## Facts

- TXU publicly stated in May 2004 that a dividend increase was not expected until 2006 if specified financial goals were met, while reserving the board’s discretion to change course.
- In September 2004, TXU launched a self-tender offer to repurchase certain publicly traded convertible securities at a premium; plaintiffs were holders who tendered.
- The tender materials disclosed that management was “considering” or “evaluating” whether to recommend a dividend-policy change but stated that timing and outcome were unknown and that the board retained independent judgment.
- The tender closed on October 13, 2004.
- On October 21, 2004, management proposed, and the board approved, a large dividend increase and an expansion of the stock-repurchase plan.
- After the announcement, TXU’s common stock and related convertible securities rose substantially.
- Plaintiffs sued under Exchange Act § 10(b) and Rule 10b-5 and under § 14(e), alleging TXU misled tendering holders by failing to disclose that a major dividend and repurchase increase was already planned.

## Issues

1. Whether the complaint alleged, with PSLRA particularity, facts creating a strong inference that TXU acted with scienter in the tender-offer disclosures about dividend policy.
2. Whether the challenged statements and omissions about dividend-policy consideration and timing were materially false or misleading when made.
3. Whether the § 14(e) tender-offer claims were adequately pled under the applicable scienter standard.

## Decision

- The Fifth Circuit affirmed dismissal under Rule 12(b)(6).
- The court held plaintiffs failed to plead facts giving rise to a strong inference of scienter as required by the PSLRA for § 10(b) and Rule 10b-5.
- The court held the § 14(e) claims failed for the same core reasons, including failure to plead scienter and actionable misstatements or omissions.

## Legal Principles

- Under the PSLRA, a securities-fraud plaintiff must plead particularized facts supporting a strong inference that the defendant acted with the required state of mind.
- Under *Tellabs*, scienter allegations are assessed collectively, and the inference of scienter must be cogent and at least as compelling as non-fraudulent inferences.
- Qualified, forward-looking statements that disclose uncertainty and reserve board discretion are less likely to be actionable absent concrete, contemporaneous facts showing the speaker knew the statements were misleading when made.
- Close timing between a tender offer and subsequent corporate action, plus an alleged economic motive to repurchase securities at a lower price, is insufficient by itself to plead a strong inference of scienter.
- In this circuit, § 14(e) tender-offer fraud claims require scienter; allegations that do not satisfy the PSLRA scienter standard for § 10(b) generally fail under § 14(e) on the same facts.

## Conclusion

The court held that plaintiffs’ theory relied largely on the post-tender timing and magnitude of TXU’s dividend and repurchase changes, which did not supply particularized facts showing intentional or severely reckless deception during the tender period; because non-fraudulent explanations were at least as compelling, the PSLRA scienter requirement was not met and dismissal was affirmed.


Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200 (5th Cir. 2009)