Nature of the Case
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Facts
On December 22, 1997, the American International Group, Inc. (AIG) announced that it would acquire one hundred percent of the outstanding shares of ABI common stock for $47 per share. On January 27, 1998, D made a competing tender offer to purchase the same shares at a price of $58 per share, or a total price of approximately $2.7 billion. D filed a Schedule 14D-1 that overstated its income during prior financial reporting periods. On March 3, 1998, AIG matched D's bid and offered to pay ABI shareholders $58 for each share of outstanding ABI common stock. D raised its bid price to $67 per share. It then executed an agreement to purchase ABI for approximately $3.1 billion, payable in part cash and in part shares of D common stock. d filed an amendment to its Schedule 14D-1 on March 23, 1998, reporting the terms of the merger agreement. Eight days later, D filed a Form 10-K reporting its financial results for the 1997 fiscal year. After the close of trading on April 15, 1998, D announced that it had discovered potential accounting irregularities. D then reported that the irregularities occurred in a single business unit that 'accounted for less than one third' of D's net income, and it indicated that D would restate its annual and quarterly earnings for the 1997 fiscal year by $0.11 to $0.13 per share. The price of ABI common stock dropped from $64-7/8 to $57-3/4. D made several public statements in which it represented that it was committed to completing the merger with ABI notwithstanding the discovery of the accounting irregularities. On April 27, 1998, D doubled down on its statements that D is strong, highly liquid, and extremely profitable. On May 5, 1998, D stated that 'over eighty percent of the Company's net income for the first quarter of 1998 came from D business units not impacted by the potential accounting irregularities.' On July 14, 1998, D revealed that the April 15, 1998 announcement anticipating the restatement of its financial results for the 1997 fiscal year was inaccurate and that the actual reduction in income would be twice as much as previously announced. D acknowledged that its investigation had uncovered several accounting irregularities that had not previously been disclosed, and that those accounting irregularities affected additional D business units and other fiscal years. D estimated that earnings would be reduced by as much as $0.28 per share in 1997. The price of ABI common stock dropped until Cendant issued several public statements indicating that it intended to continue the tender offer and that it was 'contractually committed' to completing the ABI merger. On August 13, 1998, D issued the results of the audit report. The report included findings that 'fraudulent financial reporting' and other 'errors' inflated D's pretax income by approximately $500 million from 1995 to 1997. The price of ABI common stock closed at $53-1/2 per share on August 28, 1998, and fell further to a closing price of $51-7/8 per share on August 31, 1998, the first day of trading following the disclosure. On September 29, 1998, D's amended Form 10-K for the 1997 fiscal year announcing that D had lost $217.2 million in 1997 rather than earning $55.5 million. ABI common stock dropped to $43 per share. On October 13, 1998, D and ABI announced that they were terminating the merger agreement and that Cendant would pay ABI a 400 million dollar break up fee, despite the fact that it was not contractually bound to do so. Ps filed a complaint for violation of §10(b) and Rule 10b-5 for Ds making fraudulent misrepresentations concerning D's financial condition, its willingness to complete the tender offer, and its willingness to complete the proposed merger. Ds moved to dismiss the complaint pursuant to Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure. The court granted the motion. It held that the complaint failed to establish that the alleged misrepresentations were made 'in connection with' Ps' purchases of ABI common stock, that Ps reasonably relied on the purported misrepresentations, and that Ps suffered a loss as the proximate result of the purported misrepresentations. Ps appealed.
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