Katyle v. Penn National Gaming, Inc.

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

ROBERT H. KATYLE; JOSEPH T. 

SMALL; BRENT STILLE, Individually

and on behalf of all others

similarly situated,

Plaintiffs-Appellants,

and

HERMAN MARTIN BRAUDE,  No. 09-2272

Plaintiff,

v.

PENN NATIONAL GAMING,

INCORPORATED; PETER M. CARLINO;

WILLIAM J. CLIFFORD,

Defendants-Appellees.



Appeal from the United States District Court

for the District of Maryland, at Greenbelt.

Peter J. Messitte, Senior District Judge.

(8:08-cv-01752-PJM)

Argued: October 26, 2010

Decided: March 14, 2011

Before KEENAN and WYNN, Circuit Judges, and

Bobby R. BALDOCK, Senior Circuit Judge of the

United States Court of Appeals for the Tenth Circuit,

sitting by designation.

2 KATYLE v. PENN NATIONAL GAMING

Affirmed by published opinion. Senior Judge Baldock wrote

the opinion, in which Judge Keenan joined. Judge Wynn

wrote a separate opinion concurring in the judgment.

COUNSEL

ARGUED: Herman Martin Braude, BRAUDE & MARGU-

LIES, PC, Washington, D.C., for Appellants. Paul K. Rowe,

WACHTELL, LIPTON, ROSEN & KATZ, New York, New

York, for Appellees. ON BRIEF: Joseph C. Garland,

BRAUDE & MARGULIES, PC, Washington, D.C., for

Appellants. Adam M. Gogolak, WACHTELL, LIPTON,

ROSEN & KATZ, New York, New York; Kevin B. Collins,

Danielle M. Estrada, COVINGTON & BURLING, LLP,

Washington, D.C., for Appellees.

OPINION

BALDOCK, Senior Circuit Judge:

The Private Securities Litigation Reform Act of 1995

(PSLRA) states that a private plaintiff claiming an implied

right of action for securities fraud under § 10(b) of the Securi-

ties Exchange Act of 1934, 15 U.S.C. § 78j(b), must prove,

among other things, "loss causation," i.e., that the defendant’s

material misrepresentation or omission "caused the loss for

which the plaintiff seeks to recover damages." 15 U.S.C.

§ 78u-4(b)(4). Of course in this Circuit, pleading practice

requires that a plaintiff, as a precursor to proof, allege loss

causation in the complaint "with sufficient specificity to

enable the court to evaluate whether the necessary causal link

exists." Teachers’ Ret. Sys. v. Hunter, 477 F.3d 162, 186 (4th

Cir. 2007). On appeal, Plaintiffs, representing a putative class

of investors which purchased common shares of Defendant

Penn National Gaming (Penn) in vain anticipation of an

KATYLE v. PENN NATIONAL GAMING 3

announced third-party buyout, do not challenge the district

court’s dismissal of their Second Amended Complaint (SAC)

based on its failure to adequately allege loss causation.

Rather, Plaintiffs challenge the district court’s refusal to allow

them to file their proposed Third Amended Complaint (TAC)

because, according to the court, it too fails to adequately

allege loss causation.

The sole issue presented here is whether Plaintiffs’ TAC

sufficiently alleges loss causation based upon a purported

series of partially corrective disclosures of a recurring mate-

rial omission, such that the district court abused its discretion

in refusing to vacate its judgment of dismissal and grant

Plaintiffs leave to amend.1 Exercising jurisdiction pursuant to

28 U.S.C. § 1291, we hold that the district court properly

declined to disturb its judgment and allow amendment

because the series of partial disclosures identified in the TAC

did not inform the market of Penn’s alleged ongoing fraudu-

lent omission. See US Airline Pilots Ass’n v. AWAPPA, LLC,

615 F.3d 312, 320 (4th Cir. 2010) (holding that the district

court did not abuse its discretion in denying leave to amend

where the proposed amendment "would have no impact on the

outcome of the motion to dismiss"). Accordingly, we affirm.

I.

In adjudicating the sufficiency of the TAC, we, like the dis-

trict court, accept as true the TAC’s well-pleaded factual alle-

gations, but owe no allegiance to "unwarranted inferences,

unreasonable conclusions, or arguments" drawn from those

1

To maintain a § 10(b) securities fraud action, a plaintiff must ade-

quately plead (1) a material misrepresentation or omission; (2) scienter;

(3) a connection with the purchase or sale of a security; (4) reliance; (5)

economic loss; and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544

U.S. 336, 341-42 (2005). In addressing the sufficiency of the TAC’s alle-

gations concerning loss causation, we simply assume without deciding the

adequacy of the TAC’s allegations bearing upon the additional elements

of Plaintiff’s § 10(b) securities fraud claim.

4 KATYLE v. PENN NATIONAL GAMING

facts. Monroe v. City of Charlottesville, 579 F.3d 380, 385-86

(4th Cir. 2009) (internal quotation marks omitted). We may

consider as well other sources that courts ordinarily examine

when ruling on a Rule 12(b)(6) motion to dismiss a securities

fraud complaint, "in particular, documents incorporated into

the complaint by reference, and matters of which a court may

take judicial notice." Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 551 U.S. 308, 322 (2007). Facts recited herein that are

not contained within the four corners of the TAC are either

found in documents referred to in the TAC or "capable of

accurate and ready determination by resort to sources whose

accuracy cannot reasonably be questioned," and thus properly

subject to judicial notice under Fed. R. Evid. 201. See, e.g.,

Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir.

2008) (considering stock analyst reports cited in the complaint

in the context of a motion to dismiss); Greenhouse v. MCG

Capital Corp., 392 F.3d 650, 655 n.4 (4th Cir. 2004) (taking

judicial notice of published stock prices in the context of a

motion to dismiss).

A.

Penn is a publicly-owned corporation traded on the NAS-

DAQ. Penn operates numerous gaming and off-track betting

facilities in several states. Plaintiffs represent a putative class

of investors that purchased common shares of Penn between

March 20, 2008 and June 15, 2008, inclusive. One year prior

to the class period’s end date, on June 15, 2007, Penn

announced in a press release that it had entered into a lever-

aged buyout agreement (LBO) with private equity buyers:

Penn National Gaming . . . entered into a definitive

agreement to be acquired by certain funds managed

by affiliates of Fortress Investment Group LLC . . .

and Centerbridge Partners LP in an all-cash transac-

tion valued at approximately $8.9 billion, including

the planned repayment of approximately $2.8 billion

of Penn National’s outstanding debt.

KATYLE v. PENN NATIONAL GAMING 5

Under the terms of the agreement, Penn National

shareholders will receive $67.00 in cash for each

outstanding Penn National share. The purchase con-

sideration represents a premium of approximately

31% over Penn National’s closing share price on

June 14, 2007 [of $51.14 per share]. Penn National

Gaming has approximately 85.5 million shares out-

standing.

Joint Appendix (JA) at A36. Deutsche Bank and Wachovia

Securities committed to finance roughly $7 billion of the

LBO. The LBO was set to close on or before June 15, 2008,

subject to a 120-day extension in the event all state regulatory

approvals had not been forthcoming. Under the terms of the

LBO, the purchase price was to increase 1.49c for each day

the closing was extended beyond June 15.

On the day of the LBO’s announcement, Penn’s common

stock gained $11.98 to close at $62.12 per share, $4.88 below

the agreed buyout price of $67 per share. On November 9,

2007, Penn filed with the Securities and Exchange Commis-

sion (SEC) a proxy statement which, among other things,

detailed the terms of the LBO and the circumstances under

which the LBO might be terminated. On December 12, 2007,

Penn’s shareholders voted to approve the LBO. At the end of

2007, Penn’s shares were priced at $59.55, a $7.45 or approx-

imately 11% discount off the buyout price. The price levels

of Penn’s stock throughout the latter half of 2007 reflected the

market’s initial view that the odds of the Penn buyout closing

were favorable. But given the economic downturn of 2008

and, specifically, the turmoil in the credit markets, share-

holder confidence that the buyout would close, as reflected in

Penn’s stock price, proved unsustainable. By March 20, 2008,

the beginning date of Plaintiffs’ class period, Penn’s stock

price had dropped to $40.58 per share, a $26.42 or nearly 40%

discount off the buyout price.

According to a Lehman Brothers report dated April 1,

2008, just ten days after commencement of the class period,

6 KATYLE v. PENN NATIONAL GAMING

Penn’s stock price following announcement of the LBO had

fallen from a high of $63.68 on June 19, 2007 to a low of

$38.76 on March, 10, 2008. Recognizing that the "target-

friendly" terms of both the LBO and the lenders’ debt com-

mitment letter might lessen the buyers’ and/or lenders’ incen-

tives to act aggressively against Penn in the event of

disagreement or difficulty, Lehman Brothers nonetheless

explained:

Much has changed since June 2007, which perhaps

represented the peak of the leveraged buyout boom.

. . . The credit environment has deteriorated from the

very favorable conditions experienced during the

first half of 2007 to extremely difficult. . . . Many

private equity transactions have either been cancel-

led or face continuing difficulty as targets, private

equity firms, and lenders disagree on the original

terms of the mergers. . . .

We cannot predict whether the Penn transaction will

close, especially given recent headlines regarding

other distressed or cancelled leveraged buyout trans-

actions.

JA at A448 (emphasis added).2 Citing increased competition

and earnings pressure in the gaming industry, Lehman Broth-

ers observed that since Penn’s announcement of the LBO in

June 2007, the prices of comparables, such as Boyd Gaming

and Pinnacle Entertainment, had dropped an average of 60%.

Lehman Brothers opined that "[t]he high price paid for Penn

at the peak of the LBO boom and the significant decline in

2

Prior to the commencement of the class period and just one month

prior to the Lehman Brothers Report, Penn warned in its SEC Form 10-K

Annual Report for 2007, filed February 29, 2008, that its stock price might

be adversely affected "if any event change or other circumstance occurs

that results in the termination of the Merger Agreement (including a fail-

ure by Parent to obtain the necessary debt financing in light of current

market conditions)." JA at A311.

KATYLE v. PENN NATIONAL GAMING 7

comps are negative factors for Penn in the sense that they

could create incentives for both Fortress/Centerbridge to look

for outs and for lenders to act aggressively against the spon-

sors." JA at A454.

Lehman Brothers noted that over the first quarter of 2008,

Penn’s stock price had "fallen sharply despite the lack of neg-

ative news regarding the actual transaction." JA at A448. Leh-

man’s further noted that "on March 25, 2008, Fortress

publicly reaffirmed its commitment to complete and fund the

acquisition by Summer 2008." JA at A448. Consistent there-

with, the TAC alleges:

From March 20, 2008 through the middle of June

2008, through official press releases . . . , [Penn]

issued frequent updates and announcements related

to the planned buyout — all of them relating to

securing transaction approval by various state regu-

latory gaming agencies of the proposed buy-

out/merger agreement, calculated to influence the

investing public and shareholders that the buy-

out/merger transaction, as contained in the original

SEC filings and the proxy statement was still in

effect.

JA at A1007. Specifically, Penn issued seven press releases

between March 20 and June 5, 2008, notifying the public of

state regulatory approvals.3 Then, on June 6, 2008, Penn

issued an eighth press release announcing the extension of the

3

The TAC identifies seven press releases announcing transaction

approval by various entities between March 20 and June 5, 2008 as fol-

lows: 1) on March 20, from the West Virginia Lottery Commission; 2) on

April 15, from the New Mexico Gaming Board; 3) on April 16, from the

Pennsylvania State Horse Racing Commission and the New Mexico Rac-

ing Commission; 4) on April 17, from the Mississippi Gaming Commis-

sion; 5) on May 15, from the West Virginia Racing Commission; 6) on

May 29, from the Pennsylvania State Gaming Control Board; and 7) on

June 5, from the Iowa Racing and Gaming Commission. JA at A1008-09.

8 KATYLE v. PENN NATIONAL GAMING

closing date by 120 days, from June 15 to October 13, 2008,

pursuant to the terms of the LBO. The release stated the

extension was necessary to secure the approval of five

remaining states, i.e., Illinois, Indiana, Louisiana, Maine, and

Missouri. Penn’s stock price closed that day at $45.76 per

share.

The problem, according to the TAC, was that while Penn

continued to behave publicly throughout the class period as if

the LBO would close, Penn was involved in private discus-

sions with the buyers and financing institutions related to the

renegotiation of the buyout price or the termination of the

LBO. Based upon a host of inferences we need not detail

here, the TAC alleges that by "at least March 20, 2008," Penn

"knew or had reason to believe that the proposed cash buy-

out/merger transaction would not take place under the terms

of the June 15, 2007 agreement." JA at A1007-08, A1011.

Plaintiffs cite a confidentiality agreement between Penn and

the buyers dated May 22, 2008, as illustrative of Penn’s

knowledge. Therein, the signatories agreed that discussions

aimed at resolving disputes over the rights and obligations of

the parties to the LBO would remain confidential and pro-

tected by the settlement privilege. The signatories further

agreed that neither party would commence litigation related to

the LBO while the confidentiality agreement remained in

effect. The May 22 agreement expired on May 28, 2008, but

was extended by a series of additional agreements through

June 29, 2008.

The closing of the class period on June 15, 2008 is based

on the TAC’s allegation that "from June 16, 2008 through

July 2, 2008," the day before Penn issued a press release

announcing termination of the LBO, the truth surrounding

Penn’s ongoing material omission "leaked out to the market

through a variety of leaks." JA at A1023 (capitalization omit-

ted). Those leaks, which Plaintiffs claim individually consti-

tuted partially corrective disclosures of Penn’s fraudulent

press releases are identified in the TAC as follows:

KATYLE v. PENN NATIONAL GAMING 9

• On June 16, the market learned the Maine Har-

ness Racing Commission cancelled a meeting

scheduled to address the LBO;

• On June 17, the market learned the Louisiana

Gaming Control Board held a meeting without

taking action on the LBO;

• On June 24, the market learned Penn failed to

issue a press release announcing the Illinois

Gaming Board had approved the LBO;

• On June 24, the market learned Susquehanna

Financial Group suspended coverage of Penn’s

stock due to market uncertainty over whether the

LBO would close;

• On June 24, the market learned Oppenheimer

Analysts expressed doubts about the LBO’s clos-

ing;

• On June 25, the market learned the Missouri

Gaming Commission held a meeting without

approving the LBO.

See JA at A1018-22. On June 16, 2008, the day these pur-

ported leaks allegedly began to disclose Penn’s fraud on the

market, the price of Penn’s stock opened at $44.18 per share.

When the leaks concluded on June 25, 2008, the price of

Penn’s stock closed at $34.14 per share, down $10.04 or 22%

from its June 16 opening. According to the TAC:

After Penn National failed to issue a press release

announcing the Illinois approval by the close of busi-

ness Friday, June 27, 2008, "the cat was out of the

bag" — the market knew that the Penn National deal

would not close. Accordingly, Penn National’s stock

declined from $33.84 on Monday June 30, 2008, to

10 KATYLE v. PENN NATIONAL GAMING

$28.60 on Wednesday June [sic] 2, 2008, a fall of

$5.39 or 15. 86%. . . . This removes most but not all,

of the price inflation [due to Penn’s fraud] from

Penn National’s stock.

JA at A1022.

On July 3, 2008, before the market opened, Penn

announced the termination of the LBO in a press release.

Peter Carlino, Penn’s Chief Executive Officer, commented

that Penn’s decision to enter into a settlement agreement fol-

lowed "a thorough evaluation of a wide range of alternatives

for consummating the transaction." JA at A678. The release

stated that as part of the settlement agreement, Penn would

receive $1.475 billion, consisting of a $225 million cash ter-

mination fee and the purchase of $1.25 billion of Penn’s pre-

ferred stock due 2015 by affiliates of Fortress/Centerbridge,

Deutsche Bank, and Wachovia Securities. Penn also

announced it would repurchase up to $200 million of its own

common stock over the following 24 months. Penn’s stock

price closed that day at $29.66 per share, up 96¢ over its

opening. After the market closed on July 9, 2008, Penn filed

its SEC Form 8-K detailing the terms and conditions of the

settlement agreement. Over the next two days, Penn stock fell

$4.88 from its close on July 9 of $29.35 per share to its close

on July 11 of $24.47 per share. According to the TAC, "on

July 11, 2008, for the first time, all of the artificial price infla-

tion resulting from Penn National’s fraud was finally removed

from Penn National’s stock price." JA at A1027. As a post-

script, the Wall Street Journal, in an article dated July 5, 2008,

noted that in 2008 a "record number" of LBO’s involving

domestic targets had been terminated short of closing: "In

many of the situations where deals fell apart, banks and com-

panies accused the private-equity firms of buyers’ remorse,

while the buyout firms have accused the banks of lenders’

remorse. The truth is somewhere in between." JA at A721.

KATYLE v. PENN NATIONAL GAMING 11

B.

In contrast to the TAC’s allegation that the market became

aware of Penn’s fraud through a series of partially corrective

disclosures prior to July 3, 2008, Plaintiffs’ SAC alleged the

market became aware of such fraud upon Penn’s July 3 press

release announcing the LBO’s termination. According to the

SAC, Penn’s ongoing material omission over the course of the

class period proximately caused Plaintiffs economic harm

when the artificially inflated price of Penn’s shares fell after

the truth about the ill-fated LBO became known on July 3.

The district court, however, granted Penn’s motion to dismiss

the SAC based upon its failure to adequately plead loss causa-

tion. The court observed that Penn’s stock price closed up 96¢

on July 3. That, said the court, proved fatal to the SAC’s the-

ory of loss causation and to Plaintiffs’ securities fraud claim

(a point on which we express no opinion). Plaintiffs did not

challenge the district court’s rationale for dismissal, only its

decision to dismiss the SAC with prejudice. To that end,

Plaintiffs filed a "motion for reconsideration" in which they

sought leave to file their TAC. The court denied Plaintiffs’

motion in a memorandum to counsel because "allowing Plain-

tiffs to replead would be futile." JA at A1158. The court rea-

soned:

Under the Supreme Court’s decision in Dura

Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005),

in order to plead loss causation with particularity,

Plaintiffs must allege that Penn’s "share price fell

significantly after the truth became known." They

remain unable to meet this standard because none of

the events Plaintiffs now raise constitutes a "correc-

tive disclosure" under the Supreme Court’s decision

in Dura and its progeny; furthermore, none of the

events Plaintiffs cite can be said to have caused any

significant fall in [Penn’s] stock price.

JA at A1158. Plaintiffs timely appealed.

12 KATYLE v. PENN NATIONAL GAMING

II.

Plaintiffs assert the district court erred in denying what, in

effect, was a postjudgment motion for leave to file their TAC.

In Laber v. Harvey, 438 F.3d 404, 427 (4th Cir. 2006) (en

banc), we explained that a district court may not grant a post-

judgment motion to amend the complaint unless the court first

vacates its judgment pursuant to Fed. R. Civ. P. 59(e) or 60(b).4

To determine whether vacatur is warranted, however, the

court need not concern itself with either of those rules’ legal

standards. The court need only ask whether the amendment

should be granted, just as it would on a prejudgment motion

to amend pursuant to Fed. R. Civ. P. 15(a). In other words, a

court should evaluate a postjudgment motion to amend the

complaint "under the same legal standard as a similar motion

filed before judgment was entered — for prejudice, bad faith,

or futility." Laber, 438 F.3d at 427; accord Matrix Capital

Mgmt. Fund, LP v. Bearingpoint, Inc., 576 F.3d 172, 193 (4th

Cir. 2009). Futility is apparent if the proposed amended com-

plaint fails to state a claim under the applicable rules and

accompanying standards: "[A] district court may deny leave

if amending the complaint would be futile — that is, if the

proposed amended complaint fails to satisfy the requirements

of the federal rules." United States ex rel. Wilson v. Kellogg

Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (inter-

nal quotation marks omitted).

A.

We review allegations of loss causation for "sufficient

specificity," a standard largely consonant with Fed. R. Civ. P.

4

The Federal Rules of Civil Procedure do not provide for a postjudg-

ment "motion for reconsideration." Rather, they provide for a Rule 59(e)

motion to alter or amend the judgment or a Rule 60(b) motion for relief

from judgment. Because, consistent with Rule 59(e), Plaintiffs filed their

motion within ten days of the district court’s judgment, we construe it as

arising under Rule 59(e). See Shepard v. Int’l Paper Co., 372 F.3d 326,

328 n.1 (5th Cir. 2004).

KATYLE v. PENN NATIONAL GAMING 13

9(b)’s requirement that averments of fraud be pled with particu-

larity.5 In re Mutual Funds Inv. Litig., 566 F.3d 111, 119-120

(4th Cir. 2009). The degree of specificity demanded is that

which will "enable the court to evaluate whether the necessary

causal link exists." Teacher’s Ret. Sys., 477 F.3d at 186.

Because loss causation is fact-dependent, the specificity suffi-

cient to plead loss causation will vary depending on the facts

and circumstances of each case. For instance:

[W]hen the plaintiff’s loss coincides with a market

wide phenomenon causing comparable losses to

other investors, the prospect that the plaintiff’s loss

was caused by the fraud decreases, and a plaintiff’s

claim fails when it has not adequately pled facts

which, if proven, would show that its loss was

5

Rule 9(b) states that a party must plead "with particularity the circum-

stances constituting fraud." In Tellabs, Inc., 551 U.S. at 319, the Supreme

Court recognized that "[p]rior to the enactment of the PSLRA, the suffi-

ciency of a complaint for securities fraud was governed not by [the general

pleading standard of] Rule 8, but by the heightened pleading standard set

forth in Rule 9(b)." The PSLRA sets forth specific standards for pleading

the elements of misrepresentation and scienter, and thus supercedes Rule

9(b) to that extent. 15 U.S.C. § 78u-4(b)(1),(2). The PSLRA, however,

does not address the pleading standards applicable to the remaining ele-

ments of a §10(b) claim, and so presumably the pleading standard of Rule

9(b) still applies to those elements. While the Supreme Court has not spe-

cifically addressed whether loss causation must be pled with particularity

after enactment of the PSLRA, in Teacher’s Ret. Sys., 477 F.3d at 186, we

recognized that "[a] strong case can be made that because loss causation

is among the circumstances constituting fraud for which Rule 9(b)

demands particularity, loss causation should be pleaded with particular-

ity." (internal quotation marks omitted). Uncertainty has arisen because in

Dura Pharm., Inc., 544 U.S. at 346-47, the Court applied Rule 8’s "a short

and plain statement" pleading standard to allegations of loss causation.

Fed. R. Civ. P. 8(a)(2). But because the complaint in that case could not

satisfy Rule 8’s lesser standard, much less Rule 9(b)’s stricter standard,

the Court only "assume[d], at least for argument’s sake, that neither the

Rules nor the [PSLRA] impose any special further requirement [beyond

Rule 8] in respect to the pleading of proximate causation or economic

loss." Dura Pharm., Inc., 544 U.S. at 346 (emphasis added).

14 KATYLE v. PENN NATIONAL GAMING

caused by the alleged misstatements [or omissions]

as opposed to intervening events.

Lentell v. Merrill Lynch & Co., 396 F.3d 161, 174 (2d Cir.

2005) (internal quotation marks omitted).

To be sure, "the facts alleged in the complaint . . . need not

conclusively show that the securities’ decline in value is

attributable solely to the alleged fraud rather than to other

intervening factors." In re Mutual Funds Inv. Litig., 566 F.3d

at 128; see also Lentell, 396 F.3d at 177 ("We do not suggest

that plaintiffs were required to allege the precise loss attribut-

able to Merrill’s fraud . . . ."). What we do require the alleged

facts to show is that the misrepresentation or omission was

"one substantial cause of the investment’s decline in value."

In re Mutual Funds Inv. Litig., 566 F.3d at 128. Only then

may we conclude that the complaint alleges the "necessary

causal link" between the defendant’s alleged fraud and the

plaintiff’s economic harm, or, in tort-related terms, that "the

defendant’s misrepresentation (or other fraudulent conduct)

proximately caused the plaintiff’s economic loss." Dura

Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005). Stated oth-

erwise, the complaint must allege a sufficiently direct rela-

tionship between the plaintiff’s economic loss and the

defendant’s fraudulent conduct. See Miller v. Asensio & Co.,

364 F.3d 223, 232 (4th Cir. 2004). "[I]f the connection is

attenuated . . . a fraud claim will not lie. That is because the

loss causation requirement — as with the foreseeability limi-

tation in tort — is intended to fix a legal limit on a person’s

responsibility, even for wrongful acts." Lentell, 396 F.3d at

174 (internal quotation marks and citations omitted).

B.

In Dura Pharm., Inc., the Supreme Court held a complaint

asserting a violation of § 10(b) based upon a fraud on the mar-

ket theory does not sufficiently allege loss causation simply

by stating that the security price was artificially inflated at the

KATYLE v. PENN NATIONAL GAMING 15

time of purchase, because "an inflated purchase price will not

itself constitute or proximately cause the relevant economic

loss." Dura Pharm., Inc., 544 U.S. at 342. The Court

explained that if the purchaser sells "before the relevant truth

begins to leak out, the misrepresentation will not have led to

any loss. [But] [i]f the purchaser sells later after the truth

makes its way into the marketplace, an initially inflated pur-

chase price might mean a later loss." Id.

Because the Supreme Court acknowledged the relevant

truth may "leak out," subsequent decisions have recognized

that neither a single complete disclosure nor a fact-for-fact

disclosure of the relevant truth to the market is a necessary

prerequisite to establishing loss causation (although either

may be sufficient). See Alaska Elec. Pension Fund v.

Flowserve Corp., 572 F.3d 221, 230-31 (5th Cir. 2009) (per

curiam) (recognizing a series of partially corrective disclo-

sures may suffice to establish loss causation). Rather, "loss

causation may be pleaded on the theory that the truth gradu-

ally emerged through a series of partial disclosures and that

an entire series of partial disclosures [prompted] the stock

price deflation." Lormand v. US Unwired, Inc., 565 F.3d 228,

261 (5th Cir. 2009); see also In re Williams Sec. Litig., 558

F.3d 1130, 1140 (10th Cir. 2009) ("Any reliable theory of loss

causation that uses corrective disclosures will have to show

both that corrective information was revealed and that this

revelation [prompted] the resulting decline in price."). The

district court in this case properly recognized that because

Plaintiffs’ proposed TAC relies upon the cumulative effect of

an alleged series of partially corrective disclosures to plead

loss causation, the TAC must state facts that show (1) those

disclosures gradually revealed to the market the undisclosed

truth about Penn’s fraudulent press releases, and (2) such dis-

closures resulted in the decline of Penn’s share price.

16 KATYLE v. PENN NATIONAL GAMING

III.

Here, exposure of the fact that Penn fraudulently omitted

from its prior press releases the truth about the ill-fated status

of the LBO is the first requisite to adequately pleading loss

causation. In other words, to sufficiently plead loss causation

under a fraud on the market theory, the TAC must provide a

basis on which to conclude the six alleged corrective disclo-

sures issued between June 16 and June 25, 2008, inclusive,

revealed "new facts" suggesting Penn had perpetrated a fraud

on the market by omitting in its eight prior press releases

related to state regulatory approvals any mention that the

LBO would not close as written. Teachers’ Ret. Sys., 477 F.3d

at 187. Corrective disclosures must present facts to the market

that are new, that is, publicly revealed for the first time,

because, "if investors already know the truth, false statements

won’t affect the price."6 Schleicher v. Wendt, 618 F.3d 679,

681 (7th Cir. 2010). Such disclosures need not precisely iden-

tify the misrepresentation or omission; nor need the disclosure

emanate from any particular source. See Lormand, 565 F.3d

at 264 n.32. But they must reveal to the market in some sense

the fraudulent nature of the practices about which a plaintiff

complains. See Metzler Inv. GMBH v. Corinthian Colleges,

Inc., 540 F.3d 1049, 1063 (9th Cir. 2008). The disclosure

must "at least relate back to the misrepresentation and not to

some other negative information about the company." In re

Williams Sec. Litig., 558 F.3d at 1140 (emphasis added).

6

In Basic Inc. v. Levinson, 485 U.S. 224, 241 (1988), the Court

explained that "[t]he fraud on the market theory is based on the hypothesis

that, in an open and developed securities market, the price of a company’s

stock is determined by the available material information regarding the

company and its business." (internal quotation marks omitted). Thus, only

the first revelation (or series of partial revelations) of facts apprising the

market of the entire truth about prior misleading statements will affect a

stock’s price. Once the truth is revealed, the stock’s price presumably

adjusts and reflects the effect of the fraud.

KATYLE v. PENN NATIONAL GAMING 17

A.

Let us first consider the TAC’s allegations that (1) on June

16 the market learned the Maine Harness Racing Commission

cancelled a meeting scheduled to address the LBO, (2) on

June 17 the market learned the Louisiana Gaming Control

Board held a meeting without taking action on the LBO, and

(3) on June 25 the market learned the Missouri Gaming Com-

mission held a meeting without approving the LBO. Recall

that on June 6, 2008, Penn and the buyers announced, consis-

tent with the terms of the LBO, that they had extended the

deal’s closing until no later than October 13, 2008. Prior to

June 16, the state regulatory approval process had been pro-

ceeding at a measured pace since March 20, 2008, with the

latest approval occurring on June 5, 2008. Considered in con-

text, what these alleged disclosures revealed is that three state

regulatory boards or commissions, less than three weeks fol-

lowing a four month extension of the LBO’s closing deadline,

failed to address the LBO as previously planned. On their

face, these disclosures do not suggest Penn, since March 20,

2008 or anytime thereafter during the class period, had been

perpetrating a fraud on the market by failing to disclose in

numerous press releases its knowledge about the status of the

LBO. The three disclosures themselves did nothing to dis-

count the possibility that state regulators would approve the

LBO before the extended closing deadline or that the LBO

would ultimately be consummated.

Plaintiffs argue these disclosures revealed much more than

delays in the state regulatory approval process. The TAC con-

cluded "[a]ll these hearings were canceled because Penn

National failed to provide current financial information

related to the buyout," which, according to Plaintiffs, meant

Penn had stopped cooperating with state regulators, which in

turn showed the buyout would not close. JA at A1019

(emphasis omitted). The only fact that the TAC alleges in

support of its sweeping conclusion, however, relates to the

Missouri review and is based on a selective account of a June

18 KATYLE v. PENN NATIONAL GAMING

23, 2008 report from the internet publication thedeal.com:

"The Missouri review, which arbs consider the most rigorous

of the approval process, is at a standstill.[7] Missouri is still

waiting for updated pro forma financial data requested in

April because the market has changed considerably since the

parties filed for the license review last August, a source said."

JA at A972. That the most discerning state in the process,

Missouri, was waiting to receive revised financial data from

Penn, data requested as a result of increasingly difficult mar-

ket conditions, is, standing alone, hardly an endorsement of

the proposition that Penn had abandoned the state regulatory

process and was refusing to cooperate with regulators from

states yet to approve the LBO.

But the news from Missouri did not appear in isolation. The

website also reported the Illinois Gaming Board had tabled

review of Penn’s LBO at its May 19, 2008 meeting and

requested "additional financial information on the transac-

tion." JA at A972. The board placed the deal back on the

agenda for a closed meeting to be held June 23 and 24.

According to a board spokesperson quoted in the report: "The

license review would not be up for final consideration unless

the information the board sought had been provided . . . ." JA

at A972 (emphasis added). The Illinois Gaming Board

approved the Penn buyout on June 24, 2008. The June 23

7

"Arbs" refers to arbitrageurs or those who engage in arbitrage. In the

context of a takeover or buyout, "risk arbitrage" generally —

[I]nvolves the simultaneous purchase of shares in one company

and the short sale of assets in another. . . . By purchasing shares

in the company that is expected to be taken over (with the antici-

pation that market value will increase) and selling short shares in

the acquiring company (with the anticipation that market value

will decrease), an investor hopes to gain from both sides of the

trade.

http://www.investordictionary.com/definition/risk-arbitrage (visited March

3, 2011); see also Black’s Law Dictionary, 112 (8th ed. 2004). The risk

is that the buyout does not occur and what the arbitrageur anticipated does

not materialize.

KATYLE v. PENN NATIONAL GAMING 19

report from thedeal.com, considered in its entirety, simply

belies Plaintiffs’ conclusory allegation that Penn had ceased

cooperating with state regulators at the time delays in the state

regulatory approval process were announced on June 16, 17,

and 25. What the report reveals is that Missouri regulators, in

light of changed market conditions and consequent doubts

about the Penn buyout, were proceeding cautiously in seeking

to ascertain the true status of the LBO.

Undoubtedly, news of regulatory delays from Missouri, as

well as from Maine and Louisiana, did not bolster the mar-

ket’s already shaken confidence in the likelihood of the Penn

buyout closing. Given the downturn in the gaming market, the

credit crisis, the broader market’s downward trend, and the

consequent fact that many LBOs involving domestic targets

were in trouble, the postponements did nothing to reassure the

market that Penn’s LBO would close. But to conclude these

disclosures revealed facts that were related in any manner to

the fraudulent nature of Penn’s prior press releases proves too

much. The disclosures did not "relate back" to Penn’s earlier

omissions of the alleged truth because they did not even infer-

entially suggest that Penn’s prior press releases were fraudu-

lent and that the LOB would not close. In re Williams Sec.

Litig., 558 F.3d at 1140. Upon the facts pled, the TAC’s con-

clusion — that the disclosures of June 16, 17, and 25, 2008,

informing the market of delays in the regulatory approval pro-

cess revealed something about the fraudulent nature of Penn’s

prior press releases and the undisclosed knowledge behind

them — is unsustainable.

B.

The term unsustainable similarly characterizes the TAC’s

conclusion that the information contained in the June 24, 2008

analyst reports from Susquehanna and Oppenheimer consti-

tuted corrective disclosures of Penn’s alleged fraud. The TAC

simply alleges "Oppenheimer Analysts issued a research

report stating ‘the markets have become increasingly con-

20 KATYLE v. PENN NATIONAL GAMING

vinced that the company’s acquisition will not be com-

pleted.’" JA at A1021. That statement certainly does not

imply that Penn had issued fraudulent press releases during

the class period by failing to disclose what it supposedly knew

about the LBO. And if that were not enough, news that the

market had become convinced the LBO would not close as

written was hardly novel. With the initial closing date having

passed and the revised date looming, that Penn’s stock was

trading well below the buyout price of $67 per share said

quite enough about the investment risk.8 Moreover, the market

had been questioning the viability of the LBO since at least

the start of February 2008, when the price of Penn shares

began to steadily decline, reaching a low prior to commence-

ment of the class period of $38.76 on March 10, a 42% dis-

count off the $67 buyout price. Penn’s stock had been trading

in a similar range just prior to issuance of Oppenheimer’s

report.

Meanwhile, the Susquehanna report, like the Lehman

Brothers report three month prior, declined to predict the

LBO’s outcome given the continuing absence of facts directly

related to the deal’s prospects:

We are suspending our investment rating on PENN.

Shares have been highly volatile in recent months on

unsubstantiated speculation as to whether or not the

pending buyout deal will go through. Fundamentals

are clearly playing no role in the trading of the stock,

8

When an LBO is announced, the stock of the target usually trades at

a discount to the buyout price prior to the LBO’s closing. The size of the

discount, also known as the deal spread, generally depends on the period

of time to closing and the perceived risk that the deal will not close. See

Isaac Corre, Corporate Control Transactions: Commentary on Fischel, 69

U. Chi. L. Rev. 963, 970 (2002). In other words, the deal spread represents

"the market’s assessment of likelihood that the [buyout] would close; . . .

the higher the spread the lower the probability that the deal would close."

Dale A. Oesterle, Regulating Hedge Funds, 1 Entrepren. Bus. L.J. 1, 20

(2006).

KATYLE v. PENN NATIONAL GAMING 21

and day-to-day handicapping of the deal’s prospects

has become the primary mover of the stock. At this

point, there is significant uncertainty as to whether

the company will be acquired by the Fortress Invest-

ment Group LLC and Centerbridge Partners, L.P. for

$67 per share. . . . [W]e do not expect more public

announcements from the company any time soon.

Thus, we are suspending our rating until we have

more clarity on the prospects of the deal closing.

JA at A982 (emphasis added). Notably, Susquehanna consid-

ered numerous possible reasons for the most recent downturn

in Penn’s stock price, none of which even remotely hinted at

fraud: "The stock has continued to trade down since last week

when news of the Hexicon deal to buy Huntsman being on the

brink of collapsing was announced. There have been no

updates from either Penn or the buyers, and any opinion about

whether or not the deal will close or not close is pure specula-

tion, in our view." JA at A982 (emphasis added). Susque-

hanna observed that in addition to the shock waves from the

troubled Hexicon deal, "the current state of the economy" had

"obviously impacted" Penn’s stock price. JA at A982. Sus-

quehanna also reported the unfavorable effect that recent

smoking bans might have on Penn’s Illinois and Colorado

properties, and the effect that a Maryland proposal to legalize

slot machines might have on Penn’s West Virginia properties.

Conspicuously absent from Susquehanna’s report is any sug-

gestion that Penn, at any point during the previous three

months, had issued misleading press releases as a conse-

quence of its refusal to disclose the true facts about the LBO’s

prospects. See Lentell, 396 F.3d at 175 n.4 (analyst down-

grades did not constitute corrective disclosures because they

did not reveal that analysts’ prior representations were false).

What the report revealed was risk as evidenced by its conclu-

sion: "There is a risk that the deal falls apart and the stock

returns to pre-deal levels." JA at A982. The "unsubstantiated

speculation" and "significant uncertainty" surrounding the

LBO’s prospects did not in any sense reveal to the market the

22 KATYLE v. PENN NATIONAL GAMING

alleged fraudulent nature of Penn’s practices over the course

of the class period. See Metzler Inv. GMBH, 540 F.3d at 1063.

C.

Lastly, the TAC alleges Penn’s failure to issue a press

release announcing the Illinois Gaming Board’s approval of

the LBO on June 24, 2008, disclosed to the market that Penn

had misled the market into believing the LBO would close.

This, according to the TAC, is because Penn issued press

releases announcing all prior state regulatory approvals of the

LBO. Plaintiffs essentially ask us to conclude that Penn’s

non-announcement of positive news — Illinois’ approval of

the LBO — constitutes a corrective disclosure. Plaintiffs have

not pointed us to any decision that suggests a defendant’s

silence may constitute a corrective disclosure.9 Cf. In re Wil-

liams Sec. Litig., 558 F.3d at 1138 ("[I]t would be difficult to

characterize an announcement that contained no negative

information . . . as revelatory of the truth."). Moreover, we are

uncertain how Penn’s failure to issue a press release on June

24 suggests the falsity of press releases issued prior to and

including June 6. We acknowledge Penn’s silence likely fur-

ther fueled speculation that the LBO’s death knell would soon

sound. But we are at a quandary to understand how specula-

tion about the LBO’s prospects based on Penn’s failure to

issue a press release on June 24 announcing the Illinois Gam-

ing Board’s approval of the buyout translates into knowledge

9

Nor does every announcement of bad news constitute a corrective dis-

closure. In a financial market wrought with turmoil across the spectrum,

"[t]he standard cannot be so lax that every announcement of negative news

becomes a potential ‘corrective’ disclosure." In re Williams Sec. Litig.,

558 F.3d at 1140 (internal quotation marks omitted). Otherwise, contrary

to the aim of § 10(b), unwarranted federal security fraud claims seeking

"broad insurance against market losses" might run amok. Dura Pharm.,

Inc., 544 U.S. at 345 (explaining that § 10(b) provides a cause of action

"not to provide investors with broad insurance against market losses, but

to protect them against those economic losses that misrepresentations

actually cause").

KATYLE v. PENN NATIONAL GAMING 23

of the relevant truth, namely that from March 20, 2008

through June 6, 2008, Penn issued a series of fraudulent press

releases because Penn knew then the deal was off.

IV.

Plaintiffs argue that to sufficiently plead the first compo-

nent of loss causation, i.e., exposure of the relevant truth, the

six partially corrective disclosures identified in the TAC, con-

sidered holistically, "need[ ] only to alert investors to the fact

the merger was off the table." Reply Brief at 4 (emphasis

omitted). To that our response is two-fold. First, while we

suppose such a factual disclosure about the LBO may reveal

a part of the relevant truth because the falsity of the eight

press releases necessarily depends on the fact Penn knew the

deal was off, the disclosures identified in the TAC, as we

have just seen, did not disclose to the market any such fact.

Of course, one might posit that following the disclosures’ dis-

semination "the market must have known" the deal was off.

In re Williams Sec. Litig., 558 F.3d at 1138. Such sentiment

seems particularly apropos in hindsight given the downward

trend in Penn’s stock price over the course of the disclosures

and Penn public announcement of the LBO’s termination very

shortly thereafter. But —

So long as there is a drop in a stock’s price, a plain-

tiff will always be able to contend that the market

"understood" a . . . statement precipitating a loss as

a coded message revealing fraud. Enabling a plaintiff

to proceed on such a theory would effectively resur-

rect what Dura discredited—that loss causation is

established through an allegation that a stock was

purchased at an inflated price. Loss causation

requires more.

Metzler Inv. GMBH, 540 F.3d at 1064 (internal citation omit-

ted). Sentiment simply is not enough to sufficiently plead loss

causation. Speculation and conjecture, even a well-educated

24 KATYLE v. PENN NATIONAL GAMING

guess, in the context of market prognostication does not suf-

fice to establish a fact. Cf. id. at 1065 ("The TAC’s allegation

that the market understood the . . . disclosures as a revelation

of . . . systematic manipulation . . . is not a ‘fact.’").

To be sure, the six purported corrective disclosures identi-

fied in the TAC alerted investors to the ever-mounting risk

that the deal was unlikely to close. But this case is not about

materialization of a concealed risk. Plaintiffs do not argue that

"negative investor inferences" drawn from the disclosures

"were a foreseeable materialization of the risk concealed" by

Penn’s fraudulent press releases.10 In re Omnicom Group Inc.

Sec. Litig., 597 F.3d 501, 511 (2d Cir. 2010). The market well

understood the risk. The alleged disclosures told the market

nothing factually about the deal’s prospects that it had not

already heard, repeatedly. We have already discussed the

price trend of Penn’s shares over the course of 2008 and the

Lehman Brothers report from April 1, 2008, in which Leh-

man’s declined to predict whether the LBO would close.

Based upon activity in the options market, Lehman Brothers

at that time estimated at best a 32% probability the deal would

close as written. See JA at A455. Two weeks later, on April

16, thedeal.com reported the Penn deal was "trading so badly

[around $40 per share] that it could become a foregone con-

clusion that the buyers seek a price cut or want out of the buy-

out." JA at A444. The report noted the fact "[t]hat Deutsche

Bank and Wachovia are leading the Penn financing does not

boost confidence as the buyout comes closer to its funding

dates." JA at A444. Similar to Susquehanna’s June 24 report,

thedeal.com’s April 16 report attributed the downward drift in

Penn’s stock price in 2008 to the state of economic affairs.

10

"In such a case, the plaintiffs would not need to identify a public dis-

closure that corrected the previous, misleading disclosure because the

news of the materialized risk would itself be the revelation of the fraud

that caused plaintiffs’ loss." Teachers’ Ret. Sys., 477 F.3d at 187; see also

In re Williams Sec. Litig., 558 F.3d at 1138 (recognizing the truth may be

revealed by the materialization of the concealed risk rather than by a pub-

lic disclosure of the relevant truth).

KATYLE v. PENN NATIONAL GAMING 25

Second, even assuming the six disclosures revealed that

Penn knew the LBO would not close, the fact of such knowl-

edge alone would still not suffice. To sufficiently plead loss

causation, the TAC must have alleged facts suggesting some-

thing more. Specifically, the TAC must have alleged facts to

show the disclosures revealed to the market something about

the fraudulent nature of the press releases on which Plaintiffs

purportedly relied to their detriment because only then could

the press releases have caused Plaintiffs’ economic loss. See

Metzler Inv. GMBH, 540 F.3d at 1063. The fact that Penn

knew sometime prior to June 16, 2008 that the deal would not

close says nothing about its knowledge on or prior to June 6,

2008 when it issued the last of its eight press releases related

to the state regulatory process. None of the TAC’s six alleged

corrective disclosures "even purport[ ] to reveal some then-

undisclosed fact with regard to the specific misrepresentations

alleged in the complaint." In re Omnicom Group, Inc. Sec.

Litig., 597 F.3d at 511. The TAC fails to adequately plead

loss causation because it does not allege facts that suggest

Penn’s fraudulent omissions over the course of eight press

releases ever "‘became generally known.’" Tricontinental

Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824,

843 (7th Cir. 2007) (rejecting the argument that "the precise

fraud that resulted in the underlying transaction [need not] be

the subject of a later corrective disclosure in order to satisfy

loss causation").

Because the series of six partially "corrective" disclosures

alleged in the TAC did not, gradually or otherwise, reveal to

the market any undisclosed truth about Penn’s undisclosed

knowledge and resulting fraudulent omissions, any subse-

quent decline in Penn’s share price cannot be attributed to

those omissions. Accordingly, the judgment of the district

court is

AFFIRMED.11

11

Because the TAC fails to state a § 10(b) claim, we necessarily uphold

the district court’s dismissal of Plaintiffs’ § 20(a) claim against Penn Offi-

26 KATYLE v. PENN NATIONAL GAMING

WYNN, Circuit Judge, concurring in the judgment:

I concur in the majority’s judgment but write separately

because I read Plaintiffs’ complaint more broadly than the

majority. While it is true that Plaintiffs make a securities

fraud allegation based, at least in part, on press releases that

Penn issued between March 20 and June 6, 2008, I believe

that Plaintiffs claim more generally that Penn wrongly failed

to disclose that the leveraged buyout would likely not close.

Nonetheless, even under my broader reading of the com-

plaint, I agree with the majority’s judgment that Plaintiffs’

Third Amended Complaint founders. That is because the

alleged corrective disclosures tell nothing of the alleged fraud,

and, even assuming for the sake of argument that the alleged

disclosures did reveal that the leveraged buyout would likely

not close, the market had already come to that conclusion.

I.

As the majority notes, the Third Amended Complaint

alleges that Penn issued seven press releases between March

20 and June 5, 2008, notifying the public of state regulatory

approvals. Further, on June 6, 2008, Penn issued an eighth

press release announcing the extension of the leveraged buy-

out closing date by 120 days, from June 15 to October 13,

2008. The June 6 press release stated that the extension was

necessary to secure regulatory approvals from Illinois, Indi-

ana, Louisiana, Maine, and Missouri. Plaintiffs allege that

while Penn behaved publicly, through these releases, as if the

leveraged buyout would close, Penn was involved in private

discussions with the buyers and financing institutions about

the renegotiation or termination of the buyout.

cers Peter M. Carlino and William J. Clifford based upon such claim’s

failure to allege a predicate violation of § 10(b). See 15 U.S.C. § 78t(a)

(imposing liability on persons who "control[ ] any person liable under any

provision of this chapter").

KATYLE v. PENN NATIONAL GAMING 27

The Third Amended Complaint also alleges more broadly

that Penn failed to disclose that the buyout might not close.

For example, in paragraph 34 Plaintiffs contend that "[d]uring

the period from March 20, 2008 through June 15, 2008 inclu-

sive, Defendants never informed or apprised the investing

public of such material developments (ongoing termination

and/or renegotiation discussions)." After explaining that the

decision to terminate the buyout had likely occurred by May

2008, Plaintiffs allege, in paragraph 55, that "Defendants did

not previously disclose the potential merger termination to the

investing public or, in any way, indicate to the investing pub-

lic that the Purchaser and/or banks were seeking to materially

renegotiate the buyout price and/or terminate the previously

announced, published and stockholder-approved cash buy-

out/merger agreement."

Additionally, in paragraph 57, Plaintiffs allege that "after

months of undisclosed negotiations between the Defendants,

Purchaser, the financing banks, as well as with each party’s

respective advisors and counsel, the parties waited until July

3, 2008 to finalize the Termination and Settlement Agreement

. . . ." Plaintiffs contend in paragraph 61 that "Defendants

deliberately elected not to disclose or apprise the investing

public that the original buyout/merger agreement was ever in

jeopardy or that termination or modification negotiations were

taking place in order to keep Penn share prices artificially

inflated." Per paragraph 62, Penn’s "affirmative misrepresen-

tations, along with the concealments of the ongoing negotia-

tions and discussions . . . influenced Plaintiffs and the Class

to retain and/or purchase additional Penn shares." Accord-

ingly, per paragraph 65, "[b]y concealing material information

concerning the termination negotiations, Defendants were

artificially manipulating the open market price and obstruct-

ing the operation of the market as indices of the stock’s true

value . . . ."

Because of these and other allegations in the Third

Amended Complaint, I believe that Plaintiffs claim more gen-

28 KATYLE v. PENN NATIONAL GAMING

erally that Penn wrongly failed to disclose that the leveraged

buyout would likely not close. I therefore diverge from the

majority’s suggestion that the alleged securities fraud is tied

exclusively to the press releases that Penn issued between

March 20 and June 6, 2008.

II.

I agree with the majority that affirmative (mis)statements or

half-truths can serve as the basis for 10b-5 liability. But so

can omissions—that is, the failure to disclose material facts

that the plaintiffs "ha[ve] the right to know." See, e.g., Affili-

ated Ute Citizens of Utah v. United States, 406 U.S. 128, 151-

153 (1972) ("It is no answer to urge that, as to some of the

petitioners, these defendants may have made no positive rep-

resentation or recommendation. The defendants may not stand

mute" when in possession of material information that those

buying and selling securities have a right to know.); Cox v.

Collins, 7 F.3d 394, 396 (4th Cir. 1993) (noting that plaintiffs

alleged securities fraud by positive misrepresentation and by

nondisclosure of material information and affirming denial of

judgment as a matter of law in the face of conflicting evi-

dence regarding the "materiality of the alleged omissions and

[defendant’s] alleged knowledge and intent to deceive").

Nevertheless, even read more broadly to encompass Penn’s

general failure to disclose that the buyout would likely be ter-

minated, the Third Amended Complaint still fails to success-

fully plead loss causation. To state a claim for securities fraud

under Section 10(b) of the Securities Exchange Act of 1934

and Securities and Exchange Commission Rule 10b-5, a

plaintiff must plead "(1) a material misrepresentation or omis-

sion 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 omis-

sion; (5) economic loss; and (6) loss causation (that is, the

economic loss must be proximately caused by the misrepre-

sentation or omission)." Matrix Capital Mgmt. Fund, LP v.

KATYLE v. PENN NATIONAL GAMING 29

BearingPoint, Inc., 576 F.3d 172, 181 (4th Cir. 2009) (inter-

nal quotation marks and emphasis omitted).

Regarding the last two elements, the Supreme Court, in

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005), recently

made clear that securities fraud suits are permitted "where,

but only where, plaintiffs adequately allege and prove the tra-

ditional elements of causation and loss." Id. at 346. In other

words, the alleged facts must show that the misrepresentation

or omission was "one substantial cause of the investment’s

decline in value." In re Mutual Funds Inv. Litig., 566 F.3d

111, 128 (4th Cir. 2009) (internal quotation marks omitted).

Only then may we conclude that the complaint alleges the

necessary causal link between the defendant’s alleged fraud

and the plaintiff’s economic harm. See Dura Pharm., 544

U.S. at 346-47. Therefore, as the majority notes, because the

Third Amended Complaint relies upon the cumulative effect

of a series of partially corrective disclosures to plead loss cau-

sation, it must state facts showing that those disclosures grad-

ually revealed to the market the undisclosed truth about

Penn’s fraud and resulted in a decline of Penn’s share price.

Plaintiffs allege that the following purported corrective dis-

closures leaked the truth onto the market: (1) Maine, Louisi-

ana, and Missouri regulators failed to take action regarding

the transaction in June 2008; (2) Illinois regulators approved

the transaction in June 2008 but Penn failed to announce that

approval in a press release; and (3) One brokerage firm sus-

pended coverage of Penn’s stock in June 2008, while another

made negative comments regarding the likelihood of the

merger’s consummation. None of these events revealed in any

way that Penn and other parties to the buyout were discussing

terminating or restructuring the transaction.

The one regulatory approval and three regulatory board

failures to act disclosed nothing other than that which Penn

had already made clear, in the leveraged buyout agreement

filed with the Securities and Exchange Commission and in

30 KATYLE v. PENN NATIONAL GAMING

Penn’s June 6, 2008 press release: Penn sought regulatory

approval for the buyout, and the regulatory approval process

would not be completed by June 15, 2008. These regulatory

events, therefore, did not reveal Penn’s alleged fraud.

Further, one stock brokerage’s suspension of coverage and

another’s negative comments did not constitute corrective dis-

closures. On June 24, 2008, Susquehanna Financial Group,

LLP announced that it was suspending its coverage of Penn’s

stock. In doing so, Susquehanna expressly noted that "any

opinion about whether or not the deal will close or not close

is pure speculation, in our view." Susquehanna’s announce-

ment cannot, particularly in the face of that caveat, constitute

a corrective disclosure that Penn and other parties to the buy-

out were discussing terminating or restructuring the transac-

tion.

Oppenheimer Analysts issued a report indicating that "the

markets have become increasingly convinced that the compa-

ny’s merger will not be completed." But that June 24, 2008

statement did not say anything other than that which Lehman

Brothers had indicated in its April 1, 2008 report attached to

Plaintiffs’ Third Amended Complaint—that the deal was

unlikely to be consummated, especially given general eco-

nomic deterioration, credit market deterioration, and then-

recent headlines about other distressed and cancelled lever-

aged buyouts. Lehman Brothers’ April 1, 2008 report esti-

mated the likelihood of the deal’s closing to be between 21

and 32 percent. Not surprisingly, therefore, Penn’s share price

steadily declined from the time the buyout was announced to

May 2008, the time of the alleged decision to renegotiate or

terminate the deal.

In any event, neither the Oppenheimer report nor the Sus-

quehanna announcement disclosed to investors that the parties

were terminating or renegotiating the deal. Moreover, the

Lehman Brothers report from April 1, 2008, among other

KATYLE v. PENN NATIONAL GAMING 31

things, indicates that the market had decided well before May

2008 that Penn’s buyout would likely fall through.

Under these circumstances, the alleged corrective disclo-

sures failed to disclose Penn’s alleged fraud, and, even assum-

ing for the sake of argument that the alleged disclosures did

reveal that the leveraged buyout would likely not close, the

market had already come to that conclusion. With their Third

Amended Complaint, Plaintiffs therefore still fail to success-

fully plead loss causation. For this reason, I concur in the

majority’s judgment.