George Semerenko v. Cendant Corp. Walter A. Forbes E. Kirk Shelton Cosmo Corigliano Christopher K. McLeod Ernst & Young LLP George Semerenko, Individually and on Behalf of All Others Similarly Situated, P. Schoenfeld Asset Management Llc, on Behalf of Itself and All Others Similarly Situated v. Cendant Corp. Walter A. Forbes E. Kirk Shelton Cosmo Corigliano Christopher K. McLeod Ernst & Young LLP

* The P. Schoenfeld Asset Management LLC and the class of similarly situated investors (collectively, the "Class") appeal from the order of the district court dismissing their claims for securities fraud pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Class's complaint was filed under S 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. The complaint also alleged that the individual defendants were liable for the underlying violations of S 10(b) and Rule 10b-5 as control persons under S 20(a) of the Exchange Act.

We conclude that the complaint alleges sufficient facts to establish the elements of reliance and loss causation, and that the district court applied the incorrect analysis for determining whether the complaint alleges that the purported misrepresentations were made "in connection with" the purchase or the sale of a security. Because the standard that we have articulated for the "in connection with" requirement is different from the one applied by the district court, we vacate the judgment below and remand the matter for further proceedings. Given that we do not resolve whether the dismissal was proper under S 10(b) and Rule 10b-5, we do not address the dismissal of the Class's claim under S 20(a).

The Class filed this action against the Cendant Corporation ("Cendant"),1 its former officers and directors Walter A. Forbes, E. Kirk Shelton, Christopher K. McLeod, and Cosmo Corigliano (the "individual defendants"), and its accountant Ernst & Young LLP ("Ernst & Young") (collectively, the "defendants"). The Class alleges that the defendants violated S 10(b) and Rule 10b-5 by making certain misrepresentations about Cendant during a tender offer for shares of American Bankers Insurance Group, Inc. ("ABI") common stock. The Class consists of persons who purchased shares of ABI common stock during the course of the tender offer. The class period runs from January 27, 1998 to October 13, 1998. The complaint does not allege that any member of the Class purchased securities issued by Cendant, or that any member of the Class tendered shares of ABI common stock to Cendant. Instead, it alleges that the defendants made certain misrepresentations about Cendant that artificially inflated the price at which the Class purchased their shares of ABI common stock, and that the Class suffered a corresponding loss when those misrepresentations were disclosed to the public and the merger agreement was terminated. In light of the procedural posture of this case, we must assume the truth of the facts alleged in the complaint. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997).

On December 22, 1997, the American International Group, Inc. ("AIG") announced that it would acquire one hundred percent of the outstanding shares of ABI common stock for $47 per share. On January 27, 1998, Cendant made a competing tender offer to purchase the same shares at a price of $58 per share, or a total price of approximately $2.7 billion. In conjunction with its tender offer, Cendant filed with the Securities and Exchange Commission (the "SEC") a Schedule 14D-1 that overstated its income during prior financial reporting periods.

On March 3, 1998, AIG matched Cendant's bid and offered to pay ABI shareholders $58 for each share of outstanding ABI common stock. Cendant eventually raised its bid price to $67 per share. It then executed an agreement to purchase ABI for approximately $3.1 billion, payable in part cash and in part shares of Cendant common stock. Cendant filed an amendment to its Schedule 14D-1 on March 23, 1998 reporting the terms of the merger agreement. Eight days later, Cendant filed a Form 10-K reporting its financial results for the 1997 fiscal year.

After the close of trading on April 15, 1998, Cendant announced that it had discovered potential accounting irregularities, and that its Audit Committee had engaged Willkie, Farr & Gallagher and Arthur Andersen LLP to perform an independent investigation. Cendant also announced that it had retained Deloitte & Touche LLP to reaudit its financial statements, and that "[i]n accordance with [Statement of Accounting Standards] No. 1, the Company's previously issued financial statements and auditors' reports should not be relied upon." Nevertheless, the April 15, 1998 announcement reported that the irregularities occurred in a single business unit that "accounted for less than one third" of Cendant's net income, and it indicated that Cendant would restate its annual and quarterly earnings for the 1997 fiscal year by $0.11 to $0.13 per share. Immediately after Cendant disclosed the accounting irregularities, the price of ABI common stock dropped from $64-7/8 to $57-3/4, representing an eleven percent decrease from the price at which the shares had been trading.

Following the April 15 announcement, Cendant made several pubic statements in which it represented that it was committed to completing the merger with ABI notwithstanding the discovery of the accounting irregularities. On April 27, 1998, Walter A. Forbes, the chairman of the board of directors of Cendant, and Henry R. Silverman, the president and the chief executive officer of Cendant, issued a letter to Cendant shareholders, which was published in the financial press. That letter states:

We are outraged that the apparent misdeeds of a small number of individuals within a limited part of our company has adversely affected the value of your investment -- and ours -- in Cendant. We are working together diligently to clear this matter up as soon as possible. We fully support the Audit Committee's investigation and continue to believe that the strategic rationale and industrial logic of the HFS/CUC merger that created Cendant is as compelling as ever.

Cendant is strong, highly liquid, and extremely profitable. The vast majority of Cendant's operating businesses and earnings are unaffected and the prospects for the Company's future growth and success are excellent.

We have reaffirmed our commitment to completing all pending acquisitions: American Bankers, National Parking Corporation and Providian Insurance.

In a press release issued on May 5, 1998, Cendant stated that "over eighty percent of the Company's net income for the first quarter of 1998 came from Cendant business units not impacted by the potential accounting irregularities."

On July 14, 1998, Cendant revealed that the April 15, 1998 announcement anticipating the restatement of its financial results for the 1997 fiscal year was inaccurate, and that the actual reduction in income would be twice as much as previously announced. Cendant further acknowledged that its investigation had uncovered several accounting irregularities that had not previously been disclosed, and that those accounting irregularities affected additional Cendant business units and other fiscal years. Cendant estimated that earnings would be reduced by as much as $0.28 per share in 1997. After the July 14, 1998 disclosure, the price of ABI common stock dropped until Cendant issued several public statements indicating that it intended to continue the tender offer and that it was "contractually committed" to completing the ABI merger. Thereafter, the market price of ABI common stock was "buoyed" by Cendant's repeated statements that it was committed to completing the merger.

On August 13, 1998, Cendant issued a press release announcing that its investigation into the accounting irregularities was complete. The release stated that Cendant would restate its earnings by $0.28 per share in 1997, by $0.19 per share in 1996, and by $0.14 per share in 1995. On August 27, 1998, Cendant issued a statement that the board of directors had adopted the audit report. The audit report was publicly filed with the SEC on August 28, 1998, and a copy was forwarded to the United States Attorney for the District of New Jersey. The report included findings that "fraudulent financial reporting" and other "errors" inflated Cendant's pretax income by approximately $500 million from 1995 to 1997, and that Forbes and Shelton were "among those who must bear responsibility." After the audit report was filed with the SEC, the price of ABI common stock closed at $53-1/2 per share on August 28, 1998 and fell further to a closing price of $51-7/8 per share on August 31, 1998, the first day of trading following the disclosure.

On September 29, 1998, Cendant filed an amended Form 10-K for the 1997 fiscal year announcing that Cendant had actually lost $217.2 million in 1997 rather than earning $55.5 million, as previously reported. That announcement caused the price of ABI common stock to drop further to $43 per share by the close of trading. On October 13, 1998, Cendant and ABI announced that they were terminating the merger agreement, and that Cendant would pay ABI a $400 million dollar break up fee, despite the fact that it was not contractually bound to do so. The termination agreement, which was executed the same day, provided that the termination of the merger would not result in liability on the part of Cendant or ABI, or on the part of any of their directors, officers, employees, agents, legal and financial advisors, or shareholders. In response to the disclosure, the price of ABI common stock dropped to $35-1/2 per share by the end of the day.

On October 14, 1998, the day after Cendant and ABI disclosed the termination of the planned merger, the Class filed a complaint in the United States District Court for the District of New Jersey alleging that Cendant and the individual defendants violated S 10(b) and Rule 10b-5 by making fraudulent misrepresentations concerning Cendant's financial condition, its willingness to complete the tender offer, and its willingness to complete the proposed merger. The complaint also alleged that the individual defendants were liable for those violations as control persons under S 20(a). The Class subsequently amended its complaint to expand the class period and to name Ernst & Young as an additional defendant in its claims under S 10(b) and Rule 10(b)(5).2

The defendants filed a motion to dismiss the Class's complaint pursuant to Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure. The district court granted the motion and entered an order dismissing the complaint under Rule 12(b)(6). In explaining its dismissal order, the district court stated that the complaint failed to establish that the alleged misrepresentations were made "in connection with" the Class's purchases of ABI common stock, that the Class reasonably relied on the purported misrepresentations, and that the Class suffered a loss as the proximate result of the purported misrepresentations. The order also dismissed the Class's S 20(a) claim against the individual defendants on the basis that a claim for control person liability cannot be maintained in the absence of an underlying violation of the Exchange Act. In light of its decision to dismiss the complaint pursuant to Rule 12(b)(6), the district court declined to consider whether the Class's complaint also failed to satisfy the heightened pleading requirements of Rule 9(b).

Before we address the merits of the Class's arguments, we must first resolve an important question that concerns our jurisdiction to hear this appeal pursuant to 28 U.S.C. S 1291. In reviewing this matter, it came to our attention that the district court did not indicate whether it intended to dismiss all of the Class's claims with or without prejudice. In fact, the order denying the Class's motion for leave to amend suggests that the dismissal was without prejudice inasmuch as it did not foreclose the Class from submitting a second motion for leave to amend with a proposed complaint attached. The order states:

Plaintiffs have requested leave to amend their complaints if any or all of their claims are dismissed. However, plaintiffs have not detailed the substance of any amendment or presented to the Court a proposed amended complaint. Although plaintiffs no longer have the right to amend their complaints as a matter of course after those complaints have been dismissed, the Court may still permit amendment as a matter of discretion. Kauffman v. Moss, 420 F.2d 1270, 1276 (3d Cir.) cert. denied, 400 U.S. 846, 91 S. Ct. 93, 27 L. Ed.2d 84 (1970). However, the Court will not consider plaintiffs' requests until they submit the sought amendment for the Court's review. The present complaints lack legal vitality. Without scrutiny of the proposed amendment, the Court cannot determine whether it, the amendment, would be resuscitable or futile. Plaintiffs' motion for leave to amend is denied.

This court has held that a dismissal without prejudice is not a final and appealable order under S 1291, unless the plaintiff can no longer amend the complaint or unless the plaintiff declares an intention to stand on the complaint as dismissed. See Nyhuis v. Reno, 204 F.3d 65, 68 n.2 (3d Cir. 2000); In re Westinghouse Sec. Litig., 90 F.3d 696, 705 (3d Cir. 1996); Borelli v. City of Reading, 532 F.2d 950, 951-52 (3d Cir. 1976) (per curiam). The Class did not advise the district court that it could no longer amend its pleadings, or that it had elected to stand on the complaint. Instead, it filed a notice of appeal with this court. In its opening brief, the Class represented that "[t]his court has jurisdiction over this appeal under 28 U.S.C. S 1291 because the district court's opinion and order dismissed of all claims with respect to all parties without leave to replead."

On March 1, 2000, this court ordered the parties to submit further briefing on the question whether the district court had entered a final, appealable order. In its supplemental brief, the Class indicated that it intended to stand on its complaint for the purposes of our review of whether the dismissal was proper under Rule 12(b)(6), but not for the purposes of our independent review of whether the complaint complied with Rule 9(b). In effect, the Class took the position that it could stand on its complaint to satisfy the final judgment rule and, at the same time, avoid a de novo review of whether the complaint pleads the element of scienter with sufficient particularity.

Our own research indicates that the Class's position is consistent with the law of this circuit. In Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992), this court recognized that a plaintiff may amend a complaint to comply with the particularity requirements of Rule 9(b) even after the plaintiff stands on the complaint to invoke the court's appellate jurisdiction under 28 U.S.C. S 1291. In that case, the district court dismissed all of the plaintiffs' claims for securities fraud under Rule 12(b)(6) and, alternatively, dismissed a number of the plaintiffs' claims for failing to plead scienter with the particularity required by Rule 9(b). The district court also granted the plaintiffs leave to file an amended complaint to cure some of the defects identified in its order. See id. at 277-78. Rather than filing an amended complaint, however, the plaintiffs formally announced that they would stand on their complaint. See id. at 278. On review, this court concluded that the district court incorrectly dismissed several of the plaintiffs' claims pursuant to Rule 12(b)(6). See id. at 280- 284. Despite the fact that the plaintiffs had elected to stand on their complaint as dismissed, this court declined to affirm the dismissal under Rule 9(b). See id. at 285 & n.14. Instead, it remanded the matter to the district court to grant the plaintiffs leave to amend those claims which were properly dismissed pursuant to Rule 9(b) and to evaluate whether the remaining claims satisfied the rule's heightened pleading requirements. See id.

In this matter, the district court did not consider the sufficiency of the allegations under Rule 9(b)."[B]ecause we are hesitant to preclude the prosecution of a possibly meritorious claim because of defects in the pleadings," the Class should be "afforded an additional, albeit final opportunity, to conform the pleadings" in the event that its complaint fails to comply with Rule 9(b).3 In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1435 (quoting Ross v. A.H. Robins Co., 607 F.2d 545, 547 (2d Cir. 1979)). We leave it to the district court, however, to determine, in the first instance, whether such an amendment is required. See Shapiro, 964 F.2d at 285 n.14. We hold, consistent with the law of this circuit, that we have jurisdiction to hear the merits of this appeal pursuant to S 1291. See Shapiro, 964 F.2d at 278. Our review is limited to the question whether the dismissal was proper under Rule 12(b)(6).

Our review of a district court's decision to grant a motion to dismiss is plenary. See Weiner v. Quaker Oats Co., 129 F.3d 310, 315 (3d Cir. 1997). "A motion to dismiss pursuant to Rule 12(b)(6) may be granted only if, accepting all well pleaded allegations in the complaint as true, and viewing them in the light most favorable to [the] plaintiff, [the] plaintiff is not entitled to relief. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1420 (quotations and citations omitted). In this case, we may affirm only if it appears that the Class could prove no set of facts that would entitle it to relief. See Weiner, 129 F.3d at 315.

Section 10(b) prohibits the "use or employ, in connection with the purchase or sale of any security, . . .[of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. S 78j(b). Rule 10b-5, which was promulgated under S 10(b), makes it unlawful for any person "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made in the light of the circumstances under which they were made, not misleading. . . in connection with the purchase or sale of any security." 17 C.F.R. S 240.10b-5(b). To state a valid claim under Rule 10b-5, a plaintiff must show that the defendant (1) made a misstatement or an omission of a material fact (2) with scienter (3) in connection with the purchase or the sale of a security (4) upon which the plaintiff reasonably relied and (5) that the plaintiff 's reliance was the proximate cause of his or her injury. See Weiner, 129 F.3d at 315; In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1417.

In the present case, the defendants make numerous arguments to support the dismissal of the Class's complaint pursuant to Rule 12(b)(6). They contend that the district court correctly concluded that the alleged misrepresentations were not made "in connection with" the purchase or the sale of a security. They also suggest that the Class could not have reasonably relied on any of the alleged misrepresentations, and that the alleged misstatements were not the proximate cause of the Class's loss. We address each argument, below, under a separate heading.

We must first decide whether the Class's complaint pleads sufficient facts to satisfy the "in connection with" requirement of S 10(b) and Rule 10b-5. The parties have expressed much disagreement over the standard that this court applies in determining whether an alleged misrepresentation was made "in connection with" the purchase or the sale of a security. The defendants, in varying respects, contend that the alleged misrepresentations must speak directly to the investment value of the security that is bought or sold, and that they must have been made with the specific purpose or objective of influencing an investor's decision. In contrast, the Class and the SEC, as amicus curiae, argue that the "in connection with" requirement is satisfied whenever a misrepresentation is made in a manner that is reasonably calculated to influence the investment decisions of market participants. Recognizing that "the `in connection with' phrase is not the least difficult aspect of the 10b-5 complex to tie down," we take this opportunity to clarify the standard that governs this matter. Chemical Bank v. Arthur Anderson & Co., 726 F.2d 930, 942 (2d Cir. 1984) (noting the difficulty in establishing a test for the "in connection with" requirement) (quotations and citations omitted).

In Ketchum v. Green, 557 F.2d 1022 (1977), this court considered the question whether certain misrepresentations arising out of an internal contest for the control of a closely held corporation were made "in connection with" the subsequent forced redemption of the losing parties' stock. There, a group of minority shareholders secretly conspired to remove the two majority shareholders from their respective positions as the chairman of the board of directors and as the president of the corporation. See Ketchum, 557 F.2d at 1023-24. By misrepresenting their intentions concerning the election of corporate officers, the minority shareholders were able to persuade the majority shareholders to elect them to a majority of the seats on the board of directors. See id. After gaining control of the board of directors, the minority shareholders immediately voted to remove the two majority shareholders from their officerships. See id. To entrench themselves, they also passed resolutions terminating the majority shareholders' employment and authorizing the mandatory repurchase of the majority shareholders' stock pursuant to a stock retirement agreement. The majority shareholders brought an action pursuant to S 10(b) and Rule 10b-5 to enjoin their ouster from the corporation and to obtain damages. See id. at 1024. On review, this court held that the majority shareholders failed to establish that the complained of misrepresentations were made "in connection with" the purchase or the sale of a security. See id. at 1027-29. In addition to noting that the case fell within an "internal corporate mismanagement" exception to S 10(b) and Rule 10b-5, the court reasoned that the degree of proximity between the claimed fraud and the securities transaction was simply too attenuated for the case to fall within the scope of the federal securities laws. See id. at 1028-29

This court again considered the contours of the "in connection with" requirement in Angelastro v. Prudential-Bache-Sec., Inc., 764 F.2d 939 (3d Cir. 1985), when it addressed the question whether a brokerage firm could be held liable under S 10(b) and Rule 10b-5 for making misrepresentations concerning the terms of its margin accounts. In that case, a class of investors sued a national brokerage firm for misrepresenting both the specific interest rates that it would charge in connection with a margin purchase and the formula that it would apply in calculating those rates. See Angelastro, 764 F.2d at 941. The district court dismissed the investors' complaint on the basis that the alleged misrepresentations were not made "in connection with" the purchase or the sale of a security. See id. This court reversed, holding that the investors could pursue their claims under S 10(b) and Rule 10b-5. The court reasoned that the requisite causal connection was satisfied by the brokerage firm's fraudulent course of dealing, notwithstanding the fact that the alleged misrepresentations did not relate to the merits of a security. See id. at 944-45. In holding in favor of the class, the court specifically noted that "Rule 10b-5 also encompasses misrepresentations beyond those implicating the investment value of a particular security." Id.

While the decisions in Ketchum and Angelastro are illustrative of the point that the "in connection with" language requires a causal connection between the claimed fraud and the purchase or the sale of a security, and that the misrepresentations need not refer to a particular security, they are not helpful in applying the standard to the facts of this case. This case does not present a claim based on allegations of internal corporate misconduct arising from a contest for the control of a closely held corporation. See Ketchum, 557 F.2d at 1028. Nor does it concern a fraudulent course of dealing by a brokerage firm. See Angelastro, 764 F.2d at 944. Rather, it involves the public dissemination of allegedly misleading information into an efficient securities market. In light of the law of this circuit that the scope of the "in connection with" requirement must be determined on a case-by-case basis, we are compelled to look elsewhere in deciding the standard that governs this matter.4 See Ketchum, 557 F.2d at 1027; Angelastro, 764 F.2d at 942-43, 945.

In resolving the issue before us, we are persuaded by recent decisions in the Second Circuit and the Ninth Circuit that have addressed the scope of the "in connection with" requirement when the alleged fraud involves the public dissemination of false and misleading information. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 956, 965- 66 (2d Cir. 1993) (involving the public dissemination of false information in publicly filed offering documents, press releases, and research reports); McGann v. Ernst & Young, 102 F.3d 390, 392-93 (9th Cir. 1996) (involving the public dissemination of false information in a publicly filed annual report). Those courts have generally adopted the standard articulated in Securities & Exch. Comm'n v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (in banc), and applied an objective analysis that considers the alleged misrepresentation in the context in which it was made.5 They have held that, where the fraud alleged involves the public dissemination of information in a medium upon which an investor would presumably rely, the "in connection with" element may be established by proof of the materiality of the misrepresentation and the means of its dissemination. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 963, 965; Securities & Exch. Comm'n v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993); In re Leslie Fay Cos. Sec. Litig., 871 F. Supp. 686, 697 (S.D.N.Y. 1995). Under that standard, it is irrelevant that the misrepresentations were not made for the purpose or the object of influencing the investment decisions of market participants. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 965 (holding that an investor's reliance need not be envisioned to give rise to liability under S 10(b) and Rule 10b-5).

We conclude that the materiality and public dissemination approach should apply in this case. The purpose underlying S 10(b) and Rule 10b-5 is to ensure that investors obtain fair and full disclosure of material facts in connection with their decisions to purchase or sell securities. See Angelastro, 764 F.2d at 942. That purpose is best satisfied by a rule that recognizes the realistic causal effect that material misrepresentations, which raise the public's interest in particular securities, tend to have on the investment decisions of market participants who trade in those securities. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 966. We therefore adopt the reasoning of the Second Circuit and the Ninth Circuit and hold that the Class may establish the "in connection with" element simply by showing that the misrepresentations in question were disseminated to the public in a medium upon which a reasonable investor would rely, and that they were material when disseminated. We also point out that, under the standard which we adopt, the Class is not required to establish that the defendants actually envisioned that members of the Class would rely upon the alleged misrepresentations when making their investment decisions. See In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 965; In re Leslie Fay Cos. Sec. Litig., 871 F. Supp. at 697-98. Rather, it must only show that the alleged misrepresentations were reckless. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999) (reaffirming that S 10(b) and Rule 10b-5 cover reckless misrepresentations).

In its petition for rehearing, Ernst & Young contends that the alleged misrepresentations contained in the financial statements and audit reports that it prepared for Cendant should not be deemed to have been made "in connection with" the purchase of ABI common stock unless it was reasonably foreseeable that they would be incorporated in the tender offer documents. We agree. The Supreme Court has warned that "[a]ny person or entity, including a lawyer, accountant, or bank who employs a manipulative device or makes a material misstatement . . . on which a purchaser relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability are met." Central Bank of Denver, N.A. v. First Interestate Bank of Denver, N.A., 511 U.S. 164, 191 (1994) (emphasis in original). Because an accountant is blameless where it could not reasonably have foreseen that its representations would be used in the purchase or the sale of securities, however, the Class must also establish that Ernst & Young knew, or that it had reason to know, that Cendant would use its financial statements and audit reports when making the tender offer for shares of ABI common stock. See McGann, 102 F.3d at 397 (holding that the "in connection with" requirement was satisfied for the purposes of Rule 12(b)(6) where the plaintiffs "squarely alleged that the [auditor] knew that [its client] would include its audit opinion in a Form 10-K"); Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183 (7th Cir. 1993) (stating that "[t]o find the `connection' just because the managers, unbeknownst to the auditors, show the financial statements to some potential investor would abolish the requirement that the defendant's acts occur in connection with the purchase or sale of securities").

We emphasize, though, that it is no defense that the alleged misrepresentations were made in the context of a tender offer and a proposed merger, or that they did not specifically refer to the investment value of the security that was bought or sold. It is well established that information concerning a tender offer or a proposed merger may be material to persons who trade in the securities of the target company, despite the highly contingent nature of both types of transactions. See Basic Inc. v. Levinson, 485 U.S. 224, 238-39 (1988) (holding that preliminary merger discussions may be material even before an agreement-in-principle is reached); Securities & Exch. Comm'n v. Materia, 745 F.2d 197, 199 (2d Cir. 1984) (stating that "even a hint of an upcoming tender offer may send the price of the target company's stock soaring"); Securities & Exch. Comm'n v. Maio, 51 F.3d 623, 637 (7th Cir. 1995) (holding that undisclosed information concerning a tender offer was sufficiently material to give rise to liability for insider trading under Rule 10b-5 and Rule 14e-3); Securities & Exch. Comm'n v. Mayhew, 916 F. Supp. 123, 131 (D. Conn. 1995) (holding that undisclosed information concerning a pending merger was sufficiently material to give rise to liability for insider trading under S 10(b)). It is also settled that S 10(b) and Rule 10b-5 encompass misrepresentations beyond those concerning the investment value of a particular security. See Angelastro, 764 F.2d at 942-44 (holding that a brokerage firm may be liable for misrepresenting the terms of a margin account); cf. Deutschman v. Beneficial Corp., 841 F.2d 502, 508 (3d Cir. 1988) (holding that the purchaser of an option contract has standing to seek damages under S 10(b) for misrepresentations concerning the underlying securities). So long as the alleged misrepresentations were material, the "in connection with" requirement may be satisfied simply by showing that they were publicly disseminated in a medium upon which investors tend to rely, and, in the case of Ernst & Young, that it knew or had reason to know that Cendant would use its financial statements and audit reports when making a tender offer for shares of ABI common stock.

We do not resolve, however, whether the "in connection with" requirement is satisfied in the present case. Because the standard that we have set forth is different from the one applied by the district court, and because the parties have not been afforded a full opportunity to brief the issues of materiality and public dissemination, we will remand this matter to allow the district court to consider, in the first instance, the question whether the Class's complaint pleads sufficient facts to satisfy the requirements of Rule 12(b)(6).6 We note, however, that the issue of materiality typically presents a mixed question of law and fact, and that the delicate assessment of inferences is generally best left to the trier of fact. See Shapiro, 964 F.2d