165SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

arbitration agreements with foreign com-mercial enterprises.’’ Maj. Op. at 160.

In addition, the rule that the majorityreaches is actually quite unfair. MunichRe is a massive corporation with excellentcounsel who engaged in careful negotia-tions with another corporation. As part ofits deal, it willingly offered to litigate inany forum selected by its partner. Such apromise seems on its face to be a promisenot to remove a case, and our cases makeclear that it will be interpreted as such—except in cases involving removal underthe FSIA. Today the majority allows thiscorporation to walk away from its freelyentered obligation. I respectfully dissent.

,

George SEMERENKO

v.

CENDANT CORP.; Walter A. Forbes;E. Kirk Shelton; Cosmo Corigliano;Christopher K. McLeod; Ernst &Young LLP.

George Semerenko, individually and onbehalf of all others similarly

situated, Appellant.

P. Schoenfeld Asset Management LLC,on behalf of itself and all others

similarly situated, Appellant,

v.

Cendant Corp.; Walter A. Forbes; E.Kirk Shelton; Cosmo Corigliano;Christopher K. McLeod; Ernst &Young LLP.

Nos. 99–5355, 99–5356.

United States Court of Appeals,Third Circuit.

Argued March 21, 2000.

Opinion Filed June 16, 2000.

Amended Opinion Filed Aug. 10, 2000.

Investors in stock of corporation thatwas target of tender offer sued offeror,

certain of its officers and directors, and itsaccountant, alleging violations of Rule 10b-5. Motions to dismiss and for leave toamend complaint were filed. The UnitedStates District Court for the District ofNew Jersey, William H. Walls, J., 47F.Supp.2d 546, granted motion to dismiss,and denied leave to amend. Investors ap-pealed. The Court of Appeals, Alarcon,Senior Circuit Judge, held that: (1) ‘‘inconnection with’’ element could be estab-lished by proving materiality and dissemi-nation to the public in medium upon whichreasonable investor would rely; (2) inves-tors’ allegations were sufficient to pleadreliance element; (3) investors could notreasonably rely on offeror’s misrepresenta-tions about its financial condition after of-feror disclosed accounting irregularities;and (4) investors successfully alleged losscausation element.

Vacated and remanded.

Superseding 216 F.3d 315.

1. Federal Courts O589

Where district court granted motionto dismiss for failure to state a claim onsecurities fraud class action complaint, anddenied plaintiffs’ motion for leave toamend complaint, plaintiffs could elect tostand on their complaint in seeking reviewof motion to dismiss, thereby creating finaljudgment required for appeal, while simul-taneously electing not to stand on com-plaint for review of whether complaintstated fraud with sufficient particularity.28 U.S.C.A. § 1291; Fed.Rules Civ.Proc.Rules 9(b), 12(b)(6), 28 U.S.C.A.

2. Federal Courts O763.1

Court of Appeals’ review of a districtcourt’s decision to grant a motion to dis-miss is plenary.

3. Federal Civil Procedure O1772

A motion to dismiss for failure to statea claim may be granted only if, accepting

166 223 FEDERAL REPORTER, 3d SERIES

all well pleaded allegations in the com-plaint as true, and viewing them in thelight most favorable to the plaintiff, theplaintiff is not entitled to relief. Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

4. Federal Civil Procedure O1771The issue on a motion to dismiss for

failure to state a claim is not whether aplaintiff will ultimately prevail, but wheth-er the claimant is entitled to offer evidenceto support his claims. Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.

5. Securities Regulation O60.15, 60.18To state a valid claim under Rule 10b-

5, a plaintiff must show that the defendant:(1) made a misstatement or an omission ofa material fact; (2) with scienter; (3) inconnection with the purchase or the sale ofa security; (4) upon which the plaintiffreasonably relied; and (5) that the plain-tiff’s reliance was the proximate cause ofhis or her injury. Securities ExchangeAct of 1934, § 10(b), 15 U.S.C.A. § 78j(b);17 C.F.R. § 240.10b–5(b).

6. Securities Regulation O60.15Where a securities fraud class action

involves the public dissemination of alleg-edly misleading information into an effi-cient securities market, plaintiffs may es-tablish that the misrepresentations weremade ‘‘in connection with’’ the purchase orsale of a security simply by showing thatsuch misrepresentations were material,and that they were disseminated to thepublic in a medium upon which a reason-able investor would rely. Securities Ex-change Act of 1934, § 10(b), 15 U.S.C.A.§ 78j(b); 17 C.F.R. § 240.10b–5(b).

See publication Words and Phras-es for other judicial constructionsand definitions.

7. Securities Regulation O60.15In order for accounting firm allegedly

responsible for misrepresentations in fi-nancial statements and audit reports thatit prepared for tender offeror to havemade such statements ‘‘in connection with’’shareholders’ purchase of target compa-

ny’s common stock, as required to imposeliability on firm under Rule 10b-5, share-holders had to establish that it was reason-ably foreseeable to firm that statementswould be incorporated in tender offer doc-uments. Securities Exchange Act of 1934,§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

8. Securities Regulation O60.28(11),60.46

For purposes of establishing a securi-ties fraud claim under Rule 10b-5, infor-mation concerning a tender offer or aproposed merger may be ‘‘material’’ topersons who trade in the securities of thetarget company, despite the highly contin-gent nature of both types of transactions.Securities Exchange Act of 1934, § 10(b),15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

See publication Words and Phras-es for other judicial constructionsand definitions.

9. Securities Regulation O60.27(1)Section 10(b) of the Securities Ex-

change Act and Rule 10b-5 encompass mis-representations beyond those concerningthe investment value of a particular securi-ty. Securities Exchange Act of 1934,§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

10. Securities Regulation O60.46For purposes of establishing a securi-

ties fraud claim under Rule 10b-5, in thecontext of an efficient market, the conceptof materiality of an alleged misrepresenta-tion about a corporation translates intoinformation that alters the price of thecorporation’s stock. Securities ExchangeAct of 1934, § 10(b), 15 U.S.C.A. § 78j(b);17 C.F.R. § 240.10b–5(b).

11. Securities Regulation O60.62Under the fraud on the market theory

of proving reliance for purposes of estab-lishing a securities fraud claim under Rule10b-5, a plaintiff is generally entitled to arebuttable presumption of reliance if he orshe purchased or sold securities in an effi-

167SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

cient market. Securities Exchange Act of1934, § 10(b), 15 U.S.C.A. § 78j(b); 17C.F.R. § 240.10b–5(b).

12. Securities Regulation O60.62Under the fraud on the market theory

of reliance required to establish a securi-ties fraud claim under Rule 10b-5, thecourt presumes: (1) that the market priceof the security actually incorporated thealleged misrepresentations; (2) that theplaintiff actually relied on the market priceof the security as an indicator of its value;and (3) that the plaintiff acted reasonablyin relying on the market price of the secu-rity. Securities Exchange Act of 1934,§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

13. Securities Regulation O60.62To rebut the presumption of reliance

on defendant’s misrepresentations in aRule 10b-5 securities fraud action underthe fraud on the market theory, a defen-dant may show that the misrepresenta-tions were immaterial, that the market wasaware that the misrepresentations werefalse, or that the misrepresentations wereotherwise not assimilated into the price ofthe security. Securities Exchange Act of1934, § 10(b), 15 U.S.C.A. § 78j(b); 17C.F.R. § 240.10b–5(b).

14. Securities Regulation O60.48(1)For purposes of establishing a secu-

rities fraud claim under Rule 10b-5, toestablish that an investor’s reliance ondefendant’s misrepresentations was un-reasonable, a defendant may show thatthe investor knew, or had reason toknow, that the misrepresentations werein fact false. Securities Exchange Act of1934, § 10(b), 15 U.S.C.A. § 78j(b); 17C.F.R. § 240.10b–5(b).

15. Securities Regulation O60.53Allegations by investors in stock of

corporation that was target of tender offerthat stock traded in an open and developedmarket, that market price of stock incorpo-rated alleged misrepresentations regard-ing offeror’s financial condition and intent

to complete merger, and that they pur-chased stock in reliance on market pricewere sufficient to plead reliance element ofsecurities fraud action under Rule 10b-5.Securities Exchange Act of 1934, § 10(b),15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

16. Securities Regulation O60.48(1)

Investors who purchased stock of ten-der offer target before offeror made suc-cessful bid and executed agreement to pur-chase target reasonably relied on offeror’salleged misrepresentations regarding pos-sible merger and concerning offeror’s op-erations, prospects, and financial condition,as required to establish securities fraudclaim under Rule 10b-5. Securities Ex-change Act of 1934, § 10(b), 15 U.S.C.A.§ 78j(b); 17 C.F.R. § 240.10b–5(b).

17. Securities Regulation O60.48(1)

For purposes of establishing a securi-ties fraud claim under Rule 10b-5, reason-ableness of plaintiff’s reliance on defen-dant’s misrepresentations is determined atthe time of the transaction in question.Securities Exchange Act of 1934, § 10(b),15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

18. Securities Regulation O60.48(1)

Fact that investors purchased stock oftender offer target at same time compet-ing tender offer was made did not precludefinding, in Rule 10b-5 action against suc-cessful offeror, that investors reasonablyrelied on offeror’s misrepresentations re-garding its financial condition, rather thanamount of competitor’s bid, in purchasingtheir stock. Securities Exchange Act of1934, § 10(b), 15 U.S.C.A. § 78j(b); 17C.F.R. § 240.10b–5(b).

19. Securities Regulation O60.48(1)

Investors who purchased stock of ten-der offer target could not reasonably relyon successful offeror’s representations con-cerning its financial condition, as requiredto establish securities fraud claim underRule 10b-5, after offeror issued press re-

168 223 FEDERAL REPORTER, 3d SERIES

lease disclosing accounting irregularitiesand warning investors not to rely on suchrepresentations. Securities Exchange Actof 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17C.F.R. § 240.10b–5(b).

20. Securities Regulation O60.48(1)

Investors who purchased stock of ten-der offer target reasonably relied uponsubsequent alleged misrepresentations bysuccessful offeror stating its intention torestate its past earnings by a specificamount, though statement was accompa-nied by general statement that figures giv-en were subject to risk of uncertainty;such warning was not sufficiently caution-ary to deter reliance. Securities Ex-change Act of 1934, § 10(b), 15 U.S.C.A.§ 78j(b); 17 C.F.R. § 240.10b–5(b).

21. Securities Regulation O60.47

In order to establish loss causationelement of securities fraud action underRule 10b-5 where claimed loss involvespurchase of security at a price that isinflated due to an alleged misrepresenta-tion, plaintiff must prove more than pur-chase of security at an inflated price; plain-tiff must also prove that misrepresentationproximately caused decline in security’svalue. Securities Exchange Act of 1934,§ 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

22. Securities Regulation O60.47

Allegations by investors in stock ofcorporation that was target of tender offerthat offeror’s misrepresentations regard-ing its operations, prospects, financial con-dition and intent to proceed with mergerartificially inflated target’s stock price attime investors purchased stock, togetherwith allegations that stock price fell whenofferor disclosed losses and terminatedmerger agreement, were sufficient to al-lege loss causation required to establishsecurities fraud action under Rule 10b-5.Securities Exchange Act of 1934, § 10(b),15 U.S.C.A. § 78j(b); 17 C.F.R.§ 240.10b–5(b).

23. Securities Regulation O60.47For purposes of establishing loss cau-

sation element of securities fraud actionunder Rule 10b-5, not every interveningevent occurring after alleged misrepresen-tations is sufficient to break the chain ofcausation; so long as the alleged misrepre-sentations were a substantial cause of theinflation in the price of a security and in itssubsequent decline in value, other contrib-uting forces will not bar recovery. Securi-ties Exchange Act of 1934, § 10(b), 15U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5(b).

Arthur N. Abbey [Argued], Jill S.Abrams, Stephen J. Fearon, Jr., NancyKaboolian, Abbey, Gardy & Squitieri,LLP, New York, NY, Allyn Z. Lite, Jo-seph J. DePalma, Mary Jean Pizza, Lite,DePalma, Greenberg & Rivas, LLC, New-ark, NJ, Andrew Barroway, David Kes-sler, Schiffrin & Barroway, Cynwyd, PA,for Appellants George Semerenko and P.Schoenfeld Management, LLC.

Jonathan J. Lerner, Samuel Kadet [Ar-gued], Skadden, Arps, Slate, Meagher &Flom LLP, New York, NY, Michael M.Rosenbaum, Carl Greenberg, Budd Lar-ner, Gross, Rosenbaum, Greenberg &Sade, P.C., Short Hills, NJ, for AppelleeCendant Corporation.

James M. Hirschhorn, Steven S. Radin,Sills, Cummis, Radin, Tischman, Epstein &Gross, P.A., Newark, NJ, Dennis J. Block[Argued], Howard R. Hawkins, Jr., Cad-walader, Wickersham & Taft, New York,NY, Greg A. Danilow, Timothy E. Hoeff-ner, Weil, Gotshal & Manges LLP, NewYork, NY, for Appellees Walter Forbesand Christopher McLeod.

Richard Schaeffer [Argued], Bruce Han-dler, Dornbush, Mensch, Mandelstam &Schaeffer, LLP, New York, NY, for Appel-lee E. Kirk Shelton.

Gary P. Naftalis, Kramer, Levin, Naftal-is & Frankel, New York, NY, for AppelleeCosmo Corigliano.

169SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

Alan N. Salpeter, Michele Odorizzi,Mayer, Brown & Platt, Chicago, IL, Wil-liam P. Hammer, Jr., J. Andrew Heaton,[Argued], Ernst & Young LLP, Washing-ton, DC, Douglas S. Eakeley, LowensteinSandler, Roseland, NJ, for Ernst & YoungLLP.

Harvey J. Goldschmid, General Counsel,Jacob H. Stillman, Solicitor, Eric Summer-grad, Deputy Solicitor, Hope Hall Augusti-ni, Special Counsel, Securities & ExchangeCommission, Washington, DC, for Amicus–Appellant Securities and Exchange Com-mission.

BEFORE: MANSMANN andGREENBERG, Circuit Judges andALARCON, Senior Circuit Judge.*

OPINION OF THE COURT

ALARCON, Senior Circuit Judge.

I

The P. Schoenfeld Asset ManagementLLC and the class of similarly situatedinvestors (collectively, the ‘‘Class’’) appealfrom the order of the district court dis-missing their claims for securities fraudpursuant to Rule 12(b)(6) of the FederalRules of Civil Procedure. The Class’scomplaint was filed under § 10(b) of theSecurities Exchange Act of 1934 (the ‘‘Ex-change Act’’) and Rule 10b–5. The com-plaint also alleged that the individual de-fendants were liable for the underlyingviolations of § 10(b) and Rule 10b–5 ascontrol persons under § 20(a) of the Ex-change Act.

We conclude that the complaint allegessufficient facts to establish the elements ofreliance and loss causation, and that thedistrict court applied the incorrect analysisfor determining whether the complaint al-leges that the purported misrepresenta-

tions were made ‘‘in connection with’’ thepurchase or the sale of a security. Be-cause the standard that we have articulat-ed for the ‘‘in connection with’’ require-ment is different from the one applied bythe district court, we vacate the judgmentbelow and remand the matter for furtherproceedings. Given that we do not resolvewhether the dismissal was proper under§ 10(b) and Rule 10b–5, we do not addressthe dismissal of the Class’s claim under§ 20(a).

II

The Class filed this action against theCendant Corporation (‘‘Cendant’’),1 its for-mer officers and directors Walter A.Forbes, E. Kirk Shelton, Christopher K.McLeod, and Cosmo Corigliano (the ‘‘indi-vidual defendants’’), and its accountantErnst & Young LLP (‘‘Ernst & Young’’)(collectively, the ‘‘defendants’’). The Classalleges that the defendants violated§ 10(b) and Rule 10b–5 by making certainmisrepresentations about Cendant duringa tender offer for shares of AmericanBankers Insurance Group, Inc. (‘‘ABI’’)common stock. The Class consists of per-sons who purchased shares of ABI com-mon stock during the course of the tenderoffer. The class period runs from January27, 1998 to October 13, 1998. The com-plaint does not allege that any member ofthe Class purchased securities issued byCendant, or that any member of the Classtendered shares of ABI common stock toCendant. Instead, it alleges that the de-fendants made certain misrepresentationsabout Cendant that artificially inflated theprice at which the Class purchased theirshares of ABI common stock, and that theClass suffered a corresponding loss whenthose misrepresentations were disclosed tothe public and the merger agreement wasterminated. In light of the procedural

* The Honorable Arthur L. Alarcon, SeniorJudge of the United States Court of Appealsfor the Ninth Circuit, sitting by designation.

1. Cendant was formed on December 17, 1997as the surviving entity in a merger between

HFS Inc. and CUC International, Inc. In theinterests of simplicity, and because the merg-er predates the class period, we refer to Cen-dant as including its predecessor organiza-tions.

170 223 FEDERAL REPORTER, 3d SERIES

posture of this case, we must assume thetruth of the facts alleged in the complaint.See In re Burlington Coat Factory Sec.Litig., 114 F.3d 1410, 1420 (3d Cir.1997).

On December 22, 1997, the AmericanInternational Group, Inc. (‘‘AIG’’) an-nounced that it would acquire one hundredpercent of the outstanding shares of ABIcommon stock for $47 per share. On Jan-uary 27, 1998, Cendant made a competingtender offer to purchase the same sharesat a price of $58 per share, or a total priceof approximately $2.7 billion. In conjunc-tion with its tender offer, Cendant filedwith the Securities and Exchange Commis-sion (the ‘‘SEC’’) a Schedule 14D–1 thatoverstated its income during prior financialreporting periods.

On March 3, 1998, AIG matched Cen-dant’s bid and offered to pay ABI share-holders $58 for each share of outstandingABI common stock. Cendant eventuallyraised its bid price to $67 per share. Itthen executed an agreement to purchaseABI for approximately $3.1 billion, payablein part cash and in part shares of Cendantcommon stock. Cendant filed an amend-ment to its Schedule 14D–1 on March 23,1998 reporting the terms of the mergeragreement. Eight days later, Cendantfiled a Form 10–K reporting its financialresults for the 1997 fiscal year.

After the close of trading on April 15,1998, Cendant announced that it had dis-covered potential accounting irregularities,and that its Audit Committee had engagedWillkie, Farr & Gallagher and Arthur An-dersen LLP to perform an independentinvestigation. Cendant also announcedthat it had retained Deloitte & ToucheLLP to reaudit its financial statements,and that ‘‘[i]n accordance with [Statementof Accounting Standards] No. 1, the Com-pany’s previously issued financial state-ments and auditors’ reports should not berelied upon .’’ Nevertheless, the April 15,1998 announcement reported that the ir-regularities occurred in a single businessunit that ‘‘accounted for less than onethird’’ of Cendant’s net income, and it indi-

cated that Cendant would restate its annu-al and quarterly earnings for the 1997fiscal year by $0.11 to $0.13 per share.Immediately after Cendant disclosed theaccounting irregularities, the price of ABIcommon stock dropped from $64–7/8 to$57–3/4, representing an eleven percentdecrease from the price at which theshares had been trading.

Following the April 15 announcement,Cendant made several public statements inwhich it represented that it was committedto completing the merger with ABI not-withstanding the discovery of the account-ing irregularities. On April 27, 1998, Wal-ter A. Forbes, the chairman of the boardof directors of Cendant, and Henry R.Silverman, the president and the chief ex-ecutive officer of Cendant, issued a letterto Cendant shareholders, which was pub-lished in the financial press. That letterstates:

We are outraged that the apparent mis-deeds of a small number of individualswithin a limited part of our company hasadversely affected the value of your in-vestment—and ours—in Cendant. Weare working together diligently to clearthis matter up as soon as possible. Wefully support the Audit Committee’s in-vestigation and continue to believe thatthe strategic rationale and industriallogic of the HFS/CUC merger that cre-ated Cendant is as compelling as ever.

Cendant is strong, highly liquid, andextremely profitable. The vast majorityof Cendant’s operating businesses andearnings are unaffected and the pros-pects for the Company’s future growthand success are excellent.

We have reaffirmed our commitment tocompleting all pending acquisitions:American Bankers, National ParkingCorporation and Providian Insurance.

In a press release issued on May 5, 1998,Cendant stated that ‘‘over eighty percentof the Company’s net income for the firstquarter of 1998 came from Cendant busi-

171SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

ness units not impacted by the potentialaccounting irregularities.’’

On July 14, 1998, Cendant revealed thatthe April 15, 1998 announcement anticipat-ing the restatement of its financial resultsfor the 1997 fiscal year was inaccurate, andthat the actual reduction in income wouldbe twice as much as previously announced.Cendant further acknowledged that its in-vestigation had uncovered several account-ing irregularities that had not previouslybeen disclosed, and that those accountingirregularities affected additional Cendantbusiness units and other fiscal years.Cendant estimated that earnings would bereduced by as much as $0.28 per share in1997. After the July 14, 1998 disclosure,the price of ABI common stock droppeduntil Cendant issued several public state-ments indicating that it intended to contin-ue the tender offer and that it was ‘‘con-tractually committed’’ to completing theABI merger. Thereafter, the marketprice of ABI common stock was ‘‘buoyed’’by Cendant’s repeated statements that itwas committed to completing the merger.

On August 13, 1998, Cendant issued apress release announcing that its investi-gation into the accounting irregularitieswas complete. The release stated thatCendant would restate its earnings by$0.28 per share in 1997, by $0.19 per sharein 1996, and by $0.14 per share in 1995.On August 27, 1998, Cendant issued astatement that the board of directors hadadopted the audit report. The audit re-port was publicly filed with the SEC onAugust 28, 1998, and a copy was forwardedto the United States Attorney for the Dis-trict of New Jersey. The report includedfindings that ‘‘fraudulent financial report-ing’’ and other ‘‘errors’’ inflated Cendant’spretax income by approximately $500 mil-lion from 1995 to 1997, and that Forbesand Shelton were ‘‘among those who mustbear responsibility.’’ After the audit re-port was filed with the SEC, the price ofABI common stock closed at $53–1/2 per

share on August 28, 1998 and fell furtherto a closing price of $51–7/8 per share onAugust 31, 1998, the first day of tradingfollowing the disclosure.

On September 29, 1998, Cendant filed anamended Form 10–K for the 1997 fiscalyear announcing that Cendant had actuallylost $217.2 million in 1997 rather thanearning $55.5 million, as previously report-ed. That announcement caused the priceof ABI common stock to drop further to$43 per share by the close of trading. OnOctober 13, 1998, Cendant and ABI an-nounced that they were terminating themerger agreement, and that Cendantwould pay ABI a $400 million dollar breakup fee, despite the fact that it was notcontractually bound to do so. The termi-nation agreement, which was executed thesame day, provided that the termination ofthe merger would not result in liability onthe part of Cendant or ABI, or on the partof any of their directors, officers, employ-ees, agents, legal and financial advisors, orshareholders. In response to the disclo-sure, the price of ABI common stockdropped to $35–1/2 per share by the end ofthe day.

On October 14, 1998, the day after Cen-dant and ABI disclosed the termination ofthe planned merger, the Class filed a com-plaint in the United States District Courtfor the District of New Jersey allegingthat Cendant and the individual defen-dants violated § 10(b) and Rule 10b–5 bymaking fraudulent misrepresentations con-cerning Cendant’s financial condition, itswillingness to complete the tender offer,and its willingness to complete the pro-posed merger. The complaint also allegedthat the individual defendants were liablefor those violations as control persons un-der § 20(a). The Class subsequentlyamended its complaint to expand the classperiod and to name Ernst & Young as anadditional defendant in its claims under§ 10(b) and Rule 10b–5.2

2. We note that the Class also alleged in itsamended complaint that Cendant and the in-

dividual defendants violated § 14(e) of theWilliams Act by making purported misrepre-

172 223 FEDERAL REPORTER, 3d SERIES

The defendants filed a motion to dismissthe Class’s complaint pursuant to Rule12(b)(6) and Rule 9(b) of the Federal Rulesof Civil Procedure. The district courtgranted the motion and entered an orderdismissing the complaint under Rule12(b)(6). In explaining its dismissal order,the district court stated that the complaintfailed to establish that the alleged misrep-resentations were made ‘‘in connectionwith’’ the Class’s purchases of ABI com-mon stock, that the Class reasonably reliedon the purported misrepresentations, andthat the Class suffered a loss as the proxi-mate result of the purported misrepresen-tations. The order also dismissed theClass’s § 20(a) claim against the individualdefendants on the basis that a claim forcontrol person liability cannot be main-tained in the absence of an underlyingviolation of the Exchange Act. In light ofits decision to dismiss the complaint pursu-ant to Rule 12(b)(6), the district court de-clined to consider whether the Class’s com-plaint also failed to satisfy the heightenedpleading requirements of Rule 9(b).

III

[1] Before we address the merits ofthe Class’s arguments, we must first re-solve an important question that concernsour jurisdiction to hear this appeal pursu-ant to 28 U.S.C. § 1291. In reviewing thismatter, it came to our attention that thedistrict court did not indicate whether itintended to dismiss all of the Class’sclaims with or without prejudice. In fact,the order denying the Class’s motion forleave to amend suggests that the dismissalwas without prejudice inasmuch as it didnot foreclose the Class from submitting asecond motion for leave to amend with aproposed complaint attached. The orderstates:

Plaintiffs have requested leave to amendtheir complaints if any or all of theirclaims are dismissed. However, plain-tiffs have not detailed the substance of

any amendment or presented to theCourt a proposed amended complaint.Although plaintiffs no longer have theright to amend their complaints as amatter of course after those complaintshave been dismissed, the Court may stillpermit amendment as a matter of dis-cretion. Kauffman v. Moss, 420 F.2d1270, 1276 (3d Cir.) cert. denied, 400U.S. 846, 91 S.Ct. 93, 27 L.Ed.2d 84(1970). However, the Court will notconsider plaintiffs’ requests until theysubmit the sought amendment for theCourt’s review. The present complaintslack legal vitality. Without scrutiny ofthe proposed amendment, the Courtcannot determine whether it, the amend-ment, would be resuscitable or futile.Plaintiffs’ motion for leave to amend isdenied.

This court has held that a dismissalwithout prejudice is not a final and appeal-able order under § 1291, unless the plain-tiff can no longer amend the complaint orunless the plaintiff declares an intention tostand on the complaint as dismissed. SeeNyhuis v. Reno, 204 F.3d 65, 68 n. 2 (3dCir.2000); In re Westinghouse Sec. Litig.,90 F.3d 696, 705 (3d Cir.1996); Borelli v.City of Reading, 532 F.2d 950, 951–52 (3dCir.1976) (per curiam). The Class did notadvise the district court that it could nolonger amend its pleadings, or that it hadelected to stand on the complaint. In-stead, it filed a notice of appeal with thiscourt. In its opening brief, the Class rep-resented that ‘‘[t]his court has jurisdictionover this appeal under 28 U.S.C. § 1291because the district court’s opinion andorder dismissed of all claims with respectto all parties without leave to replead.’’

On March 1, 2000, this court ordered theparties to submit further briefing on thequestion whether the district court hadentered a final, appealable order. In itssupplemental brief, the Class indicatedthat it intended to stand on its complaintfor the purposes of our review of whether

sentations in connection with the tender offer.See 15 U.S.C. § 78n(e). We do not discuss

that claim, however, because the Class haschosen to abandon it on appeal.

173SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

the dismissal was proper under Rule12(b)(6), but not for the purposes of ourindependent review of whether the com-plaint complied with Rule 9(b). In effect,the Class took the position that it couldstand on its complaint to satisfy the finaljudgment rule and, at the same time, avoida de novo review of whether the complaintpleads the element of scienter with suffi-cient particularity.

Our own research indicates that theClass’s position is consistent with the lawof this circuit. In Shapiro v. UJB Finan-cial Corp., 964 F.2d 272 (3d Cir.1992), thiscourt recognized that a plaintiff mayamend a complaint to comply with theparticularity requirements of Rule 9(b)even after the plaintiff stands on the com-plaint to invoke the court’s appellate juris-diction under 28 U.S.C. § 1291. In thatcase, the district court dismissed all of theplaintiffs’ claims for securities fraud underRule 12(b)(6) and, alternatively, dismisseda number of the plaintiffs’ claims for fail-ing to plead scienter with the particularityrequired by Rule 9(b). The district courtalso granted the plaintiffs leave to file anamended complaint to cure some of thedefects identified in its order. See id. at277–78. Rather than filing an amendedcomplaint, however, the plaintiffs formallyannounced that they would stand on theircomplaint. See id. at 278. On review, thiscourt concluded that the district court in-correctly dismissed several of the plain-tiffs’ claims pursuant to Rule 12(b)(6). Seeid. at 280–284. Despite the fact that theplaintiffs had elected to stand on theircomplaint as dismissed, this court declinedto affirm the dismissal under Rule 9(b).See id. at 285 & n. 14. Instead, it remand-ed the matter to the district court to grantthe plaintiffs leave to amend those claimswhich were properly dismissed pursuant toRule 9(b) and to evaluate whether theremaining claims satisfied the rule’s

heightened pleading requirements. Seeid.

In this matter, the district court did notconsider the sufficiency of the allegationsunder Rule 9(b). ‘‘[B]ecause we are hesi-tant to preclude the prosecution of a possi-bly meritorious claim because of defects inthe pleadings,’’ the Class should be ‘‘af-forded an additional, albeit final opportuni-ty, to conform the pleadings’’ in the eventthat its complaint fails to comply with Rule9(b).3 In re Burlington Coat Factory Sec.Litig., 114 F.3d at 1435 (quoting Ross v.A.H. Robins Co., 607 F.2d 545, 547 (2dCir.1979)). We leave it to the districtcourt, however, to determine, in the firstinstance, whether such an amendment isrequired. See Shapiro, 964 F.2d at 285 n.14. We hold, consistent with the law of thiscircuit, that we have jurisdiction to hearthe merits of this appeal pursuant to§ 1291. See Shapiro, 964 F.2d at 278.Our review is limited to the questionwhether the dismissal was proper underRule 12(b)(6).

IV

[2–4] Our review of a district court’sdecision to grant a motion to dismiss isplenary. See Weiner v. Quaker Oats Co.,129 F.3d 310, 315 (3d Cir.1997). ‘‘A mo-tion to dismiss pursuant to Rule 12(b)(6)may be granted only if, accepting all wellpleaded allegations in the complaint astrue, and viewing them in the light mostfavorable to [the] plaintiff, [the] plaintiff isnot entitled to relief. The issue is notwhether a plaintiff will ultimately prevailbut whether the claimant is entitled tooffer evidence to support the claims.’’ Inre Burlington Coat Factory Sec. Litig., 114F.3d at 1420 (quotations and citationsomitted). In this case, we may affirm onlyif it appears that the Class could prove noset of facts that would entitle it to relief.See Weiner, 129 F.3d at 315.

3. We note that the Class is not free to addnew factual allegations to comply with Rule

12(b)(6). See Shapiro, 964 F.2d at 284.

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[5] Section 10(b) prohibits the ‘‘use oremploy, in connection with the purchase orsale of any security, TTT [of] any manipu-lative or deceptive device or contrivance incontravention of such rules and regulationsas the Commission may prescribe.’’ 15U.S.C. § 78j(b). Rule 10b–5, which waspromulgated under § 10(b), makes it un-lawful for any person ‘‘[t]o make any un-true statement of a material fact or to omitto state a material fact necessary to makethe statements made in the light of thecircumstances under which they weremade, not misleading TTT in connectionwith the purchase or sale of any security.’’17 C.F.R. § 240.10b–5(b). To state a validclaim under Rule 10b–5, a plaintiff mustshow that the defendant (1) made a mis-statement or an omission of a material fact(2) with scienter (3) in connection with thepurchase or the sale of a security (4) uponwhich the plaintiff reasonably relied and(5) that the plaintiff’s reliance was theproximate cause of his or her injury. SeeWeiner, 129 F.3d at 315; In re BurlingtonCoat Factory Sec. Litig., 114 F.3d at 1417.

In the present case, the defendantsmake numerous arguments to support thedismissal of the Class’s complaint pursuantto Rule 12(b)(6). They contend that thedistrict court correctly concluded that thealleged misrepresentations were not made‘‘in connection with’’ the purchase or thesale of a security. They also suggest thatthe Class could not have reasonably reliedon any of the alleged misrepresentations,and that the alleged misstatements werenot the proximate cause of the Class’s loss.We address each argument, below, under aseparate heading.

A.

We must first decide whether theClass’s complaint pleads sufficient facts tosatisfy the ‘‘in connection with’’ require-ment of § 10(b) and Rule 10b–5. Theparties have expressed much disagreementover the standard that this court applies indetermining whether an alleged misrepre-sentation was made ‘‘in connection with’’

the purchase or the sale of a security.The defendants, in varying respects, con-tend that the alleged misrepresentationsmust speak directly to the investment val-ue of the security that is bought or sold,and that they must have been made withthe specific purpose or objective of influ-encing an investor’s decision. In contrast,the Class and the SEC, as amicus curiae,argue that the ‘‘in connection with’’ re-quirement is satisfied whenever a misrep-resentation is made in a manner that isreasonably calculated to influence the in-vestment decisions of market participants.Recognizing that ‘‘the ‘in connection with’phrase is not the least difficult aspect ofthe 10b–5 complex to tie down,’’ we takethis opportunity to clarify the standardthat governs this matter. Chemical Bankv. Arthur Andersen & Co., 726 F.2d 930,942 (2d Cir.1984) (noting the difficulty inestablishing a test for the ‘‘in connectionwith’’ requirement) (quotations and cita-tions omitted).

In Ketchum v. Green, 557 F.2d 1022 (3dCir.1977), this court considered the ques-tion whether certain misrepresentationsarising out of an internal contest for thecontrol of a closely held corporation weremade ‘‘in connection with’’ the subsequentforced redemption of the losing parties’stock. There, a group of minority share-holders secretly conspired to remove thetwo majority shareholders from their re-spective positions as the chairman of theboard of directors and as the president ofthe corporation. See Ketchum, 557 F.2dat 1023–24. By misrepresenting their in-tentions concerning the election of corpo-rate officers, the minority shareholderswere able to persuade the majority share-holders to elect them to a majority of theseats on the board of directors. See id.After gaining control of the board of di-rectors, the minority shareholders immedi-ately voted to remove the two majorityshareholders from their officerships. Seeid. To entrench themselves, they alsopassed resolutions terminating the majori-ty shareholders’ employment and authoriz-

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ing the mandatory repurchase of the ma-jority shareholders’ stock pursuant to astock retirement agreement. The majori-ty shareholders brought an action pursu-ant to § 10(b) and Rule 10b–5 to enjointheir ouster from the corporation and toobtain damages. See id. at 1024. On re-view, this court held that the majorityshareholders failed to establish that thecomplained of misrepresentations weremade ‘‘in connection with’’ the purchase orthe sale of a security. See id. at 1027–29.In addition to noting that the case fellwithin an ‘‘internal corporate mismanage-ment’’ exception to § 10(b) and Rule 10b–5, the court reasoned that the degree ofproximity between the claimed fraud andthe securities transaction was simply tooattenuated for the case to fall within thescope of the federal securities laws. Seeid. at 1028–29.

This court again considered the contoursof the ‘‘in connection with’’ requirement inAngelastro v. Prudential–Bache Sec., Inc.,764 F.2d 939 (3d Cir.1985), when it ad-dressed the question whether a brokeragefirm could be held liable under § 10(b) andRule 10b–5 for making misrepresentationsconcerning the terms of its margin ac-counts. In that case, a class of investorssued a national brokerage firm for misrep-resenting both the specific interest ratesthat it would charge in connection with amargin purchase and the formula that itwould apply in calculating those rates.See Angelastro, 764 F.2d at 941. Thedistrict court dismissed the investors’ com-plaint on the basis that the alleged misrep-resentations were not made ‘‘in connectionwith’’ the purchase or the sale of a securi-ty. See id. This court reversed, holding

that the investors could pursue theirclaims under § 10(b) and Rule 10b–5. Thecourt reasoned that the requisite causalconnection was satisfied by the brokeragefirm’s fraudulent course of dealing, not-withstanding the fact that the alleged mis-representations did not relate to the mer-its of a security. See id. at 944–45. Inholding in favor of the class, the courtspecifically noted that ‘‘Rule 10b–5 alsoencompasses misrepresentations beyondthose implicating the investment value of aparticular security.’’ Id.

While the decisions in Ketchum andAngelastro are illustrative of the point thatthe ‘‘in connection with’’ language requiresa causal connection between the claimedfraud and the purchase or the sale of asecurity, and that the misrepresentationsneed not refer to a particular security,they are not helpful in applying the stan-dard to the facts of this case. This casedoes not present a claim based on allega-tions of internal corporate misconduct aris-ing from a contest for the control of aclosely held corporation. See Ketchum,557 F.2d at 1028. Nor does it concern afraudulent course of dealing by a broker-age firm. See Angelastro, 764 F.2d at 944.Rather, it involves the public disseminationof allegedly misleading information into anefficient securities market. In light of thelaw of this circuit that the scope of the ‘‘inconnection with’’ requirement must be de-termined on a case-by-case basis, we arecompelled to look elsewhere in decidingthe standard that governs this matter.4

See Ketchum, 557 F.2d at 1027; Angelas-tro, 764 F.2d at 942–43, 945.

In resolving the issue before us, we arepersuaded by recent decisions in the Sec-

4. Despite the arguments of the defendants, wedo not find the Second Circuit’s decision inChemical Bank instructive in the present in-quiry. In that case, a corporation misrepre-sented its financial status to a commerciallender when it pledged the securities of asubsidiary as collateral for a loan. See Chem-ical Bank, 726 F.2d at 944–45. The courtheld that the misrepresentations were ‘‘mere-ly an incident in a transaction not otherwiseinvolving the purchase or sale of securities’’

and dismissed the lender’s action under§ 10(b). Id. at 944 n. 24. As this court haspreviously pointed out, the ‘‘Second Circuitwas concerned that every bank loan partiallysecured by the pledge of stock might fallwithin the scope of [§ ] 10(b).’’ Angelastro,764 F.2d at 946. That concern is not presenthere, where the alleged fraud involves thepublic dissemination of allegedly false andmisleading statements into an efficient securi-ties market.

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ond Circuit and the Ninth Circuit thathave addressed the scope of the ‘‘in con-nection with’’ requirement when the al-leged fraud involves the public dissemina-tion of false and misleading information.See In re Ames Dep’t Stores Inc. StockLitig., 991 F.2d 953, 956, 965–66 (2d Cir.1993) (involving the public dissemination offalse information in publicly filed offeringdocuments, press releases, and researchreports); McGann v. Ernst & Young, 102F.3d 390, 392–93 (9th Cir.1996) (involvingthe public dissemination of false informa-tion in a publicly filed annual report).Those courts have generally adopted thestandard articulated in Securities & Exch.Comm’n v. Texas Gulf Sulphur Co., 401F.2d 833, 862 (2d Cir.1968) (in banc), andapplied an objective analysis that considersthe alleged misrepresentation in the con-text in which it was made.5 They haveheld that, where the fraud alleged involvesthe public dissemination of information ina medium upon which an investor wouldpresumably rely, the ‘‘in connection with’’element may be established by proof of themateriality of the misrepresentation andthe means of its dissemination. See In reAmes Dep’t Stores Inc. Stock Litig., 991F.2d at 963, 965; Securities & Exch.Comm’n v. Rana Research, Inc., 8 F.3d1358, 1362 (9th Cir.1993); In re Leslie FayCos. Sec. Litig., 871 F.Supp. 686, 697(S.D.N.Y.1995). Under that standard, it isirrelevant that the misrepresentationswere not made for the purpose or theobject of influencing the investment deci-sions of market participants. See In reAmes Dep’t Stores Inc. Stock Litig., 991F.2d at 965 (holding that an investor’sreliance need not be envisioned to give riseto liability under § 10(b) and Rule 10b–5).

[6] We conclude that the materialityand public dissemination approach shouldapply in this case. The purpose underly-ing § 10(b) and Rule 10b–5 is to ensure

that investors obtain fair and full disclo-sure of material facts in connection withtheir decisions to purchase or sell securi-ties. See Angelastro, 764 F.2d at 942.That purpose is best satisfied by a rulethat recognizes the realistic causal effectthat material misrepresentations, whichraise the public’s interest in particular se-curities, tend to have on the investmentdecisions of market participants who tradein those securities. See In re Ames Dep’tStores Inc. Stock Litig., 991 F.2d at 966.We therefore adopt the reasoning of theSecond Circuit and the Ninth Circuit andhold that the Class may establish the ‘‘inconnection with’’ element simply by show-ing that the misrepresentations in questionwere disseminated to the public in a medi-um upon which a reasonable investorwould rely, and that they were materialwhen disseminated. We also point outthat, under the standard which we adopt,the Class is not required to establish thatthe defendants actually envisioned thatmembers of the Class would rely upon thealleged misrepresentations when makingtheir investment decisions. See In reAmes Dep’t Stores Inc. Stock Litig., 991F.2d at 965; In re Leslie Fay Cos. Sec.Litig., 871 F.Supp. at 697–98. Rather, itmust only show that the alleged misrepre-sentations were reckless. See In re Ad-vanta Corp. Sec. Litig., 180 F.3d 525, 535(3d Cir.1999) (reaffirming that § 10(b) andRule 10b–5 cover reckless misrepresenta-tions).

[7] In its petition for rehearing, Ernst& Young contends that the alleged misrep-resentations contained in the financialstatements and audit reports that it pre-pared for Cendant should not be deemedto have been made ‘‘in connection with’’the purchase of ABI common stock unlessit was reasonably foreseeable that theywould be incorporated in the tender offer

5. Contrary to the suggestions of the individualdefendants, this court has adopted the stan-dards articulated in Texas Gulf Sulphur Co.for determining whether the statutory re-quirements of § 10(b) and Rule 10b–5 are

satisfied. See Gottlieb v. Sandia AmericanCorp., 452 F.2d 510, 515–16 (3d Cir.1971)(adopting the Texas Gulf Sulphur Co. test asthe statutory test for actions arising under§ 10(b)).

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documents. We agree. The SupremeCourt has warned that ‘‘[a]ny person orentity, including a lawyer, accountant, orbank who employs a manipulative deviceor makes a material misstatement TTT onwhich a purchaser relies may be liable as aprimary violator under 10b–5, assuming allof the requirements for primary liabilityare met.’’ Central Bank of Denver, N.A.v. First Interstate Bank of Denver, N.A.,511 U.S. 164, 191, 114 S.Ct. 1439, 128L.Ed.2d 119 (1994) (emphasis in original).Because an accountant is blameless whereit could not reasonably have foreseen thatits representations would be used in thepurchase or the sale of securities, however,the Class must also establish that Ernst &Young knew, or that it had reason toknow, that Cendant would use its financialstatements and audit reports when makingthe tender offer for shares of ABI commonstock. See McGann, 102 F.3d at 397(holding that the ‘‘in connection with’’ re-quirement was satisfied for the purposesof Rule 12(b)(6) where the plaintiffs‘‘squarely alleged that the [auditor] knewthat [its client] would include its auditopinion in a Form 10–K’’); Frymire–Bri-nati v. KPMG Peat Marwick, 2 F.3d 183(7th Cir.1993) (stating that ‘‘[t]o find the‘connection’ just because the managers,unbeknownst to the auditors, show the fi-nancial statements to some potential inves-tor would abolish the requirement that thedefendant’s acts occur in connection withthe purchase or sale of securities’’).

[8, 9] We emphasize, though, that it isno defense that the alleged misrepresenta-tions were made in the context of a tenderoffer and a proposed merger, or that theydid not specifically refer to the investmentvalue of the security that was bought orsold. It is well established that informa-tion concerning a tender offer or a pro-posed merger may be material to personswho trade in the securities of the targetcompany, despite the highly contingent na-ture of both types of transactions. SeeBasic Inc. v. Levinson, 485 U.S. 224, 238–39, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)

(holding that preliminary merger discus-sions may be material even before anagreement-in-principle is reached); Secu-rities & Exch. Comm’n v. Materia, 745F.2d 197, 199 (2d Cir.1984) (stating that‘‘even a hint of an upcoming tender offermay send the price of the target compa-ny’s stock soaring’’); Securities & Exch.Comm’n v. Maio, 51 F.3d 623, 637 (7thCir.1995) (holding that undisclosed infor-mation concerning a tender offer was suffi-ciently material to give rise to liability forinsider trading under Rule 10b–5 and Rule14e–3); Securities & Exch. Comm’n v.Mayhew, 916 F.Supp. 123, 131 (D.Conn.1995) (holding that undisclosed informationconcerning a pending merger was suffi-ciently material to give rise to liability forinsider trading under § 10(b)). It is alsosettled that § 10(b) and Rule 10b–5 en-compass misrepresentations beyond thoseconcerning the investment value of a par-ticular security. See Angelastro, 764 F.2dat 942–44 (holding that a brokerage firmmay be liable for misrepresenting theterms of a margin account); cf. Deutsch-man v. Beneficial Corp., 841 F.2d 502, 508(3d Cir.1988) (holding that the purchaserof an option contract has standing to seekdamages under § 10(b) for misrepresenta-tions concerning the underlying securities).So long as the alleged misrepresentationswere material, the ‘‘in connection with’’requirement may be satisfied simply byshowing that they were publicly dissemi-nated in a medium upon which investorstend to rely, and, in the case of Ernst &Young, that it knew or had reason to knowthat Cendant would use its financial state-ments and audit reports when making atender offer for shares of ABI commonstock.

[10] We do not resolve, however,whether the ‘‘in connection with’’ require-ment is satisfied in the present case. Be-cause the standard that we have set forthis different from the one applied by thedistrict court, and because the parties havenot been afforded a full opportunity tobrief the issues of materiality and public

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dissemination, we will remand this matterto allow the district court to consider, inthe first instance, the question whether theClass’s complaint pleads sufficient facts tosatisfy the requirements of Rule 12(b)(6).6

We note, however, that the issue of materi-ality typically presents a mixed question oflaw and fact, and that the delicate assess-ment of inferences is generally best left tothe trier of fact. See Shapiro, 964 F.2d at281 n. 11. The district court should decidethe issue of materiality as a matter of lawonly if the alleged misrepresentations areso clearly and obviously unimportant thatreasonable minds could not differ in theiranswers to the question. See Weiner, 129F.3d at 317; In re Craftmatic Sec. Litig.,890 F.2d 628, 641 (3d Cir.1990).

B.

We next turn to the question whetherthe Class’s complaint alleges sufficientfacts to establish the element of reliance.It is axiomatic that a private action forsecurities fraud must be dismissed when aplaintiff fails to plead that he or she rea-sonably and justifiably relied on an allegedmisrepresentation. See Weiner, 129 F.3dat 315 (setting forth reliance as an elementof a private right of action under § 10(b)and Rule 10–5); In re Burlington CoatFactory Sec. Litig., 114 F.3d at 1417(same). The defendants claim that thecomplaint fails to establish the element ofreliance, because it alleges that the defen-dants’ misrepresentations were made inthe context of a tender offer and a pro-posed merger, that AIG made a competingtender offer to purchase shares of ABIcommon stock at $58 per share, and thatCendant issued a press release on April 15,1998 warning investors not to rely on its

prior representations concerning its finan-cial condition.

[11] Traditionally, purchasers and sell-ers of securities were required to establishthat they were aware of, and directly mis-led by, an alleged misrepresentation tostate a claim for securities fraud under§ 10(b) and Rule 10b–5. See Peil v. Speis-er, 806 F.2d 1154, 1160 (3d Cir.1986) (dis-cussing theories of reliance). Recognizingthat the requirement of showing directreliance presents an unreasonable eviden-tiary burden in a securities market whereface-to-face transactions are rare andwhere lawsuits are brought by classes ofinvestors, however, this court has adopteda rule that creates a presumption of reli-ance in certain cases. See id. Under thefraud on the market theory, a plaintiff in asecurities action is generally entitled to arebuttable presumption of reliance if he orshe purchased or sold securities in an effi-cient market. See In re Burlington CoatFactory Sec. Litig., 114 F.3d at 1419 n. 8(holding that a purchaser of securities inan open and developed market is entitledto a presumption of reliance).

[12–14] The fraud on the market theo-ry of reliance is, in essence, a theory ofindirect actual reliance under which aplaintiff is entitled to three separate pre-sumptions in attempting to establish theelement of direct reliance. See Zlotnick v.TIE Communications, 836 F.2d 818, 822(3d Cir.1988). Under the fraud on themarket theory of reliance, the court pre-sumes (1) that the market price of thesecurity actually incorporated the allegedmisrepresentations, (2) that the plaintiffactually relied on the market price of the

6. The parties’ briefs consider whether it wasreasonable for the Class to rely on some of thedefendants’ statements. On remand, the par-ties are bound by our holding with respect tothose statements inasmuch as it addresses theissue of materiality. See In re Trump CasinoSec. Litig., 7 F.3d 357, 371 (3d Cir.1993)(applying the bespeaks caution doctrine in thecontext of materiality). They are otherwisefree to renew their motions and make any

other arguments concerning the question ofmateriality as they see fit. See In re PhillipsPetroleum Sec. Litig., 881 F.2d 1236, 1248 n.16 (3d Cir.1989). We note that, in the con-text of an efficient market, ‘‘the concept ofmateriality translates into information that al-ters the price of the firm’s stock.’’ In reBurlington Coat Factory Sec. Litig., 114 F.3dat 1425.

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security as an indicator of its value, and (3)that the plaintiff acted reasonably in rely-ing on the market price of the security.See id. The fraud on the market theory ofreliance, however, creates only a presump-tion, which a defendant may rebut by rais-ing any defense to actual reliance. SeeBasic, Inc., 485 U.S. at 248–49, 108 S.Ct.978. This court has pointed out that thepresumption of reliance may be rebuttedby showing that the market did not re-spond to the alleged misrepresentations, orthat the plaintiff did not actually rely onthe market price when making his or herinvestment decision.7 See Zlotnick, 836F.2d at 822; Peil, 806 F.2d at 1161. Thiscourt has also held that a defendant maydefeat the presumption of reliance byshowing that the plaintiff’s reliance on themarket price was actually unreasonable.8

See Zlotnick, 836 F.2d at 822; Peil, 806F.2d at 1161.

[15] In the present case, we are per-suaded that the Class has sufficientlypleaded the element of reliance to with-stand a challenge under Rule 12(b)(6) withrespect to at least some of the allegedmisrepresentations. The complaint allegesthat ABI common stock traded in an openand developed market throughout the

class period, that the market price of ABIcommon stock incorporated the allegedmisrepresentations,9 and that the Classmembers purchased shares of ABI com-mon stock in reliance on that price. Thecomplaint also states that the Class wasdirectly misled by the alleged misrepre-sentations. Those allegations, if true, aresufficient to establish direct reliance andto create a presumption of indirect actualreliance so long as the Class’s reliance onthe purported misrepresentations or themarket price of ABI common stock wasnot unreasonable as a matter of law.

[16, 17] We conclude that it was rea-sonable for the Class members who pur-chased shares prior to March 3, 1998 torely on the alleged misrepresentations oc-curring prior to that date. The defendantshave not provided us with a legitimatereason for us to conclude to the contrary.Their arguments concern only the reason-ableness of the reliance of the Class mem-bers who purchased shares of ABI com-mon stock after March 3, 1998. They haveno bearing on the investment decisions ofpersons who purchased shares of ABIcommon stock prior to that date, becausethe reasonableness of reliance is deter-

7. To rebut the presumption of reliance, a de-fendant may show that the misrepresentationswere immaterial, that the market was awarethat the misrepresentations were false, or thatthe misrepresentations were otherwise not as-similated into the price of the security. Ofcourse, the defendant may also rebut the pre-sumption by showing that the investor wouldhave purchased or sold the securities at thatprice even with full knowledge of the misrep-resentation, that the investor traded in thesecurities based on an actual belief that themarket price was inaccurate, or that the in-vestor’s decision to trade was based on somefactor other than the market price. See Basic,Inc., 485 U.S. at 248, 108 S.Ct. 978; Zlotnick,836 F.2d at 822; Peil, 806 F.2d at 1161.

8. To establish that an investor’s reliance wasunreasonable, a defendant may show that theinvestor knew, or had reason to know, thatthe misrepresentations were in fact false. SeeZlotnick, 836 F.2d at 822; Peil, 806 F.2d at1161.

9. The market assimilates information con-cerning the possibility of a tender offer or amerger, and the amount of consideration thatwill be received, into the price of the securi-ties of a target corporation. See Frank L.Easterbrook & Daniel R. Fischel, The ProperRole of a Target’s Management in Respondingto a Tender Offer, 94 Harv. L.Rev. 1161, 1164(1981). ‘‘The value of any stock can be un-derstood as the sum of two components: theprice that will prevail in the market if there isno successful offer (multiplied by the likeli-hood that there will be none) and the pricethat will be paid in a future tender offer(multiplied by the likelihood that some offerwill succeed).’’ Id. In this case, the defen-dants’ misrepresentations were incorporatedinto the price of ABI common stock inasmuchas they spoke to the likelihood that the tenderoffer and the proposed merger would be suc-cessful, or to the extent that they related tothe investment value of the Cendant sharesthat members of the Class were to receive inconsideration for tendering their shares ofABI common stock.

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mined at the time of the transaction inquestion. See Hayes v. Gross, 982 F.2d104, 107 (3d Cir.1992) (requiring an inves-tor to rely on an alleged misrepresentationat the time of the purchase or the sale ofsecurities); Zlotnick, 836 F.2d at 823(same); Gannon v. Continental Ins. Co.,920 F.Supp. 566, 578 (D.N.J.1996) (holdingthat an investor cannot rely on statementsthat are made subsequent to the purchaseof securities).

To the extent that the defendant’s argu-ments suggest that it is unreasonable as amatter of law to rely on information con-cerning a tender offer or a merger beforethe transaction is finalized, we disagree.The Supreme Court has cautioned that‘‘[n]o particular event or factor short ofclosing the transaction need be either nec-essary or sufficient by itself to rendermerger discussions material.’’ Basic, Inc.,485 U.S. at 239, 108 S.Ct. 978. And, othercourts have similarly held that informationconcerning a tender offer may be materialwhile the transaction is still in the plan-ning stage. Maio, 51 F.3d at 637; May-hew, 916 F.Supp. at 131. If it may bereasonable for an investor to find informa-tion concerning a tentative tender offer ora merger important when making an in-vestment decision, we see no reason whythe conditional nature of those transactionsshould necessarily prevent the investorfrom reasonably relying on that informa-tion as well. See 2 Thomas Lee Hazen,The Law of Securities Regulation § 13.5B,at 527 (3d ed.1995) (stating that ‘‘[t]hereliance requirement is a corollary of ma-teriality’’).

[18] We are also persuaded that theClass members who purchased shares ofABI common stock between March 3,1998 and April 15, 1998 alleged sufficientfacts to satisfy the element of reliance.With respect to those purchasers, the de-fendants maintain that AIG’s $58 tenderoffer provided an independent valuation ofABI common stock upon which the Classmembers directly or indirectly relied. Ineffect, the defendants suggest that the

market did not incorporate the allegedmisrepresentations into the price of ABIcommon stock during the competing ten-der offer, and that the Class memberswould have purchased shares of ABI com-mon stock to tender to AIG even if theyhad known the truth about Cendant. SeeBasic, Inc., 485 U.S. at 249, 108 S.Ct. 978(noting that the presumption of indirectactual reliance may be rebutted by show-ing that the plaintiff would have complet-ed the transaction regardless of the al-leged misrepresentations); Zlotnick, 836F.2d at 822 (stating that the presumptionof indirect actual reliance may be rebuttedby showing that the market price was notaffected by the alleged misrepresenta-tions). While those arguments are faciallyappealing, we do not find them persuasivegiven the procedural posture of this case.

In reviewing a motion to dismiss underRule 12(b)(6), we must accept the allega-tions of the complaint as true and draw allreasonable inferences in the light mostfavorable to the plaintiffs. See Weiner,129 F.3d at 315. In this case, the Class’scomplaint alleges that the market price ofABI common stock was inflated due to thealleged misrepresentations, and it statesthat the Class purchased ‘‘ABI shares be-lieving they would receive $58 per shareTTT in a combination of cash and Cendantstock.’’ Though we agree with the defen-dants that the market price of ABI com-mon stock incorporated information con-cerning AIG’s $58 tender offer, we maynot assume for the present purposes thatit did not also incorporate information con-cerning a potential acquisition by Cendant,or that Cendant’s tender offer did not havean actual effect on the 25 Class. Indeed, itis likely that the shares of ABI commonstock traded at a relative premium duringthe competing tender offer based on thefact that two purportedly willing and ablesuitors sought to acquire the company. Itis also possible that members of the Classwould not have purchased shares of ABIcommon stock had they been unable toexchange them for shares of Cendant.

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Because we must assume the truth of theallegations of the complaint, and resolve allcompeting allegations and inferences in fa-vor of the Class, we agree that the exis-tence of a competing tender offer did noteffect the Class’s reliance on the defen-dants’ alleged misrepresentations. See Inre Burlington Coat Factory Sec. Litig., 114F.3d at 1420 (stating that a court mustcredit the allegations of the complaint andnot the defendant’s responses when resolv-ing conflicting allegations on a motion todismiss). We also note that the effect ofthe $58 tender offer would have been limit-ed to those members of the Class whopurchased shares from March 3, 1998,when the tender offer was made, andMarch 17, 1998, when Cendant raised itsbid price to $67 per share.

[19] We agree that the Class hasfailed to demonstrate that it was reason-able for its members to rely on the defen-dants’ prior financial statements and audi-tors’ reports following the April 15, 1998disclosure of the accounting irregularities.The complaint states that Cendant dis-closed on April 15, 1998 that it had uncov-ered accounting irregularities, and that itwarned investors not to rely on its priorfinancial statements and auditor’s reportswhen making an investment decision.10

The complaint further alleges that thecommon stock of both Cendant and ABItraded in an efficient market, and that themarket price of each stock instantlydropped after Cendant issued the warn-ing.11 In light of the curative nature ofthe warning statement, and given the in-stantaneous decline in the market price ofboth companies’ common stock, we con-clude that the announcement immediatelyrendered the prior misrepresentations

concerning Cendant’s financial conditionthereafter immaterial as a matter of law.See Weiner, 129 F.3d at 321 (holding thata public statement curing the misleadingeffect of a prior misrepresentation rendersthe prior misrepresentation immaterial);In re Burlington Coat Factory Sec. Litig.,114 F.3d at 1425 (stating that an efficientmarket immediately incorporates informa-tion into the price of a security); Team-sters Local 282 Pension Trust Fund v.Angelos, 762 F.2d 522, 530 (7th Cir.1985)(dicta) (stating that an investor may notask a court to focus on a misrepresenta-tion and ignore information that has al-ready been disseminated). Thus, neitherthe market nor the Class members couldhave reasonably relied upon Cendant’sprior financial statements or its audit re-ports after April 15, 1998. Because itmade no misrepresentations after the cu-rative statement was issued, Ernst &Young may not be held liable to membersof the Class who purchased shares of ABIcommon stock after April 15, 1998.

[20] Nevertheless, we do not acceptthe defendants’ contention that the Classcould not have reasonably relied on thealleged misrepresentations that were in-cluded in the April 15, 1998 announcement.The Class claims that the April 15, 1998announcement misrepresented Cendant’sfinancial condition by stating that the com-pany expected to restate its 1997 earningsby $0.11 to $0.13 per share and to reduceits net income prior to restructuring andunusual charges by approximately $100 to$115 million. The defendants claim thatthe Class was not entitled to rely on thosestatements or on any subsequent state-ments, because the announcement warnedthat the representations were subject to

10. The April 15, 1998 announcement, whichwas filed as an exhibit to an amendment toCendant’s Schedule 14D–1, warned:

In accordance with SAS No. 1, the Compa-ny’s previously issued financial statementsand auditors’ reports should not be reliedupon. Revised financial statements and au-ditors’ reports will be issued upon comple-tion of the investigations.

11. The complaint states that the market priceof ABI common stock dropped eleven per-cent, from $64–7/8 to $57–3/4, following thedisclosure of the accounting irregularities,and that the market price of Cendant com-mon stock plummeted forty-six percent, from$35–10/16 to $19–1/16, following the disclo-sure.

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‘‘known and unknown risks and uncertain-ties including, but not limited to, the out-come of the Audit Committee’s investiga-tion.’’ 12 Their argument is based uponboth the bespeaks caution doctrine, whichrenders alleged misrepresentations imma-terial, and the common sense principle thatinvestors do not act reasonably in relyingon statements that are accompanied bymeaningful cautionary language.

The parties disagree as to whether thebespeaks caution doctrine applies to thestatements made in the April 15, 1998announcement that predicted the amountby which Cendant would restate its resultsfor the 1997 year. The Class and the SECmaintain that the ‘‘bespeaks caution’’ doc-trine is inapplicable, because the state-ments related to present and historicalfacts that were capable of verification and,as such, not forward-looking. See Gross-man v. Novell, Inc., 120 F.3d 1112, 1123(10th Cir.1997) (holding that the bespeakscaution doctrine applies only to forward-looking information). The defendants, incontrast, characterize the statements con-cerning the restatement as forward-look-ing, and thus subject to the bespeaks cau-tion doctrine, because Cendant had notcompleted a reaudit when it disclosed theamount of the anticipated restatement.See Harris v. Ivax Corp., 182 F.3d 799,802–3 (11th Cir.1999) (holding that state-ments made on the last day of a quarterconcerning the results for the quarter areforward-looking).

We need not decide whether the allegedmisrepresentations in the April 15, 1998announcement were forward-looking state-ments, however, because we conclude thatthe accompanying warnings were not suffi-ciently cautionary to warn against the dan-ger of relying on the specific numbersidentified in the announcement. In In reTrump Casino Sec. Litig., 7 F.3d 357, 369(3d Cir.1993), this court instructed thatcautionary language must be ‘‘extensiveyet specific’’ to prevent a reasonable inves-tor from relying on specific projections.There, the court explained:

a vague or blanket (boilerplate) disclaim-er which merely warns the reader thatthe investment has risks will ordinarilybe inadequate to prevent misinforma-tion. To suffice, the cautionary state-ments must be substantive and tailoredto the specific future projections, esti-mates or opinions in the prospectuswhich the plaintiffs challenge.

Id. at 371–72. In Kline v. First WesternGov’t Sec., Inc., 24 F.3d 480, 489 (3d Cir.1994), this court clarified that ‘‘Trump re-quires that the language bespeaking cau-tion relate directly to that by which plain-tiffs claim to have been misled.’’

In the present case, the cautionary lan-guage set forth in the April 15, 1998 an-nouncement generally pertains only to therisk that the results of operations couldvary in future fiscal years.13 In fact, the

12. We note that the Private Securities Litiga-tion Reform Act’s safeharbor for forward-looking statements does not apply in this case.See 15 U.S.C. § 78u–5(i)(A)(B). The allegedmisrepresentations were made in conjunctionwith a tender offer and were attached asexhibits to Cendant’s Schedule 14D–1 and theamendments thereto. The safeharbor ex-pressly states that it is inapplicable to state-ments made in connection with a tender offer,except ‘‘to the extent otherwise specificallyprovided by rule, regulation, or order of the[SEC].’’ Id. Because the SEC has yet to ex-tend the safeharbor to tender offers by rule,regulation, or order, we do not discuss thedefendants’ contentions that their statementswere also protected under the safeharbor.

13. The cautionary language states, in relevantpart:

Certain matters discussed in the news re-lease are forward-looking statements, asdefined in the Private Securities Litiga-tion Reform Act of 1995. Such forward-looking statements are subject to a num-ber of known and unknown risks and un-certainties including, but not limited to,the outcome of the Audit Committee’s in-vestigation; uncertainty as to the Compa-ny’s future profitability; the Company’sability to develop and implement opera-tional and financial systems to managerapidly growing operations; competition inthe Company’s existing and potential fu-ture lines of businesses; the Company’s

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only risk factor that is apparently applica-ble to the restatement of Cendant’s resultsfor the 1997 fiscal year relates to the riskthat the announcement’s calculations mightdiffer from those made by the Audit Com-mittee. We are not persuaded that such ageneral statement of risk is sufficientlysubstantive and tailored to satisfy the re-quirements of the bespeaks caution doc-trine. See In re Trump Casino Sec. Litig.,7 F.3d at 371–72. Nor are we persuadedthat it is adequate to give investors rea-sonable notice that the projected restate-ment of Cendant’s financial statementsshould not be trusted so as to make anyreliance unreasonable as a matter of law.In our opinion, a reasonable investor maybe willing to rely on the announcement’sspecific calculations concerning the re-statement in the absence of a more de-tailed explanation of the reasons that thecalculations might be incorrect and of theeffect of any error. The announcement’sblanket warning-that the amount of therestatement could later turn out to bewrong-was simply not sufficient to cautionreasonable investors against relying on thedefendants’ representations. See Kline, 24F.3d at 489–90 (holding that cautionarystatements in an opinion letter were notsufficiently cautionary to preclude reliancewhere they suggested nothing more thanthe possibility that the speaker ‘‘mighthave gotten the law wrong or incorrectlyassessed the risk that the IRS would denydeductions’’); see, e.g., Harris, 182 F.3d at810, 813–14 (setting forth meaningful andspecific cautionary language as an appen-dix to the opinion). Because we concludethat the alleged misrepresentations con-cerning the restatement of Cendant’s 1997financial information did not include suffi-cient cautionary language, we agree thatthe Class could reasonably rely on the

anticipated restatement in the April 15,1998 announcement. For the same rea-son, we conclude that the Class memberswere not necessarily prevented from rea-sonably relying on the defendants’ subse-quent statements concerning Cendant’s in-tent to merge with ABI.

The Class was not entitled, however, torely indefinitely upon the April 15, 1998misrepresentations. Cendant announcedon July 14, 1998 that it had revised therestatement of its 1997 income, and it dis-seminated the formal results of the AuditCommittee’s investigation one month later.We think that it is possible that either, ifnot both, of those announcements mighthave cured the effect of the alleged mis-representations in the April 15, 1998 an-nouncement and rendered the disclosurethereafter unreliable. However, in light ofour decision to remand this case, and giventhat the parties have not discussed theissue, we leave it for the district court todecide in the first instance the point atwhich the particular misrepresentationscould no longer be trusted.

C.

Finally, we must decide whether theClass’s complaint adequately pleads theelement of loss causation. The defendantscontend that the complaint failed to allegesufficient facts to support an inference thatthe alleged misrepresentations were theproximate cause of the Class’s loss. Theymaintain that the complaint shows thatseveral intervening events, and not thealleged misrepresentations, led first to theartificial inflation and then to the decline inthe market price of ABI common stock.In particular, they assert that the price ofABI common stock was inflated by AIG’s

ability to integrate and operate successfullyacquired businesses and the risks associat-ed with such businesses; the Company’sgrowth strategy and for the Company tooperate within the limitations imposed byfinancing arrangements; uncertainty as tothe future profitability of acquired busi-nesses; and other factors. Other factors

and assumptions not identified abovewere also involved in the derivation ofthese forward-looking statements, and thefailure of such other assumptions to berealized as well as other factors may alsocause actual results to differ materiallyfrom those projected.

(emphasis added).

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$58 tender offer and by the approval of themerger agreement by the board of di-rectors of ABI. They also suggest that theClass’s loss was actually caused by themutual termination of the merger agree-ment by the board of directors of bothABI and Cendant. We disagree.

In Scattergood v. Perelman, 945 F.2d618, 624 (3d Cir.1991), this court held thata plaintiff may establish the element ofloss causation simply by showing that heor she purchased a security at a marketprice that was artificially inflated due to afraudulent misrepresentation. Id. In thatcase, the defendants issued a press releasestating that they were considering acquir-ing the outstanding shares of anothercompany at the prevailing market price.See id. at 623. The press release alsowarned that the defendants had ‘‘not yetdetermined to proceed with such transac-tion,’’ and it cautioned that there could ‘‘beno assurance that [the defendants] will ul-timately decide to make such an offer orthat the [board of directors of the targetcorporation] would recommend such an of-fer to the stockholders.’’ Id. Some of theplaintiffs purchased shares of the targetcompany’s stock at price below the tenderoffer price expecting that the stock wouldbe acquired at the tender offer price inthe near future. See id. at 624. The de-fendants moved to dismiss the complaintpursuant to Rule 12(b)(6), because thecomplaint lacked an assertion that ‘‘theplaintiffs experienced an economic loss asa proximate result of the alleged Rule10b–5 violation.’’ Id. The district courtgranted the motion to dismiss, and thiscourt reversed. This court held that ‘‘thefair inference of the complaint, if one as-sumes-as we must-the truth of its allega-tions, is that the market price paid by theplaintiffs exceeded the value of the stockat the time of purchase based on thefacts.’’ Id. It reasoned that the dismissalwas improper, because the complaint sug-gested that the price paid exceeded thevalue that the market would have estab-lished for the target company’s shares hadthe truth been known. See id. The court

expressed no opinion concerning the prop-er method for measuring the plaintiffs’injury. See id. at 624 n. 2.

This court reached a similar conclusionin Hayes v. Gross, 982 F.2d 104, 107 (3dCir.1992). There, an investor filed a classaction lawsuit against the directors andofficers of a savings and loan associationpursuant to § 10(b) and Rule 10b–5 claim-ing that the class members were injuredwhen they purchased the association’sstock at an inflated price. See id. at 105.At the urging of the directors, the officers,and the Resolution Trust Company, thedistrict court dismissed the action for fail-ure to state a claim. See id. at 105. Thiscourt reversed the dismissal and remandedthe matter for further proceedings. Itconcluded that the class had establishedthe element of reliance, and it expresslyfound ‘‘no merit’’ in the Resolution TrustCompany’s contention that the complaintfailed to allege the element of loss causa-tion. See id. at 107 & n. 2. In holding thatthe complaint stated a claim under § 10(b)and Rule 10b–5, the court explained:

Plaintiff alleges that defendants know-ingly or recklessly made material mis-representations which inflated the mar-ket price for Bell stock, and that herelied on the market price as reflectingBell’s true value. As a result, plaintiffclaims to have suffered injury as a stockpurchaser.

Id. at 107.

[21] We interpret Scattergood andHayes as holding that, where the claimedloss involves the purchase of a security ata price that is inflated due to an allegedmisrepresentation, there is a sufficientcausal nexus between the loss and thealleged misrepresentation to satisfy theloss causation requirement. Cf. Sowell v.Butcher & Singer, Inc., 926 F.2d 289, 297(3d Cir.1991) (stating that the differencebetween the purchase price and the ‘‘truevalue’’ of the security at the time of thepurchase is the ‘‘proper measure of dam-ages to reflect the loss proximately caused

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by the defendants’ deceit’’) (quoting Hud-dleston v. Herman & MacLean, 640 F.2d534, 555 (5th Cir.1981) modified on othergrounds, 459 U.S. 375, 103 S.Ct. 683, 74L.Ed.2d 548 (1983)). We note, however,that those decisions assume that the artifi-cial inflation was actually ‘‘lost’’ due to thealleged fraud. Where the value of thesecurity does not actually decline as a re-sult of an alleged misrepresentation, itcannot be said that there is in fact aneconomic loss attributable to that misrep-resentation. In the absence of a correc-tion in the market price, the cost of thealleged misrepresentation is still incorpo-rated into the value of the security andmay be recovered at any time simply byreselling the security at the inflated price.See Green v. Occidental Petroleum Corp.,541 F.2d 1335, 1345 (9th Cir.1976) (Sneed,J., concurring) (stating that an investor’sproximate losses are limited to thoseamounts that are attributable to the unre-covered inflation in the purchase price).Because a plaintiff in an action under§ 10(b) and Rule 10b–5 must prove that heor she suffered an actual economic loss, weare persuaded that an investor must alsoestablish that the alleged misrepresenta-tions proximately caused the decline in thesecurity’s value to satisfy the element ofloss causation.

We find the Eleventh Circuit’s decisionin Robbins v. Koger Properties, Inc., 116F.3d 1441, 1448 (11th Cir.1997), instructiveof this point. In that case, a group ofinvestors filed a class action lawsuitagainst Kroger Properties, Inc. (‘‘KPI’’),its officers, and its independent accountantpursuant to § 10(b) and Rule 10b–5 whenthe price of KPI stock dropped following adividend cut. See id. at 1445. Only thesuit against the independent accountantproceeded to trial. See id. At trial, theinvestors presented evidence that the inde-pendent accounting firm made fraudulentstatements which inflated the price atwhich they purchased KPI stock. See id.at 1445–46. It was also shown, however,that the dividend cut and the drop in theprice of KPI stock occurred more than one

year before the fraud was uncovered, andthat the board of directors cut the dividendfor reasons unrelated to the alleged fraud.See id. at 1445, 1448. The independentaccountant moved for judgment as a mat-ter of law, contending that the investorshad failed to prove the essential element ofloss causation. See id. at 1446. The dis-trict court denied the accountant’s motion,and the Eleventh Circuit reversed. See id.at 1446, 1449. The Eleventh Circuit heldthat the investors had failed to satisfy theloss causation requirement, because theydid not present evidence that the artificialinflation was removed from the marketprice of KPI stock, thereby causing a loss.See id. at 1446. In entering judgment infavor of the accountant, the court notedthat the misrepresentations were not dis-covered until more than one year after thedrop in the stock price, and that the inves-tors had not presented any evidence thatthe cut in dividends, which led to the dropin price, was related to the alleged misrep-resentations. See id. at 1446–47.

[22] Turning to the complaint at issuein this case, we are persuaded that theClass has alleged sufficient facts to showthat the alleged misrepresentations proxi-mately caused the claimed loss. The Classcontends that it purchased shares of ABIcommon stock at a price that was inflateddue to the alleged misrepresentations, andthat it suffered a loss when the truth wasmade known and the price of ABI commonstock returned to its true value. The com-plaint states, in relevant part:

94. As a result of the Cendant De-fendants’ fraudulent conduct as allegedherein, the prices at which ABI securi-ties traded were artificially inflatedthroughout the Class Period. Whenplaintiff and the other members of theClass purchased their ABI securities,the true value of such securities wassubstantially lower than the prices paidby plaintiff and the other members ofthe Class. The market price of ABIcommon stock declined sharply from its

186 223 FEDERAL REPORTER, 3d SERIES

March 23, 1998, $64–7/16 per share clos-ing price, to its September 29, 1998, $43per share closing price. By October 13,1998, ABI’s closing price dropped to$35–1/2. In ignorance of the materiallyfalse and misleading nature of the state-ments and documents complained ofherein, as well as of the adverse, undis-closed information known to defendants,plaintiff and the other members of theClass relied, to their detriment on suchstatements and documents, and/or onthe integrity of the market, in purchas-ing their ABI common stock at artifi-cially inflated prices during the ClassPeriod. Had plaintiff and the othermembers of the Class known the truth,they would not have taken such action.

95. At all relevant times, the misrep-resentations and omissions particular-ized in this Amended Complaint directlyor proximately caused, or were a sub-stantial contributing cause of, the dam-ages sustained by plaintiff and the othermembers of the Class. The misstate-ments and omissions complained ofherein had the effect of creating in themarket an unrealistically positive assess-ment of Cendant, as well as of its finan-cial condition, causing ABI’s commonstock to be overvalued and artificiallyinflated at all relevant times. Defen-dants’ false portrayal, during the ClassPeriod, of the Company’s operations andprospects, as well as of Cendant’s finan-cial condition, resulted in purchases ofABI securities by plaintiff and by theother members of the Class at artificial-ly inflated prices measured by the dif-ference between the market prices andthe actual value of such securities at thetime of purchase, thus causing the dam-ages complained of herein.

* * * * * *

97. As a direct and proximate resultof defendants’ aforesaid wrongful con-duct during the Class Period, plaintiffand other members of the Class havesuffered substantial damages in connec-

tion with their purchases of ABI com-mon stock.

The complaint further indicates that theprice of ABI common stock was ‘‘buoyed’’by the defendants alleged misrepresenta-tions, and that it dropped in response todisclosure of the alleged misrepresenta-tions and the termination of the mergeragreement. Assuming the truth of thoseallegations, and taking all reasonable infer-ences in the light most favorable to theClass, we agree that the Class is entitledto offer evidence to support its claim.

Notwithstanding the allegations of thecomplaint, however, the defendants main-tain that the price of ABI common stockwas inflated, not by the alleged misrepre-sentations, but rather by AIG’s $58 tenderoffer and by the approval of the mergeragreement by the board of directors ofABI. We do not agree. The Class periodcovers persons who purchased shares ofABI common stock prior to both events.For those purchasers, neither the compet-ing tender offer nor the board approval ofthe merger agreement could have providedan independent valuation that would haveinflated the price of ABI common stock.

[23] Nor can we say, for the Classmembers who purchased shares of ABIcommon stock after that time, that theannouncement of AIG’s $58 bid and theapproval of the merger agreement weresufficient to destroy the causal connectionbetween the alleged misrepresentationsand the artificial inflation in the price ofABI common stock. It is well establishedthat not every intervening event is suffi-cient to break the chain of causation. SeeRankow v. First Chicago Corp., 870 F.2d356, 367 (7th Cir.1989) (stating that toallow any intervening change in marketconditions not directly caused by the de-fendant to break the chain of causationand exempt the defendant from liabilitywould eviscerate Rule 10b–5); W. PageKeeton et al., Prosser & Keeton on theLaw of Torts § 44 (5th ed.1984) (explain-ing that proximate causation is not de-stroyed by every intervening event). So

187SEMERENKO v. CENDANT CORP.Cite as 223 F.3d 165 (3rd Cir. 2000)

long as the alleged misrepresentationswere a substantial cause of the inflation inthe price of a security and in its subse-quent decline in value, other contributingforces will not bar recovery. See Robbins,116 F.3d at 1447 n. 5. While we are mind-ful that the defendants may disprove thatthe Class suffered a loss as a result of thealleged misrepresentations by showingthat the misrepresentations were not asubstantial factor in setting the price ofABI common stock during the Class peri-od, we disagree that the defendants maydo so at this stage of the proceedings. SeeIn re Burlington Coat Factory Sec. Litig.,114 F.3d at 1420 (setting forth the stan-dard for reviewing a motion to dismiss).It is possible that one portion of the infla-tion was attributable to both the compet-ing tender offer and the board approval ofthe merger agreement, and that the re-maining portion of the inflation was attrib-utable to the alleged misrepresentations.It is equally reasonable to infer that thealleged misrepresentations played a sub-stantial role in the decision of the board ofdirectors of ABI to approve the mergeragreement, especially considering the factthat ABI shareholders were to receiveCendant common stock in exchange fortheir shares of ABI common stock.

We also disagree with the defendants’contention that the mutual termination ofthe merger agreement was an interveningevent that caused the Class’s loss. Thecomplaint alleges that the market price ofthe common stock of both ABI and Cen-dant declined in response to the allegedfraud. From that allegation, it is reason-able to conclude that the disclosure of the

falsity of the alleged misrepresentationsplayed a substantial factor in the termi-nation of the merger agreement. Indeed,it is possible that the board of directors ofABI no longer found it beneficial for itsshareholders to exchange shares of ABIcommon stock for shares of Cendant com-mon stock following the discovery of Cen-dant’s true financial condition. In light ofthe sharp decline in the price of Cendantcommon stock, it is also reasonable to inferthat the board of directors of Cendantsought to cancel the merger to avoid dilut-ing the shares of its existing shareholders.We therefore agree with the contentions ofthe Class and conclude that the complaintalleges sufficient facts to establish the ele-ment of loss causation.

CONCLUSION

In sum, we conclude that the complaintalleges sufficient facts to establish the ele-ments of reliance and loss causation. Wedo not resolve, however, whether the com-plaint also satisfies the ‘‘in connectionwith’’ requirement; nor do we considerwhether the complaint complies with theheightened pleading requirements of Rule9(b). Rather, we vacate the judgment ofthe district court and remand this matterso that the district court may determine, inthe first instance, whether the alleged mis-representations were material and publiclydisseminated in a reliable medium and, inthe case of Ernst & Young, whether it wasreasonably foreseeable that Cendant woulduse its financial statements and audit re-ports in its tender offer for shares of ABIcommon stock.14 We also instruct the dis-

14. We find no merit in the defendants’ claimthat the dismissal should be affirmed on thealternative ground that the complaint fails toallege that the defendants shared a ‘‘fiduciaryor other similar relation of trust and confi-dence’’ with the Class members. The com-plaint does not allege that the defendantsfailed to disclose material facts. See, e.g.,Dirks v. Securities & Exch. Comm’n, 463 U.S.646, 661, 103 S.Ct. 3255, 77 L.Ed.2d 911(1983) (considering whether a tippee was un-der a duty to disclose inside information or toabstain from trading); Chiarella v. United

States, 445 U.S. 222, 228, 100 S.Ct. 1108, 63L.Ed.2d 348 (1980) (considering whether afinancial printer was under a duty to discloseinformation to shareholders of a corporationfor whom he did not work or to abstain fromtrading in the corporation’s securities); Gor-don v. Diagnostek, Inc., 812 F.Supp. 57, 60(E.D.Pa.1993) (considering whether an ac-quiring corporation was under a duty to dis-close certain financial information to theshareholders of a target corporation); Lernerv. FNB Rochester Corp., 841 F.Supp. 97, 99,

188 223 FEDERAL REPORTER, 3d SERIES

trict court to consider whether the com-plaint nevertheless should be dismissed fora failure to plead scienter with particulari-ty. Because we do not resolve whetherthe dismissal was proper under § 10(b)and Rule 10b–5, we do not address themerits of the dismissal of the Class’s claimunder § 20(a).

,

UNITED STATES of America,Appellant,

v.

Stanley BAPTISTE.

No. 99–1353.

United States Court of Appeals,Third Circuit.

Submitted Pursuant to Third CircuitLAR 27.4 and I.O.P. 10.6 Motions

Panel April 20, 2000.

Filed June 8, 2000.

After affirmance of his conviction fordrug offenses, and various unsuccessfulmotions for postconviction relief, prisonerfiled petition for writ of error coram nobis.The United States District Court for theEastern District of Pennsylvania, James T.Giles, Chief District Judge, denied petition,

and prisoner appealed. The Court of Ap-peals held that prisoner could not seekcoram nobis relief.

Affirmed.

1. Criminal Law O1447Prisoner that was still in custody had

no basis for seeking relief through writ oferror coram nobis. 28 U.S.C.A. § 1651(a).

2. Criminal Law O1073Certificate of appealability was not re-

quired for petitioner’s appeal from denialof petition for writ of error coram nobis.28 U.S.C.A. § 1651(a).

3. Criminal Law O1412Writ of error coram nobis is an ex-

traordinary remedy, and a court’s jurisdic-tion to grant relief is of limited scope. 28U.S.C.A. § 1651(a).

4. Criminal Law O1427Fact that prisoner’s second collateral

challenges to his conviction and sentencewere barred under Antiterrorism and Ef-fective Death Penalty Act (AEDPA) didnot permit prisoner to seek coram nobisrelief, where prisoner had earlier opportu-nity to raise all of his claims. 28 U.S.C.A.§§ 1651(a), 2244, 2255.

Stanley Baptiste, Ray Brook, NY, prose.

David L. Hall, Office of U.S. Attorney,Philadelphia, PA, for U.S.

103 (W.D.N.Y.1993) (considering whether apotential acquirer was under a duty to dis-close material information to the sharehold-ers of a target corporation); Gershon v. Wal–Mart Stores, Inc., 901 F.Supp. 128, 129–31(S.D.N.Y.1995) (considering whether a corpo-ration was under a duty to disclose to theshareholders of another corporation that itintended to terminate a contract for the saleof goods); Lindblom v. Mobile Telecomm.Technologies Corp., 985 F.Supp. 161, 163(D.D.C.1997) (considering whether a subsid-iary whose securities were not traded owed aduty to disclose certain information to theshareholders of the parent corporation).

Rather, it alleges that the defendants madeaffirmative misrepresentations. Though de-fendants who are neither fiduciaries nor in-siders generally are not under a duty to dis-close material information, they subjectthemselves to liability under § 10(b) and Rule10b–5 when they make affirmative misrepre-sentations. See Deutschman v. BeneficialCorp., 841 F.2d 502, 506 (3d Cir.1988) (stat-ing that nothing in the law of this circuit‘‘can be construed to require a fiduciary rela-tionship between a section 10(b) defendantand the victim of that defendant’s affirmativemisrepresentation’’).