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P. Schoenfeld Asset Management LLC v. Cendant Corp.
Citations: 161 F. Supp. 2d 355; 2001 U.S. Dist. LEXIS 18858; 2001 WL 958788Docket: 98-4734(WHW), 98-5384(WHW)
Court: District Court, D. New Jersey; August 24, 2001; Federal District Court
Ernst & Young (E.Y.) sought to have the United States District Court for the District of New Jersey certify its May 7, 2001 opinion for immediate appeal under 28 U.S.C. § 1292(b). The court's opinion had determined that the plaintiffs, represented by P. Schoenfeld Asset Management LLC and George Semerenko, had adequately established the "in connection with" element necessary for claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The plaintiffs were investors who purchased shares of American Bankers Insurance Group, Inc. (ABI) between January 27 and October 13, 1998, based on misleading information related to Cendant Corp.'s tender offer for ABI, which was made amid competition with American International Group, Inc. (AIG). The plaintiffs alleged they relied on materially false statements in Cendant's offer documents, leading to an inflated stock price. Initially, the court dismissed the claims, ruling the plaintiffs did not satisfy the "in connection with" requirement. However, the Third Circuit reversed this decision, stating the court should have applied standards from the Second and Ninth Circuits, which allow the "in connection with" element to be satisfied by demonstrating the materiality of the misrepresentation and its means of dissemination, regardless of intent to influence investment decisions. The motion for certification of the opinion for immediate appeal was ultimately denied by the court. The Circuit directed the Court to assess whether the alleged misrepresentations were publicized in a manner that a reasonable investor would trust and were material at the time they were disseminated. Furthermore, for E. Y's misrepresentations in financial statements and audit reports to be deemed "in connection with" ABI stock purchases, it must be shown that E. Y was aware, or should have been aware, that Cendant would utilize these documents for its tender offer. The Court determined that SEC filings referenced in the tender documents were indeed the kind of information reasonable investors rely on, thus satisfying the "in connection with" requirement. E. Y challenged this ruling, arguing that the Court misapplied the standard regarding foreseeability related to the 1995 and 1996 financial statements, which were released prior to the tender offer. E. Y asserted that this broad interpretation of foreseeability, as applied by the Court, diverged from the Third Circuit's guidance. Additionally, E. Y claimed the Court incorrectly applied the "in connection with" test regarding the 1997 financial statements, as these were never included in the tender offer documents. Plaintiffs countered that E. Y's issues do not represent controlling legal questions and lack substantial grounds for dispute, arguing that E. Y's disagreement with the Court's application of the law is insufficient for an appeal. They further contended that the 1997 financial statements are independent in the public domain, indicating that an immediate appeal would not eliminate the need for trial nor materially expedite the litigation. The standard for certifying an order for immediate appeal under 28 U.S.C. § 1292(b) requires the following: a controlling question of law, substantial grounds for differing opinions, and the potential for the appeal to materially advance litigation resolution. Certification is discretionary, and a controlling question of law is one that, if incorrect, would lead to reversible error upon final appeal. It is not essential for a reversal to end the litigation. "Controlling" is defined as being "serious to the conduct of the litigation, either practically or legally," with practical concerns including time savings for the court and expense reduction for litigants being significant. Section 1292(b) aims to resolve substantial legal issues without necessitating a potentially unnecessary trial. For an appeal to be valid under this section, it is insufficient for a party to merely disagree with a district court's ruling. E. Y claims that the issue it seeks to appeal constitutes a controlling question of law because a reversal would likely lead to the dismissal of most claims against it. E. Y argues that since the plaintiffs must demonstrate foreseeability regarding the use of 1995 and 1996 financial statements by Cendant in a tender offer, and these statements were issued prior to any contemplation of such an offer, the claims should fail. E. Y asserts that the court incorrectly found the "in connection with" test met due to foreseeability. Additionally, E. Y challenges the court's ruling regarding the 1997 audit opinion, arguing it did not meet the "in connection with" test since it was not included in any tender offer documents and was not consented to for such use. E. Y contends that even if the second issue is not controlling, the first remains critical as it would significantly reduce the class size if reversed. In contrast, plaintiffs argue that E. Y's position does not represent a controlling question of law but rather a disagreement with the district court's interpretation of the law, asserting that Section 1292(b) was not designed to allow appellate courts to clarify speculative matters. They contend that E. Y is attempting to fabricate a controlling question by misinterpreting the Third Circuit's standard. E. Y contends that the issues regarding the financial statements from 1995, 1996, and 1997 represent controlling questions of law that, if certified for appeal and reversed, would dismiss the plaintiffs' claims. However, the Court views these questions as "manufactured" issues stemming from E. Y's disagreement with the outcome. E. Y argues there is substantial ground for dispute based on the Third Circuit's requirement that plaintiffs show E. Y knew or had reason to know its audit opinions would be used by Cendant for a specific tender offer for ABI stock. E. Y claims this Court misapplied that standard by suggesting foreseeability of use in any future tender offer rather than the specific ABI tender offer, which was not contemplated when the 1995 and 1996 statements were made. E. Y also disputes the Court's application regarding the 1997 statements, stating they were not incorporated into the tender offer documents and were not used by Cendant in its purchase attempt. Citing the Ninth Circuit case McGann v. Ernst & Young, E. Y argues that the auditor's report must directly influence investor decisions at the time of issuance to establish a connection to stock purchases. E. Y concludes that the Court's interpretation did not align with the precise language of the Third Circuit, suggesting it could have used broader terms if that was the intent. E. Y argues that the 1995 and 1996 financial statements are not material to ABI investors and therefore cannot be deemed capable of influencing their decisions at the time of issuance. E. Y criticizes the Court's standard as vague and overly broad, asserting that it could expose accounting firms to liability for unforeseen adverse impacts on any company related to their statements. In response, the plaintiffs assert that the disagreement with E. Y does not constitute a "substantial ground for a difference of opinion" as required for certification under Section 1292(b). The Court agrees, highlighting that a mere disagreement does not indicate genuine doubt regarding the legal standard. The Court maintains that the Third Circuit's "in connection with" test does not necessitate E. Y's prior knowledge of a specific transaction, such as the ABI tender offer, which occurred in 1998. E. Y's interpretation of the relevant legal standards is deemed illogical and inconsistent with the Circuit's findings. Regarding the 1997 financial statements, E. Y's claims of a substantial ground for a difference of opinion are weak, as it fails to provide sufficient reasoning against the Court’s conclusion that these statements were linked to the sale or purchase of ABI securities. E. Y's assertions that the audit opinion was not included in the tender offer documents and that it had not consented to its use are insufficient to challenge the Court's findings. E. Y's arguments lack a substantial basis for dispute, failing to demonstrate why the Third Circuit's decision supports their claims. The court clarifies that it is sufficient for Cendant's financial information to be incorporated by reference in the tender offer documents, contradicting E. Y's assertion that explicit statements were necessary. Moreover, the foreseeability of the 1997 financial statements is affirmed, as the tender offer had already been made, directing readers to Cendant’s publicly filed information. The court also finds no requirement for E. Y's consent for the use of a statement if its use was foreseeable. The Third Circuit emphasized that the intent behind misrepresentations does not influence their relevance to market participants' investment decisions. E. Y's contention appears to stem from mere disagreement with the court's conclusions rather than substantial grounds for dispute. Regarding whether an immediate appeal would expedite the litigation's resolution, E. Y argues it would, as a reversal could eliminate or narrow plaintiffs' claims. However, plaintiffs counter that the clarity of the issue regarding the 1997 financial statements implies a trial is inevitable regardless of the appeal outcome. The court concurs with the plaintiffs, concluding that there is no substantial ground for dispute and that an appeal would not materially advance the case's termination. Consequently, E. Y's motion to certify the May 7, 2001 opinion for immediate appeal is denied.