WATER ISLAND EVENT-DRIVEN FUND, LLC, formerly known as The Arbitrage Event-Driven Fund v. Tribune Media Company

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20-1183
WATER ISLAND EVENT-DRIVEN FUND, LLC, formerly known as
The Arbitrage Event-Driven Fund, et al.,
Plaintiffs-Appellants,
v.
TRIBUNE MEDIA COMPANY, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 18 C 6175 — Charles P. Kocoras, Judge.
____________________
ARGUED SEPTEMBER 16, 2020 — DECIDED JULY 5, 2022
____________________
Before EASTERBROOK, MANION, and SCUDDER, Circuit
Judges.
EASTERBROOK, Circuit Judge. In May 2017 Tribune Media
Company (a broadcast enterprise that had spun off its news-
paper assets in 2014) and Sinclair Broadcasting Group an-
nounced an agreement to merge. In August 2018 Tribune
abandoned the merger and filed suit against Sinclair, accusing
it of failing to comply with its contractual commitment to “use

-- 1 of 9 --

2 No. 20-1183
reasonable best efforts” to satisfy demands of the Antitrust
Division of the Department of Justice and the Federal Com-
munications Commission, both of which had authority to
block the merger or request the judiciary to stop it. Sinclair
se]led that suit for $60 million plus the transfer of one broad-
cast station, though the se]lement disclaims liability.
While the merger agreement was in place, many investors
bought and sold Tribune’s stock. Late in 2017 Tribune’s larg-
est investor, Oaktree Capital Management (which at one point
held 22% of its stock), sold some shares through Morgan Stan-
ley in a registered public offering. In this class action investors
accuse Tribune, Oaktree, Morgan Stanley, and some of their
officers and directors, of violating both the Securities Act of
1933 and the Securities Exchange Act of 1934 by failing to dis-
close that Sinclair was playing hardball with the regulators,
increasing the risk that the merger would be stymied.
The Department of Justice wanted Sinclair to divest ten
stations in markets where both Tribune and Sinclair operated;
Sinclair said no. The Department offered to accept eight sta-
tions as sufficient; Sinclair said no. When it feared that the De-
partment would sue, Sinclair finally said yes. But it did not
mean by divestiture what the Antitrust Division meant. Sin-
clair devised transactions that would have left it in practical
(though not legal) control of the ten stations by pu]ing them
in friendly hands, which would have enabled the sort of coor-
dinated behavior that had concerned the Antitrust Division.
When the FCC got wind of those conditions, it started an in-
vestigation that threatened to derail the merger indefinitely.
At that point Tribune bailed out and sought another partner,
finding one in September 2019, when it was acquired by Nex-
star Media Group. (Tribune remains in existence as a wholly-

-- 2 of 9 --

No. 20-1183 3
owned subsidiary.) We’ll fill in some critical dates later; this
outline gives the picture.
The district court dismissed the complaint on the plead-
ings. 2020 U.S. Dist. LEXIS 1565 (N.D. Ill. Jan. 2, 2020). The
principal claims, which rest on the 1934 Act because they con-
cern trading in the aftermarket, all failed, the district court
found, under the Private Securities Litigation Reform Act of
1995 (PSLRA or 1995 Act). Questionable statements, such as
predictions that the merger was likely to proceed, were for-
ward-looking and shielded from liability because Tribune ex-
pressly cautioned investors about the need for regulatory ap-
proval and the fact that the merging firms could prove unwill-
ing to do what regulators sought. 15 U.S.C. §78u–5(c)(1).
Moreover, the judge observed, all defendants wanted the deal
to close, so plaintiffs had not adequately alleged that any
omissions occurred with the requisite state of mind. 15 U.S.C.
§78u–4(b)(2). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308 (2007). The claims under the 1933 Act failed, the judge
stated, because Oaktree’s secondary offering ended before the
first sign that Sinclair was not fulfilling its contractual com-
mitment to use “reasonable best efforts” to satisfy the regula-
tors.
We start with §12 of the 1933 Act, 15 U.S.C. §77l(a)(2),
which creates liability for any false statement or material
omission, regardless of intent, “to the person purchasing such
security from him”. In this case “him” is Morgan Stanley,
which purchased the securities from Oaktree and sold them
to the public in a registered offering covered by §11, 15 U.S.C.
§77k. (There is an exception to strict liability for certain per-
sons who conduct reasonable investigations. See 15 U.S.C.

-- 3 of 9 --

4 No. 20-1183
§77k(b). Morgan Stanley is not among the persons who can
use this due-diligence defense.)
Morgan Stanley contends that none of the plaintiffs pur-
chased securities from it and that none has standing to sue.
“Standing” is a bad word for this argument. All plaintiffs al-
lege losses that could be redressed by a favorable judicial de-
cision. Morgan Stanley maintains that they do not satisfy a
statutory condition of liability—purchase direct from the un-
derwriter. Failure to satisfy a statutory condition differs from
a lack of standing, and the Supreme Court has urged us to
avoid using that word in a way that could confuse statutory
criteria with the absence of a constitutional case or contro-
versy. Lexmark International, Inc. v. Static Control Components,
Inc., 572 U.S. 118 (2014). So we drop the word “standing” and
ask whether the complaint adequately alleges that at least
some of the plaintiffs bought from Morgan Stanley.
The answer is yes. Some allegations in the complaint are
mealy mouthed—for example, ¶¶ 61 and 62 allege that plain-
tiffs FNY Partners and FNY Managed Accounts purchased
Tribune stock “pursuant or traceable to the Oaktree Offer-
ing”. There’s a legal difference between these possibilities;
“traceable to” means in the aftermarket, and thus outside the
scope of §12. Why would a securities lawyer tiptoe around the
critical issue? But eventually, in ¶229, the complaint alleges
that “Morgan Stanley sold Tribune common stock pursuant
to Offering Materials directly to Plaintiffs and other members
of the class”. Exhibits D and E to the complaint show pur-
chases on November 29 and 30, 2017, and December 1, 2017;
these dates are within the span during which Morgan Stanley
sold the stock it was underwriting. The prices listed in Exhib-
its D and E do not exactly match Morgan Stanley’s offering

-- 4 of 9 --

No. 20-1183 5
price, but sellers don’t always get what they ask for. The detail
about price does not plead the plaintiffs out of court on their
§12 claim.
This is as far as they go under the 1933 Act, however. The
registration statement and prospectus through which Morgan
Stanley offered these shares stated all of the material facts.
Plaintiffs point to what they say is a material omission: Trib-
une’s failure to reveal that Sinclair was playing a dangerous
game with the regulators. Yet the Antitrust Division did not
propose divestiture of eight to ten stations until November 17,
2017, and Sinclair did not reject that demand until December
15. That was two weeks after plaintiffs say that they pur-
chased shares from Morgan Stanley. Securities law requires
honest disclosures but not prescience or mind reading. Cf.
Higginbotham v. Baxter International, Inc., 495 F.3d 753, 756, 759
(7th Cir. 2007). Plaintiffs do not allege that Tribune (or Mor-
gan Stanley) knew that Sinclair was preparing to look the lion
in the teeth. When Tribune found out, it chided Sinclair for
acting inconsistently with its contractual promise to use “rea-
sonable best efforts” to obtain necessary regulatory clear-
ances. It is impossible to rest any liability on the 1933 Act.
Plaintiffs’ main problem under the 1934 Act, as amended
by the 1995 Act, is that statements about prospects for the
merger’s success were forward-looking. (Plaintiffs do not al-
lege that Tribune misstated any ma]er of historical fact.) The
press releases, proxy materials, and other statements issued
in connection with the proposed merger, plus the quarterly
reports filed before the merger was abandoned, all correctly
stated the terms of the deal, including Sinclair’s promise to
use “reasonable best efforts” to win approval. Plaintiffs don’t
view Sinclair’s efforts as reasonable (nor did Tribune, in the

-- 5 of 9 --

6 No. 20-1183
end), but a term such as “reasonable” may mean different
things to different people, and it is hard to describe as “fraud”
by Tribune the fact that Sinclair saw its obligation differently
from Tribune’s understanding. And, as the district court
stressed, Tribune alerted investors repeatedly to potential
problems. Here are some of the cautions:
• [I]t cannot be certain when or if the conditions for
the Merger will be satisfied or waived;
• The Merger is subject to a number of conditions,
including conditions that may not be satisfied or
completed on a timely basis, if at all;
• There can be no assurance that the actions Sinclair
is required to take under the Merger Agreement
to obtain the governmental approvals and con-
sents necessary to complete the Merger will be
sufficient to obtain such approvals and consents
or that the divestitures contemplated by the Mer-
ger Agreement to obtain necessary governmental
approvals and consents will be completed; and
• Failure to obtain the necessary governmental ap-
provals and consents would prevent the parties
from consummating the proposed Merger.
These cautions satisfy the requirements of the 1995 Act’s safe
harbor. That concessions would be demanded, and that too
much would be too much, was disclosed (and outsiders had
to know anyway). Likewise investors surely knew that bluff-
ing in negotiations is normal, and Tribune could not reveal,
as if they were facts, beliefs about how far Sinclair would push
the regulators and whether the Antitrust Division or the FCC
would call any bluff.

-- 6 of 9 --

No. 20-1183 7
As time went on, Tribune became gloomier about whether
Sinclair would do enough to satisfy the regulators. Let us sup-
pose that, after Tribune reached this conclusion (recall that in
December 2017 it accused Sinclair of not doing enough), the
cautions about contingencies were no longer enough to meet
the requirements of the safe harbor. Still, during the negotia-
tions Sinclair assured Tribune that it would keep its promise,
which makes it hard to say that Tribune acted with intent to
defraud when it didn’t disclose that Sinclair was balky. There
was at most a dispute, not certainty, about compliance (“rea-
sonable” is a term hard to pin down)—and Tribune’s execu-
tives were not privy to the thinking of Sinclair’s executives.
The complaint does not tell us when, if at all, Tribune
learned about the “entanglements” (the parties’ word for the
conditions on divestiture) that led to the merger’s demise; the
complaint is not specific about either dates or details. At all
events, plaintiffs do not deny that Tribune wanted the merger
to close; no one there had anything to gain by its failure,
which would diminish the price of management’s stock (and
Oaktree’s remaining holdings) as surely as it would injure
outside investors. Tellabs says that defendants are entitled to
judgment on the pleadings unless the allegations show that
intent to defraud is at least as likely as the absence of bad in-
tent. Like the district court, we think that this complaint’s al-
legations fall short.
Indeed, plaintiffs’ complaint lacks any information about
the time that Tribune learned things, in relation to the public
statements that Tribune made, which makes it impossible to
see how Tribune could have had fraudulent intent on the
dates it made statements. Tribune says that the entanglements
came to its knowledge only after all of the contested public

-- 7 of 9 --

8 No. 20-1183
statements; if that is so, there isn’t even a colorable argument
for fraudulent intent. That leaves only the high-level-of-gen-
erality arguments about nondisclosure of Sinclair’s negotiat-
ing posture, which are not enough to show bad intent.
Two additional points are worth making.
Plaintiffs suppose that, during a major corporate transac-
tion, managers’ thoughts must be an open book. Nothing in
the 1934 Act or any of the SEC’s regulations requires this. See
Livonia Employees’ Retirement System v. Boeing Co., 711 F.3d
754, 758–59 (7th Cir. 2013). To the contrary, secrecy can be val-
uable. Suppose Tribune’s managers knew Sinclair’s full strat-
egy and exactly how far it would go to satisfy regulators—in
economic terms, Sinclair’s reservation price. Nothing in the
complaint implies that it did (Sinclair’s negotiators were not
inept), but suppose. Could investors have gained by disclo-
sure? Hardly; revelation of the reservation price would have
enabled the Antitrust Division and the FCC to squeeze
harder, potentially making the merger unprofitable to both
Tribune and Sinclair—and, if expected profits decline, so does
the stock price, to investors’ detriment. Keeping Sinclair’s
strategy confidential strengthened the potential merging part-
ners’ hand in negotiations with regulators. It would be un-
warranted to read the securities laws as requiring businesses
to surrender that advantage when negotiating with the gov-
ernment.
Next consider Sinclair’s effort to produce the outward
signs of divestiture (separate legal ownership) while retaining
practical control, which led the FCC to take steps that doomed
the merger. Would Tribune, had it known that information
earlier, have thought that concealing it from investors would
injure them? We ask the question this way because bad intent

-- 8 of 9 --

No. 20-1183 9
is essential to liability under the 1934 Act, as amended by the
1995 Act. Contrast Basic Inc. v. Levinson, 485 U.S. 224, 234–35
(1988), a pre-PSLRA decision saying that the benefits of se-
crecy during merger negotiations do not justify fraud. Basic
did not discuss the requirements for pleading scienter.
We doubt that Tribune would have understood news
about Sinclair’s contemplated entanglements as adverse to in-
vestors. Recall why the Antitrust Division wanted divestiture:
a merged firm holding multiple broadcast assets in a given
area obtains some market power and could raise prices. That
would work to the detriment of advertisers (the customers for
over-the-air broadcasting) but to the benefit of investors in the
merged firm. Trying to put one over on regulators is a dan-
gerous game, and once the FCC caught on the merger was
cooked, but if Sinclair’s gambit had succeeded investors
would have been the winners. (By this we mean investors in
the merged firm; investors in advertisers, and the economy as
a whole, would have been worse off as a result of monopoly
pricing.) It is hard to see an intent to harm Tribune’s investors
in thinking that the gambit was worth the risk. With the ben-
efit of hindsight, we know that Sinclair failed. But as Judge
Friendly observed long ago, there is no “fraud by hindsight.”
Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978). See also Mur-
ray v. ABT Associates, 18 F.3d 1376, 1379 (7th Cir. 1994).
Remaining disputes, such as loss causation and the deriv-
ative liability of corporate insiders, need not be addressed.
AFFIRMED

-- 9 of 9 --