12-1776-cv
Boca Raton Firefighters & Police Pension Fund v. Bahash



                                  UNITED STATES COURT OF APPEALS
                                     FOR THE SECOND CIRCUIT

                                          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. When 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
the 20th day of December, two thousand twelve.

PRESENT:

                    JOSÉ A. CABRANES,
                    REENA RAGGI,
                    SUSAN L. CARNEY,

                                        Circuit Judges.

_____________________________________

BOCA RATON FIREFIGHTERS AND POLICE
PENSION FUND,

                                      Plaintiff-Appellant,

                    v.                                                         No. 12-1776-cv

ROBERT J. BAHASH, MCGRAW-HILL
COMPANIES, INC., HAROLD MCGRAW, III,

                     Defendants-Appellees.
_____________________________________

FOR PLAINTIFF-APPELLANT:                                         SUSAN K. ALEXANDER (Sanford Svetcov,
                                                                 on the brief), Robbins Geller Rudman & Dowd
                                                                 LLP, San Francisco, CA; (David J. George,
                                                                 Douglas Wilens, Robert J. Robbins, on the

                                                             1
                                                                       brief), Robbins Geller Rudman & Dowd LLP,
                                                                       Boca Raton, FL; (David A. Rosenfeld, Mario
                                                                       Alba, Jr., on the brief), Robbins Geller Rudman
                                                                       & Dowd LLP, Melville, NY.

FOR DEFENDANTS-APPELLEES:                                              SUSAN BUCKLEY (Floyd Abrams, Tammy L.
                                                                       Roy, Jason M. Hall, on the brief), Cahill Gordon
                                                                       & Reindel LLP, New York, NY.

     Appeal from a judgment of the United States District Court for the Southern District of
New York (Sidney H. Stein, Judge).

     UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the District Court is AFFIRMED.

        Plaintiff-appellant Boca Raton Firefighters and Police Pension Fund (the “Fund”), a putative
class representative of similarly situated purchasers of McGraw-Hill stock between October 21, 2004
and March 11, 2008, alleges that defendants-appellees McGraw-Hill Companies, Inc., and two of its
corporate officers (collectively, “McGraw-Hill”) violated federal securities laws by making false and
misleading statements about the operations of Standard & Poor’s Ratings Services (“S&P”), a
subunit of McGraw-Hill. In essence, the Fund alleges that officers of McGraw-Hill made public
statements about the honesty and integrity of S&P’s credit-ratings services while knowing that its
ratings method was basically a sham. The Fund brought claims under Section 10(b) of the Securities
Exchange Act of 1934, see 15 U.S.C. § 78j(b),1 and Rule 10b-5, see 17 C.F.R. § 240.10b-5,2
promulgated thereunder, and it asserted control-person liability in violation of § 20(a) of the

1
    15 U.S.C. § 78j(b) provides, in relevant part, that it shall be unlawful:
            To use or employ, in connection with the purchase or sale of any security registered on a national
            securities exchange or any security not so registered, or any securities-based swap agreement . . . any
            manipulative or deceptive device or contrivance in contravention of such rules and regulations as the
            Commission may prescribe as necessary or appropriate in the public interest or for the protection of
            investors.
2
    17 C.F.R. § 240.10b-5 provides:
            It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of
            interstate commerce, or of the mails or of any facility of any national securities exchange,
                      (a) To employ any device, scheme, or artifice to defraud,
                      (b) To make any untrue statement of a material fact or to omit to state a material fact
                      necessary in order to make the statements made, in the light of the circumstances under
                      which they were made, not misleading, or
                      (c) To engage in any act, practice, or course of business which operates or would operate as
                      a fraud or deceit upon any person,
            in connection with the purchase or sale of any security.

                                                                  2
Exchange Act, see 15 U.S.C. § 78t(a).3 The Fund’s legal theory depends not on the accuracy of the
credit ratings themselves but rather on how securities-market participants would view McGraw-
Hill’s stock in light of the company’s purportedly misleading statements about its credit-ratings
services.

       In an order dated March 30, 2012, the District Court dismissed the Fund’s complaint under
Rule 12(b)(6). The Court’s analysis is succinct and worth quoting in full:

                The Complaint fails to set forth “enough facts to state a claim for relief that is
            plausible on its face.” Bell Atl. Corp. v. Twombly, 

, 570 (2007). Although
            plaintiffs’ Complaint identifies three categories of misstatements, none are
            actionable. In addition, the Complaint fails to allege facts sufficient to support an
            inference of scienter.

                First, plaintiffs allege that S&P misled investors by representing that it had
            “market lead[ing] software,” that it used “transparent and independent decision-
            making” to produce “independent and objective analysis,” and that “excelled” in its
            role. (Compl. ¶¶ 253, 271, 290, 297.) These statements are mere commercial
            puffery. “[I]ntegrity and risk management are ‘matters of great importance to
            investors,’” but general statements by a defendant that “it ‘set the standard for best
            practices in risk management’” are “precisely the type of puffery” that may not
            undergird a Section 10b-5 claim. In re JP Morgan Chase Sec. Litig., No. 02 Civ. 1282,
            

, at *35-36 (S.D.N.Y. Mar. 28, 2007) (citations
            omitted), aff’d sub nom. ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP
            Morgan Chase Co., 

 (2d Cir. 2009).

                Second, plaintiffs allege that defendants “misled the market as to the frequency
            and quality of its ratings surveillance” by concealing that S&P’s surveillance was
            “perpetually late” and its surveillance group was “over-worked, under-staffed, and
            underfunded.” (Compl. ¶ 256; see also id. ¶¶ 261, 270, 328.) Missing from plaintiffs’
            pleadings, however, are the statements that these alleged facts render misleading.
            Thus, this claim falls short of the PSLRA’s particularity threshold, 15 U.S.C. § 78u-
            4(b). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

, 321 (2007).

3   15 U.S.C. § 78t(a) provides as follows:
            Every person who, directly or indirectly, controls any person liable under any provision of this chapter
            or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same
            extent as such controlled person to any person to whom such controlled person is liable (including to
            the Commission in any action brought under paragraph (1) or (3) of section 78u(d) of this title),
            unless the controlling person acted in good faith and did not directly or indirectly induce the act or
            acts constituting the violation or cause of action.

                                                               3
             Third, plaintiffs challenge McGraw-Hill’s financial reports because “the overly
        positive statements describing those numbers were misleading in light of the
        concealed manner in which they were achieved.” (Pls.’ Opp. 14.) But plaintiffs
        admit that the reported earnings figures were accurate, (see id.), and a defendant’s
        failure to disclose that its earnings were unsustainable is not securities fraud. See In re
        Axis Capital Holdings Ltd. Sec. Litig., 

, 587 (S.D.N.Y. 2006).

            Finally, plaintiffs have failed to allege facts that constitute “strong circumstantial
        evidence of conscious misbehavior or recklessness.” ECA & Local 134, 553 F.3d at
        198. Plaintiffs have not set forth facts to support the inference that either McGraw
        or Bahash knew of facts or had access to information that contradicted either man’s
        statements. See Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 

, 196 (2d Cir. 2008).

Dist. Ct. Op. 2-3.

        On appeal, the Fund contests each aspect of the District Court’s opinion. With regard to
the Fund’s purported failure to allege actionable false or misleading statements, the Fund argues that
McGraw-Hill’s statements about its objectivity were not mere puffery, that it adequately pleaded
misleading statements regarding McGraw-Hill’s surveillance, and that McGraw-Hill’s financial
reports were misleading. With regard to scienter, the Fund argues that a plethora of pleaded facts
supply a strong inference of scienter on the part of McGraw-Hill. We assume the parties’ familiarity
with the facts and procedural history of this case.

                                             DISCUSSION

                                                     A.

         We review de novo “the dismissal of a complaint under Rule 12(b)(6), accepting all factual
allegations as true and drawing all reasonable inferences in favor of the plaintiff.” ECA & Local 134
IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 

, 196 (2d Cir. 2009). “To
survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 

, 678 (2009) (internal
quotation marks omitted). “A claim has facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. “[C]ourts must consider the complaint in its entirety,” assessing “whether all of the
facts alleged, taken collectively, give rise” to the required inferences. See Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 

, 322-23 (2007).



                                                     4
         Additionally, a complaint alleging a violation of § 10(b) and Rule 10b-5 must also satisfy the
heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the rules
set out in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). See 15 U.S.C. § 78u-
4(b); Tellabs, 551 U.S. at 321. Under Rule 9(b), allegations of fraud must be “state[d] with
particularity.” Fed. R. Civ. P. 9(b). “To satisfy this requirement the plaintiff must (1) specify the
statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and
when the statements were made, and (4) explain why the statements were fraudulent.” Anschutz
Corp. v. Merrill Lynch & Co., 

, 108 (2d Cir. 2012) (internal quotation marks omitted).
Moreover, the PSLRA requires that “securities fraud complaints ‘specify’ each misleading statement;
that they set forth the facts ‘on which [a] belief’ that a statement is misleading was ‘formed’; and that
they ‘state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.’” Dura Pharms., Inc. v. Broudo, 

, 345 (2005) (quoting 15 U.S.C.
§ 78u-4(b)(1), (2)).

        Section 10(b) “prohibit[s] the full range of ingenious devices that might be used to
manipulate securities prices,” but it does not reach mere “instances of corporate mismanagement.”
Santa Fe Indus., Inc. v. Green, 

, 477 (1977). As the Supreme Court has explained, a
contrary understanding of § 10(b) would “bring within the Rule a wide variety of corporate conduct
traditionally left to state regulation,” thus “posing a danger of vexatious litigation which could result
from a widely expanded class of plaintiffs under Rule 10b-5.” Id. at 478-79. To prevail on their
claim that McGraw-Hill violated § 10(b) and Rule 10b-5, the Fund 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.” Matrixx Initiatives, Inc. v.
Siracusano, 

, 1317 (2011) (quotation marks omitted). At issue in this appeal are the
first two of these elements.

                                                            B.

        Having reviewed the pleadings de novo,4 we agree with the District Court’s well-reasoned
analysis, which we briefly review. The Fund identifies a variety of statements allegedly constituting

4 The Fund also requests that we take judicial notice of the substance of materials recently unsealed in another case.

That motion is denied, as the substance of the deposition testimony at issue is neither undisputed, nor relevant to the
question at hand, which is whether the complaint presents sufficient allegations to survive a motion to dismiss. See
Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc., 

, 63 n.4 (2d Cir. 2012) (explaining why, with
exceptions not applicable here, matters outside the pleadings are not properly within the scope of a court’s review of a
motion to dismiss under Rule 12); Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger U.S.A., Inc., 

, 70-71 (2d
Cir. 1998) (testimony from another case that is not common knowledge or derived from an unimpeachable source is not
properly subject to judicial notice). For the same reason, we grant McGraw-Hill’s motion to strike references in the
Fund’s reply brief to these materials. Under the circumstances, “we see no reason to allow [the Fund] to effectively
amend [its] complaint on appeal.” Kendall v. Emps. Ret. Plan of Avon Prods., 

, 117 (2d Cir. 2009).

                                                             5
material misrepresentations or omissions by the defendant. “The materiality of a misstatement
depends on whether ‘there is a substantial likelihood that a reasonable shareholder would consider it
important in deciding how to [act].’” ECA, 553 F.3d at 197 (quoting Basic Inc. v. Levinson, 

, 231 (1988)). “In other words, in order for the misstatement to be material, ‘there must be a
substantial likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the “total mix” of information made available.’”
Id. (quoting Basic Inc., 485 U.S. at 231-32). This inquiry is “fact-specific” and “depends on all
relevant circumstances.” Id. We have further explained:

        Because materiality is a mixed question of law and fact, in the context of a Fed. R.
        Civ. P. 12(b)(6) motion, a complaint may not properly be dismissed . . . on the
        ground that the alleged misstatements or omissions are not material unless they are
        so obviously unimportant to a reasonable investor that reasonable minds could not
        differ on the question of their importance.

Id. (internal quotation marks omitted; alteration in original). However, we will not credit mere
business “puffery,” which we have defined in this context as “statements [that] are too general to
cause a reasonable investor to rely upon them.” Id. at 206. For instance, generalizations about a
company’s business practices and integrity may be “so general that a reasonable investor would not
depend on [those statements].” Id.

         The statements alleged in the Fund’s complaint regarding McGraw-Hill’s integrity and
credibility and the objectivity of S&P’s credit ratings are the type of mere “puffery” that we have
previously held to be not actionable. For instance, in a conference call in October 2004 to discuss
McGraw-Hill’s quarterly financial results, a McGraw-Hill representative asserted that S&P’s recently
posted code of practices and procedures “underscores our own dedication towards transparent and
independent decision-making process.” App’x 136-37 (¶ 253). In another conference call in July
2006, McGraw purportedly claimed that “[t]he integrity, reliability and credibility of S&P has enabled
us to compete successfully in an increasingly global and complex market, and that is true today and
we are confident it will be so in the future.” Id. at 191-92 (¶ 302).

         The Fund argues that these statements are distinguishable from the “puffery” we identified
in ECA because McGraw-Hill’s statements were “directly related” to its credit-ratings service and
were not “about the general integrity of McGraw-Hill as a company.” Appellant’s Br. 48. The
“puffery” designation, however, stems from the generic, indefinite nature of the statements at issue,
not their scope. See City of Omaha, Neb. Civilian Emps.’ Ret. Sys. v. CBS Corp., 

, 67 (2d Cir.
2012) (distinguishing “matters of objective fact” from “misstatements regarding opinion” (internal
quotation marks and alteration omitted)). Otherwise, we would “bring within the sweep of federal
securities laws many routine representations made by investment institutions.” ECA, 553 F.3d at

                                                    6
206. In short, no reasonable purchaser of McGraw-Hill common stock would view statements such
as these as meaningfully altering the mix of available information about the company.

         We also agree with the District Court’s conclusion that the complaint’s allegations with
respect to McGraw-Hill’s oversight and surveillance procedures “fall[ ] short of the PSLRA’s
particularity threshold.” Dist. Ct. Op. 2 (citing 15 U.S.C. § 78u-4(b)). Indeed, the 280-page
complaint consists in large part of large block quotations with italicized text, followed by a passage
that reads “[t]he statements referenced in [the preceding paragraphs] were each materially false and
misleading when made for the reasons set forth in ¶ 256 and the factual detail contained throughout
this Complaint.”5 See, e.g., App’x 147 (¶ 261); id. 153 (¶ 270); id. 162 (¶ 276); id. 168 (¶ 280); id. 179
(¶ 289). The frequently cross-referenced paragraph 256 says that the statements in three of the
preceding paragraphs “were each materially false and misleading when made as they misrepresented
and/or omitted adverse facts which then existed and disclosure of which was necessary to make the
statements not false and/or misleading.” Id. at 139 (¶ 256). The paragraph then provides a bullet-
point list (running over a page) of “true facts, which were then known to or recklessly disregarded
by each of the Defendants.” Id. Other paragraphs use the same structure, alleging “true facts” that
were “then known to or recklessly disregarded by each of the Defendants,” but these paragraphs do
not identify or clearly cross-reference any facts demonstrating a strong inference of scienter.

         As we explained above, a complaint alleging a violation of Rule 10b-5 must (1) meet the
four-part requirement6 under Rule 9(b); (2) “set forth the facts ‘on which [a] belief’ that a statement
is misleading was ‘formed,’; and [(3)] ‘state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.’” Dura Pharms., 544 U.S. at 345 (quoting 15
U.S.C. § 78u-4(b)(1), (2)). The Fund’s complaint fell far short of this standard, basically leaving the
District Court to search the long quotations in the complaint for particular false statements, and
then determine on its own initiative how and why the statements were false and how other facts
might show a strong inference of scienter. Needless to say, asking the Court to assess the truth of
facts in light of “the factual detail contained throughout this Complaint,” see, e.g., App’x 147 (¶ 261),
does not comport with our exhortation that plaintiffs “must demonstrate with specificity why and
how” each statement is materially false or misleading. Rombach v. Chang, 

, 174 (2d Cir.
2004).

       Lastly, the Fund argues that McGraw-Hill’s statements about its earnings were actionable,
even though literally true, because they did not acknowledge the long-term unsustainability of its

5As a preliminary matter, we note that this oft-repeated sentence is a grammatical nightmare. McGraw-Hill’s statements
were not “made for . . . the factual detail contained throughout this Complaint.”
6 “To satisfy [Rule 9(b)] the plaintiff must (1) specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were
fraudulent.” Anschutz Corp., 690 F.3d at 107-08 (internal quotation marks omitted).

                                                           7
business model. See Appellant Br. 52-60. This argument is easily rejected. Whatever the scope of
the responsibility not to make statements that constitute “half-truths,” that surely does not apply to
the reporting of unmanipulated corporate earnings. See In re Int’l Bus. Machs. Corp. Sec. Litig., 

, 108 (2d Cir. 1998) (noting that a report about current dividends “contain[ed] no long-term
guarantee or assurance that the dividend will be paid at a specific level for a foreseeable time”). To
the extent that investors might impute a positive corporate outlook from omissions in earnings
reports, we have explained that general expressions of corporate optimism are “too indefinite to be
actionable under the securities laws.” Id. As the Sixth Circuit succinctly observed, “[i]t is clear that a
violation of federal securities law cannot be premised upon a company’s disclosure of accurate
historical data.” In re Sofamor Danek Group, Inc., 

, 401 n.3 (6th Cir. 1997).

                                                             C.

         Given the lack of actionable false or misleading statements, we need not proceed any
further, though we also agree with the District Court’s assessment that the complaint failed to “‘state
with particularity facts giving rise to a strong inference that the defendant acted with the required
state of mind.’” Dura Pharms., 544 U.S. at 345 (quoting 15 U.S.C. § 78u-4(b)(2)(A)). As it is
understood in this context, scienter refers to “a mental state embracing intent to deceive,
manipulate, or defraud” investors. Matrixx Initiatives, 131 S. Ct. at 1323 (quotation marks omitted).7
Applying the relevant pleading standards, “we require the complaint to allege facts that give rise to a
strong inference of fraudulent intent.” In re Carter-Wallace, Inc., Sec. Litig., 

, 39 (2d Cir.
2000) (internal quotation marks omitted)).

         The Fund’s complaint left the District Court to determine on its own initiative how and why
the other alleged facts in the 280-page complaint might show a strong inference of scienter, thus
falling far short of the particularity required in fraud claims brought under § 10(b) and Rule 10b-5.
This defect is especially problematic here, where the underlying theory of securities fraud vacillates
within the complaint. For instance, the complaint criticizes S&P for being more focused on
“pragmatic business decision[s]” than serving the interests of those who relied on its ratings, App’x
99 (¶ 172), and that its business practices reflected a “scheme to pursue market share at all costs,” id.
at 104 (¶ 181). Elsewhere, executives are alleged to have defrauded McGraw-Hill investors by acting
“to the benefit of the Company.” Id. at 112 (¶ 209). These statements would seem to negate—not
support—a strong inference of intent to defraud McGraw-Hill investors.




7 “In addition to intent, recklessness is a sufficiently culpable mental state for securities fraud in this circuit. . . .

Recklessness is defined as ‘at the least, an extreme departure from the standards of ordinary care to the extent that the
danger was either known to the defendant or so obvious that the defendant must have been aware of it.’” ECA, 553
F.3d at 198 (quoting Novak v. Kasaks, 

, 308 (2d Cir. 2000)).

                                                             8
        In the end, the complaint relies on an assumption that McGraw-Hill executives were
prescient, understanding not only the weaknesses of the services they were offering but also the
imminent detrimental effect that those weaknesses would have on the company’s stock price once
the financial markets collapsed. See, e.g., App’x 26 (¶ 12), id. at 172 (¶ 284). This is a prescience that
the complaint does not adequately demonstrate. Whatever the failings of S&P’s business model, the
well-pleaded factual allegations do not give rise to a strong inference that McGraw-Hill executives
misled investors about S&P’s services in an effort to artificially inflate McGraw-Hill’s stock price.

                                           CONCLUSION

       We have considered the Fund’s arguments on appeal and find them to be without merit.
Accordingly, for the reasons stated above, we AFFIRM the judgment of the District Court.

       Moreover, for the reasons stated above, the Appellant’s motion for judicial notice (dated
August 10, 2012) is DENIED, and the Appellees’ motion to strike (dated August 23, 2012) is
GRANTED.


                                                         FOR THE COURT:
                                                         Catherine O’Hagan Wolfe, Clerk




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