The Second Circuit relies on Fait v. Regions Financial Corp. to affirm the dismissal of a securities fraud suit against CBS concerning goodwill impairments

On May 10, 2012, the Second Circuit relied on its recent opinion in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) to affirm the dismissal of a securities fraud action against CBS Corporation and several individual defendants concerning the timing of an impairment charge to the value of CBS’s goodwill. City of Omaha v. CBS Corp., 2012 WL 1624022, at *2–3 (2d. Cir. May 10, 2012) (per curiam) (CBS II). Because there was no allegation that the defendants “did not believe in their statements of opinion regarding CBS’s goodwill at the time they made them” as required under Fait, the Second Circuit held that the plaintiffs’ “Section 10(b), Rule 10b–5, and Section 20(a) claims … were properly dismissed … .” Id. at *3. (To read our discussion of the Fait decision in the September 2011 edition of the Alert, please click here.)

Background

“On October 10, 2008, CBS announced that it was performing an interim impairment test on its existing goodwill, and that, as a result, CBS expected to incur a non-cash impairment charge during the third quarter of approximately $14 billion.” Id. at *1. The plaintiffs subsequently brought suit alleging that the defendants “knew about the facts that led CBS to perform an interim impairment test much earlier than October 2008, so CBS should have performed the test and disclosed its results during the first or second quarter of 2008— that is, no later than June 30, 2008.” Id. The plaintiffs claimed that the “defendants’ statements about CBS’s goodwill and its general financial condition during the first and second quarters of 2008 were knowingly or recklessly false.” Id.

On March 16, 2010, the Southern District of New York dismissed the complaint in its entirety. City of Omaha v. CBS Corp., 2010 WL 1029290 (S.D.N.Y. March 16, 2010) (Castel, J.) (CBS I). The court found that the complaint did “not adequately allege that [CBS’s] failure to take an earlier impairment charge amount[ed] to securities fraud” because it contained no “coherent explanation as to what facts were known to the defendants [by the second quarter of 2008] that required them to test for impairment of goodwill … .” Id. at *9. The plaintiffs appealed the district court’s ruling.

The Second Circuit Finds That Fait Requires Dismissal of the Plaintiffs’ Claims

On appeal, the Second Circuit affirmed the district court’s ruling “for substantially the [same] reasons” set forth in the district court’s opinion. Id. at *2. The Second Circuit explained that the district court’s conclusions have since been “reinforce[d]” by Fait, “which had not yet been decided at the time of the district court’s decisions.” Id.

Like the CBS II plaintiffs, the Fait plaintiffs claimed that “various statements concerning goodwill were false and misleading due to [the] defendants’ failure to conduct timely interim impairment testing.” CBS II, 2012 WL 1624022, at *2; Fait, 655 F.3d at 108, 110. The Fait court “rejected [this] argument, reasoning that the ‘plaintiffs’ allegations regarding goodwill d[id] not involve misstatements or omissions of material fact, but rather misstatements regarding … opinion.’” CBS II, 2012 WL 1624022, at *2 (quoting Fait, 655 F.3d at 110) (alterations in the CBS II opinion). To plead a material misstatement or omission, the Fait court held that “a plaintiff must ‘plausibly allege that [the] defendants did not believe [their] statements regarding goodwill at the time they made them[.]’”¹ Id. (quoting Fait, 655 F.3d at 112). Because the Fait plaintiffs did not allege that the defendants’ statements regarding goodwill were subjectively false at the time they were made, the Second Circuit court held that the plaintiffs had “not adequately alleged actionable misstatements or omissions regarding goodwill.” Fait, 655 F.3d at 112.  

The CBS II plaintiffs, like the Fait plaintiffs, “place[d] considerable reliance on the Financial Accounting Standard Board’s Statement of Financial Accounting Standards (“SFAS”) No. 142[.]” CBS II, 2012 WL 1624022, at *2. “SFAS No. 142 requires interim goodwill impairment testing only where ‘events or changes in circumstances … indicate that it is more likely than not that the book value of a reporting unit exceeds its fair value.’” Id. The CBS II court found that the complaint did “not plausibly demonstrate that [the] defendants knew, nor even had reason to know … that it was more likely than not that interim impairment testing [in the first or second quarter of 2008] would [have] reveal[ed] that the goodwill of any specific [CBS] reporting unit was overvalued.” Id.

Even if the complaint “did plausibly plead that [the] defendants were aware of facts that should have led them to begin interim impairment testing earlier,” the CBS II court explained that “such pleading alone would not suffice to state a securities fraud claim after Fait.” Id. at *3 (emphasis in original). The CBS II court noted that the complaint was “devoid even of conclusory allegations that [the] defendants did not believe in their statements of opinion regarding CBS’s goodwill at the time they made them[,]” as required under Fait. Id.; Fait, 655 F.3d at 112.  

In sum, the Second Circuit “conclude[d] that [the CBS II] plaintiffs … have at most pleaded [the] defendants’ failure to comply with Generally Accepted Accounting Principles, rather than their commission of securities fraud[.]” CBS II, 2012 WL 1624022, at *3.