1
EXHIBIT 99.12
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
)
)
IN RE SERVICE CORPORATION )
INTERNATIONAL ) CIVIL ACTION NO. H-99-0280
) (Judge Lynn N. Hughes)
)
)
DEFENDANTS' REPLY TO PLAINTIFFS' OPPOSITION
TO DEFENDANTS' MOTION TO DISMISS THE
CONSOLIDATED CLASS ACTION COMPLAINT
J. Clifford Gunter III
Andrew M. Edison
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone: (713) 223-2900
Facsimile: (713) 221-1212
COUNSEL FOR DEFENDANTS
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TABLE OF CONTENTS
PAGE
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INTRODUCTION......................................................................................................1
ARGUMENT .........................................................................................................2
A. Plaintiffs Fail to Plead with Sufficient Particularity..........................................2
1. Plaintiffs are Pleading on Information and Belief......................................3
2. Plaintiffs do not Plead the Factual Basis for their Allegations........................5
3. Plaintiffs Must Identify Internal Documents and Informants
Relied Upon in Filing the Complaint....................................................6
4. The Preneed Study and Defendants' Alleged Statements do not
Support the Allegations in the Complaint...............................................8
B. Plaintiffs Fail to Adequately Allege Scienter..................................................11
1. Plaintiffs do not State with Particularity Facts Giving Rise
to a Strong Inference of Scienter for Each Act or Omission
Alleged...............................................................................11
2. Plaintiffs' Allegations of Motive and Opportunity are not Sufficient..................12
C. Many of the Alleged Misstatements are not Actionable as a Matter
of Law.........................................................................................15
D. Plaintiffs' Section 11 and Section 12(a)(2) Claims Fail........................................16
1. Plaintiffs' Section 11 and 12(a)(2) Claims are Subject to Rule 9(b)
and the Reform Act. ..................................................................16
2. The Accuracy of the Registration Statement/Prospectus is Tested
on its Effective Date - November 20, 1998.............................................17
3. The Registration Statement/Prospectus did not Require
Defendants to Disclose all Ongoing Developments Relating
to SCI's Business.....................................................................19
CONCLUSION.......................................................................................................23
CERTIFICATE OF SERVICE...........................................................................................23
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TABLE OF AUTHORITIES
PAGE
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CASES
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Acito v. IMCERA Group, Inc.,
47 F.3d 47 (2d Cir. 1995) ...............................................................................15
Decker v. Massey-Ferguson, Ltd., 534 F. Supp. 873 (S.D.N.Y. 1981)
(same), aff'd in part, rev'd in part on other grounds,
681 F.2d 111 (2d Cir. 1982)...............................................................................7
Finkel v. Stratton Corp.,
754 F. Supp. 318 (S.D.N.Y. 1990), aff'd in part,
rev'd in part on other grounds, 962 F.2d 169 (2d Cir. 1992)..............................................18
Hartsell v. Source Media, Inc.,
1999 WL 649645 (N.D. Tex. 1999) ..........................................................................3
Hockey v. Medhekar,
1997 WL 203704 (N.D. Cal. 1997) ..........................................................................6
In re Cirrus Logic Sec. Litig.,
946 F. Supp. 1446 (N.D. Cal. 1996) ......................................................................13
In re Donald J. Trump Casino Securities Litigation,
793 F. Supp. 543 (D.M.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993) ........................................21
In re Fine Host Corp. Sec. Litig.,
25 F. Supp.2d 61 (D.Conn. 1988) .........................................................................14
In re Green Tree Financial Corp. Stock Litigation,
1999 WL 684173 (D. Minn. 1999) ................................................................................3
In re Health Management,
970 F. Supp. 192 (E.D.N.Y. 1997) ........................................................................15
In re Health Mngmt Syst. Inc. Sec. Litig.,
1998 WL 283286 (S.D.N.Y. 1998) ...........................................................................3
In re PETsMART, Inc. Securities Litigation,
61 F. Supp.2d 982 (D.Ariz. 1999) .........................................................................3
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TABLE OF AUTHORITIES
PAGE
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CASES
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In re Silicon Graphics Sec. Litig.,
183 F.3d 970 (9th Cir. 1999) .............................................................................3
Law v. Medco Research, Inc.,
113 F.3d 781 (7th Cir. 1997) .............................................................................7
Lirette v. Shiva Corp.,
999 F. Supp. 164 (D. Mass. 1998) .........................................................................3
Marksman Partners L.P. v. Chantal Pharmaceutical Corp.,
927 F. Supp. 1297 (C.D. Cal. 1996) .......................................................................7
Medhekar v. United States Dist. Court,
99 F.3d 325 (9th Cir. 1996) ..............................................................................6
Melder v. Morris,
27 F.3d 1097 (5th Cir. 1994) ............................................................................16
Mills v. Polar Molecule Corp.,
12 F.3d 1170 (2d Cir. 1993) .............................................................................12
Moll v. U.S. Life Title Ins. Co.,
654 F. Supp. 1012 (S.D.N.Y. 1987) ........................................................................7
Nelson v. Paramount Communications, Inc.,
872 F. Supp. 1242 (S.D.N.Y. 1994) .......................................................................17
Novak v. Kasaks,
997 F. Supp. 425 (S.D.N.Y. 1998) ......................................................................4, 7
Plevy v. Haggerty,
38 F. Supp. 2d 816 (C.D.Cal. 1998) ......................................................................14
RGB Eye Associates v. Physicians Resource Group, Inc.,
1999 WL 980801 (N.D. Tex. 1999) .........................................................................13
Rubin v. Trimble,
1997 WL 227956 (N.D.Cal. 1997) ...........................................................................7
Salinger v. Projectavision, Inc.,
972 F. Supp. 222 (S.D. N.Y. 1997) .......................................................................15
Sears v. Likens,
912 F.2d 889 (7th Cir. 1990) ............................................................................16
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TABLE OF AUTHORITIES
PAGE
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CASES
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Segan v. Dreyfus Corp.,
513 F.2d 695 (2d Cir. 1975) ..............................................................................7
Shapiro v. UJB Fin. Corp.,
964 F.2d 272 (3d Cir.), cert. denied, 506 U.S. 934 (1992) ...............................................16
Shaw v. Digital Equipment Corp.,
82 F.3d 1194 (1st Cir. 1996). ...........................................................................22
Tirone v. Calderone-Curran Ranches, Inc.,
1978 WL 1095 (W.D.N.Y. 1978) ............................................................................18
Tuchman v. DSC Communications Corp.,
4 F.3d 1061 (5th Cir. 1994) ..........................................................................2, 14
Walish v. Leverage Group, Inc.,
1998 WL 314644 (E.D. Pa. 1998) ..........................................................................12
Williams v. WMX Techs., Inc.,
112 F.3d 175 (5th Cir.), cert. denied, 118 S.Ct. 412 (1997) ..........................................10-12
Zeid v. Kimberley,
973 F. Supp. 910 (N.D. Cal. 1997), vacated, 1999 WL 993649 (9th Cir. 1999)................................4
STATUTES/RULES
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15 U.S.C. Section 77k(a) .....................................................................................17
15 U.S.C. Section 77l(2)......................................................................................17
15 U.S.C. Section 78u-4(b)(1)(B)...............................................................................3
15 U.S.C. Section 78u-4(b)(3)(B)...............................................................................6
Private Securities Litigation Reform Act of 1995......................................................in passium
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TABLE OF AUTHORITIES
PAGE
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OTHER
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141 Cong. Rec. H2848 (March 8, 1995)...........................................................................8
141 Cong. Rec. H2849 (March 8, 1995)...........................................................................8
3A Harold S. Bloomenthal, Securities and Federal Corporate Law Section 8.23 (1993) ...........................18
Fed. R. Civ. P. 8(a)(2)........................................................................................2
Fed. R. Civ. P. 9(b)........................................................................................2, 3
H.R. Conf. Rep. No. 104-369 (1995).............................................................................8
Thomas Lee Hazen, Treatise on the Law of Securities Regulation.
Section 7.3 (3d ed. 1995) ...............................................................................18
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
)
)
IN RE SERVICE CORPORATION )
INTERNATIONAL ) CIVIL ACTION NO. H-99-0280
) (Judge Lynn N. Hughes)
)
)
DEFENDANTS' REPLY TO PLAINTIFFS' OPPOSITION
TO DEFENDANTS' MOTION TO DISMISS THE
CONSOLIDATED CLASS ACTION COMPLAINT
Defendants file this Reply to Plaintiffs' Opposition to Defendants'
Motion to Dismiss the Consolidated Class Action Complaint, and would show the
Court as follows:
INTRODUCTION
Why do Plaintiffs struggle to evade the requirements of the Private
Securities Litigation Reform Act of 1995 ("Reform Act")? If Plaintiffs had facts
to support their claim that a fraud has taken place, one would expect that they
would have complied with the Reform Act by pleading particularized facts or
information in their possession and demonstrating that these allegations give
rise to a strong inference of fraudulent intent. Rather than comply with the
Reform Act, Plaintiffs will concoct any argument they can to evade the tough new
requirements that Congress laid down. Plaintiffs argue that the Consolidated
Class Action Complaint ("CCAC") is plead neither on personal knowledge nor on
information and belief, but on a new species of pleading, "investigation of
counsel," that remarkably allows them to evade all of the Reform Act's
heightened pleading requirements. Rather than respond to Defendants' scienter
arguments, Plaintiffs hunker down and repeat their mantra that the court is
compelled to accept as true all of the CCAC's allegations, no
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matter how demonstrably false or inadequate.(1) The Reform Act forbids this kind
of stonewalling.
Plaintiffs must allege in their complaint all of the facts or
information in their possession so that the Court can decide at the pleading
stage if their allegations are sufficient to create a strong inference of
fraudulent intent. Plaintiffs cannot simply assert "beliefs," no matter how
particularized, and glide into discovery in search of a claim. In this case,
Plaintiffs' opposition is an exercise in denial. Plaintiffs essentially ignore
that the Reform Act ever happened, simply rehashing the allegations of the CCAC
and failing to distinguish the wealth of authority that has held that such
allegations insufficient under the Reform Act. If the Reform Act is to have any
bite, it must stop this case at the pleading stage.
ARGUMENT
A. PLAINTIFFS FAIL TO PLEAD WITH SUFFICIENT PARTICULARITY.
In most cases, all a plaintiff's complaint must contain is a "short and
plain statement of the claim showing that the pleader is entitled to relief."
Fed. R. Civ. P. 8(a)(2). In a federal securities fraud case, however, a
plaintiff may not take refuge in the usually liberal standards employed in a
Rule 12(b)(6) motion. Instead, a plaintiff seeking to avoid dismissal for
failure to state a claim "must plead specific facts, not mere conclusory
allegations." Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.
1994). Indeed, Rule 9(b) imposes a heightened level of pleading for fraud
claims: "In all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). See
also Tuchman, 14 F.3d at 1067 (applying Rule 9(b) to federal securities fraud
claims). The Reform Act imposes an even higher pleading
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(1) Plaintiffs correctly note that there are two principal claims at
issue in this case. The first claim is brought under Section 10(b) on behalf of
both SCI shareholders and former ECI shareholders. The second claim is brought
under Sections 11 and 12(a)(2) on behalf of former ECI shareholders. Both claims
should be dismissed.
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burden, expressly providing that when a plaintiff's complaint is based upon
information and belief, the plaintiff must "state with particularity all facts
upon which the belief is formed." 15 U.S.C. Section 78u-4(b)(1)(B) (emphasis
added).(2) Quite simply, Plaintiffs have failed to satisfy this burden.(3)
1. PLAINTIFFS ARE PLEADING ON INFORMATION AND BELIEF.
Plaintiffs offer several excuses for their failure to comply with the
Reform Act. First, they contend they need not comply with the Reform Act because
they are pleading on the basis of "investigation of counsel," not on knowledge
or on information and belief. See Opposition Brief at pp. 21-22.
As one would expect, the Reform Act's requirement that plaintiffs state
the factual basis for their claims may not be sidestepped simply by claiming
that allegations which are clearly based on "information and belief" are, in
actuality, based on "investigation of counsel." See In re Health Management Sys.
Inc. Sec. Litig., 1998 WL 283286, *3 (S.D.N.Y. 1998) (investigation of counsel
is an unacceptable approach to pleading falsity under the Reform Act); Hartsell
v. Source Media, Inc., 1999 WL 649645, *1 (N.D. Tex. 1999) (holding that
allegations made on "investigation of counsel" are to be treated the same as
allegations made on "information and belief"); In re Green Tree Financial Corp.
Stock Litigation, 1999 WL 684173, *10 (D. Minn. 1999) (same); In re PETsMART,
Inc. Securities Litigation, 61 F. Supp.2d 982 (D.Ariz. 1999) (same); Lirette v.
Shiva Corp., 999 F. Supp. 164, 165 (D. Mass. 1998) ("assertions that the
allegations that follow are ...
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(2) "Although the words `facts' and `particularity' are not defined in
the statute, their meaning is plain...[W]e read the statutory command that a
plaintiff plead all the `facts' with `particularity' to mean that a plaintiff
must provide a list of all relevant circumstances in great detail." In re
Silicon Graphics Sec. Litig., 183 F.3d 970 (9th Cir. 1999) (Silicon Graphics
II).
(3) As described in Section D.1., Plaintiffs' Section 11 and 12(a)(2)
claims are subject to Rule 9(b) and the Reform Act.
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founded on 'information and belief' [and] based upon 'investigation by
Plaintiffs' counsel' ... utterly failed to comply with" the Reform Act").
If allegations based upon investigation of counsel are permitted to
replace allegations based upon information and belief, the Reform Act's
heightened pleading requirements will be easily evaded. See, e.g., Novak v.
Kasaks, 997 F. Supp. 425, 431 (S.D.N.Y. 1998) (pleading based on investigation
of counsel held not sufficient to avoid the Reform Act's requirement that
plaintiffs state the factual basis for their claim). This violates both the
letter and the spirit of the Reform Act.
Plaintiffs cite several cases which appear, at first glance, to endorse
"investigation of counsel" as a means to avoid the Reform Act's pleading
requirements for allegations based on information and belief. See, e.g., Zeid v.
Kimberley, 973 F. Supp. 910, 915 (N.D. Cal. 1997), vacated, 1999 WL 993649 (9th
Cir. 1999). A closer look at these cases, however, reveals that they actually
support a heightened pleading requirement. In Zeid, for example, the plaintiffs'
insisted that their complaint was based on investigation of counsel rather than
on information and belief to mean that their claims were based on personal
knowledge. Id. This holding did not, as Plaintiffs suggest, reduce Plaintiffs'
burden to plead their claims with particularity. Rather, it heightened it. The
Zeid court held that plaintiffs who base their claims on "investigation of
counsel" were required to meet the strict, rather than the relaxed, pleading
requirements of Rule 9(b) and the Reform Act. Id. In other words, the Zeid court
held that plaintiffs who based their complaint on "investigation of counsel" had
undertaken to do more than plead the facts from which falsity and intent to
defraud could be inferred; they had undertaken to plead with particularity (1)
each statement alleged to have been misleading; (2) the reason or reasons why
the statement is misleading; and (3) as to each statement, those facts giving
rise to a strong inference that the defendants acted with scienter. Id.
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2. PLAINTIFFS DO NOT PLEAD THE FACTUAL BASIS FOR THEIR
ALLEGATIONS.
Plaintiffs spend page after page in their Opposition Brief merely
restating the allegations contained in the CCAC. The problem with Plaintiffs's
approach is that the CCAC provides no "particular facts" supporting Plaintiffs'
alleged belief that SCI committed fraud. Rather than plead particularized facts,
Plaintiffs have pled only "particularized beliefs" hoping to slip past the
strong inference requirement. Plaintiffs offer no clue regarding the
"information" upon which their "particularized beliefs" are based. Because they
do not plead such detailed information, Plaintiffs have disabled the Court from
doing the task that Congress mandated: determining whether the facts in
Plaintiffs' possession -- rather than Plaintiffs' speculations -- give rise to a
strong inference of fraud.
For example, the CCAC alleges that SCI failed to actively manage its
mortuary trust assets, and that by 1998 that failure had an increasing impact on
SCI's profit margins. See CCAC at p. 36. According to the CCAC, rather
than disclose that SCI had an enormous backlog of unmanaged, underperforming
preneed funeral trust funds and that a material number of SCI's preneed funeral
contracts had been, and would continue to be, performed at significant losses,
SCI falsely represented that SCI was actively managing its backlog of acquired
preneed trust assets. See CCAC at p. 45, 47.
These conclusory allegations, which anyone can make, are not sufficient
to meet Plaintiffs' pleading burden. As explained in detail in the Defendants'
Motion to Dismiss, the CCAC does not plead the sources of their information, how
they received such information, and why such information rendered the
Defendants' statements false or misleading.(4) It is not enough simply to
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(4) As noted in Defendants' Motion to Dismiss, "Plaintiffs point to a
number of statements made by the SCI Defendants and claim, without providing any
factual support, that the opposite of
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allege that SCI's preneed funeral business was in the tank, and that SCI failed
to disclose it. If that were the case, every securities fraud case would survive
a motion to dismiss. Plaintiffs must provide concrete facts which support their
allegations - not merely repeat unsubstantiated assertions.
Even more egregious is Plaintiffs' tacit admission that with respect to
the most central allegations in the CCAC - that SCI's preneed business was
unprofitable and negatively impacted the Company's overall profit margins and
performance - there is no factual basis whatsoever for their allegations.
Instead, Plaintiffs assert that discovery is required to provide a basis for
their alleged "belief." See Opposition Brief at p. 25. The Reform Act requires
that a complaint plead specific facts that a fraud has occurred before discovery
may commence. 15 U.S.C. Section 78u-4(b)(3)(B) (all discovery shall be stayed
during the pendency of a motion to dismiss); Medhekar v. United States Dist.
Court, 99 F.3d 325, 328 (9th Cir. 1996) ("Congress clearly intended that
complaints in these securities actions should stand or fall based on the actual
knowledge of the plaintiffs rather than information produced by the defendants
after the action has been filed."). Under the Reform Act, Plaintiffs' faint
hopes hope that the discovery process might lead eventually to some plausible
cause of action cannot satisfy their heightened obligation to plead
particularized facts evidencing fraud.
3. PLAINTIFFS MUST IDENTIFY INTERNAL DOCUMENTS AND INFORMANTS
RELIED UPON IN FILING THE COMPLAINT.
The Reform Act specifically requires a plaintiff to identify the source
of information offered in support of Plaintiffs' allegations and specific
details concerning the content and origin of supposed "internal documents." See,
e.g., Silicon Graphics II, 183 F.3d at 985 ("a plaintiff must provide, in great
detail, all the relevant facts forming the basis of her belief"); Hockey v.
Medhekar, 1997 WL
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what the SCI Defendants said was true." See Defendants' Motion to Dismiss at
p.15. This does not pass muster.
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203704, *8 (N.D. Cal. 1997) ("Nowhere in plaintiffs' complaint is there a
reference to a particular corporate documents or data. Plaintiffs do not attempt
to show when these documents were created, by whom they were drafted, or even
whether [the company] regularly prepared such documents").
Citing several Pre-Reform Act Second Circuit cases,(5) Plaintiffs
claims that they do not have to "specify which internal documents they relied on
or even that they relied on internal documents at all." See Opposition Brief at
p. 27. In making this argument, Plaintiffs ignore the fact that post-Reform Act
cases universally hold that the Reform Act increases the pleading requirements
for securities fraud, and do not limit this increased standard solely to
scienter. See, e.g., Law v. Medco Research, Inc., 113 F.3d 781, 785 (7th Cir.
1997) (Reform Act "stiffened" the requirement that fraud be pled with
particularity); Marksman Partners L.P. v. Chantal Pharmaceutical Corp., 927 F.
Supp. 1297, 1308 (C.D. Cal. 1996) ("the pleading standard in securities fraud
cases has been made more rigorous"); Rubin v. Trimble, 1997 WL 227956, at *8
(N.D.Cal. 1997) (Reform Act "significantly raised the pleading standard for
federal securities claims"). Despite Plaintiffs' wish to be subject to the less
demanding pre-Reform Act pleading requirements, the Reform Act's heightened
pleading standard is in full force and effect.
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(5) Contrary to Plaintiffs' assertion that, prior to the Reform Act,
the Second Circuit employed a relaxed pleading standard, Second Circuit courts
enforced three explicit requirements for information and belief pleading. First,
a plaintiff had to identify the specific sources of his information. Second, the
plaintiff had to identify what information was gleaned from each source.
Finally, plaintiff then had to link each belief to the specific source of
information upon which it was based. These requirements served an important
purpose: "to allow each defendant and the Court to review the sources and
determine, at the pleading stage, whether an inference of fraud may be fairly
drawn from the information contained therein." Moll v. U.S. Life Title Ins. Co.,
654 F. Supp. 1012, 1035 (S.D.N.Y. 1987). See also Segan v. Dreyfus Corp., 513
F.2d 695, 696 (2d Cir. 1975) ("A suit charging fraud may not be based on facts
so secret that the defendants cannot be told what they are"); Decker v.
Massey-Ferguson, Ltd., 534 F. Supp. 873 (S.D.N.Y. 1981) (same), aff'd in part,
rev'd in part on other grounds, 681 F.2d 111 (2d Cir. 1982).
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Part of the Reform Act's increased pleading standard includes a
requirement to identify internal documents and informants relied upon in filing
the complaint. See, e.g., Novak, 997 F. Supp. at 435. Plaintiffs fail to do
this. If Plaintiffs had a factual basis for their claims, one would think they
would gladly set forth their alleged evidence, rather than throw up every
roadblock known to man.
Congress clearly intended to impose on plaintiffs the obligation to
reveal everything they know about the alleged misconduct for which they sue,
including the precise identity of their source of that belief, whether it is
documents or individuals. In enacting the Reform Act, Congress specifically
rejected an alternative that would simply have required plaintiffs to plead
facts that support their beliefs. See 141 Cong. Rec. H2848 (March 8, 1995).
Instead, Congress adopted a requirement that a plaintiff must "state with
particularity all facts upon which the belief is formed." 15 U.S.C. Section
78u-4(b)(1)(B). Congress rejected the alternative language even though its
proponent, Congressman Dingell, pointed out that the enacted language would
require plaintiffs to name confidential informants, among others, to satisfy the
pleading standard. See 141 Cong. Rec. H2849 (March 8, 1995) (the Reform Act
requires a plaintiff to include in his pleadings "the names of confidential
informants, employees, competitors, Government employees, members of the media,
and others who have provided information leading to the filing of the case").
This heightened pleading requirement is not, as Plaintiffs assert, an
unfair burden. Rather, it signifies Congress' recognition that "[u]nwarranted
fraud claims can lead to serious injury to reputation for which our legal system
offers no redress." H.R. Conf. Rep. No. 104-369, at 41, 48 (1995).
4. THE PRENEED STUDY AND DEFENDANTS' ALLEGED STATEMENTS DO NOT
SUPPORT THE ALLEGATIONS IN THE COMPLAINT.
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The only internal SCI document cited by Plaintiffs in the CCAC to
support their allegations was the Preneed Study. In citing the Preneed Study,
Plaintiffs took a considerable gamble. If, in fact, the Preneed Study did not
support Plaintiffs' claims, Plaintiffs would be left without any factual support
for their claims. That is exactly what has occurred.
The Preneed Study,(6) which was attached as Exhibit C to Defendants'
Motion to Dismiss, conclusively demonstrates that Plaintiffs' allegations, as
contained in the CCAC, are without merit. See Defendants' Motion to Dismiss at
pp. 17-21. Not surprisingly, Plaintiffs suggest that this Court should not be
permitted to look at the Preneed Study, but should instead "accept as true
reasonable inferences drawn from plaintiffs' allegations." See Opposition Brief
at p. 25. Unfortunately for Plaintiffs, the Fifth Circuit does not put on
blinders and accept unsupportable conclusions. In Melder v. Morris, 27 F.3d
1097, 1100 (5th Cir. 1994), for example, the Fifth Circuit dismissed a
securities fraud claim when the plaintiffs alleged misstatements in a
prospectus, "but upon further review these alleged misstatements amount[ed] to
gross mischaracterizations of the contents of the prospectuses." The same is the
case here.
While the CCAC repeatedly alleges that the Preneed Study confirmed that
"a material number of SCI's funeral services had been and would continue to be,
performed at significant losses to SCI"(7) and that "a significant number of
independent funeral homes acquired by SCI failed to
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(6) Plaintiffs assert that Defendants have "submitted a collection of
select unauthenticated internal SCI documents that [Defendants] conclusorily
assert constitute the preneed study alleged in the Complaint." See Opposition
Brief at p. 6. This is simply not true. The Preneed Study is authenticated by
the declaration of Mary Beth Russo, a former SCI employee who was responsible
for coordinating the Preneed Study.
(7) See CCAC at pp. 32, 35, 44 and 74(a).
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actively manage their mortuary trust assets,"(8) the Preneed Study contains no
such statements. Faced with the clear and unequivocal language of the Preneed
Study, Plaintiffs are forced to retreat from such allegations, and, instead,
pick around the edges to find any morsel in the Preneed Study that will support
their claims. Plaintiffs point to various sentences in the Preneed Study, most
taken wholly out of context, in a desperate attempt to salvage their claim.(9)
Plaintiffs are not successful.(10)
Furthermore, Plaintiffs make much of so-called "admissions" by
Defendants that the fourth quarter earnings shortfall was caused by SCI's
unprofitable preneed business. See Opposition Brief at p. 26. Plaintiffs cite an
industry publication, however, that does not even purport to quote an SCI
executive. See CCAC at p. 127 ("SCI has said in the past that it loses
money on some of its preneed services because the contract was sold at too low a
price"). Under the Reform Act, such articles do not support a claim for fraud.
See, e.g., Williams v. WMX Techs., Inc., 112 F.3d 175, 179 (5th Cir.), cert.
denied, 118 S.Ct. 412 (1997) ("failure of [articles] to identify specific
statements made by any
- -----------------
(8) Id.
(9) For example, Plaintiffs claim that the Preneed Study confirmed that
SCI did not have a "scientific, analytical approach, focused on meeting SCI's
financial objectives." See Opposition Brief at 6. This quote is taken completely
out of context, as the Preneed Study actually states that "Although SCI
previously had an overall asset allocation policy for these trusts, the new
allocation has been developed based upon a more scientific, analytical approach,
focused on meeting SCI's financial objectives." See Exhibit C-3 to Defendants'
Motion to Dismiss, at SCI0070 (emphasis added).
(10) Plaintiffs also claim that SCI's trust fund returns had to be more
than 8.5 percent annually to cover the increasing cost of funeral services. See
Opposition Brief at 7. This figure is ludicrous, and demonstrates why the Reform
Act implemented strict pleading requirements. Plaintiffs pluck the 8.5 percent
figure from the sky, failing to identify where, if at all, such a figure came
from. See CCAC at P. 26. If Plaintiffs are not required to identify their
sources, Plaintiffs can make unsubstantial assertions that have no basis in fact
and routinely survive a motion to dismiss. That is exactly what the Reform Act
was designed to prevent. In this case, the absurdity of Plaintiffs' 8.5 percent
annual figure is demonstrated by Heiligbrodt's statement that preneed contracts
sold in the 1980s were priced 20 percent less than today. See CCAC at P. 126.
That suggests an increase in the cost of funeral services at less than 2 percent
per year, not an inflated 8.5 percent per year.
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of the defendants is fatal"); In re Marion Merrell Dow, Inc., 1993 WL 393810, *3
(W.D. Mo. 1993) (for the plaintiffs to use the contents of newspaper articles
for the basis of a securities fraud claim, "the defendants must have had some
sort of control over the statements [in newspaper articles], either as a press
release or a direct quote").
Plaintiffs also rely on Defendant Heiligbrodt's comment that "the at
need value of many of the preneed plans sold in the 1980s is about 20 percent
less than the company presently charges for its services." This is not, as
Plaintiffs claim, an admission of liability. Rather, it reflects the simple fact
that there is inflation, that prices have risen over time, and that a preneed
funeral sold 15 to 20 years ago for, say $4,000, would cost a customer more
today.(11)
B. PLAINTIFFS FAIL TO ADEQUATELY ALLEGE SCIENTER.
1. PLAINTIFFS DO NOT STATE WITH PARTICULARITY FACTS GIVING RISE
TO A STRONG INFERENCE OF SCIENTER FOR EACH ACT OR OMISSION
ALLEGED.
The Reform Act expressly requires that "the complaint shall, with
respect to each act or omission alleged to violate this chapter, state with
particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind." 15 U.S.C. Section 78u-4(b)(2) (emphasis
added). As explained above, the CCAC lacks such specific factual allegations.
Without such "corroborating details, the Court simply "cannot determine whether
there is any factual basis for alleging that the officers knew that their
statements were false at the time they were made." Silicon Graphics II, 183 F.2d
at 985. The CCAC should, therefore, be dismissed.
- -----------------
(11) It is also important to remember that if a preneed customer
purchased a preneed funeral for say, $4,000, in 1985, that money would be
deposited in a mortuary trust fund or used to pay premiums on life insurance
policies. "Earnings on trust funds and increasing benefits under insurance
funded contracts also increase the amount of cash to be received upon
performance of the funeral." See Exhibit B to Defendants' Motion to Dismiss at
p.16.
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18
Although Plaintiffs limit their discussion of the legislative history
of the Reform Act to a footnote, it is clear that the Reform Act sets out a new,
more rigorous standard for pleading scienter than is found in prior case law.
Defendants' Motion to Dismiss concisely set forth the relevant legislative
history, and there is no need to repeat that analysis again here.(12) See
Defendants' Motion to Dismiss at pp. 28-32. Under the heightened scienter
standard, allegations of motive and opportunity alone will no longer be presumed
sufficient to support the required strong inference of scienter, but instead a
plaintiff claiming securities fraud must allege specific facts constituting
strong circumstantial evidence that the Defendants' conduct involved knowledge
or severely reckless disregard of wrongdoing.
Plaintiffs' attempt to make an end-run around the Reform Act's pleading
requirements for scienter by claiming that they have alleged specific facts
which create a strong inference that the defendants acted knowingly or
recklessly. Once again, it is not sufficient to raise conclusory allegations.
See, e.g., Walish v. Leverage Group, Inc., 1998 WL 314644, at *3 (E.D. Pa. 1998)
(allegations that defendants "knowingly made false statements" and "recklessly
created a false and misleading impression" do not meet the standards for
pleading scienter under the Reform Act). Plaintiffs must specify a meaningful
factual basis for the allegation that Defendants knew facts contradicting their
public statements. There is no such factual detail here, much less "a list of
all relevant circumstances in great detail." Silicon Graphics II, 183 F.2d at
984.
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(12) Contrary to plaintiffs' suggestion, the Fifth Circuit in Williams,
112 F.3d 175, did not hold that allegations of motive and opportunity alone
satisfy the Reform Act's heightened requirement for pleading scienter. Instead,
the Williams court, in the course of dismissing plaintiffs' securities fraud
claims, merely opined that the Reform Act's heightened pleading standard is
consistent with Second Circuit case law requiring a plaintiff to "specify the
statements contended to be fraudulent, identify the speaker, state when and
where the statements were made, and explain why the statements were fraudulent."
112 F.3d at 177-78 (citing Mills v. Polar Molecule Corp., 12 F.3d 1170, 1175 (2d
Cir. 1993)).
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19
2. PLAINTIFFS' ALLEGATIONS OF MOTIVE AND OPPORTUNITY ARE NOT
SUFFICIENT.
Even if this Court finds that the Reform Act's scienter requirement can
be met by allegations showing only motive and opportunity, Plaintiffs'
allegations fail because they do not adequately establish motive on the part of
Defendants.
a. ALLEGATIONS THAT DEFENDANTS MADE FALSE AND MISLEADING
STATEMENTS TO MAINTAIN SCI'S BOND RATING AND
FACILITATE THE SCI-ECI MERGER FAIL TO CREATE THE
REQUIRED INFERENCE OF SCIENTER.
It is important to remember that the only allegations raised in the
CCAC to support an inference of scienter were that Defendants made false and
misleading statements: (1) to maintain SCI's bond rating; and (2) to facilitate
the consummation of the SCI-ECI merger. In Defendants' Motion to Dismiss,
Defendants cited a plethora of case law for the proposition that these motive
allegations fail to satisfy the Reform Act. See Defendants' Motion to Dismiss at
pp. 33-35. Defendants also explained that if all a securities fraud plaintiff
had to do to sufficiently plead scienter was to allege that the defendants
artificially inflated a stock's price to obtain more favorable terms in a
stock-for-stock transaction "nearly every stock-for-stock transaction conducted
in the United States could be subject to challenge." In re Cirrus Logic Sec.
Litig., 946 F. Supp. 1446, 1477 (N.D. Cal. 1996).
Like two ships passing in the night, Plaintiffs ignore Defendants'
arguments, and simply cite several cases which suggest that allegations that
defendants had a motive to artificially inflate stock price to facilitate a
stock-for-stock transaction suffices to allege scienter. See Opposition Brief at
pp. 33-34.(13)
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(13) Interestingly, Plaintiffs do not respond to the cases cited by
Defendants in which courts refused to infer motive from allegations that
misstatements were made to maintain a high bond or credit rating.
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20
A recent case from the Northern District of Texas highlights the
sensibility of Defendants' position, and demonstrates the flaws in Plaintiffs'
argument. In RGB Eye Associates v. Physicians Resource Group, Inc., 1999 WL
980801, *9 (N.D. Tex. 1999), a case decided on October 27, 1999, Judge Fitzwater
refused to accept plaintiffs' scienter allegations that the defendant had an
incentive to maximize the price of its stock so that it could expand through
acquisitions and acquire other physicians' practices. The reason: "courts reject
motive theories that would almost universally permit an inference of
fraud...`Accordingly, assertions that would almost universally be true...are
inadequate of themselves to plead motive.' Such allegations are `alone
insufficient to plead a strong inference of fraud.'" Id. (citations omitted).
Similarly, Plaintiffs' scienter allegations in this case should be rejected, as
they fail to satisfy the Reform Act's heightened standard for pleading scienter.
b. PLAINTIFFS' ALLEGATION THAT THE SCI DEFENDANTS MADE
MISSTATEMENTS TO MAINTAIN AND ENHANCE THEIR EXECUTIVE
POSITIONS FAILS TO CREATE THE REQUIRED INFERENCE OF
SCIENTER.
In a footnote in their Opposition Brief, Plaintiffs allege, for the
very first time, that the Individual Defendants had "motives to maintain and
enhance the price of SCI common stock to protect and enhance their executive
positions and the substantial compensation and prestige obtained thereby." See
Opposition Brief at p. 35 fn. 20.
The problem with Plaintiffs' argument is that the Fifth Circuit, on
numerous occasions, has rejected similar attempts to allege scienter. "Accepting
the plaintiffs' allegation of motive -- basically that the defendant officers
and directors were motivated by incentive compensation -- would effectively
eliminate the state of mind requirement as to all corporate officers and
defendants." Melder, 27 F.3d at 1102. "Incentive compensation can hardy be the
basis on which an allegation of fraud is predicated. On a practical level, were
the opposite true, the executives of
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21
virtually every corporation in the United States would be subject to fraud
allegations." Tuchman, 14 F.3d at 1068. See also In re Fine Host Corp. Sec.
Litig., 25 F. Supp.2d 61, 69 (D.Conn. 1988) (rejecting allegation that
defendants' incentive compensation was based, in part, on the strength of [the
company's] financial result); Plevy v. Haggerty, 38 F. Supp. 2d 816, 833
(C.D.Cal. 1998) (the motive "to reap the benefits of munificent incentive
compensations plans that were tied to [the company's] reported earnings and
stock prices... [is] insufficient as a matter of law."); Acito v. IMCERA Group,
Inc., 47 F.3d 47, 54 (2d Cir. 1995) ("incentive compensation can hardly be the
basis on which an allegation of fraud is predicated"); Salinger v.
Projectavision, Inc., 972 F. Supp. 222, 234 (S.D. N.Y. 1997) (a generalized
interest in executive compensation tied to stock price performance are
insufficient allegations of scienter).
c. PLAINTIFFS ALLEGE NO BASIS FOR IMPUTING MOTIVES TO
THE INDIVIDUAL DEFENDANTS.
Even if Plaintiffs have successfully pled scienter with respect to SCI,
Plaintiffs' securities fraud claim should be dismissed against the Individual
Defendants because Plaintiffs' factual allegations do not indicate that key
officers and directors had any motive to commit fraud. Plaintiffs recognize that
to adequately plead motive they must show "concrete benefits that could be
realized by one or more of the false statements." In re Health Management, 970
F. Supp. 192, 202 (E.D.N.Y. 1997). Here, Plaintiffs cannot show -- and do not
allege - that the Individual Defendants realized any concrete benefits. To the
contrary, Plaintiffs concede that there is a total absence of insider trading in
this case, thereby eliminating any financial motive on the part of the
Individual Defendants to engage in fraudulent activity. See Opposition Brief at
p. 34. The Individual Defendants should, therefore, be dismissed.
C. MANY OF THE ALLEGED MISSTATEMENTS ARE NOT ACTIONABLE AS A MATTER OF
LAW.
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22
Defendants' Motion to Dismiss explained that a number of statements
alleged to be false and misleading are merely non-actionable statements of
corporate optimism. See Defendants' Motion to Dismiss at pp. 23-27. While
Defendants readily concede that not every statement in the CCAC is a statement
of puffery, Defendants stick by their contention that those selected statements
identified in their Motion to Dismiss are, in fact, nonactionable expressions of
optimism. See CCAC at pp. 75, 78, 84 and 96. Defendants' Motion to Dismiss
identifies these statements in detail.
Along those same lines, some, but not all, of the statements challenged
by Plaintiffs are simply announcements of past financial results and, therefore,
not actionable. See CCAC at pp. 78, 86 and 96. Similarly, the Reform Act's safe
harbor provisions protect not every statement in the CCAC, but only those
selected forward-looking statements allegedly made by Defendants.
D. PLAINTIFFS' SECTION 11 AND SECTION 12(a)(2) CLAIMS FAIL.
1. PLAINTIFFS' SECTION 11 AND 12(a)(2) CLAIMS ARE SUBJECT TO RULE
9(b) AND THE REFORM ACT.
Ignoring Fifth Circuit authority directly on point, Plaintiffs cite
three cases from outside the Fifth Circuit and argue that their Section 11 and
12(a)(2)(14) claims are not subject to the particularity requirements of Rule
9(b) and the Reform Act. See Opposition Brief at 20. Plaintiffs' position is
without merit. In Melder, 27 F.3d 1097, the Fifth Circuit addressed this very
issue, holding that the particularity requirements of Rule 9(b) apply to claims
brought under Section 11 and Section 12(a)(2) of the 1933 Securities Act. The
Fifth Circuit noted:
[Plaintiffs] maintain that their 19[3]3 Securities Act claims
were inappropriately subjected to the Rule 9(b) heightened
pleading standard. This argument is untenable in light of the
complaint's
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(14) Congress amended Section 12 of the Securities Act of 1933 in the
Reform Act, adding subsection 12(b) to section 12 and redesignating subsections
12(1) and 12(2) as 12(a)(1) and 12(a)(2). Most of the cases refer to section
12(2), the pre-amendment designation.
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23
wholesale adoption of the allegations under the securities
fraud claims for purposes of the Securities Act claims. When
1933 Securities Act claims are grounded in fraud rather than
negligence as they clearly are here, Rule 9(b) applies.
Id. at 1100 fn. 6. See also Shapiro v. UJB Fin. Corp., 964 F.2d 272, 287-89 (3d
Cir.), cert. denied, 506 U.S. 934 (1992) (holding that Rule 9(b) applies to
Section 11 and 12(a)(2) claims); Sears v. Likens, 912 F.2d 889, 892-93 (7th Cir.
1990) (same). Given the Fifth Circuit's analysis, there is no reason to believe
that the Reform Act should be treated any differently. When Plaintiffs' claims
are grounded in fraud rather than negligence, the Reform Act's strict pleading
requirements should also apply to Plaintiffs' Section 11 and 12(a)(2) claims.
2. THE ACCURACY OF THE REGISTRATION STATEMENT/PROSPECTUS IS
TESTED ON ITS EFFECTIVE DATE - NOVEMBER 20, 1998.
Plaintiffs' Opposition Brief suggests that all Plaintiffs have to do to
state a cognizable claim under Sections 11 and 12(a)(2) is to plead that (1) the
fourth quarter had ended; (2) the fourth quarter's poor results were necessarily
complete; (3) Defendants closed on the ECI transaction without disclosing these
results; and (4) the Registration Statement/Prospectus affirmatively represented
that SCI experienced no events which would have a materially adverse effect on
its business condition. See Opposition Brief at 2. This is simply not the case.
Section 11 creates an express right of action for securities purchasers
where "any part of the registration statement, when such part became effective,
contained an untrue statement of a material fact or omitted to state a material
fact. 15 U.S.C. Section 77k(a) (emphasis added). Similarly, Section 12(2)
imposes liability for using a prospectus "which includes an untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements, in light of the circumstances under which they were made, not
misleading." 15 U.S.C. Section 77l(2).
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24
The accuracy of the Registration Statement/Prospectus is, therefore,
tested on its effective date, which in this case is November 20, 1998.(15) See
15 U.S.C. Section 77k(a) (liability attaches for misstatements in a prospectus
at the time such part becomes effective); Nelson v. Paramount Communications,
Inc., 872 F. Supp. 1242, 1246 (S.D.N.Y. 1994) (Section 11, by its own terms, is
limited to material omissions in parts of registration statements that were
misleading "when such part[s] became effective"); 3A Harold S. Bloomenthal,
Securities and Federal Corporate Law Section 8.23, at 8-102 (1993) ("The
prospectus for purposes of section 11 speaks as of the date the registration
statement becomes effective"). "[W]hen subsequent events make an effective
Registration Statement misleading, Section 11 does not apply." Thomas Lee Hazen,
Treatise on the Law of Securities Regulation Section 7.3, at 387 (3d ed. 1995).
Plaintiffs suggest that the supplement to the prospectus dated December
17, 1998(16) was, in actuality, an amendment to the Registration
Statement/Prospectus, thereby altering the effective date.(17) See Opposition
Brief at 18 fn. 8. This argument is unpersuasive.
Amendments to a registration statement require compliance with
certain administrative procedures before the Securities and
Exchange Commission. Supplements to a prospectus can be
accomplished by merely the filing of copies with the
Commission. There has been no showing by Plaintiffs that the
supplements to the Prospectus contained information which
could be properly only be included in
- -----------------
(15) See CCAC at p. 7.
(16) The December 17, 1998 supplement is attached as Exhibit A.
(17) On December 14, 1998, SCI and ECI executed an amendment to the
merger agreement. That amendment increased the minimum price of SCI common stock
used to calculate the merger consideration to be received by ECI's stockholders
from $34 to $38, and increased the maximum amount of asset divestitures required
to obtain antitrust approval. See Exhibit A. On December 17, 1999, a supplement
to the Registration Statement/Prospectus was filed with the Securities Exchange
Commission. Id. There was never an amendment to the Registration
Statement/Prospectus.
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25
an amendment to the Registration Statement or that the
supplements were issued under procedures pertinent to
amendments.
Tirone v. Calderone-Curran Ranches, Inc., 1978 WL 1095, *3 (W.D.N.Y. 1978); see
also Finkel v. Stratton Corp., 754 F. Supp. 318, 327 (S.D.N.Y. 1990), aff'd in
part, rev'd in part on other grounds, 962 F.2d 169 (2d Cir. 1992) (filing a
supplemental prospectus dated July, 1985 did not make the effective date for
Section 11 purposes July 1985; rather, the effective date for Section 11
remained the date the Registration Statement was originally filed).
The question in this case is not, as Plaintiffs posit, whether
Defendants failed to disclose in the Registration Statement/Prospectus any
material information concerning SCI's financial condition as of January 19,
1999, the date the SCI-ECI transaction closed. Rather, the key question is
whether the CCAC contains sufficient allegations that the Defendants failed to
disclose in the Registration Statement any material information concerning SCI's
financial condition as of November 20, 1998. The answer, quite simply, is no.
Despite Plaintiffs' protestations to the contrary, the fact that the
quarter was halfway completed does not automatically mean that, as of November
20, 1998, SCI was in possession of information which indicated that the quarter
as a whole would fall below analysts' expectations. This is especially true in
the death care industry because "[t]he death rate tends to be somewhat higher in
the winter months and [SCI's] funeral service locations generally experience a
higher volume of business during those months" See Exhibit B to Defendants'
Motion to Dismiss at p.2. While Plaintiffs claim that SCI had computer reports
detailing cemetery and funeral volumes, Plaintiffs concede that SCI could not,
as of November 20, 1998, predict that cemetery and funeral sales for the
remaining half of the quarter would fail to meet or exceed analysts'
expectations.
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26
3. THE REGISTRATION STATEMENT/PROSPECTUS DID NOT REQUIRE
DEFENDANTS TO DISCLOSE ALL ONGOING DEVELOPMENTS RELATING TO
SCI'S BUSINESS.
Plaintiffs repeatedly claim that the Registration Statement/Prospectus
was patently misleading because it contained a provision requiring SCI to
disclose up until the closing of the SCI-ECI transaction any event which was
having a "material adverse effect" on its business conditions. This argument is
a red herring. Plaintiffs conveniently forget to mention that the merger
agreement, which is attached to the Registration Statement/Prospectus,(18)
defines "material adverse effect" as follows:
any event, occurrence, fact, condition, change, development or
effect that is or could reasonably be anticipated to be
materially adverse to the business, assets (including
intangible assets), liabilities, financial condition, results
of operations, properties (including intangible properties) or
business prospects of [ECI] and all of its Subsidiaries or
[SCI] and all of its Subsidiaries, as applicable, taken as a
whole, EXCLUDING SPECIFICALLY ANY SUCH EVENT, OCCURRENCE,
FACT, CONDITION, CHANGE, DEVELOPMENT OR EFFECT RESULTING FROM
. . . CHANGES GENERALLY APPLICABLE TO COMPANIES ENGAGED IN
BUSINESSES OR INDUSTRIES SIMILAR TO THOSE IN WHICH [ECI] AND
ITS SUBSIDIARIES AND [SCI] AND ITS SUBSIDIARIES ARE ENGAGED.
See Exhibit B, at A-36 to A-37 (emphasis added). Thus, contrary to Plaintiffs'
assertions, Defendants were under no obligation to disclose adverse business
conditions if those conditions were generally applicable to companies engaged in
businesses or industries in which SCI and ECI were engaged, i.e., the death care
industry.
To further this point, the Registration Statement/Prospectus contained
detailed, meaningful disclosures indicating that the information contained in
the Registration Statement/Prospectus was effective only as of November 20,
1998. In particular, the Registration Statement/Prospectus stated as follows:
- -----------------
(18) The Registration Statement/Prospectus is attached as Exhibit B.
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27
THIS PROXY STATEMENT/PROSPECTUS IS DATED NOVEMBER 20, 1998.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE
PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN SUCH DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF SCI
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
SCI OR ECI SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS
OR THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
Id. at p. 3 (emphasis in original). This cautionary language cannot be ignored.
See In re Donald J. Trump Casino Securities Litigation, 793 F. Supp. 543, 553
(D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993) ("the allegations of the
complaint are not read in isolation; they cannot be separated from the language
of the Prospectus, including whatever cautionary language appears in that
text"). Even a cursory reading of the Registrations Statement/Prospectus reveals
that the information in the Registration Statement/Prospectus is only
represented as correct as of the date of the Registration Statement/Prospectus -
November 20, 1998.
At the same time, SCI made investors aware that there were several
"important factors which could cause actual results to differ materially from
those in forward-looking statements." See Form 10-Q for the quarter ended
September 30, 1998, attached as Exhibit I to Defendants' Motion to Dismiss, at
22-23.(19) Those factors include, among others, the following:
1) Changes in general economic conditions both
domestically and internationally impacting financial
markets (e.g. marketable security values as well as
currency and interest rate fluctuations).
- -----------------
(19) The Form 10-Q for the Quarter ended September 30, 1998 was
expressly incorporated into the Registration Statement/Prospectus. See Exhibit B
at p.2.
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28
2) Changes in domestic and international political
and/or regulatory environments in which the Company
operates, including tax and accounting policies.
Changes in regulations may impact the Company's
ability to enter or expand new markets.
3) Changes in consumer demand for the Company's services
caused by several factors such as changes in local
death rates, cremation rates, competitive pressures
and local economic conditions.
4) The Company's ability to identify and complete
additional acquisitions on terms that are favorable
to the Company, to successfully integrate
acquisitions into the Company's business and to
realize expected cost savings in connection with such
acquisitions. The Company's future results may be
materially impacted by changes in the level of
acquisition activity.
Id. It is hard to imagine a more detailed cautionary statement.
Plaintiffs rely heavily on the First Circuit's opinion in Shaw v.
Digital Equipment Corp., 82 F.3d 1194 (1st Cir. 1996). In Shaw, the Registration
Statement's effective date was March 21, 1994, a mere 11 days before the end of
the quarter then in progress. The Shaw plaintiffs alleged that, as of the
Registration Statement's effective date, the defendants were aware of material
facts portending unexpectedly large losses, and that the failure to disclose
these material facts in the Registration Statement/Prospectus violated both
sections 11 and 12(a)(2). The present case presents an entirely different
factual situation. Here, the effective date of the Registration
Statement/Prospectus is November 20, 1998, just about halfway through the
quarter then in progress, and almost two full months before the announcement of
SCI's fourth quarter 1998 earnings. As explained above, it is unreasonable to
assume that, simply because half of the quarter had occurred, Plaintiffs could
foresee that the quarter as a whole would turn out to be disappointing. In
short, Plaintiffs have failed to plead sufficient facts to demonstrate
otherwise.
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29
CONCLUSION
For the above reasons, Defendants' Motion to Dismiss the Consolidated
Class Action Complaint should be granted. Plaintiffs' Consolidated Class Action
Complaint should be dismissed.
Respectfully submitted,
Bracewell & Patterson, L.L.P.
By:
---------------------------------
J. Clifford Gunter III
State Bar No. 08627000
Andrew M. Edison
State Bar No. 00790029
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone: (713) 223-2900
Facsimile: (713) 221-1212
COUNSEL FOR DEFENDANTS
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document
was forwarded by messenger on the 24th day of November, 1999 to Plaintiffs' Lead
Counsel:
Mr. Roger E. Greenberg
Greenberg, Peden, Siegmyer & Oshman, P.C.
12 Greenway Plaza
10th Floor
Houston, Texas 77046
----------------------------------------
Andrew M. Edison
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