z zoo - SCACsecurities.stanford.edu/filings-documents/1006/PAH99/20001020r1c… · 1 2 3 4 5 6 7 8...

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STMUSS,

Steven M. Pesner, P.C. Stephen M. Baldini, Esq. Nancy Chung, Esq. Sean E. O'Donnell, Esq. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. 590 Madison Avenue New York, New York 10022 (212) 872-1070

OCT z Q zoo

Laurence A. Weiss, Esq. (Cal. Bar No. 64638) HELLER EHRMAN WHITE & McAULIFFE L.L.P 333 Bush Street San Francisco, CA 941 04

Attorneys for Defendants Patriot American Hospitality, Inc., Wyndham International, Inc., Paul A. Nussbaum and James D. Carreker

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

) MDL No. 1300 1

In Re PATRIOT AMERICAN HOSPITALITY ) NOTICE OF MOTION AND MOTION TO INC., SECURITIES LITIGATION. ) DISMISS ("OPEN MARKET ACTION") THE

) FIRST AMENDED COMPLAINT PURSUAN' ) TO 15 U.S.C. §78U, F.R.C.P. 12(b)(6) and 9(b) ) MEMORANDUM OF POINTS AND ) AUTHORITIES IN SUPPORT THEREOF

This Document Relates To:

Szekely v. Patriot American Hospitality, Inc. NO. 3-99-CV 1866-D

Levitch v. Patriot American Hospitality, Inc. NO. 99-CV1416-D

Gallagher v. Patriot American Hospitality, Inc. NO. 99-CV1429-L

Meisenburg v. Patriot American Hospitality, Inc. No. 3-99-CV1686-X

MOTION To DISMISS (OPEN MARKET ACTION): M D L No. 1300

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TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

PLEASE TAKE NOTICE THAT at 2:OO p.m. on December 14, 2000, or as soon

thereafter as counsel may be heard, in the courtroom of the Honorable Vaughn R. Walker,

United States District Court Judge, located at 450 Golden Gate Avenue, San Francisco,

California, Defendants Patriot American Hospitality, Inc., Wyndham International, Inc., Paul A.

Nussbaum and James D. Carreker (collectively, the “Patriot Defendants”) will and hereby do

move this Court to dismiss Plaintiffs’ First Amended Complaint (the “Open Market Action”) in

the above-captioned consolidated action, under Rules 12(b)(6) and 9(b) of the Federal Rules of

Civil Procedure, and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 8 78.

This motion is brought inter alia, on the grounds that the Open Market Complaint fails to

state a claim pursuant to F.R.C.P. 12(b)(6), fails to satisfy the requirements of the PSLRA, and

fails to plead fraud with particularity pursuant to F.R.C.P. 9(b). This motion is based on this

Notice of Motion and Motion to Dismiss; the Memorandum of Points and Authorities in support

thereof; the accompanying Affidavit of Sean E. O’Donnell sworn to on October 20, 2000, and

the exhibits annexed thereto; the complete files and records in these consolidated actions; oral

argument of counsel; and such other and further matters as this Court may consider.

Dated: October 19,2000

1 MOTION To DISMISS (OPEN MARKET ACTION): MDL No. 1300

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ......................................................................................................... iv

NTRODUCTION ........ .. ...... .. .. .......................................................... ............................................ 1

?ELIMINARY STATEMENT .................................................................................................... 2

SUMMARY OF ALLEGATIONS AND FACTS SUBJECT TO JUDICIAL NOTICE ............... 3

4RGUMENT .................................................................................................................................. 7

. PLAINTIFFS’ ALLEGATIONS ARE NOTHING MORE THAN INACTIONABLE CLAIMS OF CORPORATE MISMANAGEMENT ............................................................... 7

I. THE PSLRA’s SAFE HARBOR AND THE “BESPEAKS CAUTION” DOCTRINE BAR PLAINTIFFS’ CLAIMS BECAUSE THE FOURTEEN

STATEMENTS ARE MERE PUFFERY ................................................................................ 8 CHALLENGED PRESS RELEASES ARE BASED UPON FORWARD-LOOKING

A. Virtually All Of The Allegedly Misleading Press Releases Are Indisputably Forward-Looking Statements ................................................................................................. 9

B. Defendants’ Forward Looking Statements Were Accompanied By “Meaningful Cautionary” Warnings ......................................................................................................... 1 1

C. The Alleged Misstatements Are Nothing More Than Inactionable “Puffery” .................... 12

X. THE TRUTH ON THE MARKET BARS PLAINTIFFS’ FRAUD ON THE MARKET CLAIMS ............................................................................................................ 13

A. Patriot Fully Disclosed The Risks Associated With Managing Its Rapid Growth, Integrating Operations and Servicing Debt ......................................................................... 14

B. Patriot Fully Disclosed The Risks Associated With The Forward Equity Contracts .......... 15

C. The Market Was Aware Of The Pending Legislation In Congress And Patriot Disclosed It ...... .. . .. .. .. .. .. ..... .... .. .. .. ............ .... .. .. .. ... .. ......... .......... ..... .. ... .......... ... ..... ... ........ ... 16

.V. PLAINTIFFS HAVE FAILED TO ADEQUATELY PLEAD SCIENTER ....................... 19

A. Plaintiffs’ Allegations That The Individual Defendants Knew, Through Their Positions at Patriot, Certain Adverse Information About The Company Are Devoid Of Any Adequate Corroborating Details ............................................................................. 20

11 AOTlON TO DISMISS (OPEN MARKET ACTION): MDL NO. 1300

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B. Plaintiffs’ Allegations That Defendants Were Motivated To Commit Fraud To Inflate The Stock Price And To Solidify Their Compensation Packages Are Wholly Insufficient To Establish Scienter ..... ........ ..... .. ...... ........ ........ ........... ..................... 2 1

V. THE OPEN MARKET COMPLAINT FAILS TO PLEAD ANY SPECIFIC DETAILS AS TO WHY PATRIOT’S STATEMENTS WERE FALSE WHEN MADE .... 22

A. Plaintiffs Do Not Satisfy The Stringent Pleading Requirements Of The PSLRA and Rule 9(b) .............................................................................................................................. 23

B. Defendants Had No Duty To Disclose The Alleged Adverse Information ......................... 24

VI. PATRIOT CANNOT BE LIABLE FOR STATEMENTS MADE BY ANALYSTS ........ 26

VII. PLAINTIFFS’ ALLEGATIONS OF CONTROL PERSON LIABILITY UNDER SECTION 20(a) ARE INSUFFICIENT UNDER SETTLED LAW .................................. 27

,ONCLUSION ............................................................................................................................. 3 1 1

... 111

MOTION TO DISMISS (OPEN MARKET ACTION): M D L No. 1300

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TABLE OF AUTHORITIES.

CASES

Alfus v. Pyramid Tech. Corp., 745 F. Supp. 1511 (N.D. Cal. 1990) ................................. 25

Barth v. Nova Sensor, No. C-91-0830-DLJ, 1991 WL 330922 (N.D. Cal. Dec. 6, 1991) ........................................................................................................................ 17

Basic Inc. v. Levinson, 485 U.S. 224 (1988) ..................................................................... 25

Beverly v. Network Solutions, Inc., No. C-98-0337, 1998 WL 320829 (N.D. Cal. June 12, 1998 .......................................................................................................... 4

Epstein v. Washington Energy Co., 83 F.3d 1136 (9th Cir. 1996) .................................... 16

Genna v. Digital Link Corp., 25 F. Supp. 2d 1032 (N.D. Cal. 1997) ................................ 24

Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971 (9th Cir. 1999) ............. 5, 6, 14, 16

Hockey v. Medhekar, 30 F. Supp. 2d 1209 (N.D. Cal.1998) ............................................ 24

Hockey v. Medhekar, No. C-96-0815, 1997 WL 203704 (N.D. Cal. Apr. 14, 1997) ........................................................................................................................ 8, 20

Howard Gunty Profit Sharing v. Quantum C o p , No. 96 2071 1 SW, 1997 WL 514993 (N.D. Cal. Aug. 14, 1997) ............................................................................... 18

In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989) ..................................... 13

In re Caere Corp. Sec. Litig., 837 F. Supp. 1054 (N.D. Cal. 1993) ................................... 27

In re CBT Group PLC Sec. Litig., 1999 WL 1249287 (N.D. Cal. July 21, 1999) ............ 20

In re Convergent Tech. Sec. Litig., 948 F.2d 507 (9th Cir. 1991) ......................... 13, 25, 26

In re Fritz Cos. Sec. Litig., No. C96-2712 MHP, slip op. At 6-7 (N.D. Cal. Mar. 5, 1998) ........................................................................................................................ 23

In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217 (N.D. Cal. 1994) .................................. 12

In re Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286 (S.D.N.Y. June 1, 1998) .............................................................................................. 21

In re Interactive Network, Inc. Sec. Litig., 948 F. Supp. 91 7 (N.D. Cal. 1996) ................ 25

iv MOTION To DISMISS (OPEN MARKET ACTION): MDL No. 1300

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In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999) ............ 1, 2, 19, 20, 21

In re Stac Electronics Sec. Litin., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 520 U.S. 1103 (1997) ................................................................... 13, 16, 18, 26

!n - re Syntex Corp. Sec. Litin., 855 F. Supp. 1086 (N.D. Cal. 1994), afrd, 95 F.3d 922 (9th Cir. 1996) .............................................................................................. 24

In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) ................................................ 7, 26

In re VeriFone Sec. Litin., 784 F. Supp. 1471 (N.D. Cal. 1992), affd, 1 1 F.3d 865 (9th Cir. 1993) ................................................................................................ 12, 26

In re Verity, Inc., Secs. Litig., 2000 WL 1175580 (N.D. Cal. Aug. 11, 2000) .................. 28

In re Worlds of Wonder Sec. Litin., 35 F.3d 1407 (9th Cir. 1994), cert. denied, 516 U.S. 868 (1995) ........................................................................................... 9, 12, 19

In re Worlds of Wonder Sec. Litin., 814 F. Supp. 850 (N.D. Cal. 1993), g&. denied, Deloitte & Touche v. Miller, 5 16 U.S. 909 (1 995) .......................................... 9

Malin v. WAX Corp., 17 F. Supp. 2d 1345, 1361 (S.D. Fla. 1998) .................................. 21

Manson v. Muller, No. C 95-00016-MMC, 1995 WL 782176 (N.D. Cal. Oct. 12, 1995) ..................................................................................................................4, 18

Molinari v. Symantec Corp., 1998 WL 78120 (N.D. Cal. Feb. 17, 1998) ......................... 23

Padnes v. Scios Nova Inc., No. C 95-1693 MHP, 1996 WL 53971 1 (N.D. Cal. Sept. 18, 1996) ............................................................................................................. 18

Paracor Fin. Inc. v. General Elec. Capital Corp., 96 F.3d 1 15 1 (9th Cir. 1996) ............... 28

Plevy v. Hannerty, 38 F. Supp. 2d 816 (C.D. Cal. 1998) .................................................... 4

Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1993) ........................................ 13, 27

Rubin v. Trimble, No. C-95-4353 MMC, 1997 WL 227956 (N.D. Cal. Apr. 28, 1997) ...... ...... ............................................ .................... ..... .. ....... .................................. 18

San Leandro Emersency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996) ........................................................................... 21, 22

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) ..................................................... 7, 21

V MOTION To DISMISS ( O P E N MARKET ACTION): M D L NO. 1300

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Schlagel v. Learning Tree Int'l, No. Civ. 98-6384, 1998 WL 1144581 (C.D. Cal. Dec. 23, 1998) .............................................................................................................. 22

Tuchman v. DSC Comms.,Corp., 14 F.3d 1061 (5th Cir. 1994) ....................................... 22

Wen.ger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) ............................ 12, 23, 27

Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989) ............................. 18

Wyse Technoloqy Secs. Litig., 1990 WL 169149 (N.D. Cal. Sept. 13, 1990) .............. 8,21

~ Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996) ..................................................... 26

Zeid v. Kimberley, 973 F. Supp. 910 (N.D. Cal. 1997) ..................................................... 13

STATUTES

15 U.S.C. §780-5(i)(l)(A) ................................................................................................... 8

15 U.S.C. §78~-4(b)(2)(1998) ........................................................................................... 19

15 U.S.C. 0 78~-5(b)(3)(A) (1998) ................................................................................... 23

15 U.S.C. 4 7 8 ~ - 5 ( ~ ) ( 1 ) (1998) ........................................................................................... 8

vi IOTION TO DISMISS (OPEN MARKET ACTION): MDL NO. 1300

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MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION

This case, like the companion “Merger Action,” presents the all too familiar scenario: a

:ompany’s price per share declines and the plaintiffs’ class action bar then sues claiming that the

:ompany’s officers and directors “must have known” all along that something would or would

lot happen, and misled the shareholders for some undefined reason.

However, like the Merger Action:

(3) Disappointment does not state a claim; and

(4) A change in circumstances based upon international events or Congressional

action-the August 1998 Asian, Russian and international debt crisis, the August

through October 1998 stock market collapse, the consequent refusal or inability of

lenders to finance real estate companies and Congress’ alteration of the tax laws

respecting “paired REITs”4oes not state a claim.

Likewise, allegations that merely amount to assertions of corporate mismanagement do

state a federal securities claim. This “Open Market Action,” accordingly, should be

lismissed because it is nothing more than an improvident attempt to turn an investment

lisappointment into a fraud. Plaintiffs attempt to convert garden-variety mismanagement claims

nto viable federal securities claims by asserting that Defendants were “unreasonable” in not

xoperly predicting the future. With the benefit of hindsight, Plaintiffs complain that Defendants

mew about certain unspecified “adverse information” and should have disclosed it-without

)leading any “adequate corroborating details” as required by Silicon Graphics and without

lifferentiating which of the statements that Plaintiffs quote en masse from numerous press

.eleases are claimed to be false nor identifying the reasons why they allegedly are false.

gnoring prominent risk warnings contained in its SEC filings and press releases and the utter

tbsence of any indicia of scienter, Plaintiffs contend that Defendants painted a misleadingly

1 4OTION TO DISMISS (OPEN MARKET ACTION). MDL NO. 1300

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optimistic picture of Patriot’s prospects.’ In so doing, Plaintiffs conveniently ignore the above-

mentioned unforeseen misfortunes which befell Patriot and other hotel REITs in 1998.

PRELIMINARY STATEMENT

The First Amended Complaint (the “Open Market Complaint”) suffers from numerous

major defects warranting its dismissal with preiudice:

1. Plaintiffs allege nothing more than corporate mismanagement, which does - not constitute a securities fraud claim. See Point I.

2. Almost all of the alleged misstatements in the Open Market Complaint- statements regarding Patriot’s aggressive acquisitions, internal financial controls, forward-equity financing, pending legislation and growth prospects-were statements about the future, which were identified as forward-looking and accompanied by meaningful risk disclosures. Therefore, those statements are protected by the safe harbor established by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) as well as the judicial “bespeaks caution” doctrine. The remaining press releases were nothing more than “corporate puffery,” which is inactionable as a matter of law. See Point 11.

3. Patriot’s detailed disclosures of its aggressive acquisition strategy, the risks involved in its debt financing and possible changes in the law regarding REITS belie any argument that the market could have been misled by the challenged press releases. See Point 111.

4. Plaintiffs utterly fail to satisfy the heightened pleading standard for scienter under the PSLRA. Plaintiffs’ generic claims that Defendants were motivated to inflate the Patriot’s stock price in order to facilitate its acquisitions or were motivated to solidify their compensation packages have been rejected as insufficient under Silicon Graphics. See Point IV.

5. Plaintiffs fail to satisfy the pleading requirements of the PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure, particularly by failing to plead any specific details as to why Patriot’s statements were false when made. Moreover, Plaintiffs’ allegations fail to establish that Defendants had a duty to disclose any of the allegedly omitted adverse information. - See Point V.

6 . Plaintiffs cannot hold Defendants liable for statements made by independent third-party analysts, absent allegations that Defendants were

1 The two corporate defendants in this action are Patriot American Hospitality, Inc. (“Patriot American”) and Wyndham International, Inc. (“Wyndham”). These Defendants merged in January 1998 and are referred to Zollectively by Plaintiffs and herein as “Patriot.”

2 MOTION To DISMISS (OPEN MARKET ACTION): M D L NO. 1300

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so “entangled” with the analysts as to be responsible for their projections, which Plaintiffs fail to allege. See Point VI.

SUMMARY OF ALLEGATIONS AND FACTS SUBJECT TO JUDICIAL NOTICE

Patriot American was formed in April 1995 for the purpose of, among other things,

acquiring, developing and operating hotel properties under a corporate REIT structure. See the

Open Market Complaint (hereinafter cited as ‘T’) 7 20. In 1996, Patriot American merged with

California Jockey Club and Bay Meadows, which operated as a “paired-share” REIT. 7 20. This

paired-share REIT structure conferred certain tax benefits. f 20.

Patriot’s Self-Described “Aggressive Acquisition Activities”

Since its inception, Patriot American acquired hotel properties at a blistering pace.

v129, 32, 50, 5 1, 67. Patriot plainly considered the hotel industry to be a buyer’s market and it

stated so repeatedly in 1997 and 1998:

Patriot believes that market conditions remain favorable for the acquisition of additional hotels and hotel portfolios and it is expected that New Patriot REIT will continue Patriot American’s aggressive acquisition activities.

See Form S-4 Registration Statement, Joint Proxy and Prospectus Filed by Patriot American and

Wyndham, January 13, 1998, “Wyn Proxy,” p. 4. During 1997, Patriot American increased its

room portfolio by over 500%. 1 23. In January 1998, Patriot American merged with Wyndham

and continued its brisk pace by investing over $5.3 billion in the acquisition of hotels and other

related businesses. 7 2. Because Patriot operated as a REIT, it was required to distribute 95% of

its ordinary taxable income and, consequently, Patriot relied heavily upon outside financing to

purchase its hotel properties. Wyn Proxy, p. 29. This financing included, among other things,

revolving credit facilities, term loans, the assumption of debt and forward equity financing2 By

2 Patriot first raised $95 million through a forward-equity private placement through underwriter Union Bank of Switzerland on December 31, 1997, then a $125 million forward-equity private placement underwritten by

3 MOTION TO DISMISS (OPEN MARKET ACTION): M D L NO. 1300

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December 1998, Patriot’s combined debt was approximately $1.2 billion, 7 71, and there was no

limitation, other than market factors, on Patriot’s ability to incur more debt.

The Inherent Risks Repeatedly Were Disclosed

As with any “aggressive strategy,” Patriot’s rapid acquisitions involved risks, which were

disclosed in virtually every one of the Registration Statements and 10-Ks Patriot filed with the

SEC.3 See the Affidavit of Sean E. O’Donnell (“O’D Aff.”), Ex. C. First, there was the obvious

risk that Patriot would be unable to manage its rapid growth and integate its operations

efficiently. As Patriot disclosed:

The Corporation is currently experiencing a period of rapid growth . . . . The integration of departments, systems and procedures presents a significant management challenge, and the failure to integrate new acquisitions into existing management and operation structures could have a material adverse effect on the Corporation and the Operating Company.

July 1998, S-3 Reg. Stmt., p. 5 ; May 4, 1998, S-3 Reg. Stmt., p. 7. Second, there were the

inherent risks associated with any highly leveraged transactions. For example, Patriot’s S-4

Registration Statement, dated January 13, 1998 disclosed:

There can be no assurance that the Patriot Companies, following consummation of the Merger and the Other Transactions will be able to meet their debt service obligations and, to the extent that they cannot, the Patriot Companies risk the loss of some or all of their assets, including their hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become

Nationsbanc Montgomery Securities on February 26, 1998 and finally a $139 million forward-equity placement with Paine Webber on April 6, 1998. 7 29, fn 5. Basically, a forward-equity contract is a debt instrument whereby a borrower agrees to repay the principal of the loan with securities (equity) pegged at a price in the future. Id.

As this Court has recognized, when considering a motion to dismiss, a court may “take judicial notice of matters that are public record.” Beverly v. Network Solutions, Inc., No. C-98-0337, 1998 WL 320829, at *2 (N.D. Cal. June 12, 1998) (Walker, J.). Accordingly, courts will take judicial notice of SEC filings when considering a motion to dismiss, regardless of whether those filings were referenced in the complaint. See Plevv v. Haaaerty, 38 F. Supp. 2d 816, 821 (C.D. Cal. 1998) (“Moreover, as these documents are public records required by the SEC to be filed, the Court may take judicial notice of them”); Manson v . Muller, No. C 95-00016-MMC, 1995 WL 782 176, at *1 (N.D. Cal. Oct. 12, 1995) (“The Court rejects plaintiffs argument that it is inappropriate to consider on a motion to dismiss Centigram’s SEC filings . . . .”).


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unavailable to be unfavorable. In such circumstances, if the Patriot Companies are in need of funds to repay indebtedness, in accordance with its terms or otherwise, they could be required to liquidate one or more investments in properties at times which may not permit realization of the maximum return on such investments.

January 13, 1998, S-4 Reg. Stmt., p. 26; see also February 13, 1998, S-3 Reg. Stmt., p.7; April

29, 1998, S-3 Reg. Stmt., p.8; May 4, 1998, S-3 Reg. Stmt., pp.7-8.

Third, there was always the possibility that Patriot would no longer be able to operate as

a REIT, or as a paired-share REIT, and thus not be entitled to the tax benefits these structures

conferred. As Patriot disclosed repeatedly, qualification as a REIT involves “the application of

highly technical and complex provisions of the [Internal Revenue] Code, for which there are

only limited judicial or administrative interpretations [and the] complexity of these provisions is

greater in the case of a [paired-share] REIT.” April 29, 1998, S-3 Reg. Stmt., p. 5.

The Market Falters and Plaintiffs Sue

Unfortunately for Plaintiffs and Defendants, on May 1, 1998, President Clinton proposed

a new tax plan, modifying the grandfather exception Patriot enjoyed under the Code, which was

subsequently was enacted by Congress in July 1998. 1 59. Under this modification, any

properties acquired after March 26, 1998 could not be owned by a paired-share REIT, regardless

of whether this REIT operated as such before 1983. Making matters worse, the international

financial crisis of August 1998 to October 1998 slammed the United States stock markets and

REITs were hit particularly hard. 7 59.4 During and following this market “crash,” lenders

‘ This Court may take judicial notice of stock trades and market trends. HeliotroDe Gen.. Inc. v. Ford Motor Co., 189 F.3d 971, 981, n. 18 (9th Cir. 1999).

5 MOTION TO DISMISS (OPEN MARKET ACTION): MDL NO. 1300

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1 1 Patriot and the other paired-share REITS suffered: ' 3

4

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RElT Stock Charts 1994-1 999

1 1 By November 1998, Patriot had defaulted on at least one of its loans and it had reported a

net loss of $60 million for the 1998 third quarter. 1124. By May 1999, Patriot's stock had fallen 12

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to $5 per share:

Patriot Timeline

2-for-1 Stock Split 3/19/97

UBS Forward Equlty Contract (12/31/97) Nations Banc Forward

2-for-1 Stock Splt 7/28/97

I Equity Contract (2/26/98)

5 The Ninth Circuit has taken judicial notice that the market is aware of information contained in news articles. Heliotrope, 189 F.3d at 980-8 I , n. I8 (denying plaintiffs' fraud on the market claims by taking judicial notice of news articles that showed "that the market was aware of mounting costs associated with the tax strategy" and concluding that .'the market could have inferred that the strategy might one day be abandoned as too costly").

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These strike suits followed.

ARGUMENT

The most significant flaw in the Open Market Complaint is Plaintiffs’ utter failure to

identify any actionable misrepresentation or material omission. In order to state a viable claim

under 0 1 O(b) or Rule 1 Ob-5, Plaintiffs must allege that Defendants were responsible for a

misrepresentation of a material fact by either making an untrue statement or by omitting to state

a material fact necessary in order to make the statement made, in the light of the circumstances in

which they were made, not misleading. In re VeriFone Sec. Litin., 11 F.3d 865, 868 (9th Cir.

1993). Plaintiffs allege no such misrepresentation. Plaintiffs rely upon immaterial, optimistic

forward-looking statements and conclusory allegations of corporate mismanagement, none of

which supports a claim for securities fraud.6

I. PLAINTIFFS’ ALLEGATIONS ARE NOTHING MORE THAN INACTIONABLE CLAIMS OF CORPORATE MISMANAGEMENT

Plaintiffs’ allegations should be exposed for what they truly are: dressed-up

mismanagement claims, which simply are not actionable under the federal securities laws. Santa

Fe Indus., Inc. v. Green, 430 U.S. 462,479 (1977) (“Congress did not intend 0 10(b) to regulate

‘transactions which constitute no more than internal corporate mismanagement.”’). Plaintiffs’

entire case is founded upon allegations that Patriot was unreasonable in expecting a bright future

because the Company lacked certain internal financial controls and/or made poor financial

decisions regarding the debt it incurred to finance its aggressive acquisitions. See generally IT[ 2-

Accordingly, annexed as Exhibits C and D, respectively, to the O’D Aff. are news articles on the international financial crisis and its impact on the credit market, particularly for REITs, and the pending legislation, respectively.

6 Given the sheer amount of text quoted by Plaintiffs in the Open Market Complaint from numerous press releases, a chart annexed hereto identifies the primary pleading deficiencies on a paragraph-by-paragraph basis, including the failure to state a securities fraud claim under the pleading requirements of the PSLRA and Rule 9(b).


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4, 3 1 , 39, 37. The Open Market Complaint is rife with standard mismanagement allegations

such as these or Patriot’s purported failure to “implement a centralized computer system,”

“maintain a qualified and stable regional management team,” or Patriot’s alleged use of “sloppily

compiled reports,” 7 3 1.

Plaintiffs try desperately to take these mismanagement allegations and convert them into

a securities claim by referring to 14 press releases and alleging that they were misleading

because Defendants did not disclose that Patriot was running a loose ship. Yet, “[ilt is well

settled that defendants do not violate the federal securities laws merely by failure to disclose

their own mismanagement.” Wyse Technology Secs. Litin., 1990 WL 169149, at *2 (N.D. Cal.

Sept. 13, 1990) (holding defendant’s failure to disclose that it lacked sufficient quality control

assurances was not a~t ionable) .~

[I. THE PSLRA’S SAFE HARBOR AND THE “BESPEAKS CAUTION” DOCTRINE BAR PLAINTIFFS’ CLAIMS BECAUSE THE FOURTEEN CHALLENGED PRESS RELEASES DISCLOSE THAT THEY CONTAIN FORWARD-LOOKING STATEMENTS AND ARE MERE PUFFERY

Plaintiffs’ claims are barred in their entirety by the PSLRA’s safe harbor provisions and

ihe common law “bespeaks caution” doctrine. The PSLRA provides that no liability can attach

to a forward-looking statement if the statement is identified as forward-looking and accompanied

by meaningful cautionary language. See 15 U.S.C. 4 78~-5(c)(l) (1998). These statements

include financial projections of revenue and income, descriptions of management’s plans and

objectives for future operations, statements of future economic performance, and “any statement

of the assumptions underlying or relating to other forward-looking statements.” 15 U.S.C. 0

7 All unreported cases are annexed hereto at Tab 2 in alphabetical order.


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78~-5(i)(l); see also Hockey v. Medhekar, No. C-96-0815, 1997 WL 203704 (N.D. Cal. April

15, 1997).

Likewise, under the “bespeaks caution” doctrine, forward-looking statements are

considered immaterial when the defendant has provided the investing public with sufficiently

specific risk disclosures or other cautionary statements concerning the subject matter of the

statements at issue to nullify any potentially misleading effect. In re Worlds of Wonder Sec.

Litin., 35 F.3d 1407, 1413 (9th Cir. 1994), cert. denied, 516 U.S. 868 (1995). As long as the

risks adequately are disclosed, defendants are not liable even if “the optimistic statements are

later found to have been inaccurate.. ..” In re Worlds of Wonder Sec. Litig., 814 F. Supp. 850,

858 (N.D. Cal. 1993), cert. denied, 516 U.S. 909 (1995); Worlds of Wonder, 35 F.3d at 1413-14.

A. Virtually All Of The Allegedly Misleading Press Releases Are Indisputably Forward-Looking Statements

Among the countless press announcements made by Patriot during the Class Period,

Plaintiffs point to only 14 press releases, generally containing “soft” optimistic statements, which

Plaintiffs assert to be false or misleading. See infra press releases chart. At least nine of these

14 challenged press releases are indisputably forward-looking statements within the confines of

the PSLRA’s safe harbor provisions. (Four of the remaining press releases, 77 33, 55, 59, 67 are

nothing more than mere puffery, see Point II.C, and the remaining press release, which is only

paraphrased by Plaintiffs, simply announces Patriot’s forward equity contract with Paine

Webber, Inc. 7 43.) The following chart contains excerpts from those portions of the press

releases, which Plaintgs chose to highlight in the Open Market Complaint, along with the

applicable safe harbor provision which insulate Defendants from liability:


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EXCERPTS FROM CHALLENGED PRESS

RELEASES

JANUARY 5,1998: [W]e now have a multi-branded company . . . which will manage the growth not only of the Wyndham International brands, but our other brands . . . . [Tlhe components are in place to facilitate rapid growth of the companies’ multiple brands . . . . [W]e have worked closely with Patriot American to ensure that we were developing the best possible infrastructure to manage our growth and to increase shareholder value over tlre long term . . . . [W]e are confident that the operational structure in place . . . will enable us to make a relatively seamless transition as a significantly larger company with unparalleled growth potential . . . . 7 30. FEBRUARY 12,1998: In 1998, the Company expects earnirzgs growth to be driven principally by internal factors, including growth in average daily rate (ADR). Revenues per available room . . . and operating margins

FEBRUARY 27,1998: The terms of this placement reflect our belief that paired shares are significantly undervalued today. Through the price adjustment mechanism, we are able to issue equity today, enhancing our financial flexibility, while also retaining the ability to re-price the equity issuance during tlre coming twelve months. 7 38. MARCH 27, 1998: We remain convinced that thepaired- share structure is a legitimate and efficient vehicle for providing corltirlued and long-term value to shareholders . . . This proposed legislation will not deter Patriot from corltirluirzg its provers internal and external growth strategies . . . .” 7 4 1. MAY 4, 1998: (T]ke irltegratiorr of our recent acquisitions is 011 track and is providirrg opportunities to implement proven, successful business practices tltrougltout our portfolio . . ..I 45.

JULY 29,1998: [W]e expect to enjoy significant internal and external growth, sometime in the third quarter. We are proud of our dynamic progress and expect that the continued applicatiorl of our acquired companies’ best practices will further enhance our profitability in the coming quarters. 7 60. SEPTEMBER 16, 1998: This amassed portfolio will

. . . . 735.

10 ~ O T I O N To DISMISS (OPEN MARKET ACTION): MDL No. 1300

APPLICABLE SAFE

HARBOR PROVISION

Management’s plans and objectives for future operations. See 15 U.S.C. 4 78~-5(i)(l)(B).

Statements of future economic performance. See 15 U.S.C. $78~-5(i)( l)(C).

Assumptions which underlie forward-looking statements. See 15 U.S.C. $78~5(i)(l)(D).

Management’s plans and objectives for future operations. See 15 U.S.C. $ 78~-5(i)(l)(B).


Management’s plans and objectives for future operations. See 15 U.S.C. tj 78~-5(i)(l)(B).

Management’s plans and

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continue to provide us with significant internal growth opportunities . . . . (W]e believe that we are well-poised to reap continued benefits from our aggressive acquisition pace over the past 12 months while increasing the distribution and elevating the status of our proprietary brands. 7 6 1.

NOVEMBER 8,1998: [W]e have remained and will continue to be focused on our industry-leading operational excellence . . . . (W]e are building a powerhouse company for the long term.. . 7 64. DECEMBER 16,1998: This investment willprovide the foundation for our recapitalization plan . . . . The infusion of new equity capital will increase the Company‘s financial alternatives . . . . 7 73.

objectives for future operations. See 15 U.S.C. 4 78~-5(i)(l)(B).

Assumptions which underlie forward-looking statements. See 15 U.S.C. $78u-S(i)(l)(D).


Assumptions which underlie forward-looking statements. See 15 U.S.C. §78~-5(i)(l)(D).

B. Defendants’ Forward Looking Statements Were Accompanied By “Meaningful Cautionary” Warnings

Virtually every forward-looking statement cited in the Open Market Complaint was

accompanied by meaningful cautionary language identifying the statement as forward-looking

and disclosing the uncertainty of the projections contained therein. In fact, these warnings

disclosed that future business could be affected by the outcome of these uncertainties and

referred the audience to more specific disclosures in Patriot’s SEC filings for further information.

The February 27, 1998 press release, for example, regarding forward equity financing, contained

the following cautionary warnings and referred the public to further disclosures in other SEC

?lings:

Certain matters discussed in this press release may constitute forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including general economic conditions, competition for hotel services in a given market, the availability of equity and debt financing, interest rates and other risks detailed from time to time in the filings of Patriot American Hospitality, Inc., Patriot American Hospitality Operating Company, Wyndham Hotel Corporation and Interstate Hotels with the Securities and Exchange Commission, including quarterly reports on Form, 10-Q, reports on Form 8-K and annual reports on Form


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10-K. Reference is hereby made to the “Risk Factors” set forth in the Form 10-K for the fiscal year ended December 3 1, 1996 filed by Patriot American Hospitality, Inc., Patriot American Hospitality Operating Company, Wyndham Hotel Corporation and Interstate Hotels. *

Plaintiffs cannot escape the impact of these warnings merely by the unfounded and

unsupportable assertion that the safe harbor does not apply in this case. 7 87. (Indeed, directly

contradicting itself, the Open Market Complaint acknowledges that Defendants in fact

Zaution as to the forward-looking nature of their statements. 7 39.) Having made these

meaningful cautionary statements, Defendants are entitled to the full protections of the PSLRA’s

safe harbor, Wenger v. Lumisys. Inc., 2 F. Supp. 2d 123 1, 1241-43 (N.D. Cal. 1998), and the full

Protections of the bespeaks caution doctrine. In re Worlds of Wonder, 35 F.3d at 1413.

C. The Alleged Misstatements Are Nothing More Than Inactionable “Puffery”

Even absent the PSLRA’s protections, the majority, if not all, of the challenged press

releases are nothing more than mere “puffery,” which is not actionable as a matter of law.

Supta Cow. Sec. Litig., 900 F. Supp. 1217, 1235 (N.D. Cal. 1994). Plaintiffs assert speciously

that the market was misled by optimistic statements such as “Patriot Stock was a ‘screaming-

~uy,’” 7 33, that Patriot was “optimistic that . . . we will out perform our competitive set . . . . ” 1

55, that management planned “to expand our presence in the UK and Europe . . . .” 7 67; see also

I[ 35, 37, 38,43,48, 59-61,64, 66,69, 73. It is well-settled, however, that such statements of

3ptimism about the future and puffery about a company are too generic to state a securities claim

as a matter of law. In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992)

(“Investors.. .know how to devalue the optimism of corporate executives.”), affd, 1 1 F.3d 865

(9th Cir. 1993); Wenger, 2 F. Supp. 2d at 1245 (rejecting as inactionable puffery statements that

3 Patriot made similar safe harbor warnings in virtually every challenged press release in the Open Market Complaint. Excerpts from challenged press releases, along with the accompanying cautionary language, are annexed as Exhibit A to the O’D Aff.


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the “acquisition of both [companies] have allowed Lumisys to extend our high quality product

offerings.”); Zeid v. Kimberley, 973 F. Supp. 910, 920 (N.D. Cal. 1997) (statements that a

company is “on track” are too vague to be actionable); see also Raab v. General Physics Corn., 4

F.3d 286, 288 (4th Cir. 1993) (holding inactionable statements of an expected “growth rate 10%

to 30% over the next several years” and that the company was “poised to carry the growth and

success of 1991 well into the future”).

111. THE TRUTH ON THE MARKET DOCTRINE BARS PLAINTIFFS’ FRAUD ON THE MARKET CLAIMS

Even if the Open Market Complaint could survive dismissal under the PSLRA and the

“mere puffery” doctrine, Plaintiffs’ claims nonetheless should be dismissed because all of the

information that Plaintiffs assert was omitted was in fact disclosed in detail in Patriot’s numerous

SEC filings. In a fraud on the market case, such as here, the alleged failure to disclose material

information is not actionable if that information has been made credibly available to the market

by other sources. In re Apple Computer Sec. Litin., 886 F.2d 1109, 11 15 (9th Cir. 1989);

Convergent Tech. Sec. Litin., 948 F.2d 507, 513 (9th Cir. 1991).

Distilled to its essence, the Open Market Complaint asserts three general categories of

allegedly omitted information, which purportedly caused the challenged press releases to be

misleading. These are: (i) an alleged lack of financial controls to manage Patriot’s rapid growth,

integrate operations and service its sizeable short term debt, 7 2; (ii) the true degree of risk

associated with forward equity contracts, 7 3; and (iii) pending congressional legislation that

would adversely affect Patriot’s REIT status. 77 2-4. Patriot, however, disclosed each of these

items in detail in numerous SEC filings. See O’D Aff., Ex. B, containing copies of these

disclosures. The Open Market Complaint, therefore, fails to state a claim regardless of the

PSLRA’s safe harbor provisions or the bespeaks caution doctrine. In re Stac Electronics Sec.


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Litis., 89 F. 3d 1399, 1409 (9th Cir. 1996), cert. denied, 520 U.S. 1103 (1997) (affirming

dismissal of fraud-on-the-market claim because prospectus disclosed some of the allegedly

omitted information, and the rest would have been obvious to the market even without

disclosure); Heliotrope, 189 F. 3d at 975 (“If the market has become aware of the allegedly

concealed information the facts allegedly omitted by the defendant would already be reflected in

the stock’s price and the market will not be misled.”) (quotations omitted).

A. Patriot Fully Disclosed The Risks Associated With Managing Its Rapid Growth, Integrating Operations and Servicing Debt

Plaintiffs’ primary argument is that the some or all of the 14 press releases were

nisleading because Defendants did not disclose that Patriot lacked “the organizational,

Iperational and financial ability to integrate its acquisitions and pay its short-term debt.” 7 2

:citinP, 77 29-30, 32-33, 35, 37-38,40-41,43,45,47-49). This allegation is truly remarkable.

Since its inception, Patriot disclosed in countless SEC filings the risks associated with Patriot’s

.apid growth, the exact figures regarding its sizeable debt and that there could be no assurance

hat Patriot would meet its debt service obligations. For example, Patriot’s S-3 Registration

Statement, filed on February 13, 1998, provides:

Failure to Manage Rapid Growth and Integrate Operations; New Businesses. The Corporation is currently experiencing a period of rapid growth. The Companies are or will be responsible for the management and operation of several new businesses . . . . In addition, the Companies may acquire other new businesses in the future. The integration of departments, systems and procedures presents a significant management challenge, and the failure to integrate new acquisitions into existing management and operating structures could have a material adverse effect on the results of operations and financial condition of the Corporation and the Operating Company.

Substantial Debt Obligations; No Limits on Indebtedness; Variable Rate Debt. The Companies have obtained an unsecured revolving line of credit that expires on July 18, 2000 (the “Revolving Credit Facility”) and a term loan that expires on January 3 1, 1999 (the “Term Loan”) from certain lenders. As of February 11, 1998 the Companies’ combined debt was approximately $1,652.4 million and the Companies’ ratio of combined debt to total market capitalization was

* * * *

14 \I1OTION TO DISMISS (OPEN MARKET ACTION): M D L NO. 1300

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- approximately 34.2%. The Companies also may borrow additional amounts from the same or other lenders in the future, may assume debt in connection with acquisitions, or may issue corporate debt securities in public or private offerings. The Companies’ organizational documents do not limit the amount of indebtedness the Companies may incur. Further, substantially all of the Companies’ combined debt bears interest at a variable rate. Economic conditions could result in higher interest rates, which could increase debt service requirements on variable rate debt and could adversely affect the Companies’ ability to make distributions. There can be no assurance that the Companies will be able to meet their debt service obligations and, to the extent that they cannot, the Companies risk the loss of some or all of their assets, including the hotels. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Corporation or the Operating Company is in need of funds to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in properties at times which may not permit realization of the maximum return on such investments. The foregoing risks associated with debt obligations of the Companies may inhibit the ability of the Companies to raise capital in both the public and private markets.

lp.7) (emphasis supplied). Patriot restates these disclosures, virtually verbatim, in no less than

15 other SEC filings between June 1997 and November 1998. See O’D Aff., Ex. B.

B. Patriot Fully Disclosed The Risks Associated With The Forward Equity Contracts

Next, Plaintiffs argue that some or all of the 14 press releases were misleading because

Patriot did not disclose “the extraordinary risk these forward equity contracts posed to Patriot

x-ovided [sic] wholly insufficient cautionary language alerting investors to the true risks.”

[39(a). Yet, again, Patriot disclosed in detail the terms of each of the three forward equity

:ontracts Patriot entered into, along with the inherent risks involved. For example, page 7 of

Patriot’s S-3 Registration Statement, filed October 5 , 1998, discloses:

We have entered into transactions with three counterparties involving the sale of an aggregate of 13.3 million shares of Paired Common Stock, with related purchase price adjustment mechanisms (“Price Adjustment Mechanisms”), as described in “The Companies--Sales of Paired Common Stock with Price Adjustment Mechanisms.” Settlement under one or more of the Price Adjustment Mechanisms could have adverse effects on our liquidity or dilutive effects on our capital stock. [On] October 5, 1998, the counterparties to two of the Price Adjustment Mechanisms were entitled to require settlement of transactions. See


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The Companies--Sales of Paired Common Stock with Price Adjustment Mechanisms--PWFS Transaction” and “--UBS Transaction.” If the reset price or unwind price (in the case of the UBS and Nations transactions) or the market price (in the case of the PWFS transaction) of the Paired Common Stock is less than the applicable forward price or reference price on a given settlement date or interim settlement or reset date, we must deliver cash or additional shares of Paired Common Stock to effect such settlement, interim settlement or reset. Delivery of cash would adversely affect our liquidity, and delivery of shares would have dilutive effects on our capital stock. Moreover, settlement (whether by reason of a drop in the price of the Paired Common Stock or otherwise) may force us to issue shares of Paired Common Stock at a depressed price, which may heighten the dilutive effects on our capital stock. The dilutive effect of a stock settlement and the adverse liquidity effect of a cash settlement increase significantly as the market price of the Paired Common Stock declines below the applicable forward price or reference price . . . . See “The Companies--Sales of Paired Common Stock with Price Adjustment Mechanisms.”

(emphasis supplied); see also O’D Aff., Ex. B, containing similar risk disclosures regarding the

forward equity contracts.

C. The Market Was Aware Of The Pending Legislation In Congress And Patriot Disclosed It

Finally, Plaintiffs have no claim whatsoever regarding the “looming legislation” in

Zongress that threatened to negatively impact Patriot’s REIT status. First, the market was just as

3ware of this pending legislation as Patriot. Second, Patriot disclosed these developments in its

5-3 Registration Statement at the very beginning of the Class Period.

Plaintiffs do not allege a single fact to suggest that Patriot was privy to confidential

matters pending before Congress. In fact, there was substantial media coverage of this “looming

legislation’’ in all the major newspapers including The Washington Post, The New York Times,

The Dallas Morning News and The Los Angeles Times. See O’D Aff. Ex. D. Thus, because all

information available to Patriot also was available to the general public, Patriot’s press releases

could not have caused a fraud on the market by omitting this information. Heliotrope, 189 F. 3d

at 975; In re Stac Electronics, 89 F. 3d at 1409; see also Epstein v. Washington Energy Co., 83

F.3d 1136, 1139-41 (9th Cir. 1996) (dismissing claims based on alleged omissions where


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previous state regulatory commission holding and pending application before commission were

matter of public record); Barth v. Nova Sensor, No. C-91-0830-DLJ, 1991 WL 330922, at *6

(N.D. Cal. Dec. 6, 1991) (finding that failure to disclose publicly available state statutes “does

not constitute a material nondisclosure necessary to sustain a Rule lob-5 action.”). Moreover,

Patriot continually disclosed the risks associated with the possibility that Patriot may not always

be able to operate as a REIT and it even disclosed the “looming legislation” shortly after it was

proposed by Congressman Archer and months before President Clinton spoke on it. For

:xample, page 7 of Patriot’s S-3 Registration Statement, filed on February 13, 1998, discloses:

If the Corporation fails to qualify as a REIT in any taxable year, the Corporation will be subject to federal income taxation as if it were a domestic corporation, and the Corporation’s stockholders will be taxed in the same manner as stockholders of ordinary corporations. In this event, the Corporation could be sub-iect to potentially significant tax liabilities, and the amount of cash available for distribution to stockholders would be reduced and possibly eliminated. Unless entitled to relief under certain Code provisions, and subject to the discussion below regarding Section269B(a)(3) of the Code, the Corporation also would be disqualified from re-electing REIT status for the four taxable years following the year during which qualification was lost . . . . Moreover, qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited iudicial or administrative interpretations and the determination of various factual matters and circumstances not entirely within the Corporation’s control. The complexity of these provisions is meater in the case of a REIT that owns hotels and leases them to a corporation with which its stock is paired. Accordingly, no assurance can be given that the Corporation will satisfy such tests on a continuing basis.

Impact of Proposed Tax Legislation. The Corporation’s exemption of the anti- pairing rules and its ability to utilize the paired structure could be revoked or limited as a result of future legislation. In that regard, on November 5, 1997, Representative William Archer, Chairman of the Ways and Means Committee of the House of Representatives, publicly announced that he plans to review the grandfathering rule to determine whether there should be future restrictions on companies that are grandfathered. In addition, on February 2, 1998, the Clinton Administration released a description of the Tax Proposals included in its 1999 budget proposals. If enacted, the Tax Proposals would impose a freeze on the grandfathered status of paired share REITs such as the Corporation and a prohibition on REITs acquiring, after the effective date of the legislation, common stock of a corporation representing more than 10% of the vote or value of all classes of stock of the corporation. There can be no assurance that such


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legislation or other lepislation affecting REIT qualification or operations will not be enacted, and any such legislation - could have a material effect on the operation of the Companies.

:emphasis supplied); see also O’D Aff., Ex. B, containing similar risk disclosures regarding

Patriot’s REIT status.

Plaintiffs cannot ask this Court to sustain claims based on a fraud on the market theory,

while simultaneously ignoring the wealth of information available to the general public that

jisproves those claims. The securities markets were made well aware of the very information

which Plaintiffs claim was concealed. Plaintiffs’ fraud on the market claims, therefore, should

3e dismissed because the market could not have been misled by the alleged omissions in the

:hallenged press releases. In re Stac Electronics, 89 F.3d at 1410; Rubin v. Trimble, No. C-

35-4353 MMC, 1997 WL 227956, at *13 (N.D. Cal. April 28, 1997) (dismissing claim based on

dleged omission of shift in market trend where annual report and prospectus “did disclose the

dlegedly undisclosed trend.”); Manson, 1995 WL 782 176 at * 1 (dismissing certain claims where

SEC filings adequately disclosed alleged omitted information); Padnes v. Scios Nova Inc., No. C

35-1693 MHP, 1996 WL 539711, at *9 (N.D. Cal. Sept. 18, 1996) (dismissing fiaud-on-the-

narket complaint because alleged omissions were sufficiently disclosed in company abstract,

oumal article and analysts reports such that they were generally recognized by the market);

Howard Gunty Profit Sharing v. Quantum Corp., No. 96 2071 1 SW, 1997 WL 514993, at *4

P .D. Cal. Aug. 14, 1997) (finding no duty to disclose public information concerning consumer

preferences); Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 517 (7th Cir. 1989)(“Issuers

of securities must reveal firm-specific information. Investors combine this with public

information to derive estimates about the securities’ value. It is pointless and costly to compel

firms to reprint information already in the public domain.”).


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IV. PLAINTIFFS HAVE FAILED TO ADEQUATELY PLEAD SCIENTER

Plaintiffs fail completely to satisfy the PSLRA’s heightened requirements for pleading

scienter. Unable to identify any materially adverse information withheld by Defendants, because

no such information existed, Plaintiffs base their scienter allegations upon conclusory statements

and immaterial facts. Simply stated, Plaintiffs have not alleged any improper motive by any or

all of Defendants to defraud Patriot shareholders.

The PSLRA requires a plaintiff to “state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of mind.” 15 U.S.C. 78~-4(b)(2)(1998)

(emphasis supplied). Adopting a very rigorous pleading standard for scienter, the Ninth Circuit

in Silicon Graphics required that plaintiffs “must plead, in great detail, facts that constitute strong

circumstantial evidence of deliberately reckless or conscious misconduct.’’ 183 F.3d 970, 974

(9th Cir. 1999). Facts showing mere recklessness or a motive to commit fraud and opportunity,

however, “are not sufficient to establish a strong inference of deliberate recklessness.” Id.

(emphasis supplied). Plaintiffs must supply “a list of all relevant circumstances in great detail”

to corroborate their scienter allegations. Id. at 984.

The so-called scienter allegations in the Open Market Complaint wholly fail to meet this

heightened standard and, instead, are replete with conclusory statements that “defendants knew,

or deliberately disregarded” the alleged falsity of their statements. Significantly, the Open

Market Complaint conspicuously fails to allege (because it cannot) that any Defendant sold any

shares of Patriot stock during the Class Period. See In re Worlds of Wonder Secs. Litin., 35 F.

3d at 1425 (Defendant’s retention of their proportional share of stock throughout the entire

alleged class period, negates any inference of scienter). Instead, Plaintiffs rely on only three

vague and unsupported categories of allegations in support of their scienter allegations, see 17


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82-84, all of which are nothing more than “mere motive and opportunity” allegations, which are

wholly inadequate under Silicon Graphics. 183 F.3d at 988.

A. Plaintiffs’ Allegations That The Individual Defendants Knew, Through Their Positions at Patriot, Certain Adverse Information About The Company Are Devoid Of Any Adequate Corroborating Details

Unable to identify any improper motive on Defendants’ part, the “factual” basis for

Plaintiffs’ scienter allegations consists of the assertion that Defendants Nussbaum and Carreker,

by virtue of their positions as “top executives” of Patriot and “hands-on” approach as managers,

dealt with “important issues facing Patriot’s business” and thus “closely monitored Patriot’s

business via reports such as weekly and monthly profit and loss reports and weekly forecasts.. .”

11 79, 8 1. It is well settled, however, that such allegations do gcJ give rise to an inference of

scienter. See also In re CBT Group PLC Sec. Litin., 1999 WL 1249287, at *3 (N.D. Cal.

July 21, 1999) (“plaintiffs merely speculate that because of defendants’ positions within CBT,

they knew of, and participated in, the accounting improprieties”); Hockey, 1997 WL 203704 at

* 10-1 1 (defendants’ alleged familiarity with internal company data through unidentified

corporate documents insufficient to plead scienter).

To avoid dismissal on the pleadings, such allegations must include “adequate

corroborating details,” including “the sources of [plaintiffs] information with respect to the

reports, how [plaintiff] learned of the reports, who drafted them, or which officers received

them,” as well as specifics about the contents and facts indicating their reliability. Silicon

Graphics, 183 F.3d at 985. Plaintiffs here merely assert that “[blecause of the Individual

Defendants’ positions with the Company, they had access to the adverse undisclosed information

in 7131, 34, 36, 39,42,44, 46, 62, 68 and 74 about its business, operations, growth, financial

statements, and present and future business prospects via access to reports.. .that were provided

20 MOTION To DISMISS (OPEN MARKET ACTION): MDL NO. 1300

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by each property group’s management.. .” 114 (emphasis supplied); see also 7 8 1 .9 The Open

Market Complaint is devoid of any specific facts regarding the nature or contents of these

alleged “reports” or “documents,” who prepared them or when they were prepared, giving no

basis for the belief that these documents could have informed Defendants of undisclosed

problems. Likewise, Plaintiffs do not identify what was discussed during any of these

“conversations” or “Monday morning meetings.” Finally, they do not allege how, if at all,

Defendants were motivated to keep this information from shareholders. Plaintiffs’ conclusory

allegations, accordingly, fail to create the “strong inference” of scienter required by the PSLRA

to maintain this action. 15 U.S.C. 9 78~-4(b)(2).

B. Plaintiffs’ Allegations That The Individual Defendants Were Motivated To Commit Fraud To Inflate The Stock Price And To Solidify Their Compensation Packages Are Wholly Insufficient To Establish Scienter

Despite the clear dictates of Silicon Graphics, Plaintiffs’ remaining scienter allegations

also are nothing more than unsubstantiated motive and opportunity allegations. See 77 22, 70,

83, 84; Silicon Graphics, 183 F. 3d at 973.

In particular, Plaintiffs claim that the Individual Defendants were motivated to keep

Patriot’s stock price high in order to consummate other transactions. 11 23, 83. However,

“desire to consummate [a] corporate transaction does not constitute a motive for securities

fraud.” In re Health M m t . Svs., Inc.. Sec. Litia., No. 97 Civ. 1865, 1998 WL 283286, at *6

(S.D.N.Y. June 1, 1998); Malin v. WAX Cow., 17 F. Supp. 2d 1345, 1361 (S.D. Fla. 1998)

(rejecting motive of “maintaining the stock price.. .to facilitate mergers and acquisitions”); &

Leandro Emergency Medical Group Profit Sharing Plan v. Philip Moms Cos., 75 F.3d 801, 814

Plaintiffs also improperly plead that the Individual Defendants had unspecified “conversations and connections with other corporate officers and employees” and were in “attendance” at unspecified “Monday morning management meetings in Dallas, Board of Directors meetings and committees thereof.” 114.

21 MOTION TO DISMISS (OPEN MARKET ACTION): M D L No. 1300

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(2d Cir. 1996) (alleged desire to retain high credit rating not sufficient). Every company desires

to maintain a high stock price; if this motivation were sufficient to establish scienter in a federal

securities class action, then “virtually every company in the United States that experiences a

downturn in stock price could be forced to defend securities fraud actions.” San Leandro, 75

F.3d at 8 14 (recognizing that, since officers and directors are duty-bound to seek to maintain a

high stock price and credit rating, a scienter “standard” that allowed a plaintiff to plead this fact

as evidence of intent would be no standard at all).

Additionally, Plaintiffs allege that “Nussbaum and Carreker were also motivated to act

against shareholder interests when they sold control to the Apollo Group at a discount because

they were able to preserve their own business relationships for future deals with this investment

group and provide them with golden parachutes.” 7 84. Those allegations are fatally flawed for

two reasons. First, this vague and conclusory allegation lacks the requisite level of specificity of

fraudulent intent, let alone a “strong inference” of scienter. Second, courts have recognized that

“[ilncentive compensation can hardly be the basis on which an allegation of fraud is predicated.”

ruchman v. DSC Comms., Corn., 14 F.3d 1061, 1068-69 (5th Cir. 1994) (“On a practical level,

were the opposite true, the executives of virtually every corporation in the United States would

3e subject to fraud allegations.”); see also Schlanel v. Learning Tree Int’l, No. Civ. 98-6384,

1998 WL 1 144581, at * 16-17 (C.D. Cal. Dec. 23, 1998) (“On its own, executive compensation

;annot serve as a predicate for a fraud allegation.”) (citations omitted).

V. THE OPEN MARKET COMPLAINT FAILS TO PLEAD ANY SPECIFIC DETAILS AS TO WHY PATRIOT’S STATEMENTS WERE FALSE WHEN MADE

Assuming, arguendo, that Plaintiffs had identified an actionable misrepresentation or

Dmission, the Open Market Complaint still would fail because it is not plead with the detail

required by the PSLRA and Rule 9(b). In an effort to get past the pleading stage, Plaintiffs

22 L ~ O T I O N To DISMISS (OPEN MARKET ACTION): MDL No. 1300

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continually repeat an laundry list of alleged “adverse information.” If disclosed, according to

Plaintiffs, this information would have revealed Patriot’s lack of internal financial controls and

its “dire need to raise cash to pay off massive short-term obligations, which were not part of its

growth plans.” 7 66; see also, 17 3 1’62, 77. This is a common tactic of Plaintiffs’ counsel

herein and one that has been rejected numerous times by courts in this circuit. See ex . , Wenger,

2 F. Supp. 2d at 1243 (and cases cited therein) (“In the context of securities class action

complaints, courts have repeatedly lamented the plaintiffs’ counsels’ tendency to place the

burden on the reader to sort out the statements and match them with the corresponding adverse

facts to solve the puzzle of interpreting plaintiffs’ claims.”). Even if it could survive the other

fatal flaws identified above, Plaintiffs’ laundry list fails for a number of reasons.”

A. Plaintiffs Do Not Satisfy The Stringent Pleading Requirements Of The PSLRA and Rule 9(b)

The PSLRA requires a complaint alleging securities fraud to plead the reasons why

Defendants’ statements were false when made. See In re Fritz Cos. Sec. Litin., No. C96-2712

MHP, slip op. at 6-7 (N.D. Cal. Mar. 5 , 1998) (PSLRA strengthened prior Rule 9(b)

requirements). Failure to meet this standard shall result in dismissal of the complaint. 15 U.S.C.

5 78~-4(b)(3)(A).

Here, Plaintiffs’ vague descriptions of the allegedly material misrepresentations and

omissions wholly fail to satisfy this standard. The Open Market Complaint contains nearly 50

allegations of allegedly false or misleading statements from 14 different press releases, plus

IO Plaintiffs also rely on “group published” material (press releases and other public documents) to evade the responsibility of identifying each Defendant’s role in drafting or publishing the alleged fraud. 7 15. The PSLRA Act, however, codifies a ban against such “group pleading.” See Molinari v. Smantec Cow., 1998 WL 78120, at * 1 1 (N.D. Cai. Feb. 17, 1998) (holding that plaintiffs “failed to set forth a factual basis from which to infer that the . . . defendants were involved in drafting or publishing any group published material” and that “the status of officer or director [was] not enough in itself to establish involvement in the group ‘functionally related’ to the alleged fraud.”).

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multiple analyst reports and news articles. Without differentiating in any way which (or which

part) of any of those statements are claimed to be false, Plaintiffs simply repeatedly allege that

the statements made by Defendants “were known by the defendants to be materially false and

misleading at the time of publication.” 77 31, 34, 36, 39, 42, 44,46, 56, 57, 62,65, 66, 68, 74.

Plaintiffs offer no contemporaneous facts that contradict Defendants’ statements

regarding Patriot’s financial condition and growth prospects in light of the Company’s new

property acquisitions and debt financing plans. For instance, even if true, Plaintiffs’ vague

allegations regarding past problems that an internal audit team was disbanded in 1996-two

years before the start of the Class Period (and admittedly reinstated in 1998)-and the

Company’s chief financial officers were “isolated” from evaluating acquisitions and investments,

does not in any way demonstrate how problems about internal financial controls in fact existed

or were known to Defendants at the time that the press releases were issued. 7 3 1. See Hockey

v. Medhekar, 30 F. Supp. 2d 1209,1214-15 (N.D. Cal. 1998).

Likewise, under Rule 9(b), it is not enough for a plaintiff to make blanket assertions that

a company was experiencing problems; a complaint must be specific as to the nature and effect

of the efforts to conceal those problems. See Genna v. Digital Link Corp., 25 F. Supp. 2d 1032,

1041 (N.D. Cal. 1997) (holding that plaintiffs conclusory allegations of fraud without

identification of any specific contemporaneous facts did not satisfy the pleading requirements of

9(b)); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1095 (N.D. Cal. 1994), affd, 95 F.3d

922 (9th Cir. 1996) (concluding that “[pllaintiff s allegation that Defendants possessed ‘internal

corporate data known only to them’ comes nowhere close to satisfying Fed. R. Civ. P. 9(b)”).

B. Defendants Had No Duty To Disclose The Alleged Adverse Information

In addition to its other defects, the Open Market Complaint does not and cannot allege

that Defendants had a “duty to disclose” the alleged adverse information. See Basic Inc. v.


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Levinson, 485 U.S. 224,239 n.17, 108 S. Ct. 978, 987 (1988) (“[Slilence, absent a duty to

disclose, is not misleading”). Indefinite, optimistic statements, such as those cited in the Open

Market Complaint do not give rise to a duty to disclose. See In re Interactive Network, Inc. Sec.

Litin., 948 F. Supp. 917, 920 (N.D. Cal. 1996). Such a duty arises only when failure to speak

would make what the company has said misleading. Plaintiffs “must identify some material

omission that rendered misleading an actual affirmative statement by [Defendants] before an

obligation is triggered on the part of the company to reveal internal information that would

otherwise not have to be disclosed.” Alfus v. Pyramid Tech. Cow., 745 F. Supp. 15 11, 15 18

(N.D. Cai. 1990); see also In re Convergent., 948 F. 2d at 516 (stating that a corporation “need

not detail every corporate event” or “bury the shareholders in an avalanche of trivial information

- a result that is hardly conducive to informed decision making”) (citations omitted).

Here, Plaintiffs do not link the majority of alleged “adverse information” to any particular

affirmative statement made by Defendants which would give rise to a duty to correct a prior

misleading statement. Rather, the so-called “adverse information” concerns such trivialities as

alleged failures to implement a centralized computer system 73 1, alleged turnover at the regional

management level, 7 3 1, allegedly canceling programs such as frequent traveler plans 73 1 and

changing contract terns with vendors from 30 days to 60 days 162. Other than generalized

statements of corporate optimism, recitations of historical earnings, and forward-looking

statements-none of which are actionable as a matter of law-the Open Market Complaint fails

to identify any definitive statements made by Defendants which even relate to the vast majority

of so-called “adverse information.”

For example, Plaintiffs repeatedly assert that Defendants failed to disclose that a monthly

“Profit Projection Report” generated for “divisional vice presidents and corporate executives”

continued “to carry forward projections [of projected revenues per available room] based on the

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assumption that [certain] changes would be implemented.’’ 7 3 1. However, nowhere in the Open

Market Complaint do Plaintiffs identify any affirmative statement that Defendants ever made

about these reports or the information contained therein that would later give rise to a duty to

disclose. In fact, it is settled law that Defendants were not obligated to disclose such internal

reports. See e .g , In re Convergent, 948 F.2d at 5 16 (holding company not required to disclose

internal projections); In re VeriFone, 11 F.3d at 869 (stating defendants not required to disclose

forecasts of future sales and revenues).

VI. PATRIOT CANNOT BE LIABLE FOR STATEMENTS MADE BY ANALYSTS

The Open Market Complaint also seeks to hold Patriot liable for securities fraud based on

statements made by independent financial analysts who had no connection whatsoever with

Patriot. To the extent that the alleged misstatements were contained in reports of independent

analysts, Defendants cannot be held liable for statements made by independent third parties. See

z, f 39 (Deutsche Morgan Grenfell analyst report dated February 25, 1998); f 57 (Morgan

Stanley Dean Witter analyst report dated July 20, 1998); 7 63 (Sands Brothers & Co., Ltd.

analyst report dated September 18, 1998).

Plaintiffs cannot base a securities claim against Defendants on statements and projections

nade by such unrelated third parties, unless it shows that defendants have put their “imprimatur,

:xpress or implied, on the projections.” In re Stac Electronics, 89 F.3d at 1410 (citing

VeriFone Sec. Litig., 784 F. Supp. 1471, 1486 (N.D. Cal. 1992), aff, 11 F.3d 865 (9th Cir.

1993)); see also Genna v. Digital Link Corn., 25 F. Supp. 2d at 1039; Zeid v. Kimberley, 930 F.

Supp. 43 1,433-34 (N.D. Cal 1996) (holding that the plaintiffs failed to identify properly

statements of analysts which plaintiffs claimed to be misleading).

The securities laws “do not require [a] company to police statements made by third

parties for inaccuracies, even if the third party attributes the statement to [the company].” Raab,


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4 F.3d at 288. Thus, even where an analyst’s report purports to convey information received

from the Company, that alone cannot support a claim against Defendants. A defendant will only

be held liable for statements contained in an analyst’s report when the defendant is in a position

to exercise control over its content. See In re Caere Corp. Sec. Litin., 837 F. Supp. 1054, 1059

(N.D. Cal. 1993) (Plaintiffs must plead required entanglement with specificity required by Rule

9(b)). Otherwise comments made by the defendant could appear “out of context, incorrectly

quoted, or stripped of important qualifiers.” Raab, 4 F.3d at 288.

Plaintiffs only make the conclusory allegations that Defendants were the source of the

information underlying the reports. 158 (“Based on a review of the information provided in part

by the defendants); 163 (“based substantially upon the Company’s representations regarding

their operating results and continuing growth prospects”). Plaintiffs do not allege that any of

Defendants spoke to each analyst, what was said or the facts provided to each analyst, nor that

any of Defendants reviewed the reports before they were issued. The allegations of the Open

Market Complaint thus are clearly insufficient to demonstrate that Defendants “entangled”

themselves with the analysts’ reports sufficiently to be responsible for their content. Wenner, 2

F. Supp. 2d at 1249 (“Merely providing analysts with historical information and correcting

factual inaccuracies is not sufficient”).

VII. PLAINTIFFS’ ALLEGATIONS OF CONTROL PERSON LIABILITY UNDER SECTION 20(A) ARE INSUFFICIENT UNDER SETTLED LAW

Because the Open Market Complaint fails to state a primary claim under Section 10(b)

against any of Defendants, Plaintiffs’ allegations of control person liability under Section 20(a)

also must be dismissed. In re Verity, Inc., Secs. Litin., - 2000 WL 1175580, at *7 (N.D. Cal.

Aug. 1 1, 2000) (“Plaintiffs claim under 4 20(a) of the Exchange Act fails because it requires a

primary violation and . . . the complaint fails to state such a claim.”) (citation omitted).

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Plaintiffs’ Section 20(a) allegations are also deficient because they fail to allege facts sufficient

to support a conclusion that any of the Individual Defendants were controlling persons of Patriot

with actual power over the company. Plaintiffs rely primarily on the conclusory assertion that

certain defendants “controlled” Patriot and had “direct and supervisory responsibilities over day-

to-day operations.” 77 1 1 1, 1 18- 1 19.

None of these allegations suffice to establish control person liability. Courts consistently

have held that mere status as a director or shareholder does not demonstrate control for purposes

of Section 20(a) liability. See ex. , Paracor Fin. Inc. v. General Elec. Capital Cow., 96 F.3d 1151

(9th Cir. 1996) (refusing to hold CEO and Chairman of the Board liable as a control person

absent specific evidence that he exercised actual control over the acts giving rise to the primary

violation). Accordingly, these allegations fail to state a claim under Section 20(a) for control

person liability and must be dismissed.

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CONCLUSION

The Open Market Complaint does not contain a single allegation of any material

nisrepresentation or omission by any of the Defendants. Nor does it adequately allege that any

If the Defendants acted with scienter in perpetuating the alleged fraud. For all the reasons set

rorth above, the Open Market Complaint should be dismissed with pre-iudice.

3ated this 1 gth day of October, 2000

hIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

590 Madison Avenue New York, New York 10022

Steven M. Pesner, P.C. Stephen M. Baldini, Esq. Nancy Chung, Esq. Sean E. O'Donnell, Esq.

(2 12) 872- 1070

HELLER EHRMAN WHITE &

333 Bush Street San Francisco, CA 94104 Laurence A. Weiss, Esq.

McAULIFFE LLP

29 MOTION TO DISMISS ( O P E N MARKET ACTION): M D L NO. 1300

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