Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.

Flaherty & Crumrine Preferred Income Fund, Inc. (F&C) (plaintiff) owned certain publicly traded convertible securities of TXU Corporation (defendant). On May 18, 2004, TXU stated in a press release that, until certain financial goals were achieved in 2006, an increase in TXU’s dividend was not expected. However, the press release reserved the right for TXU’s board of directors to modify that timing and expectation based on its own judgment. On September 15, 2004, TXU launched a self-tender offer for its convertible securities at a price higher than market price. The offering materials stated that management was considering whether to recommend a change in TXU’s dividend policy to its board but that the future recommendation, if any, was not yet known, and it again reserved the right for TXU’s board to act on its own judgment. F&C and other holders accepted the offer, which closed October 13, 2004. On October 21, 2004, TXU’s management proposed to the board a 350 percent increase in TXU’s common stock dividend and a 400 percent increase in TXU’s stock repurchase plan, which the board approved. Upon announcement of the dividend increase and new plan to repurchase stock, the market price of TXU’s common stock and convertible securities increased approximately 20 percent. F&C filed a class action and alleged that TXU had committed securities fraud by making material misrepresentations and omissions in the self-tender offer, in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The Private Securities Litigation Reform Act of 1995 (PSLRA) required stringent pleading standards for federal securities-fraud claims to show the required scienter, i.e., a finding that false statements or omissions were made to intentionally and recklessly mislead investors. The district court dismissed the class action, and F&C appealed.