APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. Nos. 1:09-CV-00200-PAB-CBS 1:09-CV-00215-PAB-CBS 1:09-CV-00296-PAB-CBS 1:09-CV-00606-PAB-CBS)
The opinion of the court was delivered by: Briscoe, Chief Judge.
United States Court of Appeals Tenth Circuit
Elisabeth A. Shumaker Clerk of Court
Before BRISCOE, Chief Judge, BALDOCK, and HOLMES, Circuit Judges.
This case arises from allegations that certain officers of Level 3 Communications, Inc. (Level 3) engaged in securities fraud. Lead plaintiff William A. Poppo filed a class action complaint on behalf of all purchasers or acquirers of Level 3 securities between October 17, 2006, and October 23, 2007 (the class period).*fn1 Plaintiff sued the defendants*fn2 under Section 10(b) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiff also asserted claims against individual defendants as "control persons" pursuant to Section 20(a) of the Act, 15 U.S.C. § 78t(a). The district court dismissed the complaint with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6), and plaintiff appeals. We exercise jurisdiction under 28 U.S.C. § 1291 and affirm.
Under Section 10(b) of the Securities Exchange Act of 1934 (SEA), it is unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Implementing the SEA, Rule 10b-5 prohibits, inter alia, "mak[ing] any untrue statement of a material fact." 17 C.F.R. § 240.10b-5.
"Section 10(b) . . . affords a right of action to purchasers or sellers of securities injured by its violation." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007). A plaintiff suing under Section 10(b), however, bears a heavy burden at the pleading stage. In order to state a private securities fraud claim, a plaintiff's complaint must allege that:
(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter, that is, with intent to defraud or recklessness; (4) the plaintiff relied on the misleading statements; and (5) the plaintiff suffered damages as a result of his reliance.
Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003).
Under the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L. No. 104-67, 109 Stat. 737, a heightened pleading standard applies to the first and third of these elements. Adams, 340 F.3d at 1095-96. In order to overcome a motion to dismiss, a complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Further, it is not enough for a plaintiff to allege generally that the defendant acted with scienter, as permitted under Fed. R. Civ. P. 9(b). The plaintiff must, "with respect to each act or omission alleged . . . , state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
Plaintiff alleges that defendants made false or misleading statements of material fact to the market during the class period regarding Level 3's progress in integrating several entities it had acquired. In this appeal from defendants' motion to dismiss, we accept as true all well-pleaded facts. Adams, 340 F.3d at 1088. The facts pertinent to our decision are as follows.
Level 3 is a publicly traded company that primarily provides telecommunications services to business customers such as telephone companies, cable television companies, and internet service providers. As one of its services, Level 3 operates fiber optic networks to allow its customers to transfer data as well as voice and video communications. Between December 2005 and January 2007, the company sought to expand its network through a series of acquisitions. On December 23, 2005, Level 3 acquired WilTel Communications Group, LLC (WilTel), which operated a "long haul" network.*fn3 Then, between March 20, 2006, and August 2, 2006, Level 3 acquired four entities that operated "metropolitan" or "metro" networks*fn4 : Progress Telecom (Progress), ICG Communications, Inc. (ICG), TelCove, Inc. (TelCove), and Looking Glass Networks Holdings Co., Inc. (Looking Glass). Finally, on January 3, 2007, Level 3 acquired Broadwing Corporation (Broadwing), which operated a long haul network. This case is primarily about Level 3's attempts to integrate into its business the first of these acquisitions, WilTel, and defendants' representations to the market about that process.
B. Level 3's Anticipated Network Integration Process
As Level 3 acquired telecommunications companies, it faced the significant task of merging the new systems with its own. According to the amended complaint, Level 3 had a multiple-step network integration process in place "to facilitate the combination of the acquired businesses' physical network[s] with that of Level 3's then existing assets." JA, Vol. 1 at A83. The first step in the process was physical network analysis. Id. at A84. "[D]uring this phase[,] . . . Level 3 determined where network 'circuits'*fn5 were physically located, the design of circuits, what equipment had been utilized to 'light' circuits,*fn6 and which circuits were leased or owned." Id. at A84.*fn7 The second step was identification of network efficiencies. Id. "During this phase . . . , Level 3 merely identified where redundant network elements existed and might be later targeted for elimination." Id. The third step was network design. Id. Here, Level 3 sought to "design the most optimal and efficient combined network." Id. The fourth step involved building interconnects and capacity. Id. This was "the single most time intensive and challenging . . . phase," and it involved "physically joining elements of the network, such as . . . WilTel's and Level 3's networks . . . [and] connecting dark fiber to laser equipment to create operating circuits." Id. at A85. The final network integration step was route integration. Id. During this phase, "network redundancies identified earlier . . . are . . . physically decommissioned and customers can be moved onto new, more cost-efficient network infrastructure." Id. at A85.
By the end of 2007, defendants hoped to transfer "all the complex business systems utilized by the acquired businesses (referred to as the 'legacy' systems) onto a common operating platform." Id. at A78, A89. Ultimately, Level 3 intended to achieve fluid "provisioning"--the "end to end process starting with a signed sales order and ending with field installation, testing and activation of service necessary to begin billing"--across all the acquired networks. Id. at A78.
The integration process, plaintiff alleges, was mismanaged from the start.
According to the complaint, physical integration of the acquired entities' networks proceeded behind schedule and over budget. Id. at A59. Level 3 failed to integrate the acquired entities' inventory control and provisioning systems, and as a result found itself "simultaneously using multiple network inventory and provisioning systems acquired from WilTel and the metro businesses, resulting in significant delays in provisioning and fulfilling customer orders." Id. at A61. Furthermore, Level 3 failed "to accurately map the acquired businesses' networks and inventory control and provisioning systems." Id. at A66.
Plaintiff alleges that these basic problems arose because defendants "fired the sales personnel employed by the acquired businesses who were familiar with products and customers as well as the technical experts who had knowledge of and were responsible for provisioning orders and activating sales." Id. at A60. The "remaining Level 3 employees had difficulty understanding the functionality of" the legacy systems and were not given adequate training "to work within the numerous order tracking and provisioning systems being used to fill customers' orders." Id. at A60-61. Further, Level 3 "had no experienced personnel to accurately map the acquired businesses' networks and inventory control and provisioning systems and as a result [it] was . . . unable to determine what portions of the acquired businesses' network elements were redundant . . . or unnecessary." Id. at A61, A66.
D. Defendants' Statements During the Class Period
Mismanagement is not equal to fraud, however, and plaintiff emphasizes that this action is not about how well or how poorly defendants handled the integration of Level 3's acquisitions. Rather, plaintiff's fraud claim is based on alleged misrepresentations defendants made regarding the success of that endeavor. The complaint provided a catalog of allegedly false or misleading statements.
For instance, on October 17, 2006, ten months after Level 3 had acquired WilTel, COO O'Hara spoke favorably about the progress the company had made. "We continue to run ahead of plan," he told analysts and investors, "and have now completed the majority of integration efforts from WilTel, and we have completed these activities under budget." Id. at A53-54. A week later, O'Hara reiterated that Level 3 "continue[d] to run ahead of plan on the WilTel integration from both a timing and budget perspective." Id. at A55. He stated that "[a] majority of the physical network interconnections are completed." Id. These claims were repeated and exaggerated by market analysts. See, e.g., id. at A55 ("Management stated that it had completed the integration of Wil[T]el."). Level 3 emphasized to the market that it was working hard on integration. CEO Crowe stated, "'We have [been] working on integration tasks and it's well over 200 people, so it's a big effort for us, one we take seriously and one we think we are developing pretty good skills in.'" Id. (alteration in original). On November 9, 2006, Level 3's Form 10-Q, filed with the Securities & Exchange Commission (SEC), stated that "[d]uring 2006, the Company integrated a significant portion of WilTel into the business." Id. at A57. On December 4, CFO Patel gave a more precise estimate. Before inquiring about Level 3's metro acquisitions, a financial analyst commented, "On the WilTel side, I think you are pretty much through the woods, you said you completed that in about a year, under budget and under schedule." Id. Patel replied, "You are right on WilTel, we have generally done, substantially done, by that I mean 85%, 90% done with those efforts." Id. Patel also presented a PowerPoint slide that proclaimed that "Level 3 is a logical consolidator with proven integration experience," a statement that was displayed at conferences on six other occasions by Patel, O'Hara, and Level 3's senior vice president and treasurer. Id. at A58, A62-64, A68.
O'Hara continued to make positive statements about integration progress in 2007. On February 8, 2007, he stated that "integration of all the acquired companies is progressing well and we're beginning to see the benefits of synergies from those transactions. . . . Most of the physical integration of WilTel is now complete. The remaining ...