Opposition Brief — Flaherty & Crumrine Preferred Preferred Fund Fund, Inc. v. TXU Corp (No. 09-2)

Supreme Court, U.S.

FILED

S AUG 28 2009

No. 09-2

OFFICE OF THE CLERK

an ee Soe

IN THE

Supreme Court of the Gnited States

FLAHERTY & CRUMRINE PREFERRED INCOME

FUND INCORPORATED, et al.,

Petitioners,

Vv.

TXU CORP., et al.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of

Appeals for the Fifth Circuit

BRIEF IN OPPOSITION

GERARD G. PECHT*

RICHARD S. KRUMHOLZ

FULBRIGHT & JAWORSKI L.L.P.

2200 Ross Avenue, Suite 2800

Dallas, Texas 75201

(214) 855-8050

PETER A. STOKES

FULBRIGHT & JAWORSKI L.L.P.

600 Congress, Suite 2400

Austin, Texas 78701

(512) 536-5287

* Counsel of Record Counsel for Respondents

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D. C. 20002

QUESTION PRESENTED

Whether the Court of Appeals correctly applied the

well-settled pleading requirements for fraudulent

intent under the Private Securities Litigation

Reform Act and Federal Rules of Civil Procedure 8

and 9(b) to the particular facts in this case in

affirming the dismissal of petitioners’ complaint.

il

RULE 29.6 STATEMENT

TXU Corp. is now known as Energy Future

Holdings Corp.. Energy Future Holdings Corp. has

no parent corporation, and no publicly held company

owns 10% or more of its stock.

lil

TABLE OF CONTENTS

Page

QUESTION PRs eo isccivisioscsscssesessscsssceensontsnentn i

RSE BA Ea IIT © sosvstisicssvselessinsscseonsacaaseseane ii

EO a I i ciihiic ess bncodvincs sae danvsoesa rename 1

CAFEIG ET rrtre MIO Enid ens ssnivdeisssiissscaveutimsaueecens 4

The Factual Allegations........................ 4

The Decisions Below ..........0..0.seseserseseos 8

REASONS FOR DENYING THE PETITION......... 10

I. THE PETITION IDENTIFIES NO

EXISTING CIRCUIT SPLIT OR

UNSETTLED QUESTION OF LAW....... 10

There Is No Circuit Split Or

Unsettled Question of Law

Regarding The Applicable

FUORI SSCRTIOETGS.. occ cnsiicsccescscsseccevens 10

l. Twombly and I¢bal

Definitively Resolve The Issue...... 11

Z Petitioners’ Alleged Circuit

SOUPEEG AE SATIRE ooo nincenscs cecseviccesvace 12

There Is No Circuit Split Or

Unsettled Question Of Law

Regarding The Pleading Stan-

dards For Section 14(e) Claims. ......... 16

IT. THIS CASE INVOLVES THE

CORRECT APPLICATION OF

SETTLED LAW.......... PEARS er PR RA Mn RA 19

1V

TABLE OF CONTENTS

A. The Fifth Circuit Applied The

Same Standard As Twombly And

B. The Allegations Fail To Support A

Plausible Inference Of Fraud As

PRCUNSF OEE FEW TEUINO Go ievnccicvcccecsaccreneccccess 20

C. The Fifth Circuit Did Not Engage

In Impermissible Fact-Finding. ....... 266

ltl. THIS CASK PROVIDES AN

UNSUITABLE VEHICLE FOR

REVIEWING THE QUESTIONS

PNM signi yess cinsoescebvensscuebacsriavsseaniie 28

Ee FI oo hoes ktcsniscadssedcbneniepnielcuachevaescaweneateaeee

Vv

TABLE OF AUTHORITIES

Page

CASES:

Am. Realty Trust, Inc. v. Hamilton Lane

Advisors, Inc., 115 Fed. Appx. 662 (5th

On a as 15

Anderson v. Sara !.ee Corp., 508 F.3d

Da Es PE Bika vs tasdcensenuswtacestiecesess ccs 13

Ashcroft v. Igbal, 129 S. Ct. 1937 (2009).... passim

Bell Atl. Corp. v. Twombly, 550 U.S. 544

FREES RSet Facer eae Pe es Soo nee re passim

Berman v. Gerber Prods. Co., 454 F.

Supp. 1310 (W.D. Mich. 1978).................. 26

Chromalloy Am. Corp. v. Sun Chem.

Corp., 611 F.2d 240 (8th Cir. 1979).......... 26

Conn. Nat'l Bank v. Fluor Corp., 808

et, BOIS Dnsscsncnssssccvnraccssacssece 17

Cozzarelli v. Inspire Pharm. Inc., 549

P.O OLS CAG CIP, BOO)... cc ccccccscscssrevscsesses 25

In re Digital Island Secs. Litig., 223 F.

Supp. 546 (D. Del. 2002), affd, 357

Fe Bee Fe Ee BOS) oo sccicccisscsseverscsecns..s ET, BA

DiLeo v. Ernst & Young, 901 F.2d 624

PNP PI oc is oy ca saaadanntpadéesiesucesss 16

Dorsey v. Portfolio Equities, Inc., 540

P.3@ Sao (ott Cir. ZO08)..............00cccsnesceees. 15

Eternity Global Master Fund Ltd. v.

Morgan Guar. Trust Co. of N.Y., 375

ee Fe Oe GR ED eines snk co sieve scnsceviecess 16

Fecht v. Price Co., 70 F.3d 1078 (9th Cir.

Ta IEE a I pe Aaa ea RE ates MER 18

vi

TABLE OF AUTHORITIES—Continued

Page(s)

Feder v. MacFadden Holdings, Inc., 698

B. SUDO. 47 CS.DILN.Y. LBGS) ....ccccescscsseveess 26

Flanerty & Crumrine Preferred Income

Fund Inc. v. TXU Corp., No. 3:05-CV-

1784-G, 2006 WL 2583212 (N.D. Tex.

oo asdiicah Aches sucedsninesssvinpevsness 8

Flaherty & Crumrine Preferred Income

Fund Ine. v. TXU Corp., 242 Fed.

Appx. 253 (5th Cir. Sept. 18, 2007).......... 8

Gross v. Summa Four, Inc., 93 F.3d 987

I nc ccaganstusdeusisdeseuseaianeihiess 24

GSC Partners CDO Fund v. Washington,

S00 Fae 2ee (06 Cir, BODE) .....0cccccccesess.- 25

Halperin v. eBanker USA.com, Inc., 295

ge Rs ae 8 | 18

Hecker v. Deere & Co., 556 F.3d 575 (7th

I ens tdanhvaskentcave 13

Hefferman v. Bass, 467 F.3d 596 (7th

rsd adoqaknennknes 13

In re Burlington Coat Factory Secs.

Litig., 114 F.3d 1410 (3d Cir. 1997)......... 16

In re Navarre Corp., 299 F.3d 735 (8th

ris osc ck ee cdkdd syasnrasiwdadasesss «ie 14

Institutional Investors Group v. Avaya,

Inc., 564 F.3d 242 (3d Cir. 2009).............. 25

K-Tel Int'l Inc. Sec. Litig. v. K-Tel Int'l

Inc., 300 F.3d 881 (8th Cir. 2002) ............ 16

Kalint v. Eichler, 264 F.3d 131 (2d Cir.

I ero os Sancissbhakavneneave’ 25

vii

TABLE OF AUTHORITIES—Continued

Page(s)

Lormand v. US Unwired, Inc., 565 F.3d

I ee, Se via css sick accaseorccecdnssasicesces 10,18

Mo. Portland Cement Co. v. H.K. Porter

Co., 535 F.2d 388 (8th Cir. 1976) ............. 26

Morganroth & Morganroth v. Norris,

McLaughlin & Marcus, P.C., 331 F.3d

ID wre cksksecccsaccesscnsonsvsesener esos 14

North Am. Catholic Educ. Programming

Found. Inc. v. Cardinale, 567 F.3d 8

CR IIE nny ccosckahysconnesaskauiesesubaxescue 15-16

Plotkin v. IP Axess Inc., 407 F.3d 690

RA WE ss ccc gatonseusscasssauccuendiainaessosee 23

Reiss v. Pan Am. World Airways, 711

re ee NE oicicsdatgadasccevesssnaenese 26

S.E.C. v. Ginsburg, 362 F.3d 1292 (11th

ee areca Sree eidies sissadeate piscssics 17

Shamrock Holdings, Inc. v. Polaroid

Corp., 709 F. Supp. 1311 (D. Del. 1989)... 26

Shaw v. Digital Equip. Corp., 82 F.3d

Ee A A. CD vais eninecispnsinccsvevesssvencs 18

Susquehanna Corp. v. Pan Am. Sulphur

Co., 423 F.2d 1075 (5th Cir. 1970)........... 26

Taylor v. First Union Corp. of S.C., 857

Fe Bi Cs Ge, Ti vive ccscsiccocsssscsscanes 26

Tellabs, Inc. v. Makor Issues & Rights,

oie oe St re passim

Todd Shipyards Corp. v. Madison Fund,

Inc., 547 F. Supp. 1383 (S.D.N.Y. 1982).. 26

Vill

TABLE OF AUTHORITIES—Continued

Page(s)

Warner Comme’ns, Inc. v. Murdoch, 581

F. Supp. 1482 (D. Del. 1984) .................... 26

West Coast Roofing & Waterproofing,

Inc. v. Johns Manville, Inc., 287 Fed.

PA Be UG Be Hts BD oi che sxecnnsicccncccesets 14

Wight v. BankAmerica Corp., 219 F.3d

FE I I i cecsacvedavcsinbscasinnacdesiecsucee 14

U.S. ex rel. SNAPP, Inc. v. Ford Metor

Co., 532 F.3d 496 (6th Cir. 2008) ............. 12-13

U.S. ex rel. Willard v. United Health

Plan of Tex. Inc., 336 F.3d 375 (5th Cir.

SN davis ccacsenceevsusicasdcederaienistiaseiwiaeactbeskss es 15

U.S. ex rel. Wilson v. Kellogg Brown &

Root, Inc. , 525 F.3d 370 (4th Cir. 2008)... 15

Yourish v. Cal. Amplifier, 191 F.3d 983

I nr sande re pekndevsecaded ivdesexetinss 24

STATUTE:

ee PUD cs cclensecsdussvivereececontesssoes 3

RULES:

ic a) ices kepeeabaneneapesnnes passim

Bec cessvsdussordcnsesincerdssvens passim

RNID iiss scessacdvevvesnecensnectiss 27

OTHER AUTHORITY:

Notice Pleading Restoration Act of 2009,

S. 1604, il ith Cong. (Z008)...............02..... 29

IN THE

Supreme Court of the Anited States

No. 09-2

FLAHERTY & CRUMRINE PREFERRED INCOME

FUND INCORPORATED, et al.,

Petitioners,

V.

TXU CORP.., et al.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of

Appeals for the Fifth Circuit

BRIEF IN OPPOSITION

INTRODUCTION

Respondents TXU Corp. (now known as Energy

Future Holdings Corp.) (““TXU”) and C. John Wilder

(“Wilder”) oppose the petition for certiorari because,

among other reasons, the Court of Appeals’ decision

(1) does not raise any novel or disputed issues of law;

(2) involves a correct application of settled law to

what petitioners concede are “unique” factual

circumstances; and (3) presents an inappropriate, ill-

timed, and highly fact-specific vehicle for addressing

the questions presented.

The petition identifies no disputed legal question

warranting certiorari. In unanimously affirming

2

dismissal of petitioners’ claims, the Fifth Circuit

correctly applied the Private Securities Litigation

Reform Act (“PSLRA”) and Federal Rules of Civil

Procedure 8 and 9(b) to the particular facts of this

case in determining that the complaint failed to

allege a sufficient inference of fraudulent intent.

The petition raises no salient question of law not

fully addressed in this Court’s recent opinions in Bell

Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.

308 (2007). Indeed, Ashcroft v. Iqbal, 129 S. Ct. 1937

(2009), puts to rest any notion that the Fifth Circuit

applied an incorrect pleading standard. Petitioners

do not and cannot explain how the Fifth Circuit’s

standard for pleading fraudulent intent under Rules

8 and 9b), which requires “particularized facts

supporting an inference of fraud,” Pet. App. 22a

(citation omitted), differs from the standard

articulated in Twombly and Iqbal that a complaint’s

factual allegations must support a_ plausible

inference of the required state of mind.

Iqbal also forecloses petitioners’ Rule 9(b) “circuit

split” argument by squarely holding, in full accord

with the Fifth Circuit’s decision, that conclusory

assertions of scienter are insufficient. In any event,

petitioners mischaracterize the circuits’ application

of Rule 9(b) and overlook decisions from other

circuits that are fully consistent with the approach

taken by the Fifth Circuit and this Court.

Petitioners’ suggestion that the Fifth Circuit

applies a different pleading standard to “business

fraud” cases likewise rings hollow. The petition does

not and cannot cite a single Fifth Circuit decision

applying a different or more lenient standard in

cases not involving “business fraud.” To the contrary,

3

the Fifth Circuit has consistently applied the

pleading standards under the Federal Rules of Civil

Procedure and the PSLRA.

Nor does this case merit special attention merely

because it involves a “self-tender” offer under the

Williams Act. Petitioners fail to identify any circuit

split or nationwide controversy over the pleading

standard for private civil claims under the Williams

Act provision at issue, 15 U.S.C. § 78n(e) (“Section

14(e)”). To the contrary, courts addressing Section

14(e) have uniformly held that plaintiffs must plead

and prove scienter to the same extent as under

Section 10(b) and Rule 10b-5. All such claims are

governed by Tellabs, a decision the Fifth Circuit

faithfully applied.

In the end, the petition devolves into a garden-

variety protest that the appellate court incorrectly

weighed the inferences from petitioners’ factual

allegations. Petitioners’ argument that the Fifth

Circuit “misweighed” the inferences fails. As

petitioners concede, TXU expressly disclosed that it

was reviewing its dividend and stock-repurchase

policies during the tender offer. Everything TXU

stands accused of doing is consistent with that

disclosure. But in any event, as petitioners also

repeatedly concede, the fact pattern of this case is

“unique.” Pet. 6, 7, 8. There is no reason why this

unique context-specific fact pattern, which is merely

one of many possible permutations and combinations

of facts that may arise in securities fraud cases,

merits further review. The applicable pleading

standards have already been addressed by this Court

several times during the past three years, and any

decision with respect to this case would necessarily

4

be limited to its facts and would offer little

precedential value or guidance for future cases.

It is little wonder why this case was dismissed

twice in the district court and affirmed unanimously

on appeal. ‘I'he petition should be denied.

COUNTERSTATEMENT

A. The Factual Allegations

This is a federal and state law fraud action against

TXU and its former CEO, Wilder. Petitioners

voluntarily sold their convertible TXU debt securities

to TXU in October 2004 through a tender offer in

which they received a substantial premium over the

then-current market price of the securities. Despite

the considerable returns petitioners reaped on their

investment in TXU, petitioners complain that they

would have profited even more had they declined the

tender offer and retained their TXU securities, which

rose in value when TXU announced a dividend

increase and stock repurchase.

Petitioners assert that TXU and Wilder acted with

intent to defraud or severe recklessness when they

allegedly misrepresented or failed to disclose during

the tender offer whether those future events would

occur. Petitioners, however, allege no _ facts

demonstrating that TXU knew with certainty before

the close of the tender offer that its management

would recommend a dividend increase or change in

the stock repurchase plan to TXU’s Board of

Directors at any particular time, let alone that TXU’s

Board would approve either one.

Instead, as demonstrated by petitioners’ own

factual allegations, TXU expressly disclosed that it

was reviewing the policies at issue:

5

TXU disclosed on May 18, 2004, four months

before the tender offer was made, that “man-

agement would recommend that the Board of

Directors reevaluate the current dividend

policy” after the company met certain financial

goals. Pet. App. 63a-64a. TXU further dis-

closed that the company’s capital allocation

program “will enable management to rec-

ommend an increase of the dividend in 2006.”

Id. The May 18 press release also stated that

“the Board of Directors may consider other

relevant factors in determining if and when to

make a change in the dividend policy.” Jd.

After substantial improvement in TXU’s

business over the summer, TXU disclosed on

September 15, 2004, at the beginning of the

tender offer, that this “evaluation” and

“review —previously estimated to take place

in 2006—had already begun and was ongoing.

Pet. App. 67a-68a. The September 15

disclosure stated that

[als a part of its capital management and

restructuring program and_ considering

current business and market conditions,

TXU Corp.’s management is evaluating

whether it should recommend to the TXU

Corp. Board of Directors that they

reevaluate TXU Corp.’s current common

stock dividend policy. TXU Corp. cannot

predict the outcome of management’s

evaluation, when, tf at all, management

would make a recommendation to the

Board of Directors to change the current

common stock dividend policy, or what

management’s recommendation might be.

6

In addition to any recommendation from

management, the Board of Directors may

consider other relevant factors in deter-

mining if and when to make a change in

TXU Corp.’s common stock dividend policy.

Id. (emphasis added). This statement was

included in a September 15, 2004 press release

and Form 8-K, which was filed with the SEC,

and was incorporated verbatim into the tender

offer document itself. Jd.

e TXU also disclosed, in a September 28, 2004

presentation by its CEO filed with the SEC

before petitioners tendered their securities,

that both the dividend and stock-repurchase

policies were “[u]nder review,” and that TXU

was in the process of determining “[hlow much

cash we should return to our shareholders.”

See Pet. App. 70a, 170a.

Contrary to petitioners’ contentions, none of these

disclosures was “boilerplate.” Pet. 21-22. Rather,

each was specifically tailored to TXU’s particular

circumstances at the time it was made.

Despite these express disclosures, petitioners argue

that TXU and Wilder committed fraud because the

company (i) hired a financial advisor to review the

dividend issue; (ii) communicated with credit rating

agencies during the tender offer and provided them

with detailed information about the dividend policy

before the tender offer closed; (iii) provided dividend-

related materials to the Board after the tender offer

had closed, and scheduled an October 22, 2004 Board

meeting to discuss the dividend and stock repurchase

issues; and (iv) approved a dividend increase and

|

stock repurchase during that Board meeting and

announced them on October 25, 2004.

But each of these actions is fully consistent with

TXU’s disclosure that it was “review[ing]” and

“evaluatling|” its dividend and stock repurchase

policies. The complaint pleads no facts demonstrat-

ing that TXU management was in a position to

recommend a dividend or stock repurchase increase

before receiving feedback from the credit rating

agencies about the likely impact of such an increase

on the company’s credit rating, or that the company

received such feedback before the tender offer closed.

in fact, far from supporting an inference of fraud,

the purported “expert report” attached to petitioners’

own complaint undermines petitioners’ argument

that TXU management knew all along what the

credit rating impact of a dividend increase or stock

repurchase would be. The report concedes that: (i)

credit ratings are highly subjective and “complex,”

are “predicated on a host of qualitative or judgmental

factors,” and are “as much an art as * * * a science”;

(ii) rating agencies “would have been particularly

careful in evaluating companies with only marginally

investment grade credit ratings” such as TXU, which

had a near-junk rating at the time; (iil) during

October 2004, “Moody’s was conducting overwhelm-

ingly negative rating actions, reviews, and outlooks

in the utilities industry” due to the continued fallout

from Enron’s collapse; (iv) nearly 30% of companies

that increased their dividends by more than 160%

from 2000-06 suffered a ratings downgrade; (v)

TXU’s energy trading business depended on having

an investment-grade rating; and (vi) “[a] single notch

decline” in TXU’s rating would have had “disastrous

8

effects on the Company * * *.” Pet. App. 117a-125a,

142a-143a, 164a.

B. The Decisions Below

Petitioners originally filed this case as a federal

class action under Sections 10(b) and 14(e) of the

Securities Exchange Act without asserting any state

law claims. The district court granted petitioners’

initial motion to dismiss on August 30, 2006, holding

that the “quantum of facts” alleged by petitioners

failed to support a strong inference of scienter, as is

required for such claims. Flaherty & Crumrine

Preferred Income Fund Inc. v. TXU Corp., No. 3:05-

CV-1784-G, 2006 WL 2583212, at *6-7 (N.D. Tex.

Aug. 30, 2006) (observing that petitioners’ allega-

tions “do not plainly invalidate” TXU’s disclosures

and that “hiring a financial advisor and submitting a

financial plan to credit rating agencies appears to

substantiate the defendants’ disclosure that the

dividend policy was under review”). Because this

Court decided TVellabs while petitioners were

pursuing their initial appeal, the Fifth Circuit

vacated the district court’s first dismissal without

consideration of the merits and remanded to give the

district court an opportunity to evaluate the

allegations under Tellabs. Flaherty & Crumrine

Preferred Income Fund Inc. v. TXU Corp., 242 Fed.

Appx. 253 (5th Cir. Sept. 18, 2007).

Following remand, petitioners amended their

complaint to add a non-class claim for common law

fraud, which they have now made the centerpiece of

their petition for certiorari. The amended complaint

also included an “expert” report from Professor Linda

Allen, a law professor who claimed expertise

concerning credit rating agencies. After allowing the

amendment, the district cuurt applied Tellabs to the

9

amended complaint and again determined that

petitioners failed to state a claim. Pet. App. 27a. As

Tellabs requires, the district court took petitioners’

“well-pleaded facts” as true, evaluated petitioners’

allegations “holistically,” and compared the overall

“quantum of facts” to those in other decisions to

determine whether a strong inference cf scienter was

pled. Jd. at 36a-46a. The court concluded that

“there is hardly more substance to [petiiioners’] cur-

rent claims than in their initial complaint” and that

“professor Allen’s assessment of the facts does little

to establish a strong inference of scienter.” Jd. at 44a

& n.11. The court also dismissed the common law

fraud claim, holding that the allegations “fail to show

how each statement was fraudulent.” Jd. at 47a.

The Fifth Circuit unanimously affirmed the district

court’s second dismissal. Pet. App. la. The court

observed that “it is not clear that Appellees ever

issued a materially misleading statement or omis-

sion of fact concerning the dividend policy.” Jd. at

16a. In particular, “the statement that the dividend

policy was ‘under review’ conveyed that TXU had

taken some steps in evaluating a change in the

dividend policy ** * .” fd. at 17a. After “[tlaking

into account all of the facts in the aggregate, as weil

as inferences opposing fraudulent intent,” the court

held that “Appellants have failed to raise a strong

inference that TXU, and specifically Wilder, acted

with the intent to deceive, manipulate, or defraud or

acted with severe recklessness in making statements

concerning the dividend policy.” Jd. at 2la. The

court also affirmed dismissal of the common law

fraud claim, holding that the allegations “do not

suffice to establish an inference of fraud under Rule

9(b).” Id. at 23a.

10

One day after issuing its opinion in this matter, the

Fifth Circuit reversed the dismissal of another

securities fraud lawsuit involving a_ different

company. Lormand v. US Unwired, Inc., 565 F.3d

228 (5th Cir. 2009). As demonstrated by Lormand

and numerous other cases, the Fifth Circuit is more

than willing to sustain pleadings that meet the

requirements of the PSLRA and Rule 9(b) depending

on the individualized facts of each case. This case,

however, fell far short of the applicable pleading

requirements and was properly, dismissed.

REASONS FOR DENYING THE PETITION

I. THE PETITION IDENTIFIES NO

EXISTING CIRCUIT SPLIT OR

UNSETTLED QUESTION OF LAW.

Petitioners’ two questions presented focus entirely

on their common law fraud and Section 14(e) claims

and, tellingly, do not address their securities fraud

claim under Section 10(b). Because the scienter

requirement for Section 10(b) claims was thoroughly

addressed in Tellabs, it is hardly surprising

petitioners struggle to find some other basis for

certiorari. Neither of the questions presented,

however, provides any reason to accept this case.

A. There Is No Circuit Split Or Unsettled

Question Of Law Regarding The

Standards For Pleading Intent Under

The Federal Rules.

Petitioners first suggest the Court should grant

certiorari to address a purported nationwide

controversy over the meaning of Rule Q9b)’s

prescription that “state of mind” allegations can be

“alleged generally.” This supposed controversy does

not exist and, even if it did, would not be implicated

ll

in this case. Iqbal expressly holds, following

Twombly, that Rule 9(b)’s “alleged generally”

language does not relieve parties from the strictures

of Rule 8 in pleading the required state of mind To

the extent any prior decisions suggest otherwise,

Twombly and Iqbal clearly control and foreclose

petitioners’ argument. But in any event, the cases

cited in the petition evince no circuit split.

1. Petitioners’ Alleged Circuit Split Is Not

Implicated Here Because Twombly And

Iqbal Definitively Resolve The Standard

For Pleading Intent.

In Iqbal, the Court reiterated its prior holding in

Twombly that even in a “notice pleading” case under

Rule 8, “a complaint must contain sufficient factual

matter, accepted as true, to ‘state a claim to relief

that is plausible on its face.” Jqbal, 129 S. Ct. at

1949 (quoting Twombly, 550 U.S. at 570). “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.” Jd. (citing Twombly, 550

U.S. at 556). “Where a complaint pleads facts that

are ‘merely consistent with’ a defendant’s liability, it

‘stops short of the line between possibility and

plausibility of ‘entitlement to relief.” /d. (quoting

Twombly, 550 U.S. at 557). Determining whether a

complaint states a “plausible” claim is “a context-

specific task that requires the reviewing court to

draw on its judicial experience and common sense.”

Id. at 1950.

Iqbal also specifically addresses the state-of-mind

requirement under Rule 9(b), which is the primary

ground for certiorari urged here. Much as petition-

ers have done, the plaintiff in Jgbal sought refuge in

12

Rule 9(b)’s statement that intent may be alleged

“generally.” Jd. at 1954. The Court rejected that

assertion, holding that Rule 9(b)’s “alleged generally”

language “does not give [a plaintiff] license to evade

the less rigid—though still operative—strictures of

Rule 8,” and “does not empower [the plaintiff] to

plead the bare elements of his cause of action, affix

the label ‘general allegation,’ and expect his com-

plaint to survive a motion to dismiss.” Jd. Applying

the general standard of Rule 8 as elucidated in

Twombly, the Court held that the respondent’s

complaint failed to plead sufficient facts to support a

plausible inference of discriminatory intent. Jd.

Accordingly, there can be no circuit split over the

pleading requirement for fraudulent intent because

this Court has definitively resolved the issue. Under

Twombly and Iqbal, the well-pled factual allegations

must support a plausible inference of the required

state of mind. Any prior circuit court decisions that

can be read as holding otherwise have been

superseded by Twombly and Iqbal.

2. Petitioners’ Alleged Circuit Split Is

Illusory In Any Event.

Leaving aside this Court’s resolution of the

standard for pleading intent under the Federal Rules,

the various pre-I[gbal cases cited on pages 19-21 of

the petition as evidence of a purported “circuit split”

fail to demonstrate any such controversy.

Particularly given the recent guidance from this

Court, the present case would not be decided

differently in any of those circuits.

For example, petitioners note that in U.S. ex rel.

SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496 (6th Cir.

2008), the Sixth Circuit remarked that a defendant’s

13

state of mind need only be pled “generally,” quoting

the language in Rule 9(b). Pet. 19. But they fail to

mention that the Sixth Circuit affirmed the Rule 9(b)

dismissal in SNAPP and emphasized that a

complaint must state enough facts to support a

“plausible” claim. 532 F.3d at 502. That holding is

entirely consistent with the Fifth Circuit’s decision in

this case.

Petitioners also cite Anderson v. Sara Lee Corp.,

508 F.3d 181 (4th Cir. 2007). Pet. 19. But

petitioners fail to mention that on appeal, the

defendant in Anderson “([tlellingly” did not rely “on

the proposition that the Class Action Complaint fails

to allege the intent to deceive” and argued for

affirmance based solely on reliance grounds. 508

F.3d at 189 n.8. No such issue is present in this case.

Petitioners next cite Hefferman v. Bass, 467 F.3d

596 (7th Cir. 2006). Pet. 19. But petitioners’

characterization of Hefferman oversimplifies the

state of the law in that circuit. The Hefferman court

applied a pre-Twombly “notice pleading” standard

(under which “the plaintiff is not required to plead

either facts or legal theories”) and distinguished the

pre-Twombly federal Rule 8 regime from. the

requirement in Illinois state courts that “the

plaintiff must allege facts sufficient to bring a claim

within a legally recognized cause of action, not simp-

ly conclusions.” 467 F.3d at 599. As the Seventh

Circuit now recognizes, Twombly has supplanted this

lenient application of Rule 8. See Hecker v. Deere &

Co., 556 F.3d 575, 580 (7th Cir. 2009) (following

Twombly, a complaint must allege “enough facts to

state a claim to relief that is plausible on its face”)

(internal quotation marks and citations omitted).

14

Petitioners also cite Morganroth & Morganroth v.

Norris, McLaughlin & Marcus, P.C., 331 F.3d 406

(3d Cir. 2003), and In re Navarre Corp., 299 F.3d 735,

742 (8th Cir. 2002). Pet. 19-20. Again, however,

petitioners’ descriptions of those cases omit key

distinctions. In Morganroth, the Third Circuit listed

the numerous detailed facts pled in the complaint.

and held that “(t]he fraud allegations are sufficiently

particular because they allege specific actions by

which defendants exceeded the bounds of advocacy.”

331 F.3d at 414 n.2. The entirety of the court’s Rule

9(b) analysis was contained in a single footnote and

does not support the proposition that parties need

not plead facts supporting a plausible inference of

fraud. In In re Navarre, the Eighth Circuit merely

quoted Rule 9(b); it did not hold that a plaintiff was

excused from pleading facts supporting a plausible

claim. 299 F.3d at 742.

Petitioners’ final two citations on this issue

likewise fail to demonstrate a circuit split. In Wight

v. BankAmerica Corp., 219 F.3d 79, 92 (2d Cir. 2000),

the court specifically analyzed whether the factual

allegations demonstrated “the requisite knowledge

on the part of (the defendant],” using an approach

virtually indistinguishable from the Fifth Circuit’s.

Id. And in West Coast Roofing & Waterproofing, Inc.

v. Johns Manville, Inc., 287 Fed. Appx. 81 (11th Cir.

2008), the court expressly held that Rule 9b)

“requires more than conclusory allegations that

certain statements were fraudulent; it requires that

a complaint plead facts giving rise to an inference of

fraud.” Jd. at 86. This unpublished decision has no

precedential value even in the Eleventh Circuit, and

is in any event consistent with the Fifth Circuit’s

decision in this case.

15

In addition to their failure to establish a circuit

split, petitioners have not cited any authority to

substantiate their claim that the Fifth Circuit

applies a “heightened” Rule 9(b) standard to certain

types of fraud actions but not others. Pet. 20.

Contrary to petitioners’ assertion, the Fifth Circuit

has faithfully and consistently applied the same

“inference of fraud” standard in all cases under Rule

9(b), sometimes allowing dismissals, sometimes

reversing. See Dorsey v. Portfolio Equities, Inc., 540

F.3d 333, 341-43 (5th Cir. 2008) (analyzing whether

complaint supported “inference of scienter” and

reversing dismissal of fraud claim); Am. Realty Trust,

Inc. v. Hamilton Lane Advisors, Inc., 115 Fed. Appx.

662, 667-68 (5th Cir. 2004) (applying “inference of

fraud” test and affirming dismissal of fraud claim);

U.S. ex rel. Willard v. United Health Plan of Tex. Inc.,

336 F.3d 375, 385 (5th Cir. 2003) (applying

“inference of fraud” test to False Claims Act case and

affirming dismissal). Petitioners cite no authority

for their claim that the Fifth Circuit applies a

different standard in “business fraud” cases than in

“ordinary” fraud cases.

The cases from other circuits cited by petitioners

similarly apply no double standard. In U.S. ex rel.

Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370

(4th Cir. 2008), the court simply adopted the same

articulation of Rule 9(b) endorsed in Jgbal. See id. at

379 (“Although ‘[mJalice, intent, knowledge, and

other conditions of a person’s mind may be alleged

generally, * * * an FCA plaintiff still ‘must set forth

specific facts that support an inference of fraud’”)

(quoting Willard, 336 F.3d at 385). Likewise, North

Am. Catholic Educ. Programming Found. Inc. v.

Cardinale, 567 F.3d 8, 13 (1st Cir. 2009), applies the

16

Twombly-Iqbal rule that requires plaintiffs to set

forth specific facts that make it “reasonable to

believe that defendant(s) knew that a statement was

matcrially false or misleading.” None of these

decisions holds that Rule 9(b) applies differently in

particular types of fraud cases.

Thus, there is no disagreement in the circuits. The

cases cited in the petition are consistent with each

other, as well as with the legions of other circuit

court decisions applying the same rule as set forth in

Twombly and Iqbal—i.e., that a complaint must set

forth sufficient factual allegations to support a

plausible inference of the required state of mind. '

B. There Is No Circuit Split Or Unsettled

Question Of Law Regarding The Pleading

Standards For Section 14(e) Claims.

Petitioners also suggest the Court should grant

certiorari to clarify the standards for pleading a

| See, e.g., Eternity Global Master Fund Ltd. v. Morgan Guar.

Trust Co. of N.Y., 375 F.3d 168, 187 (2d Cir. 2004) (“Although

‘LmJalice, intent, knowledge and other condition of mind of a

person may be averred generally,’ * * * this leeway is not a

‘license to base claims of fraud on speculation and conclusory

allegations”) (citation omitted); /n re Burlington Coat Factory

Sees. Litig., 114 F.3d 1410, 1418 (od Cir. 1997) (“While state of

mind may be averred generally, plaintiffs must still allege facts

that show the court their basis for inferring that the defendants

acted with ‘scienter’”); DiLeo v. Ernst & Youny, 901 F.2d 624,

629 (7th Cir. 1990) (“Although [Rule] 9(b) does not require

‘particularity’ with respect to the defendants’ mental state, the

complaint still must afford a basis for believing that plaintiffs

could prove scienter.”); K-Tel Int'l Inc. Sec Litig. v. K-Tel Intl

Inc., 300 F.3d 881, 894 (8ttt Cir, 2002) (holding that “conclusory

allegations’ do not satisfy the pleading requirements of [FRCP]

9(b),” and that “unsupported allegations with regard to motives

generally possessed by all corporate directors and officers are

insufficient” to plead fraudulent intent under Rule 9(b))

17

Section 14(e) claim. Pet. i. But these standards

require no such clarification. Courts have uniformly

held that Section 14(e) claimants must plead and

prove scienter to the same extent as Section 10(b)

claimants. See, eg., S.E.C. v. Ginsburg, 362 F.3d

1292, 1297-98 (11th Cir. 2004) (“to establish liability

under § 10(b) and §14(e) * * *, the SEC must prove

that [the defendant] acted with scienter”); Jn re

Digital Island Secs. Litig., 357 F.3d 322, 328-29 (3d

Cir. 2004) (“Section 14(e) is ‘modeled on _ the

antifraud provisions of § 10(b) * * * and Rule 10b-5,’

which require proof of scienter.”) (citations omitted);

Conn. Nat'l Bank vy. Fluor Corp., 808 F.2d 957, 961

(2d Cir. 1987) (“Insofar as [§ 10(b)] cases deal with

the adequacy of allegations of scienter, they are

applicable to claims under the Williams Act.”).

Petitioners cite no authority for their apparent belief

that “tender offer” cases under Section 14(e) are

subject to a lower scienter requirement than

“regular” Section 10(b) cases. Nor do petitioners cite

any disagreement among the circuits over the

scienter requirement for Section 14(e) claims.

Given that Section 14(e) has the same scienter

requirement as Section 10(b), this Court’s analysis of

the scienter requirement in Tellabs controls petition-

ers’ Section 14(e) claim to the same extent as their

Section 10(b) claim. In Tellabs, this Court held that

a Section 10(b) complaint must allege particularized

facts supporting an inference of fraudulent intent

that is “cogent and at least as compelling as any

opposing inference of nonfraudulent intent.” Tellabs,

551 U.S. at 314. The district court must perform a

“comparative assessment.” of competing inferences to

determine whether facts giving rise to a strong

inference have been pled. /d. at 2511-12. Petitioners

18

do not even suggest that the district court or Fifth

Circuit misapplied this well-settled test. And given

that this Court squarely addressed the scienter

requirement in Tellabs, there is no reason to grant

certiorari here to address the scienter issue yet again.

Petitioners attempt to manufacture controversy by

citing cases from other circuits involving “cautionary

language.” Their citations are misleading; the

decisions petitioners reference address the effect of

cautionary language on the distinct elements of

materiality and falsity, rather than the scienter

requirement at issue in this appeal. See Pet. 21

(citing Halperin v. eBanker USA.com, Inc., 295 F.3d

352, 359 (2d Cir. 2002) (holding that cautionary

language rendered statement non-misleading under

“bespeaks caution” doctrine as a matter of law);

Fecht v. Price Co., 70 F.3d 1078, 1081-83 (9th Cir.

1995) (addressing effect of cautionary language on

materiality and falsity requirements); Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1213-14 (1st. Cir.

L996) (same)). Because the Fifth Circuit was focused

here on_ scienter, petitioners’ cited cases are

inapposite. Moreover, unlike petitioners’ cases,

neither the district court nor the Fifth Circuit relied

on the existence of cautionary language as a stand-

alone basis for dismissal or held that the language

precluded petitioners’ claims as a matter of law.?

Instead, the courts considered the cautionary

disclosures as but one factor in a holistic analysis of

the entire complaint to determine whether the

required inference of scienter was established.

— a

”

“ Cf Lormand, 565 F.3d at 243-48 (discussing PSLRA

cautionary “safe harbor” statement as stand-alone basis for

dismissal); Halperin, 295 F.3d at 359 (discussing “bespeaks

caution” doctrine as stand-alone basis for dismissal).

19

This case thus presents a _ poor vehicle for

addressing the sufficiency of cautionary language on

a motion to dismiss. ‘TXU’s disclosures were not

merely “boilerplate” but rather were specifically

tailored to the company’s circumstances at the time

they were made, and they were just one factor in the

lower courts’ comprehensive scienter analysis. Given

the lack of any disagreement in the circuits, there is

no basis for this Court to address that issue. But if

the Court were ever to do so, it should do so in a case

that squarely presents the question whether

cautionary language can be a sufficient independent

ground for dismissal.

II. THE FIFTH CIRCUIT’S DECISION

INVOLVES THE CORRECT APPLICATION

OF SETTLED LAW.

Far from identifying any circuit split or

controversial legal issue of national importance

warranting certiorari, the petition is simply a run-of-

the-mill challenge to the appellate court’s application

of settled law to what petitioners admit are the

“unique” facts of this case. Petitioners complain

that the district court and unanimous Fifth Circuit

panel failed to draw the proper inferences from

petitioners’ factual allegations and should have

found a plausible inference of scienter. Even

assuming such an exercise in “error correction” could

form an appropriate basis for certiorari, there is

simply no error to correct in this case.

A. The Fifth Circuit Applied The Same

Standard As Twombly And Iqbal.

In affirming dismissal of the common law claim,

the Fifth Circuit applied a standard identical to the

one articulated in Twombly and Iqbal. It required

20

ace

that the complaint “set forth specific facts to support

an inference of fraud.” Pet. App. 22a (citation

omitted). This squares precisely with Jqgbal’s holding

that the “alleged generally” language in Rule 9b)

does not excuse a plaintiff from pleading sufficient

facts to “show” the required state of mind for

purposes of Rule 8; the complaint must still plead

facts supporting a “plausible” inference of the

required intent. The Fifth Circuit correctly

recognized that while the PSLRA’s “strong inference

of scienter” standard does not apply in common law

fraud cases, the facts must still support an

“inference” sufficient under Rule 8 that’ the

defendants acted with the requisite fraudulent intent.

Pet. App. 22a. There is, accordingly, no difference

between the standard applied in Twombly and Iqbal

and the standard employed by the Fifth Circuit in

affirming dismissal.

B. Petitioners’ Allegations Fail To Support

A Plausible Inference Of Fraud As

Required By Rule 8.

The weakness of petitioners’ factual allegations

underscores the correctness of the lower courts’

decisions to grant and affirm dismissal. This matter

presents the classic situation envisioned by Twombly

and Iqbal. The allegations are, at best, merely

“consistent with” the defendants’ liability and are not

sufficient for the court “to draw the reasonable

inference that the defendant[s are] liable for the

misconduct alleged.” Iqbal, 129 S. Ct. at 1949.

Every one of petitioners’ assertions—that TXU

hired outside advisers, communicated with credit

rating agencies about the dividend policy, scheduled

Board meetings to discuss the dividend policy, and

ultimately decided to increase the dividend after the

21

tender offer—is fully consistent with TXU’s

disclosure that it was “reviewling]” and

“evaluatling]” the dividend during the tender offer.

Petitioners do not allege that TXU took a single

action inconsistent with its disclosures. Without

more, the allegations fail to nudge “across the line

from conceivable to plausible,” Twombly, 550 U.S. at

570, the inference that TXU must have known during

the tender offer what the final outcome of the

dividend and stock repurchase would be and delib-

erately or recklessly misrepresented or concealed

this information during the tender offer. Id. at 1955.

Petitioners’ proposed inference of fraud _ is

particularly tmplausible given the absence of any

allegation that TXU management received feedback

from the credit rating agencies before the tender

offer closed, as well as the admissions in petitioners’

own “expert report.” Those admissions establish

that: (i) credit ratings are “predicated on a host of

qualitative or judgmental factors” and are “as much

an art as it is a science’; (ii) rating agencies “would

have been particularly careful in_ evaluating

companies with only marginally investment grade

credit ratings” such as TXU, which had a near-junk

rating at the time; (iii) during October 2004,

“Moody’s was conducting overwhelmingly negative

rating actions, reviews, and outlooks in the utilities

industry” following the downfall of Enron; (iv) nearly

30% of companies that increased their dividends by

more than 100% from 2000-06 suffered a ratings

downgrade; (v) TXU’s energy trading business

depended on having an investment-grade rating; and

(vi) “La] single notch decline” in TXU’s rating would

have had “disastrous effects on the Company * * *.”

Pet. App. 117a-125a, 142a-143a, 164a. In light of

22

these concessions, it is not surprising the district

court and Fifth Circuit found petitioners’ fraud

allegations to be insufficient.

The allegations in this case are just as insufficient

as the allegations in Twombly and Iqbal. In

Twombly, the plaintiff asked the Court to infer an

agreement to restrain trade from various allegations

of parallel conduct by different parties to resist

competition. Twombly, 550 U.S. at 564. In Iqbal,

the plaintiff asked the Court to infer discriminatory

intent from the allegation that Arab Mus!ims were

detained in disproportionate numbers after the

attacks of September 11, 2001, and held under

highly restrictive conditions until cleared by the FBI.

In both cases, the Court held the allegations were, at

best, merely “consistent with” the possibility of

tortious conduct and did not cross the line into

“plausibility.” This case likewise fails to cross that

threshold given that TXU expressly disclosed it was

reviewing the dividend at the same time as the

tender offer and acted consistently with its

disclosures.

Petitioners ignore this Court’s repeated commands

that allegations be evaluated “collectively” and

attempt to fabricate various bright-line legal issues

based on individual allegations divorced from their

broader context. For example, petitioners claim the

September disclosures regarding TXU’s review of the

dividend and_ stock repurchase policies were

“boilerplate” and therefore should’ be freely

disregarded. But this allegation ignores the specific

context in which the disclosures were made. Just

four months earlier, in May 2004, TXU disclosed that

it anticipated being in a position to recommend a re-

evaluation and increase in TXU’s dividend policy by

23

2006. Pet. App. 63a-64a. The September 2004 dis-

closures, however, advised investors that TXU had

already begun evaluating its dividend policy at the

time of the tender offer. As the district court noted,

nearly 35% of potential class members declined to

participate in the tender offer after receiving these

statements. Pet. App. 40a. Given the _ specific

context of TXU’s disclosures, the Fifth Circuit

correctly determined that petitioners failed to allege

facts supporting a plausible inference of scienter.

Petitioners similarly insist that the proximity in

time between the close of the tender offer and the

announcement of the dividend increase and stock

repurchase should be sufficient by itself to support

the required inference of fraud, without regard to the

context of petitioners’ allegations. Pet. 9-10. Again,

however, whether timing is probative of fraud in a

particular action is a case-by-case determination

depending on the specific quantum of facts alleged.

The Fifth Circuit has found timing to be probative ot

scienter where the overall context warrants such an

inference.*

3 Petitioners’ assertion that they missed the significance of

the September 2004 disclosures, Pet. 4, is particularly

unconvincing given petitioners’ claim that they = are

“sophisticated” investment entities who are particularly

attuned to TXU’s disclosures. /d. at 14.

4 See Plotkin v. IP Axess Inc., 407 F.3d 690, 698 (5th Cir.

2006) (“Nevertheless, allegations of later-emerging facts can, in

some circumstances, provide warrant for in.crences about an

earlier situation. For example, the fact that a business files for

bankruptcy on ‘Day Two.’ may, under the right surrounding

circumstances, provide grounds for inferring that the business

was performing poorly on ‘Day One.””). And other courts have

found timing insufficient by itself to support an inference of

fraud when the totality of factual allegations do not justify an

24

In this case, however, the Fifth Circuit properly

held that when petitioners’ allegations are taken in

context and evaluated collectively, the mere

proximity between the close of the tender offer and

the announcement of the dividend increase and stock

repurchase fail to support a plausible inference of

fraud. As noted above, petitioners’ own expert

conceded that credit ratings are complex and

subjective and would likely be affected by a dividend

change at a compary like TXU, and that a change in

TXU’s rating would have been disastrous for the

company. As a result, petitioner’s own factual

allegations establish that the views of the credit

agencies, which were not received until after the

tender offer closed, were critical to any dividend

decision. The Fifth Circuit thus correctly held that

no plausible inference of fraud can be discerned from

the simple fact that the decision to increase the

dividend was not made until after the rating

agencies’ input was received, particularly given that

TXU also expressly disclosed that the dividend and

stock repurchase review was occurring at the same

time as the tender offer.

Petitioners’ “motive” allegations are_ similarly

deficient. See Pet. 31. In Tellabs, this Court

inference of fraud. See Yourish v. Cal Amplifier, 191 F.3d 983,

997 (9th Cir. 1999) (“[T]he temporal proximity of the August

disclosure to the June and July statements, without more, is

insufficient to satisfy Rule 9(b)”); Gross v. Summa Four, Inc., 93

F.3d 987, 995 (Ist Cir. 1996) (no inference of scienter when

proximity was five weeks); Jn re Digital Island Sec. Litig., 223

F. Supp. 2d 546, 555-56 (D. Del. 2002), affd, 357 F.3d 322 (3d

Cir. 2004) (fact that company disclosed two successful deals

within three weeks after tender offer completed, including one

deal two days after offer, does not establish that company had

knowledge of these transactions at time tender offer was made).

25

recognized that the presence or absence of “motive”

allegations is not dispositive of whether the required

inference of fraud has been pled, which depends on

the totality of the complaint. Tellabs, 551 U.S. at

325. The only “motives” alleged by petitioners are

that: (i) TXU wanted to complete the tender offer and

(ii) Wilder wanted to increase the value of his

personal stock holdings. To infer fraudulent intent

from universal motives such as these would

effectively eliminate the scienter requirement in

fraud cases. The Fifth Circuit’s refusal to indulge

such inferences is consistent with the approach

taken in other circuits and is fully in line with Jqgbal’s

command that allegations be considered in context.®

Finally, the petition does not challenge the Fifth

Circuit’s articulation of the disclosure standard for

tender offerors, which further undermines any

conceivable inference of fraud from TXU’s

disclosures. Under Fifth Circuit precedent, a tender

offeror “is not required to make predictions of future

behavior, however tentatively phrased, which may

5 See, e.g., Institutional Investors Group v. Avaya, Inc., 564

F.3d 242, 278 (3d Cir. 2009) (“{[MlJotives that are generally

possessed ‘by most corporate directors and officers do not

suffice,” and a “general corporate desire to retire debt and raise

funds and obtain credit on favorable terms” is insufficient to

support a strong inference of fraud) (quoting Kalint v. Eichler,

264 F.3d 131, 139 (2d Cir. 2001)); Cozzarelli v. Inspire Pharm

Inc., 549 F.3d 618, 627 (4th Cir. 2008) (“[T]he motivations to

raise capitai or increase one’s own compensation are common to

every company and thus add little to an inference of fraud”);

GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237 (3d

Cir. 2004) (“In every corporate transaction, the corporation and

its officers have a desire to complete the transaction, and

officers will usually reap financial benefits from a successful

transaction. Such allegations alone cannot give rise to a ‘strong

inference’ of fraudulent intent.”).

26

cause the offeree or the public investor to rely on

them unjustifiably.” Susquehanna Corp. v. Pan Am.

Sulphur Co., 423 F.2d 1075, 1085-86 (5th Cir. 1970).

This approach is consistent with that taken by other

courts.® In light of this standard, it can hardly be

said that TXU’s disclosure that the dividend was

“under review,” without providing further

speculation regarding the likelihood, magnitude, or

timing of any possible dividend change, was such an

extreme departure from the standard of ordinary

care as to be reckless or fraudulent.

Accordingly, taking the allegations collectively as

Twombly and Iqbal require, the Fifth Circuit

correctly concluded that the inference of fraud from

petitioners’ factual allegations did not cross the

threshold from “permissible” to “plausible.”

C. The Fifth Circuit Did Not Engage In

Impermissible Fact-Finding.

Petitioners also incorrectly assert that the lower

courts resolved disputed issues of fact and failed to

6 See Warner Commce'ns, Inc. v. Murdoch, 581 F. Supp. 1482,

1491 (D. Del. 1984); Todd Shipyards Corp. v. Madison Fund,

Inc., 547 F. Supp. 1383, 1387 (S.D.N.Y. 1982); see also Reiss v.

Pan Am. World Airways, 711 F.2d 11, 14 (2d Cir. 1983); Chrom-

alloy Am. Corp. v. Sun Chem. Corp., 611 F.2d 240, 248 (8th Cir.

1979); Shamrock Holdings, Inc. v. Polaroid Corp., 709 F. Supp.

1311, 1327 (D. Del. 1989). The principle that contingent

disclosures are not required has been reiterated numerous

times in the merger context, where it is well-settled that tender

offerors are not required to disclose preliminary merger

discussions and even tentative merger agreements. See Taylor

v. First Union Corp. of S.C., 857 F.2d 240, 244-45 (4th Cir.

1988); Mo. Portland Cement Co. v. H.K. Porter Co., 535 F.2d 388,

398 (8th Cir. 1976); Feder v. MacFadden Holdings, Inc., 698 F.

Supp. 47, 51 (S_D.N_-Y. 1988); Berman v. Gerber Prods. Co., 454

F. Supp. 1310, 1316, 1318 (W.D. Mich. 1978).

27

take petitioners’ allegations as true. Pet. 24-26. For

example, petitioners argue that the Fifth Circuit

accepted TXU’s account of the need for credit rating

input before making a recommendation regarding

the dividend policy. Petitioners inaccurately assert

throughout the petition that the lower courts

“decide[d] contested facts,” “resolve[d] disputes of

fact,” “chose ultimately to credit TXU's account of the

facts,” “resolveld] contested factual issues,”

“resolve[d] contested facts,” “creditfed TXU's]

rendition of facts,” offered a “summary resolution of

disputed facts,” and engaged in “what can only be

described as fact finding.” Jd. at 6, 14, 26, 28, 29.

Petitioners misunderstand the difference between

the resolution of disputed facts, which courts are

prohibited from doing on a Rule 12(b)(6) motion, and

the weighing of inferences from facts that are pled,

which courts are required to do in determining

whether the requisite inference of fraud has been

established. The district court and Fifth Circuit did

not “credit” one version of facts over another; they

simply accepted petitioners’ allegations as true and

found the inferences from those allegations

insufficient. See Pet. App. 12a, 36a, 42a-46a.

Importantly, it is petitioners’ burden under Tellabs,

Twombly, and Iqbal to plead sufficient facts to

support the required inference of fraud. Courts are

not required to assume facts that have not been pled

or accept proffered inferences and legal conclusions

as true. In this vein, petitioners offered no specific

factual allegation that, before the tender offer closed,

TXU management (and Wilder specifically) knew

what the dividend recommendation would be or

received any assurance from the credit rating

agencies that a dividend increase would not affect

28

the company’s credit rating. Particularly given the

numerous admissions by petitioners’ own expert, the

lower courts were not required to take the

unwarranted leap of logic urged by petitioners and

simply assume that TXU had this information in

advance absent a specifically pled fact showing such

knowledge. Taken in context and examined

holistically, the allegations failed to allege sufficient

facts demonstrating that TXU intentionally or

recklessly deceived investors regarding its dividend

and stock repurchase policies.

lif. THIS CASE PROVIDES AN UNSUITABLE

VEHICLE FOR REVIEWING THE

QUESTIONS PRESENTED.

Petitioners assert that this case presents “an

excellent vehicle” for considering the questions

presented. Pet. 28. For several reasons, nothing

could be further from the truth.

First, any decision on the questions presented in

this case will necessarily be confined to its facts and

will have little precedential value. As petitioners

themselves repeatedly admit, the facts of this case

are “unique.” Pet. 6, 7, 8. Whether a particular set

of facts supports the required inference of fraudulent

intent is, of course, “a context-specific task that

requires the reviewing court to draw on its judicial

experience and common sense.” Iqbal, 129 S. Ct. at

1950. The district court must consider the allega-

tions “collectively,” and the significance attached to

one particular type of allegation “depends on the

entirety of the complaint.” Tellabs, 551 U.S. at 325.

A determination whether the specific fact pattern of

this case supports the required inference of scienter

will necessarily be limited to its facts and will offer

little guidance to courts dealing with the near-

29

infinite array of other conceivable fact patterns that

may arise in future cases,

Second, the timing of this case makes it

particularly ill-suited for review. As shown above,

the lower courts are continuing without difficulty to

apply this Court’s recent decisions to the myriad

factual contexts that come before them. Given that

the Court has elucidated different aspects of

pleading standards three times in the last three

Terms, there is no basis for the Court to revisit those

issues yet again. Moreover, given this Court’s recent

pronouncements, if any change in the law of pleading

is needed, it should come from Congress. Indeed,

Congress is. presently considering a bill that, if

enacted, would alter the standards for pleading

claims and moot any conceivable action by this Court

in this case. See Notice Pleading Restoration Act of

2009, S. 1504, 111th Cong. (2009). That is the

appropriate forum for debating these issues.

Finally, the scienter issue that petitioners raise is

not outcome-determinative. This case would be

decided the same way regardless of whether

petitioners adequately pled scienter, because their

factual allegations fail to establish the existence of

another critical element of their cause of action—a

false or misleading statement. The Fifth Circuit

noted that “it is not clear that Appellees ever issued

a materially misleading statement or omission of fact

concerning the dividend policy.” Pet. App. 16a. The

district court likewise concluded that “simply

because the plaintiffs were misled, the court does not

therefore find TXU’s statements to be misleading;

the plaintiffs fail to show how each statement was

fraudulent.” Jd. 47a. Needless to say, a party cannot

act with the requisite intent to defraud if it never

30

made a false or misleading statement in the first

place. Respondents thus would be entitled to raise

that issue as an alternative ground for affirmance

here—or as an alternative ground for dismissal on

remand—and it is thus entirely possible, if not likely,

that the judgment would remain intact without

respect to petitioners’ scienter-based argument.

ok a oh

In sum, this case provides no basis for certiorari.

The pleading issues have been addressed by

Twombly and Iqbal. Petitioners identify no

avalanche of fraud cases involving self-tender offers

suggesting a pressing issue for certiorari, let alone

any controversy regarding how Section 14(e) claims

should be pled. And the weakness of petitioners’

factual allegations, the correctness of the Fifth

Circuit’s approach, as well as the inherently fact-

specific nature of the questions presented render this

case an unsuitable candidate for further review.

* Counsel of Record

31

CONCLUSION

For these reasons, the petition should be denied.

Respectfully submitted,

GERARD G. PECHT*

RICHARD S, KRUMHOLZ

FULBRIGHT & JAWORSKI L.L.P.

2200 Ross Avenue, Suite 2800

Dallas, Texas 75201-2784

(214) 855-8050

PETER A. STOKES

FULBRIGHT & JAWORSKI L.L.P.

600 Congress, Suite 2400

Austin, Texas 78701

(512) 536-5287

Counsel for Respondents