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Karp v. First Connecticut Bancorp, Inc.

United States District Court, D. Maryland

September 24, 2019

SELWYN KARP, Individually and On Behalf of All Others Similarly Situated Plaintiff,
v.
FIRST CONNECTICUT BANCORP, INC., et al., Defendants.

          MEMORANDUM ORDER

          Richard D. Bennett United States District Judge

         Plaintiff Selwyn Karp (“Karp” or “Lead Plaintiff”) brings this purported class action on behalf of himself and other former public shareholders (collectively, “Plaintiffs”) of First Connecticut Bancorp, Inc. (“First Connecticut” or “the Company”) against First Connecticut and the former members of the Company’s board of directors: John J. Patrick, Jr.; Robald A. Bucchi; John A. Green; James T. Healey Jr.; Patience P. McDowell; Kevin S. Ray; and Michael A. Ziebka (the “Board” or the “Individual Defendants”) (collectively, “Defendants”), alleging violations of federal securities laws. (Consol. Am. Compl., ECF No. 29.) Plaintiffs bring this federal class action for violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78n(a), and 78t(a) respectively, and United States Securities and Exchange Commission (“SEC”) Rule 14a-9, 17 C.F.R. § 240.14a-9, in connection with the acquisition of First Connecticut by People’s United Financial, Inc. (“People’s United”). (Id. at ¶ 1.)

         Currently pending before this Court is Defendants’ Motion to Dismiss (ECF No. 30). The parties’ submissions have been reviewed, and no hearing is necessary. See Local Rule 105.6 (D. Md. 2018). For the reasons that follow, Defendants’ Motion shall be DENIED.

         BACKGROUND

         In ruling on a motion to dismiss, this Court “accept[s] as true all well-pleaded facts in a complaint and construe[s] them in the light most favorable to the plaintiff.” Wikimedia Found. v. Nat’l Sec. Agency, 857 F.3d 193, 208 (4th Cir. 2017) (citing SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 422 (4th Cir. 2015)). The Court may consider only such sources outside the complaint that are, in effect, deemed to be part of the complaint, for example, documents incorporated into the complaint by reference and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

         On June 18, 2018, First Connecticut and People’s United entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which First Connecticut shareholders would receive 1, 725 shares of People’s United common stock for each share of First Connecticut common stock they owned, leaving People’s United as the surviving corporation. (Consol. Am. Compl. ¶¶ 2, 17, ECF No. 29.) Although First Connecticut reported good 2017 financial results and a strong first quarter of 2018, the Board determined to sell the company and responded eagerly to People’s United’s initial outreach in April 2018. (Id. at ¶¶ 29-31.) The sales process was finalized in only two months. (Id. at ¶ 31.) Plaintiffs allege that the Board rushed the sale and accepted consideration for the merger that undervalued First Connecticut shareholders’ shares. (Id. at ¶¶ 29-31, 34.)

         Specifically, Plaintiffs allege that Defendants negligently allowed a Proxy[1] to be disseminated to the Company’s shareholders that omitted material information-Cash Flow Projections-that would have alerted the shareholders to the fact that the consideration being offered for the merger was inadequate. (Id. at ¶¶ 34, 36.) According to Plaintiffs, the missing free cash flow projections were the single most important financial metric for valuing a company and its stock in connection with a merger and are generally a staple in proxy statements related to corporate mergers. (Id. at ¶¶ 39-47.) The lack of these cash flow projections thus resulted in the Proxy containing a materially incomplete and misleading picture of First Connecticut’s valuation and financial prospects. (Id. at ¶¶ 34, 36, 48.) The Proxy, which was filed with the SEC, recommended that the shareholders vote in favor of the merger, but because it lacked material information about the intrinsic value of the Company, the shareholders were unable to make an informed decision. (Id. at ¶ 35.)

         Defendants initially authorized the filing of the Proxy on July 25, 2018. (See Compl. ¶ 4, ECF No. 1.) Karp filed his Complaint for Violation of the Securities Exchange Act of 1934 (ECF No. 1) on August 14, 2018, initially seeking to enjoin the merger.[2] (See Id . at ¶ 7; Mot. Prelim. Inj., ECF No. 13.) The allegedly misleading Proxy was filed with the SEC on August 22, 2018. (Consol. Am. Compl. ¶¶ 3, 35, ECF No. 29.) On September 25, 2018, a special meeting of First Connecticut’s shareholders was held to vote on the merger. (Id. at ¶ 11.) The meeting having taken place, the parties entered into a Stipulation on September 27, 2018, under which Karp agreed to withdraw the Injunction Motion as moot, file an Amended Complaint, and the parties set a briefing schedule for the Defendants’ intended motion to dismiss. (Stip., ECF No. 17; Order, ECF No. 18.) The merger was consummated on October 1, 2018. (Consol. Am. Compl. ¶ 11, ECF No. 29.) Karp filed a Consolidation Motion, under which he would be appointed as Lead Plaintiff, which this Court granted on November 7, 2018, consolidating the two cases. (See ECF Nos. 21, 23.)

         The Consolidated Amended Complaint (ECF No. 29) was filed on December 17, 2018 alleging two causes of action: Count I, Against all Defendants for Violations of Section 14(a) of the Exchange Act and Rule 14a-9 Promulgated Thereunder; and Count II, Against the Individual Defendants for Violations of Section 20(a) of the Exchange Act. The pending Motion to Dismiss was filed on January 29, 2019 and is fully briefed and ripe for decision. (See ECF Nos. 30, 31, 35.) For the reasons that follow, Defendants’ dismissal motion shall be DENIED.

         STANDARD OF REVIEW

         Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that a complaint contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Rule 12(b)(6) authorizes the dismissal of a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The United States Supreme Court’s opinions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), require that complaints in civil actions be alleged with greater specificity than previously was required. While a court must accept as true all factual allegations contained in the complaint, legal conclusions drawn from those facts are not afforded such deference. Iqbal, 556 U.S. at 678. A complaint must set forth “enough factual matter (taken as true) to suggest” a cognizable cause of action, “even if . . . [the] actual proof of those facts is improbable and . . . recovery is very remote and unlikely.” Twombly, 550 U.S. at 556 (internal quotations omitted).

         This Court has noted that a claim for securities fraud must also meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b). In re Constellation Energy Grp., Inc. Sec. Litig., 738 F.Supp.2d 614, 634 (D. Md. 2010). Rule 9(b) of the Federal Rules of Civil Procedure requires that “the circumstances constituting fraud be stated with particularity.” Fed.R.Civ.P. 9(b). The rule “does not require the elucidation of every detail of the alleged fraud, but does require more than a bare assertion that such a cause of action exists.” Mylan Labs., Inc. v. Akzo, N.V., 770 F.Supp. 1053, 1074 (D. Md. 1991). To satisfy the rule, a plaintiff must “identify with some precision the date, place and time of active misrepresentations or the circumstances of active concealments.” Johnson v. Wheeler, 492 F.Supp.2d 492, 509 (D. Md. 2007).

         The Private Securities Litigation Reform Act further requires a securities fraud claim to (1) “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, ” and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, 551 U.S. at 321 (quoting 15 U.S.C. ยง 78u-4(b)(1), (b)(2)). These heightened pleading standards in the securities fraud context are demanding but ...


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