SEC Violation – Damages

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7^th Circuit Court of Appeals

Case Name: Walleye Trading LLC, v. AbbVie Inc., et al.,

Case No.: 19-3063

Officials: EASTERBROOK, ROVNER, and SYKES, Circuit Judges.

Focus: SEC Violation – Damages

AbbVie Inc. made a tender offer to repurchase as much as $7.5 billion of its outstanding shares. It conducted a Dutch auction to determine the price. In a Dutch auction one side offers a high price, which falls until the other accepts. AbbVie, acting as a buyer, began its auction at $114. Shareholders participated by offering to sell their shares at or below $114. AbbVie then selected the lowest price that would allow it to purchase $7.5 billion of shares from the tendering shareholders.

The auction was conducted from May 1, 2018 through May 29, 2018. AbbVie hired Computershare Trust Co. to receive all offers. On May 30, at eight A.M., AbbVie announced the preliminary result: it would purchase 71.4 million shares for $105 per share (using the whole $7.5 billion pot when accounting for fees and expenses). AbbVie’s stock, which had been trading at roughly $100, closed at $103 on May 30. Approximately an hour later, AbbVie announced that it had received corrected numbers from Computershare. Instead of purchasing 71.4 million shares at $105 a share, it would purchase 72.8 million shares at $103 a share, again adding to $7.5 billion. AbbVie’s share price fell to $99 the next day.

Walleye Trading LLC contends that AbbVie’s announcement of preliminary numbers, followed by corrected numbers after trading closed, violated sections 10(b) and 14(e) of the Securities Exchange Act of 1934, codified at 15 U.S.C. §§ 78j(b) and 78n(e). Walleye also contends that William Chase is liable under §20(a) of the Act, 15 U.S.C. §78t(a), as a controlling manager of AbbVie; this claim is contingent on AbbVie being liable on one of the theories. The district court dismissed Walleye’s complaint for failing to state a claim. 2019 U.S. Dist. LEXIS 158832 (N.D. Ill. Sept. 18, 2019).

The Supreme Court has held that private parties can sue under §10(b) and its corresponding rule, 17 C.F.R. §240.10b– 5, despite the lack of statutory language creating a private right of action. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975). Section 10(b) and Rule 10b–5 prohibit fraudulent or misleading statements of material fact in connection with the purchase or sale of a security. A plaintiff bringing §10(b) claims must plead the fraud with particularity, see Fed. R. Civ. P. 9(b), and allegations of scienter must be as compelling as any opposing inference. That pleading standard comes from the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. §78u–4(b). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).

Walleye’s §10(b) claims are perplexing. It has not pleaded that AbbVie made any statement that is false or misleading, let alone made a statement with the required mental state. AbbVie’s initial announcement says: “[t]he number of shares to be purchased and the purchase price are preliminary and subject to change”. How can an announcement, explicitly subject to change, become misleading or false when it is indeed changed? It does not: AbbVie did not make a false or misleading statement. It accurately reported Computershare’s preliminary numbers.

Walleye contends that AbbVie executives acted with the requisite mental state because they failed to perform “grammar school arithmetic” to verify Computershare’s numbers. But neither the statute nor any regulation requires an issuer to verify someone else’s data before reporting them. (And, given the size of this transaction, a sixth grader would not be the right person to do the math.) Walleye also argues that the length of time it took AbbVie to issue the correction supports an inference of scienter because, before issuing the correcting statement, AbbVie must have known that the initial statement was incorrect. To repeat: The initial statement was correct in relaying what Computershare told AbbVie. True, Computershare must have provided the revised numbers to AbbVie before it issued the updated statement. Yet it takes time to put new numbers in a release and make them public. It takes more time if, as Walleye insists, the numbers must be checked and rechecked. Neither the statute nor any rule requires this to be done in seconds or minutes rather than hours. Most curiously, Walleye claims that AbbVie violated §10(b) and the corresponding rule because it failed in its duty to correct the initial statement. Yet AbbVie did correct the initial statement. That correction led to this suit! Walleye has failed to plead a plausible §10(b) claim.

Without discussing the problem, Walleye assumes that §14(e) gives it a private right of action to collect damages for press releases issued after a tender offer closes. Yet the end of the tender offer placed Walleye outside the zone of interests protected by §14. By May 30, when AbbVie announced the results of the Dutch auction, there was no longer any way for shareholders to participate in it. We conclude that an investor cannot use §14(e) to challenge a statement made after a tender offer has closed.

Affirmed

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.