chapter, the plaintiff shall have the burden of 14 proving that the act or omission of the defendant alleged to 15 violate this chapter caused the loss for which the plaintiff 16 seeks to recover damages. ). 17 sufficient connection between [the fraudulent conduct] and the 18 losses suffered . . . . 19 F.3d 147, 157 (2d Cir. 2007).3 3 Dura Pharms., 544 U.S. at 342; In short, plaintiffs must show a Lattanzio v. Deloitte & Touche LLP, 476 This requirement exists because Appellant argues that: It is not Lead Plaintiff s burden, on this motion, to show that the entire relative price drop in June 2002 was due to the fraud. Rather, summary judgment may be granted only if Defendants can prove as a matter of undisputed fact that none of the price drop could have resulted from the fraud. Appellant s Br. at 42 (emphasis omitted). In doing so, it misstates the parties burdens on summary judgment. Although a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying [the evidence] which it 16 1 private securities fraud actions are available, not to provide 2 investors with broad insurance against market losses, but to 3 protect them against those economic losses that 4 misrepresentations actually cause. 5 345. 6 Dura Pharms., 544 U.S. at A third concept sometimes referred to as loss causation 7 relates to the question whether events that are a cause-in-fact 8 of investor losses fall within the class of events from which 9 Section 10(b) was intended to protect the particular plaintiffs 10 and which the securities laws were intended to prevent. 11 issue, one of proximate cause, was the subject of extended (to 12 say the least) discussion in three opinions in AUSA Life Ins. Co. 13 v. Ernst & Young, 206 F.3d 202 (2d Cir. 2000). 14 adopted the zone of risk test outlined in the dissenting 15 opinion in AUSA. 16 161, 172-75 (citing AUSA, 206 F.3d at 235, 238 (Winter, J., 17 dissenting)). 18 19 This Subsequently, we See Lentell v. Merrill Lynch & Co., 396 F.3d To one degree or another, all three of these overlapping but somewhat differing issues are involved in the present matter. 20 With regard to reliance, appellant s complaint invokes the 21 presumption of reliance based on the fraud-on-the-market theory believes demonstrate the absence of a genuine issue of material fact, this does not relieve appellant of its burden of making a showing sufficient to establish the existence of an element essential to [appellant s] case, and on which [appellant] will bear the burden of proof at trial. Celotex, 477 U.S. at 322. As a result, summary judgment is appropriate if appellant cannot show that at least some of the price drop was due to the fraud. 17 1 adopted in Basic. 485 U.S. at 241-42 (reliance of investors on 2 misrepresentations is presumed where market for securities is 3 open and developed). 4 Omnicom in a highly efficient and automated market, Omnicom s 5 provision of information to the public through SEC filings and 6 other means of disclosure, and scrutiny of available information 7 by professional analysts who themselves communicate with the 8 public. 9 result . . . the market for Omnicom s securities promptly The complaint alleges active trading by Joint App. at 152. It further alleges that [a]s a 10 digested current information regarding Omnicom from all publicly 11 available sources and reflected such information in Omnicom s 12 stock price. 13 Id. at 153. Having sought to establish investor reliance by the fraud- 14 on-the-market theory, appellant faces a difficult task. 15 fraud alleged -- the Seneca transaction and failure to write down 16 the value of the internet companies -- was the subject of 17 continuing media reports beginning in May 2001. 18 1 & 2. 19 damages claim, occurred in June 2002. 20 concede that the numerous public reports on the Seneca 21 transaction were promptly digested by the market and reflected 22 . . . in Omnicom s stock price in 2001 while seeking to recover 23 for a stock price decline a year later in 2002. 24 25 The See supra notes The stock price decline, which is the basis for the In short, appellant must Appellant seeks to do so through two means: first, by claiming the existence of cause-in-fact on the ground that the 18 1 market reacted negatively to a corrective disclosure of the 2 fraud, Lentell, 396 F.3d at 175; and, second, by arguing the 3 existence of proximate cause on the ground that negative investor 4 inferences drawn from Callander s resignation and from the news 5 stories in June 2002 caused the loss and were a foreseeable 6 materialization of the risk concealed by the fraudulent 7 statement. 8 396 F.3d at 173). 9 suffice to show loss causation. ATSI, 493 F.3d at 107 (2d Cir. 2007) (citing Lentell, Establishing either theory as applicable would 10 1) Corrective Disclosure 11 A fraud regarding a company s financial condition in May 12 2001, if concealed, may cause investors losses in June 2002 when 13 disclosure of the fraud is made and the available public 14 information regarding the company s financial condition is 15 corrected. 16 loss causation can be established by a corrective disclosure to 17 the market that reveal[s] . . . the falsity of prior 18 recommendations ). 19 to the market in June 2002, particularly by the June 12 article, 20 constituted a partial corrective disclosure of the fraud and that 21 the disclosure caused the market to respond negatively. 22 See Lentell, 396 F.3d at 175 n.4 (acknowledging that Appellant argues that information disclosed To reiterate, the June 12 article reported that Callander, a 23 director and Chair of Omnicom s Audit Committee, had resigned 24 amid questions he had raised for months regarding the purpose of 25 the Seneca transaction. Callander was also reported to have 19 1 questioned whether the board had received full information about 2 the initial Seneca transaction and about the new proposal to buy 3 back two of the internet companies. 4 concerns, including those of accounting professors, about 5 Omnicom s aggressive accounting strategy and about Omnicom s cash 6 flow and increased borrowing. 7 judgment, appellant offered the expert testimony of Dr. Hakala 8 regarding causation issues. 9 The article also noted In opposing the motion for summary However, none of these matters even purported to reveal some 10 then-undisclosed fact with regard to the specific 11 misrepresentations alleged in the complaint concerning the Seneca 12 transaction. 13 574 F.3d 29, 40-41 (2d Cir. 2009) (holding that plaintiffs 14 evidence of news events and the expert s event study did not 15 provide sufficient evidence of causation). 16 transaction as an accounting method to remove losses from 17 Omnicom s books was known to the market a year before Callander s 18 resignation. 19 that regard in these articles. 20 See In re Flag Telecom Holdings, Ltd. Sec. Litig., See supra notes 1 & 2. The use of the Seneca There was no ambiguity in All that the June 12 article stated was that Callander s 21 resignation was due to general concerns over an aggressive 22 accounting strategy, including perhaps Omnicom s year-old failure 23 to write-down the value of the internet companies, and other 24 matters concerning governance, in particular management s keeping 25 the board informed. At best, from appellant s viewpoint, it has 20 1 shown that the market may have reacted as it did because of 2 concerns that Callander s resignation and the negative tone of 3 the June 12 article implied accounting or other problems in 4 addition to the known Seneca transaction. 5 Appellant also relies on comments in the June 12 article by 6 the two accounting professors to support a nexus between the 7 fraud alleged and the June 2002 decline in share price. 8 argue that a reasonable jury could conclude that the professor 9 found Omnicom s accounting suspicious in light of Callander s They 10 resignation and Omnicom s decision to unwind Seneca, which were 11 newly disclosed facts. 12 conclusory suspicions of the accounting professors and the 13 unwinding of the Seneca transaction added nothing to the public s 14 knowledge that the Seneca transaction was designed to remove 15 losses from Omnicom s books.4 16 Appellant s Br. at 55. However, the What appellant has shown is a negative characterization of 17 already-public information. See Teacher s Ret. Sys. of La. v. 18 Hunter, 477 F.3d 162, 187-88 (4th Cir. 2007) (negative 19 characterization of previously known information cannot 20 constitute a corrective disclosure); In re Merck & Co. Sec. 21 Litig., 432 F.3d 261, 269-70 (3d Cir. 2005) (same). A negative 4 Appellant also relies on the fact that Omnicom s stock price recovered after Omnicom announced that KPMG had reviewed its accounting of the Seneca transaction and did not recommend any changes. Appellant s Br. at 52-53. However, KPMG s conclusion that there was no fraud in the Seneca transaction hardly supports a finding that fraud in the Seneca transaction caused a loss. 21 1 journalistic characterization of previously disclosed facts does 2 not constitute a corrective disclosure of anything but the 3 journalists opinions. 4 article suggested that the avoidance of the write-down was 5 improper. 6 After all, no hard fact in the June 12 Dr. Hakala s study does not alter our conclusion. It is 7 true that [w]here, as here, there are conflicting expert reports 8 presented, courts are wary of granting summary judgment. 9 v. Provident Life & Accident Ins. Co., 310 F.3d 73, 79 (2d Cir. Harris 10 2002) (internal quotation marks omitted). 11 judgment is not per se precluded because there are conflicting 12 experts. 13 ( As we read the opinion, [the district court] concluded that the 14 [expert s] report was probative of no material fact, from which 15 we deduce that it was, in [the district court s] view, irrelevant 16 and inadmissible. 17 evidentiary in character . . . . ) (citations omitted). 18 the reports must be construed in the non-moving party s favor, 19 if the admissible evidence is insufficient to permit a rational 20 juror to find in favor of the plaintiff, the court remains free 21 to direct a verdict or grant summary judgment for defendant. 22 Amorgianos v. Nat l R.R. Passenger Corp., 303 F.3d 256, 267 (2d 23 Cir. 2002); see also Raskin, 125 F.3d at 66 ( [A]n expert s 24 report is not a talisman against summary judgment. ). 25 However, summary See Raskin v. Wyatt Co., 125 F.3d 55, 65 (2d Cir. 1997) We therefore can review this ruling as Although Summary judgment is appropriate here because Dr. Hakala s 22 1 testimony does not suffice to draw the requisite causal 2 connection between the information in the June 12 article and the 3 fraud alleged in the complaint. 4 the decline in the value of [the company s] stock to various 5 events. His event study merely links Flag Telecom, 574 F.3d at 41. 6 If Dr. Hakala is opining that Omnicom s stock dropped 7 because investors first became aware in June 2002 of the fraud 8 alleged in the complaint, that opinion is, as a matter of law, 9 unsustainable on this record. It runs squarely into the 10 undisputed fact that the internet company losses and the failure 11 to write them down was known in May 2001 and into appellant s 12 allegation that the market for Omnicom s securities at all times 13 promptly digested and reflected in its share price all public 14 information.5 15 because the fraud in May 2001 caused the negative press of June 16 2002 attending Callander s resignation, then his testimony is 17 irrelevant because these events were not proximately caused by 18 the fraud alleged, for reasons discussed immediately below. If he is opining that Omnicom s stock dropped 5 The Appellant is mistaken to compare this to our cases in Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001), Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000), and Mfrs. Hanover Trust v. Drysdale Sec. Corp., 801 F.2d 13 (2d Cir. 1986). Those cases are factually distinguishable because in each case the plaintiffs demonstrated a specific causal connection between the loss and the alleged fraud. See Suez Equity, 250 F.3d at 96-97 (facts omitted from executive s background report would have indicated executive s inability to run company and forecast company s eventual liquidity problems); Rothman, 220 F.3d at 87, 89, 95 (company s misleading accounting of royalty expenses caused later losses when market became aware that a massive write-down was imminent); Mfrs. Hanover, 801 F.2d at 16-17, 19, 21-22 (defendant accounting firm s misrepresentations as to company s solvency induced plaintiff to do business with the company which ultimately led to the plaintiff s loss). 23 1 remainder of his report establishes only that, as previously 2 noted, the June 12 article raised questions about potential 3 accounting concerns, including the Seneca transaction. 4 Because appellant failed to demonstrate any new information 5 in the June 12 article regarding Omnicom s alleged fraud, 6 appellant has failed to show a price decline due to a corrective 7 disclosure. 8 2) The Materialization of the Risk Theory 9 Appellant argues that, even if no new financial facts were 10 revealed in June 2002, Callander s resignation and the ensuing 11 negative media attention were foreseeable risks of the fraudulent 12 Seneca transaction and caused the temporary share price decline 13 in June 2002. 14 goes, due to the materialization of that risk. 15 The losses suffered by the class are, the argument As noted, plaintiffs can prove loss causation by showing 16 that the loss was foreseeable and caused by the materialization 17 of the risk concealed by the fraudulent statement. 18 F.3d at 107. 19 investment loss if the risk that caused the loss was within the 20 zone of risk concealed by the misrepresentations . . . . 21 Lentell, 396 F.3d at 173. 22 losses were publicly known, the matter concealed must be the 23 invalidity of Omnicom s accounting for those losses in the Seneca 24 transaction. ATSI, 493 A misrepresentation is the proximate cause of an Because Omnicom s internet company 24 1 The zone of risk is determined by the purposes of the 2 securities laws, i.e., to make sure that buyers of securities 3 get what they think they are getting. 4 Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984). 5 context, therefore, recovery is limited to only the foreseeable 6 losses for which the intent of the laws is served by recovery. 7 AUSA, 206 F.3d at 234 (Winter, J., dissenting). Chem. Bank v. Arthur In this 8 Fraud may lead to a director s resignation -- to escape 9 personal liability, if for no other reason, see, e.g., 15 U.S.C. 10 § 77k(b)(1) (providing exemption from civil liability for 11 director who resigns before effective date of fraudulent 12 registration statement) -- and to negative stories by the media. 13 In such circumstances, it is generally the facts underlying the 14 fraud and resignation that causes a compensable investor s loss. 15 In the present case, as noted, the facts were known a year before 16 the resignation, and the resignation did not add to the public 17 knowledge any new material fact about the Seneca transaction. 18 The essence of the claim is that Callander s resignation 19 concerned the Seneca transaction and that the resultant negative 20 publicity suggesting possible accounting malfeasance may lead to 21 recovery for a temporary drop in share price. 22 To be sure, the record shows that Callander was concerned 23 over general accounting practices and governance problems. 24 that regard, he was concerned about the Seneca transaction, but 25 he had also been mistakenly informed that the Board had never 25 In 1 approved it. On the present record, appellant has at best shown 2 that Callander s resignation and resulting negative press stirred 3 investors concerns that other unknown problems were lurking in 4 Omnicom s past. 5 were ever told that improper accounting had in fact occurred with 6 regard to the Seneca transaction, either in the June 2002 stories 7 or later. Indeed, there is no allegation that investors 8 The generalized investor reaction of concern causing a 9 temporary share price decline in June 2002, is far too tenuously 10 connected -- indeed, by a metaphoric thread -- to the Seneca 11 transaction to support liability. 12 disclosure that is adequate to allow investors to make judgments 13 about a company s intrinsic value. 14 securities laws to speculate about distant, ambiguous, and 15 perhaps idiosyncratic reactions by the press or even by 16 directors. 17 shareholders to potentially expansive liabilities for events 18 later alleged to be frauds, the facts of which were known to the 19 investing public at the time but did not affect share price, and 20 thus did no damage at that time to investors. 21 liability leading to such losses would undermine the very 22 investor confidence that the securities laws were intended to 23 support. 24 25 The securities laws require Firms are not required by the To hold otherwise would expose companies and their A rule of CONCLUSION Appellant has failed to raise a material issue of fact that 26 1 would support a finding of loss causation, and, as a result, the 2 district court properly granted defendants summary judgment 3 motion.6 For the foregoing reasons, we affirm. 4 5 6 7 8 6 Plaintiffs also rely on Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t. However, in order to establish control person liability, appellant must first establish a primary violation. See ATSI, 493 F.3d at 108. Because appellant fails to establish a primary violation, the district court properly granted defendants summary judgment motion on the Section 20(a) claims. 27

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