## Facts

- Investors purchased common stock of American Bankers Insurance Group, Inc. (ABI) during a period when Cendant Corporation made a competing tender offer to acquire ABI.
- In connection with the tender offer, Cendant disseminated SEC filings (including a Schedule 14D-1) and public statements that allegedly overstated its prior income and misstated or omitted information about its financial condition.
- Plaintiffs alleged these public statements inflated Cendant’s stock price and increased the perceived value and viability of Cendant’s cash-and-stock offer, which in turn inflated ABI’s market price.
- On April 15, 1998, Cendant announced accounting irregularities and an impending restatement, after which Cendant’s stock price dropped.
- After the disclosure, the ABI–Cendant merger agreement was terminated and ABI’s stock price fell; plaintiffs alleged they suffered losses when the inflation dissipated and the transaction failed.

## Issues

1. Whether alleged misstatements about the bidder’s (Cendant’s) financial condition, made during a tender offer for ABI, were made “in connection with” ABI investors’ purchases or sales of ABI securities under § 10(b) and Rule 10b-5.
2. Whether ABI investors adequately pled reliance by invoking the fraud-on-the-market presumption based on public dissemination and an efficient market.
3. Whether plaintiffs adequately pled loss causation by linking the alleged misstatements to the later price decline following disclosure and termination of the transaction.
4. Whether the complaint sufficiently stated § 10(b)/Rule 10b-5 and § 20(a) claims against Ernst & Young LLP and certain control-person defendants.

## Decision

- The Third Circuit reversed the Rule 12(b)(6) dismissal in part and affirmed in part.
- It held plaintiffs adequately alleged the “in connection with” element, reliance (via fraud-on-the-market), and loss causation as to Cendant and most individual defendants; those claims were reinstated and remanded.
- It affirmed dismissal of the claims against Ernst & Young and affirmed dismissal of certain § 20(a) control-person claims where the pleadings did not sufficiently allege the required elements.

## Legal Principles

- The § 10(b) “in connection with” requirement is construed flexibly; it may be satisfied where misstatements are publicly disseminated in a medium a reasonable investor would use and are expected to influence investment decisions, even if the statements concern the bidder and plaintiffs traded the target’s stock.
- Fraud-on-the-market reliance may be pled by alleging a public, material misstatement; trading in an efficient market; and purchases during the period between the misstatement and corrective disclosure, such that plaintiffs relied on the integrity of the market price.
- Loss causation may be pled by alleging that the security’s price was inflated by the misstatement and that a later disclosure of the truth (or a transaction failure attributable to the disclosure) led to a price decline causing economic loss.
- Auditor liability under § 10(b) requires well-pled facts showing the auditor’s own actionable public misstatements (or omissions), their dissemination to the market, and facts supporting a strong inference of scienter; generalized allegations that the auditor participated in or should have detected irregularities are insufficient.
- § 20(a) control-person liability requires adequately pled control over a primary violator; conclusory assertions of control do not suffice.

## Conclusion

The court held that ABI purchasers stated viable Rule 10b-5 claims at the pleading stage based on alleged, publicly disseminated misstatements about the bidder that affected the target’s market price and later losses when the truth emerged and the deal collapsed, while affirming dismissal where auditor and control-person allegations lacked the required specificity.


Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000)