OPINION AND ORDER
SCHEINDLIN, District Judge.
This Document Relates To: All Cases
TABLE OF CONTENTS† INTRODUCTORY MATERIAL I. INTRODUCTION.......................................293 II. SYNOPSIS OF HOLDINGS..............................295 III. SECURITIES LAW, HOT ISSUES MARK AND TIE-IN AGREEMENTS.....................................298
A. General Background on the Securities Act and Exchange Act............298 B. Hot Issues Markets, Market Manipulation and Tie-in Agreements .......299 1. Hot Issues Market of 1959-1962 ....................................300 2. Hot Issues Market of 1967-1971 ....................................302 3. Hot Issues Market of 1979-1983.....................................305 4. Hot Issues Market of 1998-2000.....................................306 IV. THE COMPLAINTS .....................................................308 A. Individual Complaints................................................308 1. Factual Allegations and Allegation of Market Manipulation.........308 2. The Registration Statement's Misleading Statements and Omissions ......................................................310 3. Claims ...........................................................314 B. Part I of Master Allegations.........................................314 1. Tie-in Allegations and Undisclosed Compensation...................314 2. Statistical Analysis..............................................318 3. Matrix Illustrating Various Relationships Among Underwriters......319 4. Analyst Allegations...............................................319 5. Motivations of the Underwriters, Issuers and Individual Defendants.....................................................320 C. Part II and Part III of the Master Allegations.......................320 V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE..................321 A. Rule 8(a).........................................................322 B. Rule 9(b).........................................................324 1. Why Rule 9(b) Requires Particularity............................325 2. How Particularity Deters Claims of Fraud .......................326 3. Rule 9(b) Must Be Read in Harmony with Rule 8...................326 VI. PLEADING SECURITIES FRAUD...........................................328 A. Pleading Securities Fraud Before 1995............................329 B. Pleading Securities Fraud After the PSLRA........................329 1. Paragraph (b)(1)...............................................329 2. Paragraph (b)(2)...............................................330 VII. PRELIMINARY ISSUES.................................................331 A. Standard of Review..............................................331 1. The Court Must Take the Pleadings as True and Draw All Inferences In Plaintiffs'..................................331 2. Both Defendants and the Court Must Accept the Complaints As Pled........................................................332 3. Clarity of Pleadings Is Not a Factor in Dismissal ............333 B. The Pleading Standards for Some of the Claims Are Governed by the PSLRA; Others are Governed by Both the PSLRA and the Federal Rules...................................................333 1. The Differences Between the Scope of the PSLRA's Pleading Requirements and Rule 9(b)...................................333 2. The Federal Rules Still Apply to Certain Types of Securities Fraud Claim..................................................334 3. Summary........................................................335 APPLICATION OF LEGAL PRINCIPLES VIII. SECTION 11 CLAIMS..................................................336 A. The Section 11 Claims Have Been Properly Pled...................336 1. The PSLRA's Pleading Standards Do Not Apply to Claims Brought Under the Securities Act............................337 GOVERNING LEGAL PRINCIPLES
2. Rule 8(a) Applies to Sectition11..............................338 3. Plaintiffs Need Not Plead Reliance in Order to State Certain of Their Section 11 Claim......................................342 4. Plaintiffs Need Not Plead that the Issuers and Individual Defendants Had Knowledge in Order to State Section 11 Claims Against Those Defendant...............................342 B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief May Be Granted....................................................344 1. Plaintiffs Have Standing..........................................344 2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent With Their Claim..............................................344 3. Those Plaintiffs Who Sold Securities Above the Offering Price Have No Damages and Therefore No Claim Upon Which Relief Can Be Granted..........................................347 IX. SECTION 15 CLAIMS....................................................351 X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND INDIVIDUAL DEFENDANTS...............................................353 A. The Rule 10b-5 Claims for Material Misstatements Have Been Properly Pl......................................................353 1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of the PSLRA—Particular......................................353 a. Paragraph (b)(1)'s First Two Requirements Have Been Satisfied...................................................353 b. Paragraph (b)(1)'s Last Requirement Has Been Satisfied........354 2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of the PSLRA—Scienter...........................................359 a. Allocating Underwriters........................................360 b. Non-Allocating Underwriters....................................361 c. Individual Defendants..........................................362 i. The Motive Allegations Are Sufficient as to Sixty-Four Defendants.....................................................366 ii. The Motive Allegations Are Insufficient as to 161 Defendants................................................366 d. Issuers .......................................................368 i. The Motive Allegations Are Sufficient as to 185 Issuers........370 ii. The Motive Allegations Are Insufficient as to 116 Issuers........................................................370 e. Summary........................................................371 3. The Material Misstatement Claims Adequately Plead the Remaining Elements of a Rule 10b-5 Claim: Transaction Causation, Loss Causation, Reliance and Damages.....................372 a. Transaction Causation............................................375 b. Loss Causation and Damages.......................................377 B. Plaintiffs Have Stated Rule 10b-5 Claims For Material Misstatements and Omissions Upon Which Relief May Be Granted....................378 1. The Misstatements and Omissions Are Material.....................379 2. All Defendants Had a Duty to Disclose............................380 XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST THE ALLOCATING UNDERWRITERS..........................................384 A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the PSLRA—Scienter.............................................384 B. The Market Manipulation Claims Adequately State Claims Upon Which Relief May Be Granted........................................385 1. Plaintiffs Adequately Plead "Deceptive or Manipulative Conduct"......................................................387
2. College Bound II Is Not the Law 390 XII. SECTION 20 CLAIMS..................................................392 CONCLUDING MATERIAL XIII. LEAVE TO REPLEAD....................................................397 XIV. CONCLUSION...........................................................399 TABLE OF AUTHORITIES APPENDICES A1. LIST OF CONSOLIDATED CASES ...................................416 A2. SECTION 11....................................................421 A3. SECTION 15....................................................422 A4. RULE 10b-5 CLAIMS AGAINST INDIVIDUAL DEFENDANTS...............422 A5. RULE 10b-5 CLAIMS AGAINST ISSUERS ............................426 A6. SECTION 20....................................................432
INTRODUCTORY MATERIAL
These cases allege a vast scheme to defraud the investing public. The scheme—characterized by Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, and concealed by misrepresentations and omissions—was aimed at fraudulently driving up the price of stock in hundreds of companies in the immediate aftermarket of their initial public offerings ("IPOs"). Plaintiffs allege that investment banks routinely required substantial investors to participate in the scheme in order to receive allotments of these valuable IPOs. The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell their individual holdings at enormous gains. The investment banks profited by receiving kickbacks from the investors who received the IPO allocations. To hide the scheme from the investing public, the investment banks, companies, and officers violated the securities laws by making misleading statements in offering documents and by manipulating the market. Thousands of ordinary investors, who are Plaintiffs in these cases, allege that the value of their holdings plummeted as a result of this unlawful conduct.
I. INTRODUCTION
From January 1998 to December 2000, over 460 high technology and Internetrelated companies raised capital by selling ownership of their company to the public.
Plaintiffs who bought stock in the aftermarket for 309 of these high-technology and Internet-related stocks allege that the Allocating Underwriters required their customers to enter into agreements to buy additional shares of the Issuer in the aftermarket as a condition of receiving the right to purchase the IPO stock. In some instances, these customers were also required to make those purchases at predetermined escalating prices. As a result of these "Tie-in Agreements," the Allocating Underwriters created an artificial demand for the company's stock and caused the price of the stock to rise. In addition, the Underwriters used this scheme to enrich themselves by requiring customers to pay them a portion of the profits they made by selling the IPO shares in the aftermarket.
Spurred by newspaper and government investigations into the IPO allocation practices of various investment banks,
In an effort to coordinate the lawsuits and avoid taxing the limited judicial resources of this district, the Assignment Committee of the Southern District of New York directed that all of the actions be transferred to this Court for "coordination and decision of pretrial motions, discovery and related matters other than trial." Order, In re Initial Public Offering Sec. Litig., 21 MC 92 (Aug. 9, 2001). This Court subsequently consolidated the lawsuits by Issuer (e.g., In re Cacheflow Securities Litigation), thereby resulting in 309 consolidated cases that are being coordinated
The Underwriters, Issuers, and Individual Defendants now move to dismiss these actions in their entirety.
II. SYNOPSIS OF HOLDINGS
It is axiomatic that when deciding a motion to dismiss, a court must accept as true the factual allegations of a complaint. Indeed, the court must draw every reasonable inference from those factual allegations in favor of the party bringing suit. It is against this backdrop that the many rulings contained in this Opinion must be understood.
The general requirements for pleading a complaint are found in the Federal Rules of Civil Procedure unless a specific statute sets forth a different pleading standard. Rule 8 requires, only a "short and plain statement of the claim showing that the pleader is entitled to relief." When pleading fraud, under Rule 9, however, "the circumstances constituting fraud [must] be stated with particularity."
In addition, in the field of securities law, the PSLRA imposes a heightened pleading standard with respect to some causes of action by adding two more requirements. First, when pleading that a defendant has made a material misstatement or omission on which the investing public relies, the complaint must specify each statement alleged to have been misleading, the reason the statement is misleading, and, if the misstatement is alleged on information and belief, the facts on which that belief is formed. Second, when a securities fraud claim requires that a defendant act with fraudulent intent, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."
Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in Plaintiffs' favor, Plaintiffs have alleged one coherent scheme to defraud, the entire purpose of which was to artificially drive up the price of the securities. This scheme offends the very purpose of the securities laws, namely "to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing."
Plaintiffs bring six claims against various Defendants. All Defendants are alleged to have made false statements in the registration statement and prospectus related to a particular IPO, in violation of Section 11 of the Securities Act of 1933 (First Claim). The Individual Defendants are alleged to have controlled the Issuers who made those false statement in violation of Section 15 of the 1933 Act (Second Claim). All Defendants are alleged to have made false statements in the registration statement and prospectus with the intent to deceive the investing public, in violation of Section 10(b) of the Exchange Act of 1934 (Third and Fourth Claims). The Allocating Underwriters are also alleged to have engaged in a scheme to manipulate the securities markets in violation of Section 10(b) of the 1934 Act (Fifth Claim). Lastly, the Individual Defendants are alleged to have controlled the Issuers who violated Section 10(b) of the 1934 Act, in violation of Section 20 of that Act (Sixth Claim).
Because these cases are of great importance to the public, and because this Opinion is lengthy and highly technical, a synopsis of its holdings is warranted. The following constitutes, in summary form, the rulings of the Court.
Section 11 Claims
Section 11 was designed to hold those who prepare registration statements in connection with IPOs—such as the Underwriters, Issuers, and Individual Defendants here—to a stringent standard of liability for any material misrepresentations contained in those statements, although certain Defendants may raise their due diligence as an affirmative defense at trial. Pleading under Section 11 is governed solely by Rule 8 because fraud is not an element of a Section 11 claim. Plaintiffs have sufficiently pled, under the standard of Rule 8, that all those who signed the registration statement or prospectus violated Section 11 because those documents failed to disclose the fraudulent scheme— specifically, the Tie-in Agreements and the Undisclosed Compensation. Moreover, on the secondary offerings, the registration documents also failed to disclose that the analyst reports were prepared by analysts employed by the Underwriters, who consistently issued recommendations tainted by undisclosed conflicts of interest. However, those Plaintiffs who sold their shares above the offering price have no damages as a matter of law, and their claims must be dismissed.
Section 15 Claims
Section 15 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 11. Pleading a Section 15 claim is also governed by Rule 8, and thus only requires an allegation that the defendant controlled a person or entity that violated Section 11. Here, the Individual Defendants are alleged to have controlled the Issuers who violated Section 11. While the Individual Defendants may raise lack of knowledge as an affirmative defense at trial, Plaintiffs need not plead that the Section 15 Defendants acted with the intent to defraud. Thus, the Section 15 claims are dismissed only in those cases where the Section 11 claims have been dismissed for lack of damages.
Section 10(b) Claims for Material Misstatements and Omissions
Section 10(b) —the general "securities fraud" provision in the 1933 and 1934
Plaintiffs have successfully pled that all of the Underwriters (both Allocating and Non-Allocating) made material misstatements and omissions, which they had a duty to disclose, with the intent to defraud the investing public. Plaintiffs have also alleged, with the required particularity, that they purchased stock based on their falsely inflated market price, and that the misrepresentations caused a significant disparity between the price of the securities and their real value, resulting in significant financial damages.
Nonetheless, Plaintiffs have failed to plead that some of the Issuers and Individual Defendants acted with the required intent to defraud. Specifically, when an Issuer exploited the inflated value of the company to engage in a merger or acquisition, or to raise even more money through further stock offerings, the intent requirement has been satisfied. Likewise, when an Individual Defendant sold large amounts of her shares at a significant profit relatively close in time to the IPO, the requisite intent has been demonstrated. In all other instances, the pleading of intent to defraud is inadequate and therefore the claims against those Issuers and Individual Defendants must be dismissed.
Section 10(b) Claim for Market Manipulation
In addition to punishing material misstatements and omissions, Section 10(b) was designed to prohibit any intentional conduct that deceives or defrauds investors by controlling or artificially affecting the price of securities. Such claims are typically described as "market manipulation" claims. Plaintiffs' pleading obligations for the market manipulation claims are identical to those for the material misstatements claims except, because there are no alleged misstatements, the PSLRA only governs the pleading of intent to defraud. Thus, Plaintiffs must plead with particularity the manipulative scheme itself, the intent to defraud the investing public, reliance on the integrity of the market (i.e., that they believed it was not manipulated) and resulting damages.
Plaintiffs have succeeded in pleading a market manipulation claim against the Allocating Underwriter Defendants. They have alleged that these Defendants acted with the requisite intent because they required their customers to engage in Tie-in Agreements and to pay Undisclosed Compensation in order to receive an initial allocation of stock. Subsequent purchases, at escalating prices, falsely inflated the price of the shares. This very conduct evinces a strong inference that Defendants intended to defraud the investing public. Plaintiffs also have alleged that these Defendants engaged in deceptive or manipulative conduct because Defendants' conduct was "designed to deceive or defraud investors by controlling or artificially affecting
Section 20 Claims
Section 20 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 10(b). The pleading of a Section 20 claim is governed solely by Rule 8, because such claims do not necessarily require proof of scienter, nor is fraud an essential element of such claims. Thus a plaintiff must allege only that a defendant controlled a person or entity who violated Section 10(b). At trial, a plaintiff must also show that the defendant was a "culpable participant" in the underlying fraud—i.e., took some action (or inaction) that furthered the underlying fraud. A defendant may then offer proof that the culpable participation was done in good faith. Because Plaintiffs have adequately alleged control, the Section 20 claims survive against those Individual Defendants who controlled Issuers liable under Section 10(b), and are dismissed only against those Individual Defendants who controlled an Issuer as to whom the Section 10(b) claims have been dismissed.
In sum, Plaintiffs have pled a coherent scheme by Underwriters, Issuers, and their officers to defraud the investing public. As such, these lawsuits may proceed.
III. SECURITIES LAW, HOT ISSUES MARKETS, AND TIE-IN AGREMENTS
A. General Background of the Securities Act and Exchange Act
In the aftermath of the bull market of the 1920s, the 1929 stock market crash, and the subsequent Great Depression, Congress held extensive hearings to investigate the practices underlying securities trading. See generally Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934 (J.S. Ellenberger & Ellen P. Mahar eds.1973). During these investigations, Congress repeatedly discovered instances of market manipulation and deception, which it concluded had contributed to the market's collapse. For example, Professor Steve Thel has written:
Steve Thel, The Original Conception of Section 10(b) of the Securities Exchange Act, 42 Stan. L.Rev. 385, 412 (1990) (footnotes omitted). Likewise, a 1934 Act Senate Committee report explained, albeit in more muted tones, how the market was manipulated:
In order to protect the integrity of the market and combat such practices, Congress enacted the Securities Act of 1933 ("Securities Act")
The Securities Act "was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing." Ernst & Ernst, 425 U.S. at 195, 96 S.Ct. 1375 (citing H.R.Rep. No. 73-85, at 1-5). The Exchange Act "was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges." Id. (citing 1934 Senate Report at 1-5). "A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry."
B. Hot Issues Markets, Market Manipulation, and Tie-in Agreements
When a company goes public, the initial offering price (the price paid by the first customer) is established by the company and underwriters. Once issued, the stock price is determined by the market. For at least five decades, studies have shown that IPOs generally trade on the open market at a price significantly higher than the offering price, a phenomenon known as underpricing. For example, a stock might have an initial offering price of $18 and rise to a closing market price of $20 on its first day. Such stock is underpriced by $2 (or approximately 11%).
From the perspective of the initial purchasers, the underpricing of IPO stock is wonderful because they can make a substantial profit on their investment by selling their stock in the aftermarket. The increased sales activity—and the higher stock price—are also attractive to the issuer, who benefits from the false impression that the company is so highly valued. The issuer then exploits that impression by using its stock as currency to make acquisitions, or by raising more capital through a higher-priced secondary offering. The underpricing itself is not all good for the issuer—in one sense there was "money left on the table" because the issuer lost out on the difference between the offering price and the first day's closing market price. MDCM Holdings, 216 F.Supp.2d at 254. But the increased aftermarket trading that may attend underpriced issues is likely to make the whole process a winning proposition for the issuer.
When the price of an IPO stock rises quickly in the market, it is often referred to as a "hot issue." In turn, so-called "hot issues markets" are typically characterized by severe underpricing. See, e.g., Jay R. Ritter, The `Hot Issue' Market of 1980, 57 J. Bus. 215 (1984). Over the past four decades, there have been four such markets. The first three occurred from 1959-1962, 1967-1971, and 1979-1983,
1. Hot Issues Market of 1959-1962
"From 1959 until the market decline of early 1962, the distribution of securities by
In the midst of this "climate of general optimism and speculative interest," id., the SEC "addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold." SEC Legal Bulletin (describing Exchange Act, Release No. 6536). In response to these reports, the SEC issued the following interpretive release:
Securities Act, Release No. 4358/Exchange Act, Release No. 6536 (Apr. 24, 1961), available at 1961 WL 61584.
In 1963, the SEC transmitted to Congress the "Report of Special Study of Securities Markets of the Securities and Exchange Commission." See supra note 15. It "was the most extensive examination of the securities markets since the 1930s" and included "a thorough analysis of new issues" in response to the bull market of the previous three years. SEC Hot Issues Report at 5. "The intensive and extensive examination made by the special study reveals a picture ... of a general climate of speculation which may rank with excesses of previous eras." SEC Special Study at 553. "More than any single activity or incident, it is this climate of speculative fervor which provides a key to the newissue phenomenon." Id.
"In the pricing of new issues, underwriters could not help but be influenced by the knowledge that the prices of many issues would subsequently rise in the immediate after-market to prices hardly justified by traditional standards of value." Id. at 554. The Special Study identified a number of problems and abuses that resulted from this knowledge. For example, some underwriters "set low offering prices in the expectation of withholding substantial portions of the issue in accounts of insiders to be sold out to the public." Id. Likewise, "[s]ome underwriters found opportunities with the strong public demand for new issues to obtain very high amounts of compensation from small speculative companies." Id.
"The Special Study also found that certain techniques employed by broker-dealers exacerbated the `hotness' of an issue, often creating immediate and substantial premiums over the initial offering price." SEC Hot Issues Report at 8. Among other manipulative techniques,
2. Hot Issues Market of 1967-1971
"In 1967-1971, the new issues markets experienced a resurgence," SEC Hot Issues Report at 11, this time with issues in fast food business and "space age" technology
Arthur Levitt, Remarks before the 2000 Annual Meeting of the Securities Industry Association (Nov. 9, 2000).
"In response [to this market], the Commission and the NASD [National Association of Securities Dealers] created a joint task force in mid-1972 to combat the problems caused by hot issues." SEC Hot Issues Report at 11. "Teams of Commission and NASD personnel conducted intensive examinations and investigations of certain broker-dealers." Id. The SEC also "began public, fact-finding hearings on the hot issues experience." Id. (citing SEC File No. 4-148). These investigations uncovered a "considerable number" of violations of the securities laws that resulted in various enforcement actions by the SEC and NASD. Id.
Indeed, the trading abuses of the hot issues market also received scrutiny from the New York State Attorney General who requested that his office study the problems associated with the hot issues market of the late 1960s. See David Clurman, Controlling a Hot Issue Market, 56 Cornell L.Rev. 74 (1970) (discussing study made at the request of Attorney General Louis J. Lefkowitz). The Attorney General's study concluded that "a pattern emerged whereby substantial sums of money went into new and highly speculative ventures." Id. at 82.
Id.
"The basic device used to further overheat the market was stimulating demand while simultaneously reducing supply." Id. at 76. "Brokers increased demand," for example, "by frequently emphasizing to their customers the difficulty of obtaining shares." Id. "Salesmen regularly predicted that the after-market prices would be higher than the original or current prices." Id.
"Cruder techniques [to stimulate demand] included brokers informing customers that if they did not make additional purchases in the after-market they would be cut off from further new issues." Id. "In addition, a steady flow of `tips' was fed into the market, and purchasers often stated that this type of information had stimulated their interest in a particular security." Id. at 76-77. The study also "uncovered instances where intra-office brokerage memoranda were inconsistent with offering literature." Id. at 77. In sum, "[c]ompany insiders and investment bankers took full advantage of the opportunities presented to them by the generally heated situation—a situation that was partially of their own creation." Id. at 78.
In response, the SEC "proposed a number of amendments to its rules to curb the excesses of hot issues." SEC Hot Issues Report at 12.
Id. (emphasis added).
Rule 10b-20 was eventually withdrawn in 1988. See Exchange Act Release No. 26182 (Oct. 14, 1988), available at 1988 WL 999999. The SEC explained:
Id. (citing SEC Hot Issues Report at Section IV.A.3). See also SEC Hot Issues Report at Section V (entitled "Current Regulatory Authority").
3. Hot Issues Market of 1979-1983
From 1979 to 1983, another hot issues market arose. This time the companies going public were from Denver, Salt Lake City and the New York area. See SEC Hot Issues Report at 15-23. "Fad and high-technology business lines were wellrepresented, including robotic manufacturing, medical products, computers, video materials and entertainment."
The SEC provided a comprehensive review of this market when it issued its 1984 Hot Issues Report describing "the abuses identified by the Commission's regulatory and enforcement efforts" and "set[ting] forth the Commission's relevant statutory and rulemaking authority, concluding that this authority is broad enough to cover abuses that have been identified during hot issues markets." Id. at 3-4. The Report found that "selling abuses" were the most common form of misconduct. Id. at 28. "Generally, the abuses found in a hot issues market involve either artificial restrictions on supply or attempts to stimulate demand that facilitate a rapid rise in the price of a security." Id. at 29. The Commission uncovered a wide range of fraudulent activities including schemes founded upon market manipulation and domination, free-riding and withholding of stocks to shorten supply. See id. at 29-30.
"A few cases involve `tie-in' arrangements by which underwriters of hot issues require customers, as a condition of participation in a hot issue offering, either (1) to agree to purchase additional shares of the same issue at a later time and at an increased price, or (2) to participate in another hot issue offering." Id. at 37. "This practice stimulates demand for a hot issue in the aftermarket, thereby facilitating the process by which stock prices rise to a premium." Id. at 37-38. Indeed, the report highlights an example of one underwriter who was alleged to have caused the price of an IPO stock priced at $1 to rise to over $4 within a few hours of its offering. See id. at 38-39 (discussing case 13 attached to the report). The broker-dealer achieved this by (1) requiring customers to place aftermarket purchase orders for the IPO stock at substantial premiums above the offering price and (2) instructing salespersons to advise customers that the company had good financial prospects when it did not.
When discussing whether schemes such as tie-in arrangements violate the law, the
4. Hot Issues Market of 1998-2000
Few people may remember the glamour industries of the 1960s, the 1970s "go-go years," or the fact that Denver and Salt Lake City were at the epicenter of the 1980s IPO market. But the Internet and high-tech boom of the 1990s, "irrational exuberance," and Silicon Valley are not far removed from current events. Indeed, in recent years the rise and fall of these companies has been the subject of numerous articles, many books,
The first is that the underpricing of the IPOs of the late 1990s was severe when measured against any other time period. While IPOs have been historically underpriced by five to twenty percent, IPOs in the 1990s frequently surged to 100%-200% of the offering price on the first day of trading. See Jay Ritter, Big Runups of 1975-2000 (August 2001) (listing IPO stock that doubled in price on the first day of trading since 1975) available at http://bear .eba.ufl.edu/ritter/runup750.pdf. "In 1999," for example, "117 IPOs doubled on their first day. This compares with 39 during the previous 24 years combined." Id. In fact, the ten largest first-day increases in IPO stock since 1975 all took place from November 1998 to December 1999.
Indeed, the IPO market of 1998-2000 was more extraordinary than the previous three hot issues markets. The other hot issues markets that had unusual first day increases were often accompanied by a below average number of companies going public. For example, in February of 1980,
First Day Increase Month/Year Numberof IPOs 119.1 Feb. 1980 8 116.2 Feb. 2000 55 114.6 Dec. 1999 40 103.8 Dec. 1967 11 99.5 Jan. 1999 12 97.9 Nov. 1999 54 96 May 1968 28 90.7 Apr. 1977 5 87.5 Mar. 1999 21 86.5 Jan. 2000 15 85 Mar. 2000 53 82.2 Sep. 1998 3 80 May 1978 2 77.1 Oct.1999 56 76.8 Sep. 1999 40
The second point is that at the end of 2000, the SEC and various newspapers began to report on abuses in the IPO allocations. In August 2000, the SEC's Division of Market Regulation issued a legal bulletin stating that it had "become aware of complaints that, while participating in a distribution of securities, underwriters and broker-dealers have solicited their customers to make additional purchases of the offered security after trading in the security begins." SEC Legal Bulletin. The Bulletin sought to remind "underwriters, broker-dealers, and any other person who is participating in a distribution of securities ... that they are prohibited from soliciting or requiring their customers to make aftermarket purchases until the distribution is completed." Id. (emphasis added).
Newspapers also reported on their own investigations into the IPO allocation process. For example, on December 6, 2000, the Wall Street Journal published a frontpage article discussing how investment banks were requiring their customers to buy shares of stock in the aftermarket as a condition of receiving IPO stock allocations. See Trying to Avoid the Flippers. The article begins:
Id.
The next day, the Wall Street Journal published another article reporting that federal authorities had begun investigating how securities firms were allocating IPO stock. See Susan Pulliam & Randall Smith, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000, at C1. The article explained:
Id.
The first complaint in this litigation was filed one month later. See Makaron v. VA Linux Sys., Inc., 01 Civ. 242 (filed Jan. 11, 2001).
IV. THE COMPLAINTS
Plaintiffs have filed an Amended Complaint in 308 of the 309 consolidated cases. The Complaints detail the allegations about each Issuer's offering and set forth the various claims against the Underwriters, the Issuer and its officers. In addition, Plaintiffs have filed a document entitled "Master Allegations" that contains the allegations that are shared by all of the Complaints. The individual Complaints incorporate the Master Allegations by reference.
A. Individual Complaints
As a randomly-chosen example of the individual Complaints, I shall describe in some detail the 34-page Consolidated Amended Complaint in In re Cacheflow, Inc. Sec. Litig., 01 Civ. 5143 (filed April 24, 2002) ("Cacheflow Compl").
1. Factual Allegations and Allegations of Market Manipulation
In 1999, Cacheflow, Inc., was a Sunnyvale, California-based company that produced appliances designed to speed up content delivery over the Internet.
On November 18, 1999, Cacheflow's registration statement was approved by the SEC. See id. ¶ 5. The next day, an underwriting syndicate distributed 5,000,000 shares of Cacheflow at a price of $24.00 per share. See id. ¶ 30. The underwriting syndicate consisted of the following investment banks:
Id. ¶ 14. All of the Underwriters were allocated Cacheflow's initial stock except for J.P. Morgan (H & Q).
"On the day of the IPO, the price of Cacheflow stock shot up dramatically, trading as high as $139.25 per share, or more than 480% above the IPO price on substantial volume." Id. ¶ 31. Trading on the Nasdaq under the ticker symbol "CFLO", the price of Cacheflow's stock continued to rise in the weeks following the IPO. See id. ¶ 32. Indeed, the stock "hit a high of $182 1/6 per share on December 9, 1999, just prior to the end of the quiet period."
Plaintiffs allege that this remarkable price increase in Cacheflow's stock "was not the result of normal market forces." Id. ¶ 31. Rather, "the Allocating Underwriter Defendants created artificial demand for Cacheflow stock by conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of Cacheflow in the aftermarket and, in some instances, to make those purchases at pre-arranged, escalating prices ("Tie-in Agreements")." Id, ¶ 3. "As part and parcel of this scheme ... certain of the underwriters ... also improperly utilized their analysts, who, unbeknownst to investors, were compromised by conflicts of interest, [to] artificially inflate or maintain the price of Cacheflow stock by issuing favorable recommendations in analyst reports." Id. ¶ 7.
Id. ¶ 14. Plaintiffs collectively refer to these payments as "Undisclosed Compensation." Id.
Plaintiffs also contend that NeSmith, Malcolm and Johnson "knew of or recklessly disregarded the conduct complained of herein through their participation in the `Road Show' process by which underwriters generate interest in public offerings."
2. The Registration Statement's Misleading Statements and Omissions
According to the Complaint, Cacheflow's registration statement "failed to disclose, among other things ... that the Allocating Underwriter Defendants had required Tiein Agreements in allocating shares in the IPO and would receive Undisclosed Compensation in connection with the IPO." Id. ¶ 6. Plaintiffs further allege that the Defendants made eight specific materially false or misleading statements.
First, Plaintiffs highlight the following paragraph in the registration statement:
Id. ¶ 37. "[These statements] were materially false and misleading because the Allocating Underwriter Defendants required customers to commit to Tie-in Agreements and created the false appearance of demand for the stock at prices in excess of the IPO price in violation of Regulation M," a regulation promulgated by the SEC under the Exchange Act. Id. ¶ 38. Rule 101(a) of Regulation M states:
Id. ¶ 35 (quoting 17 C.F.R. § 242.101). Moreover, the SEC Legal Bulletin explains:
Id. ¶ 36 (emphasis in original) (quoting the SEC Legal Bulletin). "At no time did the Registration Statement/Prospectus disclose that the Allocating Underwriter Defendants would require their customers to engage in transactions causing the market price of Cacheflow common stock to rise, in transactions that cannot be characterized as stabilizing transactions, over-allotment transactions, syndicate covering transactions or penalty bids." Id. ¶ 38.
Second, Plaintiffs contend that the registration statement was false and misleading because Regulation S-K requires disclosure of payments from customers who received
Id. ¶ 39 (emphasis in original) (quoting 17 C.F.R. § 229.508(e)). The NASD "specifically addresses what constitutes underwriting compensation in NASD Conduct Rule 2710(c)(2)(B) (formerly Article III, Section 44 of the Association's Rules of Fair Practice)[.]" Id. ¶ 40. It states:
Id. (emphasis omitted). NASD Conduct Rule 2710(c)(2)(C) requires:
Id. ¶ 41. "Contrary to applicable law, the Registration Statement/Prospectus did not set forth, by footnote or otherwise, the Undisclosed Compensation." Id. ¶ 42.
Third the registration statement "misleadingly stated that the underwriting syndicate would receive as compensation an underwriting discount of $1.68 per share, or a total of $8,400,000, based on the spread between the per share proceeds to Cacheflow ($22.32) and the Offering price to the public ($24.00 per share)." Id. ¶ 43. "This disclosure was materially false and misleading as it misrepresented underwriting compensation by failing to include Undisclosed Compensation." Id.
Fourth, the registration statement was materially false and misleading when it stated:
Id. ¶ 44. This statement was "materially false and misleading in that in order to receive share allocations from the Allocating Underwriter Defendants in the IPO, customers were required to pay an amount
Fifth, the investment banks that allocated Cacheflow's stock violated NASD Conduct Rule 2330(f), which states that "no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member." Id. ¶ 46. "The Allocating Underwriter Defendants' scheme was dependent upon customers obtaining substantial profits by selling share allocations from the IPO and paying a material portion of such profits to the Allocating Underwriter Defendants. In this regard, the Allocating Underwriter Defendants shared in their customers' profits in violation of NASD Conduct Rule 2330(f)." Id. ¶ 47. "The failure to disclose the Allocating Underwriter Defendants' unlawful profit-sharing arrangement as described herein, rendered the Registration Statement/Prospectus materially false and misleading." Id. ¶ 48.
Sixth, the registration statement was "false and misleading due to its failure to disclose the material fact that the Allocating Underwriter Defendants were charging customers commissions that were unfair, unreasonable, and excessive as consideration for receiving allocations of shares in the IPO." Id. Plaintiffs base this allegation on NASD Conduct Rule 2440, which states in relevant part:
Id. ¶ 49. Moreover, according to Guideline IM-2440 of the NASD:
Id. ¶ 50.
Seventh, the registration statement "failed to accurately disclose which of the underwriters identified therein actually participated in the distribution of the IPO." Id. ¶ 52. For example, "J.P. Morgan (H & Q) did not receive any of the 100,000 shares listed next to its name." Id. ¶ 54. Thus, the registration statement "was materially false and misleading in that it did not inform the investing public that the shares in the IPO would be distributed only by a few of the underwriters" who were identified in the registration statement. Id. ¶ 53.
Eighth, and finally, on "December 15, 1999, just after the expiration of the `quiet period' with respect to the Cacheflow IPO, Defendants CSFB and Dain Rauscher each initiated analyst coverage of Cacheflow. Dain Rauscher issued a `Strong Buy' recommendation with a 12-month price target of $175 per share .... [and] Cacheflow stock closed at $141.50 per share that day." Id. ¶ 56. "The price target set forth in the Dain Rauscher report was materially false and misleading as it was based upon a manipulated price." Id. ¶ 57.
3. Claims
Based on these allegations, Plaintiffs have brought six claims against the Defendants pursuant to the Securities Act and the Exchange Act. First, that each member of the underwriting syndicate, Cacheflow, NeSmith, Malcolm and Johnson violated Section 11 of the Securities Act by including untrue statements and omitting statements of material fact in Cacheflow's registration statement. See Cacheflow Compl. ¶¶ 60-68; see also 15 U.S.C. § 77k. Second, that NeSmith, Malcom and Johnson are liable under Section 15 of the Securities Act, which holds a controlling person liable for a company's Section 11 violation. See Cacheflow Compl. ¶¶ 69-75; see also 15 U.S.C. § 77o. Third, that the Allocating Underwriter Defendants (i.e., all of the underwriters except J.P. Morgan (H & Q)) violated Section 10(b) of the Exchange Act and Rule 10b-5 by manipulating the market with Tie-in Agreements and by requiring customers to pay Undisclosed Compensation. See Cacheflow Compl. ¶¶ 84-92; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Fourth, that all Underwriter Defendants violated Section 10(b) and Rule 10b-5 by making material misrepresentations and omissions for the purpose of securing and concealing the Tie-in Agreements, Undisclosed Compensation, the conflicts of interest between the Underwriter Defendants and the analysts who reported on Cacheflow's stock or some combination thereof. See Cacheflow Compl. ¶¶ 93-103; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Fifth, that Cacheflow, NeSmith, Malcom, and Johnson violated Section 10(b) and Rule 10b-5 by carrying out a scheme to artificially inflate the price of the company's stock by making material misrepresentations and omissions to conceal the Underwriters' behavior. See Cacheflow Compl. Ill 111-20; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Sixth, that NeSmith, Malcom and Johnson are liable under Section 20(a), which holds a controlling person liable for a company's Section 10(b) and Rule 10b-5 violations. See Cacheflow Compl. ¶¶ 121-24; see also 15 U.S.C. § 78t(a).
The following chart summarizes these claims:
Claim Underwriters Issuers Individuals
1. Section 11 Section 11 Section 11
2. Section 15
3. Rule 10b-5 for
manipulative
practices (only
against
Allocating
Underwriters)
4. Rule 10b-5
for false
statements
and omissions
5. Rule 10b-5 Rule 10b-5
for false for false
statements statements
and omissions and omissions
6. Section 20(a)
B. Part I of Master Allegations
There are essentially three parts to the Master Allegations. Part I outlines factual allegations against the Defendants. Part II provides relevant details about twenty-two of the fifty-five Underwriter Defendants. Part III contains a brief description of each Underwriter Defendant and the number of shares received for each IPO. Part I will be the discussed in the greatest detail because it contains the most relevant factual allegations.
1. Tie-in Allegations and Undisclosed Compensation
Part I of the Master Allegations is 114-pages long and its most important paragraphs are 14-17 and 34.
MA ¶¶ 14-17.
"For example," according to paragraph 34, "customers who received allocations of IPO shares in the following listed IPOs fulfilled their commitments to purchase shares in the aftermarket pursuant to Tiein Agreements, netting the Underwriter Defendants and other underwriters of the referenced offerings substantial additional trading revenue and commissions and substantially and artificially increasing the demand for the issuer's shares[.]" Id. ¶ 34. The statement made in the Master Allegations with respect to Cacheflow's IPO is representative of the allegations repeatedly made in paragraph 34:
Id. ¶ 34, at 16.
While paragraph 34 makes similar allegation with respect to almost every IPO— from Aclara Biosciences to Z-Tel Technologies—and fills over 71 pages of the Master Allegations, see id. ¶ 34 at 8-80, these allegations are not duplicative. The allegations in paragraph 34 differ in three significant ways. First, each allegation varies with respect to the Underwriter from whom that particular unnamed customer bought the IPO stock. For example, the allegations involving Autoweb and Backweb Technologies state:
Id. ¶ 34 at 13-14 (emphasis added).
Second the allegations differ as to the amount of stock that the customer was required or induced to buy in the aftermarket. For instance, while one customer was required or induced to purchase "thousands of additional Intersil shares," id. ¶ 34 at 37, another customer was required or induced to purchase "more than three times the number of Liberate shares allocated to that customer in the IPO," id. ¶ 34 at 40.
Third, in forty-seven of the 309 cases, Plaintiffs allege at least two examples of customers who were required or induced to buy stock in the aftermarket from a particular Underwriter.
Id. ¶ 34 at 59.
Paragraphs 35-56 further supplement these allegations in three ways. First, these paragraphs provide more details about the types of Undisclosed Compensation that customers paid to the investment banks. Paragraphs 41-43 state:
Id. ¶¶ 41-43.
Second, the paragraphs provide further detail as to how the investment banks enforced their scheme with their customers:
Id. ¶¶ 45-47.
Third, paragraphs 35-56 refer to various newspaper articles that have reported on the government's investigation into the IPO allocation practices of investment banks during the same time period. For example, the Master Allegations quote a May 11, 2001, New York Times article reporting on the federal grand jury testimony of hedge fund trader Walter Scott Bruan that states:
Id. ¶ 36 (quoting Patrick McGeehan, Hedge Fund Managers Said to Talk to Grand Jury, N.Y. Times, May 11, 2001, at C1). Likewise, the Master Allegations have similar quotations from other investigative reports on IPO allocation practices. See id. ¶ 37 (quoting from 5/25/01 USA Today article); id. ¶ 40 (quoting from 12/7/00 Wall Street Journal article); id. ¶¶ 49-52 (quoting from Red Herring articles that were published in a seven-part series beginning on 5/2/01); id. ¶ 53 (quoting from 6/29/01 Wall Street Journal article); id. ¶ 55 (quoting from 6/24/00 Wall Street Journal article).
2. Statistical Analysis
Paragraphs 57-65 fall under a heading entitled "Statistical Analysis Of The Coordinated Litigation Confirms the Misconduct Alleged Herein." Id. at 87. These paragraphs compare various data from the IPOs at issue in this coordinated litigation with other data from other IPOs during the same time period or from previous years. Specifically, Plaintiffs allege:
Each of these allegations is followed by a four-colored graph illustrating the allegation.
3. Matrix Illustrating Various Relationships Among Underwriters
Paragraphs 66-85 fall under a heading entitled "Matrix." This six-page illustration shows "the relationships between the lead underwriters (`book runners') of the IPO Litigation Offerings and the underwriters who participated in such offerings." Id. ¶ 66. For example, a representative allegation states:
Id. ¶ 70. The matrix illustrates the relationship that each of the twenty-one investment banks that served as bookrunners or co-book-runners in the IPO Litigation Offerings had with the other investment banks. See id. ¶ 66.
4. Analyst Allegations
Paragraphs 86-108 contain the Plaintiffs' allegations that the Underwriter Defendants used their analysts "to artificially inflate and maintain the aftermarket price of [the IPO] securities." Id. ¶ 86. "[T]he Underwriter Defendants utilized their analysts to recommend such stocks at their first opportunity, typically at the end of the so-called `quiet period,' 25 days following the offering." Id. "Between 1998 and 2000, 97% of analyst initiations at the expiration of the quiet period were by managing underwriters of the initial public offering. Virtually all such coverage was positive." Id. ¶ 108. "In many instances the favorable recommendations were accompanied by unrealistic price targets, frequently reiterated throughout the relevant class periods." Id. 1186. Not only did "analysts employed by the Underwriter Defendants [know] that a negative recommendation
The Master Allegations allege three types of perceived conflicts. "[M]any, if not most, of the Underwriter Defendants tied their analysts' compensation to the performance of the investment banking section of the Underwriter Defendants so that the winning of new investment bank business would directly inure to the pecuniary benefit of the analyst." Id. ¶ 88. "Many analysts also suffered from conflicts of interest due to their ownership of stock in companies they were recommending." Id. ¶ 90. Finally, "analysts frequently had equity interests in entities including venture capital funds and partnerships which had investment interests in these issuers." Id. ¶ 104.
5. Motivations of the Underwriters, Issuers and Individual Defendants
The last four paragraphs of Part I, see id. ¶¶ 109-12, allege the motivations that the various Defendants had in carrying out these Tie-in Arrangements. In addition to receiving various forms of Undisclosed Compensation, see id. ¶¶ 41-43, "the Underwriter Defendants were [also] able to parlay the spectacular increase in market capitalization attendant to each offering into additional and highly lucrative investment banking opportunities for themselves," id. ¶109. "Examples of these additional opportunities include the underwriting of add-on offerings such as secondary and tertiary equity offerings (for which the Underwriter Defendants typically were paid a fixed percentage of the offering price), the underwriting and sales of debt and convertible offerings and advisory services including financial consulting and advising on mergers and acquisitions." Id Likewise, during the late 1990s, "the Underwriter Defendants marketed themselves by emphasizing the prospect of substantial market gains, including the first day gains, of IPO Offerings to entice potential clients to retain those underwriters." Id. ¶ 110.
The last paragraph contains the only reference to the alleged motivation of the Issuers and the Individual Defendants to participate in this scheme. See id. ¶ 112. "The Issuers, as new publicly held corporations, benefitted financially from the misconduct as the run up of their respective stock prices afforded them with substantial opportunities to utilize their stock as currency in connection with corporate acquisitions, and to raise even more money through add-on offerings." Id. As far as the Individual Defendants are concerned, "[they] were motivated to and did benefit financially as a result of the sharp appreciation in value of the respective Issuer's stock price." Id.
C. Part II and Part III of the Master Allegations
Although the second and third part of the Master Allegations fill hundreds of pages, they are easily summarized. Part II has twenty-two sections, each of which is tabbed to one particular Underwriter Defendant.
Part III is marked with two tabs. After Tab A, Plaintiffs have listed each of the fifty-five investment banks and provided several paragraphs of information about the bank's corporate structure. After Tab B, Plaintiffs have listed the IPOs the Underwriter participated in, the IPO price and the number of shares that investment bank was allocated in that IPO. In addition, Plaintiffs have included estimates as to the amount of additional compensation that customers were required to pay in order to receive the IPO stock. For example, one summary reads:
Banc of America
IPO IPO Shares
Price Allocated
Apropos $22.00 2,000
Digital Insight $15.00 2,000
Digitas $24.00 4,000
DrKoop.com $ 9.00 20,000
High Speed Access $13.00 8,000
Modem Media $16.00 1,000
NetRatings $17.00 2,000
Oni Systems $25.00 2,000
Repeater Teach $ 9.00 1,000
Saba Software $15.00 1,000
Ticketmaster Online-City
Search, Inc. $14.00 9,000
Utstarcom $18.00 2,000
Id. Sect. III, Tab B, at 1. A similar chart and allegation follows the listing of each Underwriter.
GOVERNING LEGAL PRINCIPLES
V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE
The individual Complaints average more than thirty pages each, comprising a total of nearly 11,355 pages. Defendants have challenged these Complaints as insufficient. The parties have submitted over 500 pages of legal briefing along with thousands of additional pages of attachments, appendixes and letters to support their arguments. Given the seriousness of these allegations, the extent of the briefing, and the fact that there are more than one thousand parties, a thorough discussion of the pleading requirements of the
A. Rule 8(a)
Under the Federal Rules it is remarkably easy for a plaintiff to plead a claim: Unless the claim falls into one of the two exceptions set forth in Rule 9, a plaintiff must simply provide "(1) a short and plain statement of the grounds upon which the court's jurisdiction depends ... (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks." Fed.R.Civ.P. 8(a). Almost five decades ago, in Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), the Supreme Court first considered the argument that a plaintiff must also "set forth specific facts to support [the complaint's] general allegations." Id. at 47, 78 S.Ct. 99. The Supreme Court responded unanimously:
Id. at 47-48, 78 S.Ct. 99. "The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits." Id. at 48, 78 S.Ct. 99.
In Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993), the Supreme Court rebuked the lower courts for imposing a more demanding rule of pleading on certain types of cases that are sometimes disfavored by the courts (e.g., section 1983 claims against municipalities, prisoner litigation, and civil rights cases). The Court (again unanimous) reaffirmed its previous decision by stating: "In Conley v. Gibson, we said in effect that the Rule meant what it said." Leatherman, 507 U.S. at 168, 113 S.Ct. 1160 (citation omitted). Moreover, as if to warn the lower courts not to stray from the Rules, the Court held that heightened pleading "is a result which must be obtained by the process of amending the Federal Rules, and not by judicial interpretation. In the absence of such an amendment, federal courts and litigants must rely on summary judgment and control of discovery to weed out unmeritorious claims sooner rather than later." Id. at 168-69, 113 S.Ct. 1160.
Nonetheless, last term in Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), the Supreme Court found occasion to again remind the lower courts not to raise the bar for pleading. This time reversing a case that originated from this district, the Court (still unanimous) reiterated that "Rule 8(a)'s simplified pleading standard applies to all civil actions, with limited exceptions." Id. at 513, 122 S.Ct. 992 (emphasis added). "This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed
While the meaning of "a short and plain statement of the claim" is clear on its face, Fed.R.Civ.P. 8(a)(2), the drafters removed any conceivable ambiguity by including more than a dozen sample complaints in the Appendix. See Fed.R.Civ.P.App. Forms 3-18. According to Rule 84, "[t]he forms contained in the Appendix of Forms are sufficient under the rules and are intended to indicate the simplicity and brevity of statement which the rules contemplate."
"For example, Form 9 sets forth a complaint for negligence in which plaintiff simply states in relevant part: `On June 1, 1936, in a public highway called Boylston Street in Boston, Massachusetts, defendant negligently drove a motor vehicle against plaintiff who was then crossing said highway.'" Swierkiewicz, 534 U.S. at 513 n. 4, 122 S.Ct. 992 (quoting Fed.R.Civ. P.App. Form 9). As the Supreme Court recognized in Swierkiewicz, one clearly written sentence can satisfy Rule 8(a)(2). See id.; see also Walker v. Thompson, 288 F.3d 1005, 1011 n. 2 (7th Cir.2002). If the complaint also includes statements "of the grounds upon which the court's jurisdiction depends" and "the relief the pleader seeks," the plaintiff has satisfied Rule 8.
Rule 8(a) does not require plaintiffs to plead the legal theory, facts or elements underlying their claim. There is nothing in Form 9, for example, to support plaintiffs accusation of negligence. "It does not say, for example, whether the hypothetical defendant was speeding, driving without lights, or driving on the wrong side of the road." Atchinson v. District of Columbia, 73 F.3d 418, 423 (D.C.Cir.1996). Nor does it outline the four elements of negligence and explain how each is satisfied. "Form 9 thus treats the mere allegation of negligence as sufficient." Id. (emphasis added). Form 9's allegations are wholly conclusory: by simply describing the claim in a short and plain fashion, Form 9 satisfies the Federal Rules. See Fed.R.Civ.P. 84.
"A complaint that complies with the federal rules of civil procedure cannot be dismissed on the ground that it is conclusory or fails to allege facts." Higgs v.
Indeed, plaintiffs who want to provide something more than a short complaint should be cautious because "[a] party's assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding." Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528 (2d Cir.1985).
Given these incentives, it is no surprise that courts "continue to be puzzled why lawyers insist on writing prolix complaints that can only get them into trouble." Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774, 778 (7th Cir.1994). Plaintiffs would do well to remember that in law, as in life: "He who guards his mouth and his tongue keeps himself from calamity." Proverbs 21:23 (New International Version).
B. Rule 9(b)
"Rule 9(b) does impose a particularity requirement in two specific instances." Leatherman, 507 U.S. at 168, 113 S.Ct. 1160. It states in full: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated
1. Why Rule 9(b) Requires Particularity
There are two main reasons why fraud claims must be pled with particularity: notice and deterrence.
Requiring particularity may also deter plaintiffs from filing frivolous fraud claims. Courts and commentators have offered several explanations for why fraud claims require more deterrence than other claims. One of the most common is that lawsuits based on fraud are more likely to harm a defendant's reputation than a typical lawsuit. "Accusations of fraud," even if proven to be untrue, "can do serious damage to the goodwill of a business firm or a professional person." Bankers Trust Co., 959 F.2d at 683. In addition, fraud claims should be deterred because "assertions of fraud ... often are involved in attempts to reopen completed transactions or set aside previously issued judicial orders." 5 Fed. Prac. § 1296. Because finality has value, courts will not lightly reexamine completed transactions because one party has claimed fraud. See Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir.1999) (citing Stearns v. Page, 48 U.S. (7 How.) 819, 828-30, 12 L.Ed. 928 (1849)); see also Chamberlain Mach. Works v. United States, 270 U.S. 347, 348-49, 46 S.Ct. 225, 70 L.Ed. 619 (1926).
Another explanation is that fraud claims deserve more deterrence than other lawsuits
Plaintiffs may also sue defendants in order to conduct "fishing expeditions" where a party files a complaint containing general allegations of fraud in hopes that subsequent discovery will uncover enough evidence to substantiate allegations.
2. How Particularity Deters Claims of Fraud
Rule 9(b) deters plaintiffs from filing fraud claims in two ways. First, by requiring plaintiffs to state their claim with particularity, the Rule creates a disincentive to the filing of claims for an improper reason. For example, the claim's particularity narrows the potential scope of discovery. Likewise, because pleadings are binding judicial admissions, see supra note 43, plaintiffs cannot easily change their claims based on what they discover during litigation. Thus, requiring plaintiffs to state their claims with particularity has a certain salutary effect.
Second, particularity increases the cost of filing the complaint by forcing a plaintiff to conduct a more substantial investigation of the grounds for her claim before bringing suit. See Ackerman, 172 F.3d at 469. Because "factual contentions [must] have evidentiary support," Fed.R.Civ.P. 11(b)(3), claims that are stated with particularity will necessarily require the plaintiffs to make inquiries that are more extensive than usual. See also Fed.R.Civ.P. 11(b) (stating that attorneys must certify that they have made their pleadings to "the best of [their] knowledge, information, and belief, formed after an inquiry reasonable under the circumstances").
3. Rule 9(b) Must Be Read in Harmony with Rule 8(a)
It is worth emphasizing that Rule 9(b) and Rule 8(a) are children of the same parents: their pleading requirements only differ in degree, not in kind. "[T]his bite of Rule 9(b) was part of the pleading revolution of 1938" in which the drafters rejected arduous fact pleading in favor of providing simple notice. Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). "[I]n applying rule 9(b) we must not lose sight of the fact that it must be reconciled with rule 8 which requires a short and concise statement of claims." Felton v. Walston & Co., 508 F.2d 577, 581 (2d Cir.1974). Thus, in various ways, courts in this circuit and others have repeatedly emphasized that Rule 9(b) must be read in harmony with the principles established by Rule 8(a). See, e.g., Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d
While a complaint may properly plead a cause of action under Rule 8(a) by stating "defendant negligently drove a motor vehicle against plaintiff," Fed.R.Civ. P.App. Form 9, plaintiffs mere incantation of "fraud" will not satisfy Rule 9(b)'s requirement of particularity. See, e.g., Segal v. Gordon, 467 F.2d 602, 606 (2d Cir. 1972). The additional requirements of Rule 9(b) were well described by Judge Frank Easterbrook when he wrote that "[particularity] means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990) (emphasis added).
While Judge Easterbrook seems to suggest that good lawyers (or at least good reporters) should be able to write a claim of fraud in one paragraph, the Appendix to the Rules shows that it can be done in one sentence. Form 13 alleges fraud and satisfies Rule 9(b) by stating:
Fed.R.Civ.P.App. Form 13. In less than fifty words, this model complaint answers the five questions posed by Judge Easterbrook:
"Official Form 13 demonstrates that even fraud may be pleaded without long or highly detailed particularity."
VI. PLEADING SECURITIES FRAUD
A. Pleading Securities Fraud Before 1995
Courts have long held that complaints pleading securities fraud claims must comply with Rule 9(b) by stating the circumstances constituting fraud with particularity. See Segal, 467 F.2d at 607 (gathering citations). Unlike a pleading that satisfies Rule 8, a securities fraud claim is not properly pled if it merely repeats a statute or regulation verbatim. "A [securities] complaint cannot escape the charge that it is entirely conclusory in nature merely by quoting such words from the statutes as `artifices, schemes, and devices to defraud' and `scheme and conspiracy.'" Id. at 608. "To pass muster under [R]ule 9(b), the complaint must allege the time, place, speaker, and sometimes even the content of the alleged misrepresentation." Ouaknine, 897 F.2d at 79. See also Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993).
To prevail, plaintiffs must ultimately prove by a preponderance of the evidence that the defendant committed the alleged fraud (e.g., the misleading statement or omission) with scienter. When plaintiffs are at the pleading stage, however, scienter—"intent, knowledge, and other condition of mind"—"may be averred generally." Fed.R.Civ.P. 9(b).
Although Rule 9(b) states that scienter may be pleaded generally, for more than a generation the Second Circuit has required that plaintiffs also plead a factual basis that gives rise to a "strong inference" of fraudulent intent. The origins of this pleading requirement are found in Ross v. A.H. Robins Co., Inc., 607 F.2d 545 (2d Cir.1979), where the court stated:
Id. at 558 (emphasis added). Over the next sixteen years, the Second Circuit repeatedly reaffirmed its holding that plaintiffs must provide a factual basis for their claims that defendants acted with fraudulent intent.
B. Pleading Securities Fraud After the PSLRA
Recognizing that courts applied different standards to claims of securities fraud, Congress promulgated a nation-wide standard for pleading securities complaints in 1995 by enacting the PSLRA. The PSLRA imposes at least two pleading requirements on securities actions, referred to as paragraph (b)(1) and paragraph (b)(2). Paragraph (b)(1) applies to securities claims "in which the plaintiff alleges that the defendant" either "made an untrue statement of a material fact" or "omitted to state a material fact." 15 U.S.C. § 78u-4(b)(1). Paragraph (b)(2) applies to claims "in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2).
1. Paragraph (b)(1)
Any claim that falls under paragraph (b)(1)'s purview must "[1] specify each statement alleged to have been misleading, [2] the reason or reasons why the statement is misleading, and [3], if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Plaintiffs' burden with respect to the first two requirements of paragraph (b)(1) is self-evident. In order to plead a claim, a plaintiff cannot generically aver that the defendant made a material misstatement or omission, nor may she merely copy the language of the statute. Rather, plaintiff must specifically plead the statements or omissions that give rise to her cause of action and then explain why they were false or misleading. These pleadings then serve as binding judicial admissions that control the plaintiffs case throughout the course of the proceedings.
The requirements of paragraph (b)(1)'s third element are not as obvious. To begin, the third requirement does not apply to all allegations but rather only "if an allegation regarding the statement or omission is made on information and belief." 15 U.S.C. § 78u-4(b)(1). As the Second Circuit has explained: "Allegations of fraud cannot ordinarily be based `upon information and belief,' except as to `matters peculiarly within the opposing party's knowledge.' " Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986) (quoting Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974), overruled on other grounds by Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1100 n. 9, 1100-06, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991)). See also Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir.1990) ("[Allegations may be based on information and belief when facts are peculiarly within the opposing party's knowledge."); Stern v.
In turn, "whenever plaintiffs allege, on information and belief, that defendants made material misstatements or omissions, the complaint must `state with particularity all facts on which that belief is formed.'" Novak, 216 F.3d at 312 (quoting 15 U.S.C. § 78u-4(b)(1)) (emphasis added). In Novak, however, the Second Circuit found that "notwithstanding the use of the word `all,' paragraph (b)(1) does not require that plaintiffs plead with particularity every single fact upon which there Second Circuit based this holding on the ground that "[r]eading `all' literally would produce illogical results that Congress cannot have intended." Novak, 216 F.3d at 314 n. 1. (emphasis added). Under Novak, "plaintiffs need only plead with particularity sufficient facts to support those beliefs."
To summarize, two threshold questions must be answered to determine whether paragraph (b)(1)'s third element applies: First, which allegations regarding the statement or omission are made on information and belief?
If plaintiff has put forward allegations on information and belief, then whether paragraph (b)(1)'s third element is met raises three additional questions: First, what facts have the plaintiffs put forward to support that belief? Second, have the plaintiffs stated those facts with particularity? Third, are those "sufficient facts to support those beliefs[?]" Novak, 216 F.3d at 313-14.
2. Paragraph (b)(2)
Paragraph (b)(2) requires the plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In Novak, the Second Circuit held that this requirement may be satisfied in one of two ways: the plaintiffs may plead "motive and opportunity to commit fraud" or "strong circumstantial evidence of conscious misbehavior or recklessness." See Novak, 216 F.3d at 310-11.
This is, of course, nothing more than a restatement of the Second Circuit's case law prior to 1995. The Novak court reached this holding after reviewing the text and legislative history, and ultimately concluded that when Congress passed the PSLRA, it settled the disagreement between the circuits in favor of the Second Circuit's pleading standard. See id.
Id. at 311 (citations omitted).
VII. PRELIMINARY ISSUES
Before turning to Defendants' arguments as to why each of Plaintiffs' claims should be dismissed, it is necessary to address some preliminary pleading issues. In addition, I will address the Defendants' argument that the pleadings should be dismissed because they are vague and incomprehensible. See, e.g., 1 Und. Mem. at 18-31.
A. Standard of Review
1. The Court Must Take the Pleadings as True and Draw All Inferences in Plaintiffs' Favor
A motion to dismiss under Rule 12 should be granted only if " `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Weixel v. Board of Educ. of New York, 287 F.3d 138, 145 (2d Cir.2002) (quoting Conley, 355 U.S. at 45^46, 78 S.Ct. 99 (alterations omitted)). At the motion to dismiss stage, the issue " `is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test.'" Phelps v. Kapnolas, 308 F.3d 180, 184-85 (2d Cir.2002) (quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998)).
The task of the court in ruling on a Rule 12(b)(6) motion is "`merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Pierce v. Marano, No. 01 Civ. 3410, 2002 WL 1858772, at *3 (S.D.N.Y. Aug.13, 2002) (quoting Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 88108, at *2 (S.D.N.Y. Mar. 15, 1994)). When deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiffs favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002). Courts may not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings. See id. at 152-53; see also Fed.R.Civ.P. 10(c).
In addition to Rule 12, the PSLRA provides an alternate basis for dismissal: "the
2. Both the Defendants and the Court Must Accept the Complaints as Pled
Throughout their briefs, the Defendants refashion and redraft much of the Complaints, then argue for the dismissal of claims that are not in those Complaints. For example, the Underwriters' third and fifth briefs are respectively entitled "Memorandum in Support of the Underwriter Defendants' Motion to Dismiss Undisclosed Compensation Claims," 3 Und. Mem. (emphasis added), and "Memorandum in Support of the Underwriter Defendants' Motion to Dismiss All Analyst Claims," 5 Und. Mem. (emphasis added).
A plain reading of the Complaint shows that there are no such claims. For example, the Cacheflow Complaint explicitly alleges six claims and even highlights the claims with headings that are bolded, underlined and capitalized. The third cause of action in the Cacheflow Complaint has the following heading:
While it is perfectly proper to use shorthand phrases to describe these claims, the Defendants have rewritten the Complaints in a way that they believe favors dismissal. It must be remembered, however, that Plaintiffs are the master of their complaint and "neither this Court nor the defendant have the right to redraft the complaint to include new claims."
3. Clarity of Pleadings Is Not a Factor in Dismissal
The Defendants also argue at great length that the Complaints should be dismissed because they are "incomprehensible," "too vague" and "meaningless." 1 Und. Mem. at 18-31. This argument has no merit. The Complaints are written in plain English and are well drafted by competent counsel. No one should have any trouble understanding what has been alleged. See supra Part IV (summarizing the Complaints). Moreover, this failure, if it exists, is not a ground for Rule 12(b)(6) dismissal. If the Defendants were truly perplexed by the Complaints, they should have filed a motion under Rule 12(e), which states:
Fed.R.Civ.P. 12(e).
B. The Pleading Standards for Some of the Claims Are Governed by the PSLRA; Others Are Governed by Both the PSLRA and the Federal Rules
Defendants argue in part that the Complaints are not properly pled under Rule 9(b) and the PSLRA. While the parties apparently assumed that both the Rule and the PSLRA applied to these pleadings, recent appellate decisions cast some doubt on this assumption. See In re Navarre Corp. Sec. Litig., 299 F.3d 735, 742 (8th Cir.2002) ("Contrary to the district court's analysis, the investors technically do not need to meet the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA, as the PSLRA supercedes reliance on 9(b) in securities fraud cases and embodies the standards of 9(b).") (emphasis in original) (citing Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1034 n. 12 (9th Cir.2002)); City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1255 n. 13 (10th Cir.2001); Greebel v. FTP Software, Inc., 194 F.3d 185, 193-94 (1st Cir.1999); see also Advanta, 180 F.3d at 531.
1. The Differences Between the Scope of the PSLRA's Pleading Requirements and Rule 9(b)
While the parties have treated the requirements of the Rule and the PSLRA as interchangeable, a plain reading of the two provisions shows they are in fact quite different. The most significant difference lies in the claims they cover. Rule 9(b)
In stark contrast, paragraph (b)(1) of the PSLRA only applies to a subset of claims brought under the Exchange Act. In particular, it applies to "any private action arising under this chapter [of the Exchange Act] in which the plaintiff alleges that the defendant"
15 U.S.C. § 78u-4(b)(l).
Consider, for example, Rule 10b-5, which makes it unlawful:
17 C.F.R. § 240.10b-5(a)-(c) (emphasis added). While claims brought under Rule 10b-5(b) must always satisfy paragraph (b)(1)'s statutory requirement, claims brought under Rule 10b-5(a) or 10b-5(c) need not if they do not rely upon misstatements or omissions (e.g., if they allege market manipulation).
Paragraph (b)(2) applies to "any private action arising under this chapter [of the Exchange Act] in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2). In contrast to paragraph (b)(1), all claims brought under Rule 10b-5 must satisfy paragraph (b)(2) because all such claims require proof that defendant acted with an intentional or reckless state of mind. See, e.g., Novak, 216 F.3d at 308.
2. The Federal Rules Still Apply to Certain Types of Securities Fraud Claims
Given that Rule 9(b) and the PSLRA differ in scope, a pivotal question is whether the Plaintiffs "need to meet the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA." Navarre, 299 F.3d at 742 (emphasis in original). With respect to those requirements specifically imposed by paragraphs (b)(1) and (b)(2) of the PSLRA—pleading facts suggesting scienter and specifying the material misstatements and omissions—plaintiffs only need to satisfy the PSLRA. If Congress intended that paragraph (b) set a pleading standard that is higher or the equivalent of Rule 9(b) for these elements of securities fraud, then the requirements of the Rule are subsumed by the PSLRA. On the other hand, if Congress intended to set a pleading standard that is lower than Rule 9(b), that standard must govern beause
However, this leaves the question of whether Congress intended that the PSLRA supercede Rule 9(b) with regard to the remaining elements of a securities fraud claim. Consider, for example, Rule 10b-5(a) claims in which a plaintiff alleges that the defendant has "employ[ed][a] device, scheme, or artifice to defraud." 17 C.F.R. § 240.10b-5(a). The answer is not difficult. Congress intended that the PSLRA supercede the Federal Rules only as to those elements which the PSLRA explicitly mentions (i.e., scienter and material misstatements and omissions). See S.Rep. No. 104-98, at 15. In all other respects, the Rules govern these pleadings.
3. Summary
Given that both the PSLRA and Rule 9(b) apply to claims of securities fraud— although never at the same time to the same element—it is necessary for litigants to be precise when challenging or defending a claim.
In this regard, the following standards will apply:
1. Market manipulation under Rule 10b-5(a) or Rule 10b-5(c): Plaintiffs must satisfy Rule 9(b) by stating "the circumstances constituting fraud ... with particularity." Fed.R.Civ.P. 9(b). Because plaintiffs must ultimately prove scienter to prevail, paragraph (b)(2) of the PSLRA also applies to this claim. Thus, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
2. Material omissions and misstatements under Rule 10b-5(b): Plaintiffs must satisfy both paragraph (b)(1) and (b)(2) of the PSLRA. It is unnecessary, however, for courts to analyze the "circumstances constituting fraud" under Rule 9(b).
APPLICATION OF LEGAL PRINCIPLES
With these governing legal principles firmly in mind, I will now, finally, address Defendants' motions. In order to prevail, Defendants must demonstrate that Plaintiffs have failed to meet their pleading burdens or have failed to state their claims as a matter of law.
VIII. SECTION 11 CLAIMS
A. The Section 11 Claims Have Been Properly Pled
Plaintiffs' first claims allege violations of Section 11 by the Underwriters, Issuers and Individual Officers.
15 U.S.C. § 77k(a) (emphasis added).
Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983) (footnotes omitted). Under Section 11, a plaintiff need not prove that the defendants acted with scienter; "he need only show a material misstatement or omission to establish his prima facie case." Id. at 382, 103 S.Ct. 683 (emphasis added). "Although limited in scope, § 11 places a relatively minimal burden on a plaintiff." Id.
Defendants identify three pleading deficiencies in Plaintiffs' Section 11 claims. First, the Underwriters argue that Rule 9(b)'s heightened pleading standards apply to the Section 11 claims because they
1. The PSLRA's Pleading Standards Do Not Apply to Claims Brought Under the Securities Act
Whether the heightened pleading requirements of the PSLRA apply to Section 11 turns on the interpretation of the phrase "any private action arising under this chapter." 15 U.S.C. § 78u-4(b)(1), (2) (emphasis added). When taken out of context, "under this chapter" is ambiguous because 15 U.S.C. § 78u-4(b) is found under Chapter 2B of Title 15 of the United States Code and entitled "Securities Exchanges." That is, all Exchange Act claims fall under Chapter 2B of Title 15. In contrast, Chapter 2A of Title 15 is entitled "Securities and Trust Indentures" and contains all of the Securities Act claims.
The question, then, is whether the phrase "under this chapter" refers to Chapter 2B (and thus paragraph (b) only applies to Exchange Act claims) or whether it refers to Chapter 2 (and thus paragraph (b) also applies to Securities Act claims). However, if the statute's full text and structure are considered, see United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am. Inc., 508 U.S. 439, 454-55, 113 S.Ct. 2173, 124 L.Ed.2d 402 (1993), then there is no ambiguity: Congress only intended paragraph (b) of 15 U.S.C. § 78u-4 to apply to Exchange Act claims.
First, paragraph (b) is entitled: "Requirements for securities fraud actions." 15 U.S.C. § 78u-4(b). Securities fraud claims can be brought only under the Exchange Act (and regulations promulgated thereunder). See supra notes 13 and 56. The title of paragraph (b) is therefore a strong indicator that Congress only intended it to apply to Exchange Act claims. See INS v. National Ctr. for Immigrants' Rights, Inc., 502 U.S. 183, 189, 112 S.Ct. 551, 116 L.Ed.2d 546 (1991) ("[T]he title of a statute or section can aid in resolving an ambiguity in the legislation's text."); United States v. Fisher, 6 U.S. (2 Cranch) 358, 386, 2 L.Ed. 304 (1805) (Marshall, C.J.) ("Where the mind labours to discover the design of the legislature, it seizes every thing from which aid can be derived; and in such case the title claims a degree of notice, and will have its due share of consideration.").
Second, and more important, in enacting the PSLRA Congress repeatedly treated the Securities Act and the Exchange Act as separate chapters. See 15 U.S.C. §§ 77z-1(a)(2)-(3), 78u-4(a)(2)-(3) (identical provisions concerning plaintiff certifications, appointment of lead plaintiffs, selection of lead counsel, restrictions on plaintiffs); id. §§ 77z-1(c), 78u-4(c) (identical provisions concerning sanctions for abusive litigation); id. §§ 77z-1(d), 78u^(d) (identical provision concerning defendant's right to written jury interrogatories). If this Court were to interpret "under this chapter" as used throughout 15 U.S.C. § 78u-4 to include the Securities Act, each of these identical provisions in the Securities Act would be entirely superfluous.
In sum, because the phrase "under this chapter" as used throughout 15 U.S.C. § 78u-4 only refers to the Exchange Act, the PSLRA pleading requirements have no application to claims that arise under Section 11 or other provisions of the Securities Act (e.g., Section 15).
2. Rule 8(a) Applies to Section 11
Rather than contend that Plaintiffs' Section 11 claims must satisfy the PSLRA, Defendants seek to impose a heightened pleading standard through the Federal Rules. "Because the Section 11 claims asserted here `sound in fraud,'" Defendants contend, "they must be pled in accordance with the heightened pleading standards imposed by Federal Rule of Civil Procedure Rule 9(b)." 1 Und. Mem. at 15 (citing Ellison v. American Image Motor Co., 36 F.Supp.2d 628, 639 (S.D.N.Y. 1999); Schoenhaut v. American Sensors, Inc., 986 F.Supp. 785, 795 n. 13 (S.D.N.Y. 1997); In re Chans Sec. Litig., No. 88 Civ. 8641, 1990 WL 188921, at *10 (S.D.N.Y. Nov.20, 1990)).
While some courts have accepted Defendants' argument, most have not because nothing in Section 11 requires a plaintiff to prove the defendant committed fraud.
Defendants argue that several circuit courts have recognized the sound in fraud doctrine.
While the Seventh Circuit discussed the application of Rule 9(b) to Section 16(a) and Section 20 claims in Sears v. Likens, 912 F.2d 889, 893 (7th Cir.1990), the district courts in that Circuit have refused to apply Sears to Section 11 claims on the ground that the circuit's reference to Rule 9(b) was pure dictum.
Meanwhile, in recent years the Fifth and Third Circuits have taken steps to substantially undercut the application of the sound in fraud doctrine. In the Fifth Circuit, plaintiffs who explicitly disavow any allegation of fraud in connection with their Section 11 claim only need to satisfy Rule 8(a).
Id. at 1104-05 (emphasis added). Thus, Rule 9(b) no longer applies to all allegations in a Section 11 claim; it applies only to the actual "averments of fraud." Id. at 1105.
The Ninth Circuit is the only circuit court that has provided any rationale for its decision to accept the sound in fraud doctrine: " `Rule 9(b) serves to ... protect professionals from the harm that comes from being subject to fraud charges.' Fraud allegations may damage a defendant's reputation regardless of the cause of action in which they appear, and they are therefore properly subject to Rule 9(b) in every case." Vess, 317 F.3d at 1105 (quoting Stac Elec., 89 F.3d at 1405) (ellipsis in original) (citations omitted). But even if these policy considerations apply with the same force to a claim that does not require proof of scienter, the Supreme Court has made it clear that such considerations are never a valid reason to stray from the language of the applicable statute or Rule. "Whatever merits these and other policy arguments may have, it is not the province of [the courts] to rewrite the statute [or Rules] to accommodate them." Artuz v. Bennett, 531 U.S. 4, 10, 121 S.Ct. 361, 148 L.Ed.2d 213 (2000). See also Badaracco v. Commissioner, 464 U.S. 386, 398, 104 S.Ct. 756, 78 L.Ed.2d 549 (1984) ("Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement.").
Indeed, in the last decade the Supreme Court has twice admonished the lower courts for augmenting federal pleading requirements: "A requirement of greater specificity for particular claims is a result that `must be obtained by the process of amending the Federal Rules, and not by judicial interpretation.'" Swierkiewicz, 534 U.S. at 515, 122 S.Ct. 992 (quoting Leatherman, 507 U.S. at 168, 113 S.Ct. 1160) (emphasis added). In fact, in Swierkiewicz, the Defendant tried to persuade the Court on policy grounds by asserting that "allowing lawsuits based on conelusoallegations
Plaintiffs rely on those cases that have allowed litigants to explicitly disclaim any allegations of fraud in connection with their Section 11 claims, as Plaintiffs have, in order to avoid Rule 9(b)'s heightened pleading standard. See 3 PI. Mem. at 2 n.4; see also Lone Star Ladies, 238 F.3d at 369; Westinghouse, 90 F.3d at 717. But it is obvious from the Complaints that Plaintiffs' disclaimer is superficial.
This does not mean, however, that a heightened pleading standard applies to Plaintiffs' Section 11 claims. Whether Rule 8(a) or 9(b) is triggered turns on the type of claim alleged (i.e., the cause of action) rather than the factual allegations on which that claim is based.
That being so, just as the half-page model complaints in the Appendix to the Federal Rules of Civil Procedure satisfy the pleading requirements of the Federal Rules, see Fed.R.Civ.P. 84, Plaintiffs' allegations here are sufficient to state a Section 11 claim against each of the Defendants. See, e.g., Cacheflow Compl. ¶¶ 1, 5, 6, 9, 61.
3. Plaintiffs Need Not Plead Reliance in Order to State Certain of Their Section 11 Claims
Section 11(a) requires that if a plaintiff acquires the security
15 U.S.C. § 77k(a) (emphasis added). Defendants argue that in approximately a dozen of these coordinated cases, "plaintiffs... purchased their shares after the issuers made available an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement." 6 Und. Mem. at 3. "None of those plaintiffs allege that they relied upon the registration statement they claim was misleading." Id. "As a result," Underwriters argue, "those claims should be dismissed." Id.
This argument has no merit because Rule 8 does not require plaintiffs to plead the elements of a claim. See supra Part V.A. Just as plaintiffs do not need to allege causation in order to plead a negligence claim (even though a plaintiff must ultimately prove causation to prevail), see Fed.R.Civ.P.App. Form 9, plaintiffs do not need to allege reliance on a registration statement to plead a Section 11 claim. See, e.g., In re MobileMedia Sec. Litig., 28 F.Supp.2d 901, 923 (D.N.J. 1998) ("A plaintiff need not plead fraud, reliance, motive, intent, knowledge or scienter under Section 11."). Indeed, given that the Underwriter Defendants do not claim they lack notice of the Section 11 claim, or that there are no set of facts under which plaintiffs could prevail, their argument must be rejected.
4. Plaintiffs Need Not Plead that the Issuers and Individual Defendants Had Knowledge in Order to State Section 11 Claims Against Those Defendants
The Issuers and Individual Defendants argue that "Section 11 liability does not
Section 11 "was designed to assure compliance with the disclosure provisions of the [Securities] Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering." Herman & MacLean, 459 U.S. at 381-82, 103 S.Ct. 683 (footnotes omitted). The Supreme Court has held that, "[liability against the issuer of a security is virtually absolute" while "[o]ther defendants bear the burden of demonstrating due diligence." Id. at 382, 103 S.Ct. 683 (emphasis added). See also AnnTaylor Stares, 807 F.Supp. at 998 ("An issuer has absolute liability for any misrepresentations or omissions; the underwriters and signatories have an affirmative due diligence defense.") (emphasis added).
Because intent to defraud is not an element in a Section 11 claim, "only a material misstatement or omission need be shown to establish a prima facie case, and scienter need not be alleged." Degulis v. LXR Biotechnology, Inc., 928 F.Supp. 1301, 1310 (S.D.N.Y.1996). See also In re Twinlab Corp. Sec. Litig., 103 F.Supp.2d 193, 201 (E.D.N.Y.2000) ("Section 11 `places a relatively minimal burden on a plaintiff,' requiring simply that the plaintiff allege that he purchased the security and that the registration statement contains false or misleading statements concerning a material fact.") (quoting Herman & MacLean, 459 U.S. at 381-82, 103 S.Ct. 683). Because there is no scienter requirement in Section 11, Plaintiffs need not plead that the Defendants had knowledge of the alleged omission. See In re Turkcell Iletisim Hizmetler, A.S. Sec. Litig., 202 F.Supp.2d 8, 12 (S.D.N.Y.2001); see also Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204, 1997 WL 20832, at *3 (S.D.N.Y. Jan.21, 1997) ("[T]o make out a prima facie case at the pleadings stage, Plaintiffs need only allege a material misstatement or omission. Neither knowledge nor reason to know is an element in a plaintiffs prima facie case.").
Defendants cite In re Adams Golf Inc. Sec. Litig., 176 F.Supp.2d 216 (D.Del. 2001), and In re Ultimate Corp. Sec. Litig., No. 86 Civ. 5944, 1989 WL 86961 (S.D.N.Y. June 30, 1989) (mem.), in support of their argument that Plaintiffs must plead that the Issuers and Individual Defendants had knowledge of the alleged omissions at the time of the IPO. See Iss. Mem. at 50-53. Defendants' reliance on these cases is misplaced. Ultimate decided a motion for summary judgment and thus provides little guidance at the pleading stage. Adams Golf is easily distinguished. The court granted a motion to dismiss in that case because it concluded that neither of the alleged omissions was actionable as a matter of law: one omission was simply not material, see Adams Golf, 176 F.Supp.2d at 234, and the other was a forward looking statement (i.e., something which could not have been known at the time of the omission), id. (citing Zucker v. Quasha, 891 F.Supp. 1010, 1014 (D.N.J.1995)).
While some Defendants may raise an affirmative defense that the alleged omission concerned information of which it was unaware, and which it could not have discovered by the exercise of reasonable care, see Herman & MacLean, 459 U.S. at 382, 103 S.Ct. 683; AnnTaylor Stores, 807 F.Supp. at 998, Plaintiffs need not plead the converse—namely, that Defendants had the requisite knowledge. Accordingly, Plaintiffs have sufficiently pled their Section 11 claims.
B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief May Be Granted
1. Plaintiffs Have Standing
Section 11 creates a right of action for "any person" acquiring a security offered pursuant to a misleading registration statement. 15 U.S.C. § 77k(a). Nonetheless, Underwriters argue that only individuals who purchase in the initial offering (as opposed to the aftermarket) may assert a claim. See 6 Und. Mem. at 8; 6 Und. Reply at 4-8.
The Court of Appeals has now definitively held otherwise: "aftermarket purchasers who can trace their shares to an allegedly misleading registration statement have standing to sue under § 11 of the 1933 Act." Demaria v. Andersen, 318 F.3d 170, 178-79 (2d Cir.2003). Accord Lee v. Ernst & Young, LLP, 294 F.3d 969, 976-78 (8th Cir.2002); Joseph v. Wiles, 223 F.3d 1155, 1158 (10th Cir.2000); Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1079-82 (9th Cir.1999). See also Milman, 192 F.R.D. at 107 ("a secondary market purchaser who can trace her securities to a registered offering may bring suit under [section] 11"). Because Plaintiffs allege that their shares are traceable to the allegedly misleading registration statements, see, e.g., Cacheflow Compl. ¶¶ 12, 61, they unquestionably have standing.
2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent with Their Claims
"Although reliance ordinarily need not be pled to state a Section 11 claim, under Section 11(a) a plaintiff has no claim if `it is proved that at the time of such acquisition he knew of such untruth or omission.'" 2 Und. Mem. at 9 (quoting McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044, 1047 (2d Cir.1995)) (emphasis added). See also 15 U.S.C. § 77k(a) (providing that when a registration statement has a material misstatement or omission "any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may... sue [the following groups]" (emphasis added)). "Here," the Underwriters argue, "the pleadings allege on their face `common knowledge' of the alleged misrepresentation." 2 Und. Mem. at 9. "Because a court may properly dismiss a claim on the pleadings when an affirmative defense appears on its face, the Section 11 claims should be dismissed." Id. (quotation marks and citation omitted).
While the Underwriters are correct that Plaintiffs may plead themselves out of court by pleading information that defeats their legal claim because a complaint
The pertinent allegations to which the Underwriters refer in making their "common knowledge" argument are paragraphs thirty through thirty-three of the Master Allegation. See 2 Und. Mem. at 2 (quoting parts of MA ¶¶ 30-33). Those paragraphs state in full:
MA ¶¶ 30-33 (emphasis added). When read in context, there is no ambiguity as to who had "common knowledge" of the alleged scheme: the Underwriters and their customers. See id. This allegation is entirely consistent with the Plaintiffs' allegations that in 309 IPOs, Underwriters repeatedly required their customers who received IPO stock (e.g., T. Rowe Price's Developing Technology Fund, medium, and large institutional investors) to enter
In arguing that the Plaintiffs have pled themselves out of court, the Underwriters point to the allegation that institutional and retail investors knew about the scheme, and thus all retail investors must have known about the scheme. See 11/1/02 Tr. at 31 (David W. Ichel stating: "It says also retail investors."). However, this interpretation reads the words "retail investor" out of context. The sentence to which the Underwriters refer states: "Institutional and retail investors, who have received allocations in initial public offerings from various firms...." MA ¶ 30 (emphasis added). While it is true that Plaintiffs have pled that at least some retail investors knew about the scheme, this group is plainly limited to those investors who received stock from the Underwriters in the IPO.
The Underwriters' argument would only have merit if the Complaints had alleged that the scheme was common knowledge among all investors. But not only is there no such allegation, such an allegation would not be reasonable given that investors who buy stock in the initial allocation generally have more knowledge of the IPO process than investors who purchase stock in the aftermarket. Indeed, the SEC has long defended the importance of securities law on the ground that investors in the aftermarket have a much lower level of sophistication and knowledge about the IPO process than initial purchasers. See, e.g., SEC Special Study at 556 (arguing that disclosure provisions of the Securities Act are particularly important because "persons who bought in the after-market often [are] less sophisticated [than customers who received original allotments] and more susceptible to the allure of publicity and rumor about `hot issues.'"); SEC Hot Issues Report at 9 (same).
Nor does the allegation that the scheme was "common knowledge" among those required to participate in the scheme mean that every client knew about it.
3. Those Plaintiffs Who Sold Securities Above the Offering Prices Have No Damages and Therefore No Claim Upon Which Relief Can Be Granted
Defendants are correct, however, in arguing that all Section 11 claims brought by Plaintiffs who sold securities at prices above the offering price must be dismissed because these Plaintiffs have no damages. Section 11(e), entitled "Measure of Damages," provides in pertinent part that damages under Section 11 are:
15 U.S.C. § 77k(e) (emphasis added).
If a plaintiff has no conceivable damages under Section 11, she cannot state a claim upon which relief can be granted and her Section 11 claims must be dismissed. See Fed.R.Civ.P. 12(b)(6). See also In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1203-05 (9th Cir. 2002) (affirming dismissal under Rule 12(b)(6) because plaintiffs own pleadings revealed that he made a profit on the sale of his securities). Cf. Adair v. Kaye Kotts Assocs., No. 97 Civ. 3375, 1998 WL 142353, at *8 (S.D.N.Y. Mar. 27, 1998) ("For plaintiffs' Section 11 claim to be dismissed under Section 11(e) at this stage in the proceedings, defendants must conclusively establish that plaintiffs' damages are de minimus.") (citation omitted).
Plaintiffs urge a different interpretation of Section 11(e): the parenthetical phrase "not exceeding the price at which the security was offered to the public" applies not to the "amount paid for the security," but rather to the "difference." According to Plaintiffs, the damages are $50: the $200 purchase price minus the $150 sale price.
The proper interpretation of Section 11(e) appears to be a question of first impression in this Circuit, and perhaps the entire country.
As the Supreme Court has recently noted, "in all statutory construction cases, we begin with the language of the statute." Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002). "The first step `is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case,'" Id. (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997)), and if it does, "there is no reason to resort to legislative history." United States v. Gonzales, 520 U.S. 1, 6, 117 S.Ct. 1032, 137 L.Ed.2d 132 (1997) (citing Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992)).
The language of Section 11(e) is plain and unambiguous. The parenthetical requirement "not exceeding the price at which the security was offered to the public" is placed after the first term in the
Moreover, Plaintiffs' reading of Section 11(e) would make Section 11(g) entirely redundant. Section 11(g) provides that, "In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public." 15 U.S.C. § 77k(g). The term "amount recoverable" found in Section 11(g) is nothing more than a cap on damages. Section 11(e), which governs the calculation of damages, uses the term "difference" to define the amount recoverable, thus the terms are synonymous. Under the reading espoused by Plaintiffs, therefore, Sections 11(e) and 11(g) are redundant; requiring that the "difference" does not exceed the offering price in Section 11(e) would be exactly the same as capping the "amount recoverable" at the offering price in Section 11(g). But canons of construction demand that the parenthetical limitation in Section 11(e) imposes an additional restriction. See Nordic Vill., 503 U.S. at 36, 112 S.Ct. 1011; United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 99 L.Ed. 615 (1955); Montclair v. Ramsdell, 107 U.S. 147, 152, 2 S.Ct. 391, 27 L.Ed. 431 (1883); Washington Market Co., 101 U.S. at 115, 11 Otto 112; Muniz v. United States, 236 F.3d 122, 127 (2d Cir. 2001). The only plausible interpretation is to read the parenthetical limitation onto the "amount paid," which limits the class of possible plaintiffs under Section 11.
Because the statute is written in clear and unambiguous language, "judicial inquiry is complete." Marvel Characters, Inc. v. Simon, 310 F.3d 280, 290 (2d Cir.2002) (quoting Connecticut Nat'l Bank, 503 U.S. at 254, 112 S.Ct. 1146). See also Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) ("where the statutory language provides a clear answer, [our analysis] ends there"). However, because no court has previously passed on this issue, it is worth briefly noting that the legislative history of Section 11 also supports this conclusion.
At the time the Securities Act was passed in 1933, Section 11(e) read:
48 Stat. 74, 83 (1933). Under the initial embodiment of Section 11, therefore, the measure of damages was the "purchase price, or ... damages not exceeding such price...." H.R.Rep. No. 73-85, at 9. See also S.Rep. No. 73-47, at 5 (1933). This original formulation was based on the remedy of rescission. See Federal Securities
Nonetheless, Section 11(e) came under immediate criticism. In an influential piece worth quoting at length, then-Professor William 0. Douglas wrote of the original Section 11(e):
William O. Douglas & George E. Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 174-75 (1933) (footnotes omitted). See generally Harry Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933).
As a result of this criticism, Section 11(e) was amended by Section 206(d) of the Exchange Act, which implemented the current Section 11(e) by inserting just the language (slightly edited) that Douglas suggested.
John Hanna, The Securities Exchange Act of 193k, 23 Cal. L.Rev. 1, 8 (1934). See also 78 Cong. Rec. 8716 (1934) (Statement
Therefore, based on the plain language of Section 11 and its legislative history, a plaintiff who sells a security above its offering price has no cognizable damages under Section 11 of the Securities Act, notwithstanding the fact that such plaintiff may have actually suffered a loss.
IX. SECTION 15 CLAIMS
Section 15 states:
15 U.S.C. § 77o. Plaintiffs' Section 15 claims accuse Individual Defendants of controlling Issuer Defendants and thereby sharing liability for those Issuers' violations of Section 11. Defendants argue that
In order to establish a prima facie Section 15 claim, a plaintiff need only establish (1) control, and (2) an underlying violation of Section 11 (or Section 12(a)(2)).
Control is "`the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'" SEC v. First Jersey Sec, Inc., 101 F.3d 1450, 1472-73 (2d Cir.1996) (quoting 17 C.F.R. § 240.12b-2). A plaintiff is required to prove actual control, not merely control person status. See Cromer Fin. Ltd. v. Berger, 137 F.Supp.2d 452, 484 (S.D.N.Y. 2001). Naked allegations of control, however, will typically suffice to put a defendant on notice of the claims against her.
Here, Plaintiffs allege "[e]ach of the Individual Defendants was a control person of the Issuer with respect to the IPO [and] ... [a]s a result, the Individual Defendants are liable under Section 15 of the Securities Act for the Issuer's primary violation of Section 11 of the Securities Act." Cacheflow Compl. ¶¶ 72, 74. These paragraphs, in combination with the allegations supporting the Section 11 claims, provide notice to the Individual Defendants of the claims brought against them. Thus, the Section 15 claims are adequately pled.
X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND INDIVIDUAL DEFENDANTS
Plaintiffs have brought two distinct claims under Rule 10b-5, a regulation that makes it unlawful
17 C.F.R. § 240.10b-5.
Plaintiffs' first set of claims allege that all Defendants made material misstatements and omissions in the registration statements, either with an intentional or reckless state of mind, in violation of Rule 10b-5(b). See, e.g., Cacheflow Compl. ¶¶ 95, 99, 100, 101. Because material omissions and misstatements are an essential part of these claims, see 17 C.F.R. § 240.10b-5(b), they must satisfy the requirements of paragraph (b)(1). Similarly, because Plaintiffs must ultimately prove that the Defendants acted with scienter, these claims must also satisfy paragraph (b)(2). Rule 9(b) governs the remaining elements of these claims.
A. The Rule 10b-5 Claims for Material Misstatements Have Been Properly Pled
1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of the PSLRA—Particularity
Paragraph (b)(1) requires that for any claim asserting material misstatements or omissions, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).
a. Paragraph (b)(1)'s First Two Requirements Have Been Satisfied
Plaintiffs have explicitly pled that seven specific material misstatements and omissions contained in the registration statement are false or misleading.
Plaintiffs have satisfied the first two requirements of paragraph (b)(1). They have not generally averred that the registration statements were misleading. Nor are the proffered reasons speculative or vague. Rather, Plaintiffs have pointed to specific provisions of the statement and then provided reasonable explanations as to why they believe specific statements or omissions were false or misleading.
Although these requirements are easy to satisfy, it is worth remembering that Plaintiffs are bound by these pleadings throughout the course of the proceedings. Because Plaintiffs have specified the misstatements and omissions that they claim were misleading, the Court is able to evaluate whether they are material as a matter of law. See infra Part X.B.I.
In short, while nothing more is needed to satisfy these two requirements of paragraph (b)(1) on a motion to dismiss, the PSLRA has clearly served its purpose by putting the Defendants on notice of the specific misstatements and omissions that are at issue.
b. Paragraph (b)(1)'s Last Requirement Has Been Satisfied
On November 25, 2002, I directed Plaintiffs to identify which of their allegations were based on information and belief, and to identify for those allegations, the
In response to the 11/25/02 Order, Plaintiffs submitted a chart—almost one thousand pages in length—identifying which paragraphs of the 309 Complaints and the Master Allegations were based on information and belief, and the basis for those beliefs. Plaintiffs identified eleven categories of sources: (1) confidential sources; (2) registration statements and/or prospectuses; (3) SEC filings; (4) press releases; (5) media resources, including newspapers, magazines, Internet sources, and books; (6) analyst reports; (7) letters to Plaintiffs' counsel from Underwriter Defendants' counsel; (8) academic literature; (9) congressional testimony; (10) the Order Pursuant to New York General Business Law § 354 in In re An Inquiry by Eliot Spitzer, Attorney General of the State of New York, No. 02401522 (Sup.Ct. N.Y.Co. Apr. 8, 2002); and (11) the Consent Decree in SEC v. Credit Suisse First Boston Corp., No. 1:02 CV 00090, 2002 WL 479836 (D.D.C. Jan. 29, 2002).
Cacheflow Compl. at 1 (emphasis added).
For each of the Complaints, Plaintiffs identified approximately fifty para-based
What remains are a handful of paragraphs in the Complaints that allege, on information and belief, that Defendants made various material misstatements. See, e.g., id. ¶¶ 38, 43, 45, 48, 51-54. In addition, several allegations describing the unlawful scheme are critical to Plaintiffs' material misstatement allegations because, inter alia, Plaintiffs plead that Defendants made material misstatements simply by failing to disclose various aspects of the scheme. See, e.g., id. ¶¶ 34, 47, 55-57.
The requirements of the PSLRA must be read consistently with its purpose. See Barrett v. Van Pelt, 268 U.S. 85, 90-91, 45 S.Ct. 437, 69 L.Ed. 857 (1925). Congress enacted the information and belief pleading requirement because "[n]aming a party in a civil suit for fraud is a serious matter. Unwarranted fraud claims can lead to serious injury to reputation for which our legal system effectively offers no redress." H.R. Conf. Rep. 104-369, at 41. The purpose of the information and belief requirement—indeed, the purpose of all of the PSLRA's heightened pleading requirements—was to weed out meritless lawsuits at the pleading stage.
On this point the rule of the Second Circuit is clear: "paragraph (b)(1) does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based. Rather, plaintiffs need only plead with particularity sufficient facts to support those beliefs." Novak, 216 F.3d at 313-14 (emphasis in original). What facts and what level of particularity are sufficient to support a plaintiffs beliefs will vary from case to case. Under paragraph (b)(1), sufficiency and particularity are intricately related; the greater the basis for a belief, i.e., the more obviously sufficient plaintiffs' sources are, the less particularity is required in identifying them. Where an allegation stems from only one or two sources, however, it is important that they be identified with absolute particularity. The critical threshold is that the allegations must be made in a way that satisfies the court that plaintiffs charge of fraud is not "unwarranted."
For example, where a fraud allegation is founded on the uncorroborated allegations of one anonymous whistle-blower, it is necessary to uniquely identify that source, either by naming her or by describing her with such particularity as to satisfy the court that her information is credible. See id. at 314 (where allegations are based solely on information from confidential sources, "there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged."). Where, as here, there are many confidential sources who all say the same thing— that they were required to enter into Tiein Agreements—and those sources are corroborated by a vast number
Here, generic references to news articles, academic literature, and press releases are sufficiently particular to support the formation of Plaintiffs' beliefs because the substance of those beliefs—that the Defendants were perpetrating a massive fraud on the securities market in connection with most every IPO—was the stuff of daily headlines.
To ask Plaintiffs to show more than they have would be pointless, and to ask the Court to cross-reference every paragraph of every complaint against particular media reports, articles, letters, and other sources would be a waste of this Court's limited resources. Accordingly, Plaintiffs have satisfied the third requirement of paragraph (b)(1).
2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of the PSLRA—Scienter
Paragraph (b)(2) provides, "In any private action ... in which the plaintiff may recover money damages only on -proof that the defendant acted with a particular state of mind, the complaint shall ... state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). In most of the Complaints, Plaintiffs have brought Rule 10b-5(b) claims for material misstatements and omissions against all Defendants: Allocating Underwriters, Non-Allocating Underwriters, Individual Officers, and Issuers. Plaintiffs allege that each of these Defendants made the seven misstatements and omissions when signing the registration statement. Plaintiffs have satisfied the requirements of paragraph (b)(2) with respect to these alleged misstatements and omissions for each Defendant.
a. Allocating Underwriters
Plaintiffs have alleged that the Allocating Underwriters engaged in a scheme that could have only happened intentionally, and which they knew must be disclosed to the investing public: "the Allocating Underwriter Defendants created artificial demand for Cacheflow stock by conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of Cacheflow in the aftermarket and, in some instances, to make those purchases at pre-arranged, escalating prices (`Tie-in Agreements')." Cacheflow Compl. ¶ 3. Under this scheme, the Allocating Underwriters profited by "requiring] their customers to repay a material portion of profits obtained from selling IPO share allocations in the aftermarket through one or more of the following types of transactions:
Id. ¶ 4.
These allegations of the Allocating Underwriters' conduct give rise to a strong inference that they made each of the seven material misstatements and omissions with the required state of mind. The alleged conduct was so obviously manipulative (and material, see infra Part X.B.I) that it could not have been done inadvertently. That Allocating Underwriters then signed registration statements that plainly failed to disclose the scheme—in the face of an obvious duty to disclose, see infra Part X.B.2—gives rise to a strong inference that the misstatements were made intentionally for the purpose of defrauding the investing public.
Indeed, even if parts of the alleged scheme consisted of permissible stabilization practices (which is highly unlikely, see infra Part XI.B.l), the failure to disclose that conduct still would have evinced an intent to defraud. It is well-established that the SEC allows Underwriters to engage in certain acts of "stabilization." See 15 U.S.C. § 78(i)(a)(6) (granting the SEC the authority to promulgate rules that allow "pegging, fixing or stabilizing the price of [a] security"); 17 C.F.R. § 242.104 (establishing guidelines for acts of stabilization); see also Friedman v. Salomon/Smith Barney, Inc., No. 98 Civ. 5990, 2000 WL 1804719, at *3 (S.D.N.Y. Dec.8, 2000) ("Friedman I") (describing the history and law of stabilization), aff'd, 313 F.3d 796 (2d Cir.2002) ("Friedman II").
Samuel N. Allen, A Lawyer's Guide to the Operation of Underwriting Syndicates, 26 New Eng. L.Rev. 319, 349 (1991). While such acts manipulate the market by artificially inflating the price,
However, if an underwriter fails to disclose its stabilization practices, it is liable for making material misstatements and omissions in violation of Rule 10b-5(b), see 17 C.F.R. § 240.10b-5(b), because any act of manipulation—even a legal one—is material and must be disclosed. See Miller v. Steinbach, 268 F.Supp. 255, 274 (S.D.N.Y.1967); see also infra Part X.B.2.
The rule—of logic as much as of law—is that whenever a defendant engages in clearly manipulative practices, and then conceals those practices by making misstatements, the concealment is presumptively done with the intent to defraud.
b. Non-Allocating Underwriters
Because Plaintiffs cannot accuse the Non-Allocating Underwriters of requiring their customers to enter into any Tie-in Agreements and pay Undisclosed Compensation, the allegations that were sufficient to show a strong inference of scienter with respect to the Allocating Underwriters do not suffice with respect to the Non-Allocating Underwriters. For example, in the Cacheflow complaint, Plaintiffs allege that J.P. Morgan (H & Q) did not allocate any stock, see Cacheflow Compl. ¶¶ 14-16. J.P. Morgan, as a Non-Allocating Underwriter, argues that it neither knew of nor recklessly disregarded the conduct of the Allocating Underwriters who were engaged in the allegedly illegal scheme, and as a result, did not knowingly or recklessly make the first six misstatements and omissions, which related to the Tie-in Agreements and Undisclosed Compensation.
Nonetheless, for at least two reasons, Plaintiffs have made other allegations that are sufficient to give rise to a strong inference that the Non-Allocating Underwriters signed the registration statement with the requisite state of mind. First, it is significant that these Underwriters were listed on the registration statements as underwriters of the IPO, but then allegedly received no allocation. This circumstance is so unusual that it supports a strong inference that the Non-Allocating Underwriters either knew about, or acted with reckless disregard towards, the entire scheme of the Allocating Underwriters when signing the registration statement. Second, these Complaints cannot and need not be read in isolation. There are 309 Complaints against the fifty-five Underwriters in which Plaintiffs describe in painstaking detail the relationships between the various investment banks. See MA ¶¶ 66-85. Even if an Underwriter took no role in one allocation, it took an active role in others—and in those IPOs it is accused of committing illegal acts. For example, during the class period J.P. Morgan was either a Lead or Co-Lead Under
Similarly, in the Master Allegations, Plaintiffs allege that at least one customer was required or induced by J.P. Morgan to buy stock in the aftermarket at prices substantially above the IPO price in six IPOs.
c. Individual Defendants
On November 13, 2002,1 directed Plaintiffs to submit charts summarizing their allegations of scienter as to the Individual Defendants and Issuers in each of the 309 complaints. See Order, In re Initial Public Offering Sec. Litig., No. 21 MC 92 (S.D.N.Y. Nov. 13, 2002) ("11/13/02 Order"). As to the Individual Defendants, Plaintiffs were directed to identify (1) their title, (2) whether they signed the relevant registration statement, (3) the source of their knowledge of the alleged misrepresentations or omissions, (4) the number of shares of the relevant Issuer that they owned, (5) the number of shares sold, (6) the dates(s) of sale, and (7) the proceeds from the sale. In response, Plaintiffs submitted a chart on November 26, 2002.
Individual Title Signed Sourceof Shares Shares Sold Date (s) Proceeds Defendant Knowledge Owned Sold Robert W, President, Yes -Road Show 189,424 Approximately 8/16/2000 App rox imately Wrubel CEO and -Close 100,000 shares2/23/2001 $1,320,000 Board interaction (Including (Including Member with 10,000 in $720,000 in Underwriter Secondary Secondary Defendants Offering) Offering) prior to IPO 15 137, 138, 139, 140 Individual Defendant stock sales ¶ 22 ¶ 22 ¶ 142 ¶ 142 ¶ 142
Plaintiffs' allegations against the Individual Defendants who signed the registration statement
Nonetheless, Plaintiffs' Rule 10b-5(b) claims against the Individual Defendants may still satisfy paragraph (b)(2) of the PSLRA by alleging that the Individual Defendants had the "motive and opportunity" to make the alleged misstatements
Cacheflow Compl. ¶ 110(a)-(b). The Complaint estimates that NeSmith made the following amounts of money by selling Cacheflow stock during the class period: $1,308,840 (30,000 shares on December 1, 2000), $3,021,000 (65,000 shares between November 27-30, 2000), $8,480,000 (90,000 shares between August 21-22, 2000), and $4,799,000 (90,000 shares on June 16, 2000). See id. ¶ 110(b). Malcom and Johnson made similar amounts of money by selling their stock. See id.
The Individual Defendants, for purposes of this motion, do not challenge that they had the opportunity to know about the entire scheme and thereby make the alleged misstatements and omissions. Indeed, the Individual Defendants who signed the registration statements were intimately involved in the IPO process with the Underwriters (e.g., marketing the company and attending road shows).
The Second Circuit has explained that motive is properly alleged by stating "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." Ganino v. Citizens Util, Co., 228 F.3d 154, 170 (2d Cir.2000) (quoting Shields, 25 F.3d at 1130). Here, the ability to inflate the value of Cacheflow stock and make large personal financial gains constitutes the type of "concrete benefits" that could motivate any of the Individual Defendants to
As the Novak court held, the motive prong is "generally met when corporate insiders [are] alleged to have misrepresented to the public material facts about the corporation's performance or prospects in order to keep the stock price artificially high while they sold their own shares at a profit." 216 F.3d at 308.
i. The Motive Allegations Are Sufficient as to Sixty-Four Defendants
Plaintiffs' chart lists a total of 243 Individual Defendants.
The allegations are sufficient for different reasons. For example, for fifty-one of these (sixty-four) Defendants, Plaintiffs have identified the number of shares owned, the number of shares sold, the date of the sale, and the proceeds from the sale. So long as these trades were "unusual" (discussed infra Part X.A.2.c.ii) and took place reasonably soon after the IPO, the motive prong is plainly satisfied for pleading purposes.
On the other hand, for thirteen of these (sixty-four) Defendants, Plaintiffs have merely pled the amount of the proceeds without identifying the number of shares owned or sold. Nonetheless, because of the magnitude of the proceeds—ranging from $220,000 to $40,000,000—it is fair to infer that the sales were "unusual," and therefore satisfy the motive prong at this stage. But if discovery should reveal, for example, that a sale of $220,000 in proceeds is an insignificant percentage of a Defendant's holdings in the Issuer, such a Defendant is overwhelmingly likely to be dismissed at the summary judgment stage.
ii. The Motive Allegations Are Insufficient as to 161 Defendants
Plaintiffs' Rule 10b-5 claims must be dismissed against 161 Individual Defendants either because (i) Plaintiffs have made no allegations of motive (133 Defendants); (ii) Plaintiffs' allegations of motive are not sufficiently particular (twelve Defendants); or (iii) Plaintiffs' allegations of motive are insufficient as a matter of law (sixteen Defendants).
Plaintiffs have made no motive allegations with respect to 133 Individual Defendants. Fifty of these (133) Defendants owned no shares in the company and, of course, sold no shares. For those fifty Defendants, there was no allegation sufficient to show that the Defendant satisfied the motive prong of the "motive and opportunity" test. Accordingly, the Rule 10b-5 claims against these fifty Defendants must be dismissed. The other
Plaintiffs' Rule 10b-5 claims must be dismissed against an additional twelve Defendants because paragraph (b)(2) requires the plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. (emphasis added). For these twelve Defendants, the Complaints plead generally that they sold (or intended to sell) some of their stock, but the allegations lack any particulars, i.e., there is no information as to how many shares were sold, the percentage of that Defendant's holdings that were sold, the dates of the sales, or the proceeds from those sales. These allegations are not sufficiently particular to make a meaningful determination as to motive. Because of this, Plaintiffs have failed to allege that these Defendants acted with the required state of mind. Accordingly, the Rule 10b-5 claims for material misstatements against these twelve Defendants must also be dismissed.
Finally, Plaintiffs' Rule 10b-5 claims must be dismissed, as a matter of law, against sixteen Individual Defendants. Although Plaintiffs have identified sales with sufficient particularity as to these sixteen Defendants, the trades themselves are insufficient to permit an inference of motive because they do not evince unusual insider trading activity.
d. Issuers
The 11/13/02 Order also directed Plaintiffs to submit charts detailing their scienter allegations against the Issuer Defendants. Plaintiffs were directed to identify for each Issuer (1) the source of the Defendant's knowledge of the alleged misrepresentations and omissions, and (2) any stock-based acquisitions made by the Issuer after the IPO or any other acts by the Issuer that relied upon the allegedly artificially inflated value of the company. See 11/13/02 Order. In response, Plaintiffs again submitted charts on November 26, 2002.
Issuer Source of Knowledge for 10(b)-5 Claims Acquisitions/other acts which relied on inflated
value of the company
Cacheflow, Inc. Road Show Acquisitions:
Close interaction with Underwriter Defendants
prior to IPO
06/05/00 SpringBank Networks in a stock deal
valued at $180 million;
¶¶ 105, 106, 107,108 12/08/00 Entera in a stock deal valued at $440
million
Individual Defendant stock sales
¶ 110(b) ¶ 110(c)
For the same reasons discussed above with respect to the Individual Defendants, Plaintiffs have failed to plead strong circumstantial evidence that the Issuers engaged in conscious misbehavior or acted recklessly, sufficient to support a strong inference that they knowingly or recklessly made the specified misstatements and omissions in the registration statements.
There is again no dispute as to opportunity. The Issuers, acting through their corporate officers, were intimately involved in the IPO process with the Underwriters (e.g., setting the initial price of the IPO stock). See, e.g., Cacheflow Compl. ¶ 107 ("Once the Issuer Defendants had determined to retain the Underwriter Defendants with respect to the Issuer's IPO, the Issuer Defendants worked closely with the Underwriter Defendants in preparing the Registration Statement/Prospectus, as well as generating interest in the IPO by speaking with various, but selected, groups of investors."); see
To satisfy the motive prong, Plaintiffs again point towards "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." Ganino, 228 F.3d at 170 (quoting Shields, 25 F.3d at 1130). Specifically, the Plaintiffs allege:
MA ¶ 112. Likewise, the Complaint in Cacheflow alleges:
Cacheflow Compl. ¶ 110(c).
These benefits are sufficiently concrete and personal so as to provide a motive for Cacheflow to purposefully or recklessly make the specified material misstatements and omissions in the registration statement that artificially inflated the value of the company. See, e.g., In re Complete Mgmt. Inc. Sec. Litig., 153 F.Supp.2d 314, 328 (S.D.N.Y.2001) (allegation that defendants "sought to maintain the artificially high stock price so that the [company] might use that stock as currency for acquisitions... is a sufficiently concrete motive to support a strong inference of scienter.").
While the Issuers undoubtedly benefitted from the artificially inflated value of their companies, an argument also could be made that money that was rightfully theirs ended up in the pockets of the Underwriters and the select investors who received the initial allocations.
i. The Motive Allegations Are Sufficient as to 185 Issuers
Plaintiffs have pled facts sufficient to create an inference of motive, and thus scienter, with respect to 185 Issuers by alleging either (i) stock-based acquisitions (156 Issuers), or (ii) add-on offerings (twenty-nine Issuers).
The Plaintiffs have alleged with particularity—by specifying the information requested in the 11/13/02 Order—that 156 Issuers (including Cacheflow) used the alleged inflated value of their shares to make one or more stock-based acquisitions. This category also includes one Issuer that entered into a stock-based merger with another company (El Sitio, Inc.), and one case where a stock-based acquisition was announced but not necessarily consummated (Evolve Software, Inc.). These allegations are sufficient to show motive.
The motive allegations are also sufficient in twenty-nine cases which, though lacking particularized allegations about any acquisition (either by failing to allege an acquisition at all, or by only alleging one generally), contain allegations of add-on offerings. See Turinlab, 103 F.Supp.2d at 206 (holding that allegations that issuer "inflate[d] the stock price to maximize revenue from the secondary offering" was a "sufficient allegation of motive"); Duncan v. Fencer, No. 94 Civ. 0321, 1996 WL 19043, at *14 (S.D.N.Y. Jan. 18, 1996) (holding that issuer's public offering to raise capital stated a "motive theory [] sufficient to withstand a motion to dismiss."). Plaintiffs have alleged that these Issuers used the inflated value of their shares to support a secondary or tertiary offering to raise additional funds.
ii. The Motive Allegations Are Insufficient as to 116 Issuers126
Plaintiffs' Rule 10b-5 claims are dismissed against 116 Defendants either because
Plaintiffs have made no allegation of motive whatsoever with respect to ninetythree of the Issuers. In the Issuer chart, one column was titled "Acquisition/other acts which relied on inflated value of the company." This column was left entirely blank in these ninety-three cases.
Next, Plaintiffs have failed to meet the particularity requirement of paragraph (b)(2) with respect to an additional twenty-one Issuers. In these cases, Plaintiffs have pled that each Issuer made at least one acquisition—or in one case (Tickets.com), sought to make an acquisition—but the pleadings fail to provide any information regarding the number of shares transacted or monetary values of the acquisitions. These allegations fail the particularity requirement of paragraph (b)(2) and therefore must be dismissed.
Finally, with respect to two Issuers, Plaintiffs allege a single acquisition each— one with a monetary value, one without— that occurred in March 2002, far removed in time from the IPO. These two acquisitions are insufficient as a matter of law because they occurred after the close of the Class Period, when it is admitted that the allegedly fraudulent scheme was publicized. I am therefore unable to draw the inference that these Issuers capitalized on an artificially inflated stock price.
e. Summary
Plaintiffs have satisfied paragraph (b)(2) with respect to certain members of each class of Defendant by showing "strong circumstantial evidence" or "motive and opportunity." In each case, the following facts give rise to a strong inference of scienter:
3. The Material Misstatement Claims Adequately Plead the Remaining Elements of a Rule 10b-5 Claim: Transaction Causation, Loss Causation, Reliance and Damages
The remaining elements of a Rule 10b-5 claim are not required to be pleaded under the PSLRA. Nonetheless, in the Second Circuit, plaintiffs have long been required to apply Rule 9(b) to the pleading of all elements of a Rule 10b-5 claim. See Schlick, 507 F.2d at 379-80. Most recently, the Second Circuit reiterated that to plead a Rule 10b-5 claim based on material misstatements or omissions, "[a] plaintiff must allege" the following elements:
Caiola, 295 F.3d at 321 (emphasis and numbering added).
In 1995, Congress codified the loss causation requirement in the PSLRA:
15 U.S.C. § 78u-4(b)(4) (emphasis added). Congress did not, however, require loss causation to be pled.
[P]laintiffs may allege transaction and loss causation by averring both that they would not have entered the transaction but for the misrepresentations and that the defendants' misrepresentations induced a disparity between the transaction price and the true "investment quality" of the securities at the time of transaction.
In short, the rule of Suez Equity sets out the pleading requirements for all elements of a Rule 10b-5 claim that are governed by Rule 9(b) rather than by the PSLRA. Under Suez Equity, the hallmark of an adequately pled Rule 10b-5 claim is not necessarily a particularized allegation of direct causation, but rather the allegation of a coherent scheme to defraud that accounts generally for both the plaintiffs initial investment and, without any definitive supervening cause,
These cases allege "an industry-wide scam ... whereby people were put into IPOs, the stock was hyped, the insiders got out, and the little people who bought [the stock] on their broker's recommendations were left holding the bag. That's the guts of what these cases are coming down to." 9/26/01 Tr. at 17 (Statement of Jeffrey Barist, counsel to Deutsche Banc Alex. Brown). See also supra Part IV. The question, then, is whether the pleading of such a scheme adequately alleges
Suez Equity, 250 F.3d at 97-98 (emphasis in original).
a. Transaction Causation
The first prong of the Suez Equity test—transaction causation, or reliance
Plaintiffs here rely solely on the socalled "fraud on the market" theory of reliance.
Basic Inc. v. Levinson, 485 U.S. 224, 241-42, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (alterations in original) (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir. 1986)). Where such an "efficient market" exists, all public information is assumed to be rapidly assimilated and therefore is assumed to affect prices. Almost by definition, any misstatement or omission that affects the price of a security—especially one that incorrectly represents its value— is important to the reasonable investor. See infra Part X.B.I. Under the fraud on the market theory, an individual investor need not be aware of and rely explicitly on those alleged misstatements; it is sufficient that she bases her transactions on the market trends or securities prices that are altered by the fraud. In these cases, Plaintiffs specifically rely on the fraud on the market "presumption." See Cacheflow Compl. ¶ 76.
Defendants contend that the fraud on the market doctrine is inapplicable. See 2 Und. Mem. at 6-8. Defendants' primary contention is that the fraud on the market theory cannot apply to IPOs because, "at the outset and for a significant period following an IPO, the market for those securities lacks the ingredients that make a
The instant cases are different than this line of cases in at least two important respects. First, the cases at bar concern purchases in the aftermarket. Although much of the allegedly fraudulent conduct happened at the time of the IPO, that fraud is alleged to have altered the price of the securities in the aftermarket, not on the IPO. Prices in the aftermarket are set by the market, thus the fraud on the market theory may apply. Second, to the extent that the immediate aftermarket of an IPO might be inefficient, the line of cases beginning with Freeman in 1990 all pre-date the most recent hot issues market.
Moreover, whether the fraud on the market theory applies is not a pure question of law. Rather, that determination turns on whether the relevant market has the traits of an "efficient market" as described in Basic. Thus, the question of whether securities were traded in an efficient market should not be decided on a motion to dismiss. See RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F.Supp.2d 389, 404 (S.D.N.Y.2002) (deciding applicability of fraud on the market doctrine at summary judgment); Ellison, 36 F.Supp.2d at 643-44 ("At this [motion to dismiss] stage in the litigation, before discovery has even commenced, I am not prepared to hold as a matter of law that the allegations [that the fraud on the market doctrine applies] fail."); In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 475, 490 (S.D.N.Y.1989) ("Whether in fact Laser Arms traded in an efficient market is a question of fact. Therefore, resolution of that issue must await presentation of further proof at trial.").
Accordingly, because Plaintiffs have sufficiently pled the applicability of the fraud on the market presumption, they have adequately pled the element of transaction causation.
b. Loss Causation and Damages
Plaintiffs have also adequately pled loss causation and damages under the second prong of the Suez Equity test—that the alleged misrepresentations artificially inflated the market price of the relevant securities.
Plaintiffs have alleged, inter alia, a scheme to create "artificial demand," Cacheflow Compl. ¶ 3, by requiring investors seeking an allocation of a particular IPO to enter into Tie-in Agreements and purchase stock in the aftermarket, the mechanics of which are set forth in great detail. See, e.g., MA ¶¶ 36-54. The alleged result was to create "the false appearance of demand for the stock at prices in excess of the IPO price." Cacheflow Compl. ¶ 38. In addition, certain Underwriter Defendants are alleged to have used their analysts to issue fraudulent "Buy," "Strong Buy," or "Outperform" recommendations, id. U 56, the result of which was to "manipulate the aftermarket stock price," id. ¶ 55. In all, the alleged scheme "had the effect of inflating the price of the Issuer's common stock above the price that would have otherwise prevailed in a fair and open market." Id. ¶ 59.
Defendants' repeated insistence that Plaintiffs' scheme of loss causation is somehow "incoherent," misses the mark. See 2 Und. Mem. at 9-17. Relying on a particular reading of the Complaints, Defendants argue that relief may not be available to every Plaintiff under every allegation (e.g., Plaintiffs that purchased before the conflicted analyst reports were released cannot plead loss causation in relation to the analyst conflicts). While this may be one legitimate reading of the allegations, it is neither the best reading because it does not take the Complaints as pled, see supra Part VII.A.2, nor the one that must be applied on a motion to dismiss. Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in their favor, Plaintiffs have alleged one coherent scheme to defraud—characterized by Tiein Agreements and analyst conflicts, motivated by Undisclosed Compensation, and secured and concealed by lies and omissions—the entire purpose of which was to artificially drive up the price of the relevant securities. This is precisely the sort of scheme contemplated in Suez Equity as satisfying the loss causation requirement. Accordingly, Plaintiffs have adequately pled damages and loss causation.
B. Plaintiffs Have Stated Rule 10b-5 Claims for Material Misstatements and Omissions Upon Which Relief May Be Granted
Defendants next argue that the alleged misstatements or omissions fail to state a claim upon which relief may be granted because Defendants had no duty to disclose the facts about which they allegedly lied. This argument raises two related questions:
1. The Misstatements and Omissions Are Material
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (footnote omitted). The Supreme Court has "expressly adopt[ed]" this standard of materiality for claims arising under Section 10(b) and Rule 10b-5. Basic, 485 U.S. at 232, 108 S.Ct. 978. As the Court explained, "[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor." TSC Indus., 426 U.S. at 445, 96 S.Ct. 2126. "Materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information." Basic, 485 U.S. at 240, 108 S.Ct. 978.
The question of materiality is rarely amenable to disposition as a matter of law. Rather, it is considered a "mixed question of law and fact." TSC Indus., 426 U.S. at 450, 96 S.Ct. 2126. Materiality may be resolved as a matter of law "[o]nly if the established omissions are `so obviously important to an investor, that reasonable minds cannot differ,'" id. (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th Cir.1970)), or, "if the information is trivial ... or is `so basic that any investor could be expected to know it,'" Ganino, 228 F.3d at 161-62 (quoting Levitin v. PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir.1998)). Thus,
Ganino, 228 F.3d at 162 (quoting Goldman, 754 F.2d at 1067). See also Halperin v. EBanker USA.com. Inc., 295 F.3d 352, 357 (2d Cir.2002). Moreover, when evaluating misstatements in a registration statement or prospectus,
Demaria, 318 F.3d at 180 (quotation marks and citations omitted).
Under this stringent test, Plaintiffs plainly plead materiality. The eight
2. All Defendants Had a Duty to Disclose 148
In addition to being material, "a statement must also be misleading." Basic, 485 U.S. at 239 n. 17, 108 S.Ct. 978. Seealso 17 C.F.R. § 240.10b-5(b). Both untrue statements and omissions are evaluated "in the light of the circumstances under which they were made." 17 C.F.R. § 240.10b-5(b).
An "untrue statement," i.e., a misstatement that comprises a half-truth or a whole lie (as opposed to an omission), is always misleading because a speaker, having begun to speak, is obliged to do so completely and truthfully. See Caiola, 295 F.3d at 329-31. Thus, to the extent that Defendants are accused of misstatements, see 11/1/02 Tr. at 72-86,
"Silence [i.e., an omission], absent a duty to disclose, is not misleading under Rule 10b-5." Basic, 485 U.S. at 239 n. 17, 108 S.Ct. 978.
Time Warner, 9 F.3d at 267 (citations omitted). See also First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977) ("A misstatement or omission encompasses patently false statements. Silence, or omission to state a fact, is proscribed only in certain situations: first, where the defendant has a duty to speak, secondly, where the defendant has revealed some relevant, material information even though he had no duty (i.e., a defendant may not deal in half-truths).").
Thus, "[t]he initial inquiry in each case is what duty of disclosure the law should impose upon the person being sued." Chris-Craft Indus. Inc. v. Piper Aircraft Corp., 480 F.2d 341, 363 (2d Cir.1973). A duty to speak honestly may arise in a number of ways.
Here, Plaintiffs charge Defendants with making material misstatements and omissions to conceal and effectuate the scheme to defraud. The sufficiency of those claims turns on whether Defendants had a duty to disclose the underlying scheme. Defendants deny that they had any such duty, relying on a dense thicket of regulations.
Despite Defendants' invitation, it is not necessary to analyze the application of these rules and regulations at this stage. Where a defendant has engaged in conduct that amounts to "market manipulation" under Rule 10b-5(a) or (c), that misconduct creates an independent duty to disclose.
This result follows logically from the very purpose of the Exchange Act.
Chris-Craft, 480 F.2d at 363 (citations and internal quotation marks omitted) (second alteration in original). The "fundamental purpose" of the securities laws is "to substitute a philosophy of full disclosure for the philosophy of caveat emptor," Capital Gains Research Bureau, 375 U.S. at 186, 84 S.Ct. 275, and in order to "effectuate its remedial purpose," the securities laws must be applied "not technically and restrictively, but flexibly." Id. at 195, 84 S.Ct. 275. Where insiders conspire to frustrate the efficient function of securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered it up with lies and omissions. This conduct gives rise to liability under every section of Rule 10b-5.
Moreover, the duty to disclose falls on all parties aware of the manipulation, or who take advantage of it. Here, for example, it is unimportant that only Allocating Underwriters are directly liable for the market manipulation. It is enough that all Defendants—Underwriters, Issuers, and Individuals alike—are alleged to have known of or recklessly disregarded the manipulation, and to have used that knowledge to their advantage. See supra Part X.A.2. "Failure to disclose that market prices are being artificially depressed operates as a deceit on the market place and is an omission of a material fact." United States v. Regan, 937 F.2d 823, 829 (2d Cir. 1991) (quoting United States v. Charnay, 537 F.2d 341, 351 (9th Cir.1976)). This is equally true, of course, for the failure to disclose that market prices are being artificially inflated.
Plaintiffs have sufficiently alleged a claim of prohibited market manipulation. See infra Part XI. "This being so, [Defendants] possessed the affirmative duty ... to disclose this fact" to Plaintiffs.
But Defendants had a duty to disclose even under the regulatory scheme on which they rely. SEC Regulation S-K explains that with respect to "Underwriter's Compensation," a registration statement must disclose, among other things, "all other items considered by the National Association of Securities Dealers to be underwriting compensation...." 17 C.F.R. § 229.508(e).
The NASD is explicit when it comes to what it considers to be underwriting compensation:
NASD Rule 2710(c)(2) (emphasis added). The analysis ends there. According to long-held canons of construction, regulations must be read according to their plain meaning. See Bamhart, 534 U.S. at 450, 122 S.Ct. 941; see also Gibbs v. PFS Invs., Inc., 209 F.Supp.2d 620, 626 (E.D.Va.2002) (giving terms in NASD rules their plain meaning). All means all; any means any. There is no suggestion elsewhere in the NASD Rules that these words are somehow terms of art that should be given any meaning but the usual ones.
Thus, under any analysis, Defendants
* * * * * *
For the reasons stated above, Defendants' motions to dismiss the Rule 10b-5 claims are denied except in those instances where Plaintiffs have not sufficiently alleged scienter.
XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST THE ALLOCATING UNDERWRITERS
Plaintiffs' second set of Rule 10b-5 claims allege that "[t]he Allocating Underwriter Defendants employed devices, schemes and artifices to defraud and/or engaged in acts, practices and a course of business which operated as a fraud and deceit upon the Plaintiffs," Cacheflow Compl. ¶ 87, which mimics the provisions of Rule 10b-5(a) and (c).
Defendants challenge the market manipulation claim on the grounds that Plaintiffs have failed the pleading requirements of Rule 9(b) and the PSLRA, and have failed to state a claim under Rule 12(b)(6).
A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the PSLRA—Scienter
In order to comply with the pleading requirements of the PSLRA, it is only necessary to discuss paragraph (b)(2), which requires that plaintiffs "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
With respect to the market manipulation claim against the Allocating Underwriters, Plaintiffs have satisfied paragraph (b)(2) for a simple reason: They have alleged that the Allocating Underwriters "engaged in [the] deliberately illegal behavior" of requiring customers to enter into Tie-in Agreements in order to obtain IPO stock. Novak, 216 F.3d at 311.
Thus, under the PSLRA, Novak and case law long-established in this circuit, Plaintiffs' allegations that the Allocating Underwriters required their customers to enter into Tie-in Agreements—an allegation that must be accepted as true on a motion to dismiss—gives "rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
B. The Market Manipulation Claims Adequately State Claims Upon Which Relief May Be Granted
The elements of a Rule 10b-5 market manipulation claim are well-settled in this circuit.
Blech II, 961 F.Supp. at 582 (citing Ernst & Ernst, 425 U.S. at 199, 96 S.Ct. 1375). Accord In re Sterling Foster & Co., Inc. Sec. Litig., 222 F.Supp.2d 289, 303-04 (E.D.N.Y.2002). Because the PSLRA sets no special pleading requirements for market manipulation claims, the "deceptive or manipulative conduct" in a market manipulation claim need only be pled under Rule 9(b). See supra Part VII.B.2. Moreover, the "deceptive or manipulative conduct" in a market manipulation claim, while still requiring particularity, may be pled with less specificity than that required in claims alleging material misstatements or omissions.
In re Blech Sec. Litig., 928 F.Supp. 1279, 1290-91 (S.D.N.Y.1996) ("Blech I") (emphasis added).
The question, then, is whether Plaintiffs have adequately pled that the Allocating Underwriters engaged in "deceptive or manipulative conduct." Although Underwriters are certainly correct in pointing out that "to state a claim for market manipulation, a plaintiff must do more than merely allege the existence of a manipulative scheme," Scone, 1998 WL 205338, at *5, I have already held in the material misstatement context that Plaintiffs have alleged transaction and loss causation, which also include the elements of damages and reliance. See supra Part X.A.3. Because the material misstatements were made for the primary purpose of concealing and affecting the manipulative scheme alleged herein, that analysis applies with equal force in the market manipulation context.
1. Plaintiffs Adequately Plead "Deceptive or Manipulative Conduct"
Nonetheless, not all conduct that harms investors can be called "manipulative." The word "manipulative" is "virtually a term of art when used in connection with securities markets. It connotes intentional or wilful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst, 425 U.S. at 199, 96 S.Ct. 1375.
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). That fundamental purpose is "`[t]o insure to the multitude of investors the maintenance of fair and honest markets,' "Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir.1969) (quoting H.R.Rep. No. 73-1383, at 11 (1934)). This goal is achieved by "preventing] practices that impair the function of stock markets in enabling people to buy and sell securities at prices that reflect undistorted (though not necessarily accurate) estimates of the underlying economic value of the securities traded." Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857, 861 (7th Cir.1995) (Posner, C.J.).
"Market manipulation" is that conduct which runs afoul of the "fundamental objectives of the securities laws." Id. at 865. See also Blech II, 961 F.Supp. at 580. Indeed, the Supreme Court has explained:
Affiliated Ute, 406 U.S. at 151, 92 S.Ct. 1456 (footnote omitted). See also Zandford, 122 S.Ct. at 1903; Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). In the end, "[t]he gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators." Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir.1999).
Underwriters insist that their conduct does not constitute market manipulation under any of these descriptions; they argue that Plaintiffs' Tie-in Allegations attempt to criminalize
This argument radically mischaracterizes the Complaints.
While "price stabilization in contravention of SEC regulations is unlawful ... the
"Stabilization is that process whereby the market price of a security is pegged or fixed for the limited purpose of preventing or retarding a decline in contemplation of or during a public offering of securities." Exchange Act Release No. 34^163, available at 1948 WL 28675 (Sept. 16, 1948). Rule 104 of SEC Regulation M provides that "[stabilizing is prohibited except for the purpose of preventing or retarding a decline in the market price of a security." 17 C.F.R. § 242.104(b).
Throughout the Complaints and in the Master Allegations, Plaintiffs allege a sweeping scheme whose nature, purpose, and effect was to artificially inflate the price of newly-issued securities.
Because Plaintiffs have sufficiently alleged a scheme, the "nature, purpose, and effect" of which was to artificially raise stock prices above their true value, as opposed to "preventing or retarding a decline in the market price of a security," 17 C.F.R. § 242.104(b), they have adequately pled a market manipulation scheme upon which relief may be granted.
2. College Bound II I Is Not the Law
Notwithstanding the clear statements of the Supreme Court, the Second Circuit and a number of courts in this district, counsel for Underwriters, when asked to identify the "irreducible minimum of the elements that must be pled ... in a market manipulation claim," 11/1/02 Tr. at 88, identified an entirely different list:
Id. (Statement of David W. Ichel, counsel to J.P. Morgan Chase & Co., Hambrecht & Quist, LLC, Chase Securities, Inc., J.P. Morgan Securities, Inc., and Robert Fleming, Inc.). The Underwriters insist that the pleading requirements for Rule 10b-5 market manipulation claims were laid out by the Court of Appeals in United States v. Mulheren, 938 F.2d 364 (2d Cir. 1991), as interpreted by Chief Judge Mukasey in College Bound II:
1995 WL 450486, at *6 (quoting Mulheren,
First, College Bound II and Mulheren are expressly limited to cases of so-called "open-market manipulation." College Bound II, 1995 WL 450486, at *6.
Second, even if there were such a thing as open-market manipulation, the "elements" outlined in College Bound II have no basis in law. Mulheren,itself a criminal case, decided as a direct appeal from a jury verdict rather than on a motion to dismiss—never required that a defendant act with the "sole intent" to defraud, but instead "assume[d], without deciding ... that an investor may lawfully be convicted under Rule 10b-5 where the purpose of his transaction is solely to affect the price of a security." Mulheren, 938 F.2d at 368. The court therefore left open the question of whether a defendant who acts with, for example, the "primary" intent of affecting a stock price could be criminally liable for securities fraud. See id. Mulheren also refers to "profit or personal gain" as merely "[o]ne of the hallmarks of manipulation." Id. at 370. As for market domination, the court only "agreefd], as a general proposition, that market domination is a factor that supports a manipulation charge." Id. at 371 (emphasis added). And all of these "factors"—personal gain, market domination, economic reasonableness—were simply intended as examples of conduct from which "manipulative intent can be inferred." Id. at 371. Mulheren is not an opinion purporting to announce the elements for some new cause of action, but one of many Second Circuit opinions about scienter in market manipulation cases. Read properly, Mulheren adds little to the well-settled tests of scienter in this circuit:
Tellingly, Mulheren was decided over eleven years ago and College Bound II over seven years ago, yet those cases have been cited precisely once—in this or any other court—as establishing the elements of an open-market manipulation claim. See Nanopierce, 2002 WL 31819207, at *6 n. 10. And that case, far from holding that "courts enforce special [strict] pleading requirements when evaluating the adequacy of allegations in the market manipulation context," 4 Und. Mem. at 2, joined the many courts, cited earlier, holding that a market manipulation claim need only identify the "nature, purpose, and effect" of the allegedly fraudulent scheme. With all due respect, College Bound II, to the extent it purports to interpret and apply Mulheren, is simply not the controlling law of this circuit.
For all of the reasons set forth above, Plaintiffs have adequately pled a market manipulation claim against Allocating Underwriters on which relief may be granted. Defendants' motion to dismiss these claims are therefore denied.
XII. SECTION 20 CLAIMS
Plaintiffs' final set of claims assert that all of the Individual Defendants are liable under Section 20 of the Exchange Act. Section 20(a) states, in pertinent part:
15 U.S.C. § 78t(a) (emphasis added). Every Individual Defendant accused of secondary liability under Section 20 is also accused of primary liability under Rule 10b-5. The Section 20 claims accuse the Individual Defendants of controlling the Issuers at the time the Issuers allegedly violated Rule 10b-5. See, e.g., Cacheflow Compl. ¶ 122 ("The Individual Defendants acted as controlling persons of the Issuer within the meaning of Section 20(a) of the Exchange Act as alleged herein and culpably participated in the wrongdoing."). Thus, Plaintiffs seek to hold Individual Defendants liable both for their own alleged misconduct, and for the alleged misconduct of the companies they controlled.
As with control person liability under Section 15 of the Securities Act, see supra Part IX, the two threshold questions are: (1) Does Rule 8 or Rule 9(b) apply to the pleading of a Section 20 claim, i.e., is Section 20 a fraud claim?; and (2) does the PSLRA apply to the pleading of a Section 20 claim, i.e., does Section 20 require proof (and thus, under paragraph (b)(2), pleading) of scienter? In order to answer these questions, it is necessary to explore the elements of a Section 20(a) claim.
The Supreme Court has never delineated the elements of a Section 20(a) claim. While the various courts of appeals agree that "control" and an underlying violation of the securities laws by the controlled entity are required elements, there is deep
The Second Circuit has yet to definitively answer this question. However, the Second Circuit has held that in order to prove a Section 20 claim, "a plaintiff must show (1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) `that the controlling person was in some meaningful sense a culpable participant' in the primary violation." Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998) (quoting First Jersey, 101 F.3d at 1472). Defendants argue that Plaintiffs have failed to adequately plead the elements of control and culpable participation (and, of course, that there was no underlying violation of the Exchange Act). See Iss. Mem. at 60-65.
Control" in Section 20 has the same meaning as in Section 15, and has been adequately alleged. See supra Part IX. See also 17 C.F.R. § 240.12b-2 (defining control as "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."). The Rule 10b-5 claims against Issuers, who are identified in the Section 20 claims as the primary violators, have been adequately pled. See supra Part X and Part B of Appendix 5 to this Opinion. Thus the critical question is what is meant by "culpable participation"—a term that does not appear anywhere in Section 20(a).
Because some courts have assumed that "culpable participation" requires proof of a certain state of mind,
Given the reliance of courts on this assumption, it is interesting to trace the development of Section 20(a) jurisprudence
Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en bane) (emphasis added). See also Gordon v. Burr, 506 F.2d 1080, 1086 (2d Cir.1974).
In 1980, however, the Second Circuit suggested that there was no scienter (as opposed to culpable participation) element to Section 20(a) when it held that allegations of control, coupled with an underlying violation, are sufficient to state a claim. See Marbury Mgmt, 629 F.2d at 716. According to the Marbury Management court, good faith could only be asserted as an affirmative defense. Id.
Nonetheless, after 1980, district courts were divided on whether Section 20(a) contained an element of scienter depending on whether they "followed" Lanza and Gordon, or Marbury Management
In 1996, the Court of Appeals attempted to reconcile its prior precedent by holding that,
First Jersey, 101 F.3d at 1472 (emphasis added) (citations and quotation marks omitted). According to the First Jersey court, once the prima facie case has been established, the burden shifts to defendants to demonstrate good faith. Id at
Although many district courts understood First Jersey to conclusively require plaintiffs to plead scienter, see, e.g., Mishkin, 1998 WL 651065, at *22-24, the Court of Appeals has revisited Section 20(a) three times since 1996, see Boguslavsky, 159 F.3d at 720; Ganino, 228 F.3d at 170; Suez Equity, 250 F.3d at 101, but never addressed the meaning of "culpable participation." Interestingly, whenever the Second Circuit has applied its own test, it has essentially rendered the "culpable participation" requirement meaningless.
101 F.3d at 1473 (emphasis added). Most recently in Suez Equity, on appeal from a motion to dismiss, the court reasoned:
The holding that Section 20(a) has no scienter element is also commanded by the congressional intent underlying Section 20(a), namely the desire to hold "a person who controls a person subject to the act or a rule or regulation thereunder ... liable to the same extent as the person controlled unless the controlling person acted in good faith and did not induce the act in question." S.Rep. No. 73-792, at 22 (emphasis added); H.R. Conf. Rep. No. 73-1383, at 26 (1934) (same). As Justice Douglas explained, dissenting from a denial of certiorari,
As the Supreme Court explained in Ernst & Ernst,
425 U.S. at 207, 96 S.Ct. 1375 (citations omitted). For example, while Section 11 provides for absolute liability on the part of issuers, those who assist the issuers (ie., experts) may raise the affirmative defense that their conduct was not negligent.
Id. at 208, 96 S.Ct. 1375 (emphasis added) (alterations in original, citations omitted). Similarly, " § 20, which imposes liability upon controlling persons for violations of the Act by those they control, exculpates a defendant who acted in good faith and did not induce the act constituting the violation." Id. at 209 n. 28, 96 S.Ct. 1375 (emphasis added; quotation marks, alterations, and citations omitted). Under both sections, the burden is on defendants (other than issuers under Section 11) to "exculpate" themselves by proving either good faith or due diligence.
In sum, scienter is not an essential element of a Section 20(a) claim such that a "plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2).
Therefore, because Plaintiffs have adequately alleged control, see supra Part IX, the Individual Defendants' motion to dismiss the Section 20(a) claims is denied except as to those Individual Defendants alleged to have controlled Issuer Defendants previously dismissed under Rule 10b-5, see supra Part X.A.2.d.ii.
CONCLUDING MATERIAL
XIII. LEAVE TO REPLEAD
When a cause of action is dismissed because of pleading deficiencies, the usual remedy is to permit plaintiff to replead its case. See Fed.R.Civ.P. 15(a) ("leave [to replead] shall be freely given when justice so requires."); see also Woman v. Davis, 371 U.S. 178, 183, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). This policy is especially appropriate in the context of claims dismissed under Rule 9(b) because the law favors resolving disputes on their merits. See Acito, 47 F.3d at 54-55; Luce, 802 F.2d at 56-57.
Nonetheless, not every securities fraud claim that is dismissed lends itself to repleading. There are two instances in particular where granting leave to replead may be inappropriate. First, where a claim is dismissed as a matter of law because it fails to state a claim, repleading would be "futile." Lucente v. International Bus. Mach. Corp., 310 F.3d 243, 258 (2d Cir.2002) ("An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed. R.Civ.P. 12(b)(6)") (citing Dougherty v. North Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir.2002)). See also Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir.1990). Second, where leave to amend or replead has been repeatedly granted, it may be appropriate to deny leave. Although the Rules eschew "technical forms of pleading," Fed.R.Civ.P. 8(e)(1), where pleading deficiencies have been identified a number of times and not cured, there comes a point where enough is enough. See, e.g., Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706, at *4 (S.D.N.Y. Jan.17, 2003) ("this is the plaintiffs third complaint... [t]hree bites at the apple is enough"); see also In re Am. Express Co. Shareholders Litig., 39 F.3d 395 (2d Cir. 1994); Fisher v. Offerman & Co., Inc., No. 95 Civ. 2566, 1996 WL 563141, at *9 (S.D.N.Y. Oct.2, 1996); In re Hyperion Sec. Litig., No. 93 Civ. 7179, 1995 WL 422480, at *8 (S.D.N.Y. July 14, 1995), affd sub nom., Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir.1996).
A number of Plaintiffs' claims here have been dismissed because they fail to state a claim as a matter of law. See supra Parts VIII.B.3 (dismissing Section 11 claims where Plaintiffs sold above the offering price); IX (dismissing certain Section 15 claims); X.A.2.d.ii (dismissing Rule 10b-5 claims against Issuers who only made acquisitions after a certain date); X.A.2.c.ii (dismissing Rule 10b-5 claims
Moreover, many of the claims dismissed by today's Order should not be repled, even though they have been dismissed under Rule 9(b), because Plaintiffs have had numerous opportunities to amend their pleadings. Over a year ago, in accordance with this Court's rules, Defendants first notified Plaintiffs of perceived deficiencies in the Complaints. See 1/22/02 Letter from Gandolfo V. DiBlasi, Underwriters' Liaison Counsel, to Plaintiffs; 1/29/02 Letter from Nina (Nicki) Locker & Laurie B. Smilan, writing on behalf of Issuer and Individual Defendants, to Plaintiffs. When those letters were exchanged, Plaintiffs had not yet filed their Consolidated Amended Class Action Complaints; together, those letters identified most, if not all, of the arguments ultimately raised by Defendants in the instant motions. In April 2002, Plaintiffs filed their Amended Complaints, presumably taking into consideration the objections leveled by Defendants three months earlier.
Nonetheless, in an attempt to limit the scope of these motions to dismiss to issues that could not be cured by simple repleading, I again directed Defendants to identify perceived pleading deficiencies in the Amended Complaints. As I explained at the time:
5/23/02 Tr. at 33-34. Thus, Defendants were asked to provide Plaintiffs with a "table of contents" of their contemplated motions to dismiss. Id. at 34. Defendants did just that approximately one week later. See 5/31/02 Letter from Gandolfo V. DiBlasi to Plaintiffs; 6/4/02 Letter from Jack C. Auspitz, Issuer and Individual Defendants' Liaison Counsel, to Plaintiffs. These two letters identified a number of shortcomings. As a result, Plaintiffs were again permitted to amend their Complaints in December 2002, two months after the instant motions were fully submitted and argued. See In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31894620 (S.D.N.Y. Dec.27, 2002). Plaintiffs were fully aware of the grounds raised in the motions to dismiss when they filed their most recent amendments.
Although pleading is not a "game of skill in which one misstep by counsel may be decisive to the outcome," Conley, 355 U.S. at 48, 78 S.Ct. 99, where there have been several missteps, even after one's adversary has played her hand, the game is up. In a number of instances, Plaintiffs have failed to plead essential material despite repeated opportunities to do so; there is no good reason to provide yet another opportunity. See supra Part X.A.2.d.ii. (dismissing Rule 10b-5 claims against Issuers for whom Plaintiffs made no allegation of scienter); Part X.A.2.c.ii. (dismissing Rule 10b-5 claims against Individual
Plaintiffs may replead, however, claims that have been dismissed for lack of the required particularity. Specifically, Plaintiffs may only replead the following claims:
If Plaintiffs are able to successfully replead the Rule 10b-5 claims, they may be able to revive certain of the Section 20 claims. Leave to replead all other claims is denied.
XIV. CONCLUSION
Because Plaintiffs have alleged that Defendants failed to adhere to a "philosophy of full disclosure" and engaged in a scheme to manipulate the securities markets, the motions to dismiss are, for the most part, denied. The Underwriter Defendants' motions to dismiss are granted in part and denied in part and the Issuers and Individual Defendants' motions to dismiss are granted in part and denied in part. As a result, discovery may now proceed. See 15 U.S.C. § 78u-4(3)(B). A conference is scheduled for March 5 at 11 a.m.
TABLE OF AUTHORITIES FEDERAL CASES 325, 365, Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir.1995)...............................397 Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467 (7th Cir.1999)..............326 Adair v. Kaye Kotts Assocs., No. 97 Civ. 3375, 1998 WL 142353 (S.D.N.Y. Mar. 27, 1998).................................................................... 347,351 Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972)...................... 382, 387 Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir.2002)...............................332 Alter v. DBKLM, Inc., 840 F.Supp. 799 (D.Colo.1993) ................................383 American Home Assurance Co. v. Republic Ins. Co., 984 F.2d 76 (2d Cir.1993) ..........326 APAC Teleservices, Inc., Sec. Litig., No. 97 Civ. 9145, 1999 WL 1052004 (S.D.N.Y. Nov.19,1999) .................................................................363 Aquino v. Trupin, 833 F.Supp. 336 (S.D.N.Y.1993)...................................374 Artuz v. Bennett, 531 U.S. 4 (2000).................................................340
Atchinson v. District of Columbia, 73 F.3d 418 (D.C.Cir.1996).........................323 AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202 (2d Cir.2000)......................374 Badaracco v. Commissioner of Internal Revenue, 464 U.S. 386 (1984)..................340 Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677 (7th Cir.1992).................325 Barnes v. Osofsky, 373 F.2d 269 (2d Cir.1967) .......................................344 BarnhaH v. Sigmon Coal Co., 534 U.S. 438 (2002)............................... 348, 383 Barrett v. Van Pelt, 268 U.S. 85 (1925) .............................................358 375, 377, 379, 380, Basic Inc. v. Levinson, 485 U.S. 224 (1988)..................................... passim Bastian v. Petren Res. Corp., 892 F.2d 680 (7th Cir.1990).............................374 Baxter v. A.R. Baron, No. 94 Civ. 3913, 1996 WL 586338 (S.D.N.Y. Oct.ll, 1996).....386 Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46 (2d Cir.1987)...................329 Beecherv. Able, 435 F.Supp. 397 (S.D.N.Y.1975).....................................351 Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523 (2d Cir.1985)..................324 Berwecky v. Bear, Steams & Co., 197 F.R.D. 65 (S.D.N.Y.2000)........................376 Billet v. Storage Tech. Corp., 72 F.R.D. 583 (S.D.N.Y.1976)............................339 Bloor v. Carro, Spanbock, Londin, Rodman & Pass, 754 F.2d 57 (2d Cir.1985)...........372 Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir.1998).............................. 393, 395 Bontkoivski v. Smith, 305 F.3d 757 (7th Cir.2002)....................................323 Brady v. Anderson, No. 97 Civ. 2154, 1998 U.S. Dist. LEXIS 20774 (C.D.Cal. May 27, 1998)......................................................................355 Brown v. Enstar Group, Inc., 84 F.3d 393 (11th Cir.1996).............................393 370, 372, Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir.2002)............................. 373, 380 Cammerv. Bloom, 711 F.Supp. 1264 (D.N.J.1989)....................................377 Caremark, Lie. v. Coram Healthcare Corp., 113 F.3d 645 (7th Cir.1997).................374 Carpenter v. Harris, Upham & Co., 594 F.2d 388 (4th Cir.1979)........................393 Castellano v. Young & Rubicarn, Inc., 257 F.3d 171 (2d Cir.2001 .......................374 Cayman Exploration Corp. v. United Gas Pipe Line Co., 873 F.2d 1357 (10th Cir.1989) .....................................................................327 Central Bank of Denver, N.A v. First Interstate Bank of Denver, N.A, 511 U.S. 164 (1994)........................................................................299 Chalverus v. Pegasystems, Inc., 59 F.Supp.2d 226 (D.Mass.1999).......................395
Chamberlain Mach. Works v. United States, 270 U.S. 347 (1926).......................325 Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir.2002)...................... 331, 347 Chance v. Armstrong, 143 F.3d 698 (2d Cir.1998) ....................................331 Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir.1970)..................... 348, 380 Chiarella v. United States, 445 U.S. 222 (1980) ................................. 381, 384 Chickasaw Nation v. United States, 534 U.S. 84 (2001) ...............................349 Chill v. General Elec. Co., 101 F.3d 263 (2d Cir.1996).................................365 Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.1973)........ 381, 382 Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001)...............................338 Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir.1992).............................375 City of Painesville, Ohio v. First Montauk Fin. Corp., 178 F.R.D. 180 (N.D.Ohio 1998).........................................................................386 City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir.2001)............... 333, 335 322, 323, 331, Conley v. Gibson, 355 U.S. 41 (1957)....................................... 341, passim Conn v. GATX Terminals Corp., 18 F.3d 417 (7th Cir.1994)...........................324 Connecticut Nat. Bank v. Germain, 503 U.S. 249 (1992) ......................... 348, 349 Cortec Indus., Inc. v. Sum Holding LP., 949 F.2d 42 (2d Cir.1991).....................347 Cramer v. General Tel. & Elecs. Corp., 582 F.2d 259 (3d Cir.1978)......................329 Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir.1969)...................387 Credit & Fin. Corp. v. Warner & Swasey Co., 638 F.2d 563 (2d Cir.1981)................327 Cromer Fin. Ltd. v. Berger, 137 F.Supp.2d 452 (S.D.N.Y.2001).........................352 Danis v. USN Communications, Inc., 189 F.R.D. 391 (N.D.Ill.1999)....................376 Bonis v. USN Communications, Inc., 73 F.Supp.2d 923 (N.D.Ill.1999)..................339 Davis v. A.G. Edwards & Sons, Inc., 823 F.2d 105 (5th Cir.1987).......................324 Degulis v. LXR Biotechnology, Inc., 928 F.Supp. 1301 (S.D.N.Y.1996) ..................343 Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204, 1997 WL 20832 (S.D.N.Y. Jan.21,1997)..................................................................343 Demarco v. Edens, 390 F.2d 836 (2d Cir.1968).......................................352 DeMaria v. Andersen, No. 01-7505, 2003 WL 174543 (2d Cir. Jan.28, 2003)......... 344, 380 Denny v. Barber, 576 F.2d 465 (2d Cir.1978) ........................................326 Dietrich v. Bauer, 76 F.Supp.2d 312 (S.D.N.Y.1999)..................................386
DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.1990).................................327 Dirks v. SEC, 463 U.S. 646 (1983)..................................................384 DiVittorio v. Equidyne Extractive Indus., 822 F.2d 1242 (2d Cir.1987)..................325 Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706 (S.D.N.Y. Jan.17, 2003)..................................................................397 Dorchester Investors v. Peak Trends Trust, No. 99 Civ. 4696, 2003 WL 223466 (S.D.N.Y. Feb.3, 2003)..........................................................352 Dougherty v. North Hempstead Bd. of Zoning Appeals, 282 F.3d 83 (2d Cir.2002).....397 Duncan v. Pencer, No. 94 Civ. 0321, 1996 WL 19043 (S.D.N.Y. Jan. 18, 1996)............370 Eckstein v. Balcor Film Investors, 8 F.3d 1121 (7th Cir.1993) .........................376 Ellison v. American Image Motor Co., 36 F.Supp.2d 628 (S.D.N.Y.1999)........... 338, 377 295, 298, 299, 385 387 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).................................passim Federal Deposit Ins. Corp. v. La Antillana, S.A, No. 88 Civ. 2670, 1990 WL 58914 (S.D.N.Y. May 4,1990).........................................................327 Feeney v. Mego Mortgage Corp., 45 F.Supp.2d 1356 (N.D.Ga.1999).....................355 Fellman v. Electro Optical Sys. Corp., No. 98 Civ. 6403, 2000 WL 489713 (S.D.N.Y. Apr.25, 2000)..................................................................377 Felton v. Walston & Co., 508 F.2d 577 (2d Cir.1974)..................................326 Ferber v. Travelers Corp., 785 F.Supp. 1101 (D.Conn.1991)............................363 Ferguson v. Neighborhood Hous. Servs., 780 F.2d 549 (6th Cir.1986) ...................324 First Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891 (10th Cir.1992)............393 First Virginia Bankshares v. Benson, 559 F.2d 1307 (5th Cir.1977).....................381 Fisher v. Offerman & Co., Inc., No. 95 Civ. 2566, 1996 WL 563141 (S.D.N.Y. Oct.2, 1996).........................................................................397 Flickinger v. Harold C. Brown & Co., 947 F.2d 595 (2d Cir.1991).......................324 Foman v. Davis, 371 U.S. 178 (1962)...............................................397 Freeman v. Laventhol & Horwath 915 F.2d 193 (6th Cir.1990)........................376 Friedlander v. Nims, 755 F.2d 810 (11th Cir.1985)...................................327 Friedman v. Salomon/Smith Barney, Inc., No. 98 Civ. 5990, 2000 WL 1804719 (S.D.N.Y. Dec.8, 2000) (`Friedman I")...........................................360 Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir.2002) ("Friedman II") .................................................................... 360,389 G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir.1981)........................393
Gabriel Capital, L.P. v. Natwest Fin. Inc., 122 F.Supp.2d 407 (S.D.N.Y.2000)....... 352, 397 Gabriel Capital, L.P. v. Natwest Fin. Inc., 177 F.Supp.2d 169 (S.D.N.Y.2001)............310 364, 368, 379, 384, Ganino v. Citizens Util. Co., 228 F.3d 154 (2d Cir.2000)...............................395 General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074 (7th Cir.1997).....328 General Elec. Co. v. Joiner, 522 U.S. 136 (1997)......................................347 Gibbs v. PFS Invs., Inc., 209 F.Supp.2d 620 (E.D.Va.2002)............................383 Glazer v. Formica Corp., 964 F.2d 149 (2d Cir.1992)..................................381 Global Intellicom, Inc. v. Thomson Kernaghan & Co., No. 99 Civ. 342, 1999 WL 544708 (S.D.N.Y. July 27, 1999)..................................................386 Goldman v. Belden, 580 F.Supp. 1373 (W.D.N.Y.1984)................................365 Goldman v. Belden, 754 F.2d 1059 (2d Cir.1985)................................ 365, 379 Good v. Zenith Elecs. Corp., 751 F.Supp. 1320 (N.D.Ill.1990) ..........................377 Gordon v. Burr, 506 F.2d 1080 (2d Cir.1974) ........................................394 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir.1999).............................333 Gruber v. Price Waterhouse, 776 F.Supp. 1044 (E.D.Pa.1991)..........................376 Gryl v. Shire Pharm. Group PLC, 298 F.3d 136 (2d Cir.2002)..........................347 Guidry v. U.S. Tobacco Co., 188 F.3d 619 (5th Cir.1999) ......................... 327, 328 Gurary v. Winehouse, 190 F.3d 37 (2d Cir.1999).....................................387 Gustafson v. Alloyd Co., 513 U.S. 561 (1995).........................................299 H.L. Federman & Co. v. Greenberg, 405 F.Supp. 1332 (S.D.N.Y.1975)...................381 Hade v. Capozzi, No. 91 Civ. 5897,1996 WL 426394 (S.D.N.Y. July 30, 1996) ............375 Halperin v. eBanker USA.COM. Inc., 295 F.3d 352 (2d Cir.2002) ......................379 Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774 (7th Cir.1994)...................324 Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873 (7th Cir.1992)...................393 Health-Chem Corp. v. Baker, 915 F.2d 805 (2d Cir.1990)..............................397 Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir.2001) (en banc)..........................332 Henslee v. Union Planters Nat. Bank & Trust Co., 335 U.S. 595 (1949).................397 336, 343, Herman & MacLean v. Huddleston, 459 U.S. 375 (1983)......................... 344, 347 Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir.1999)......................344 Higgs v. Carver, 286 F.3d 437 (7th Cir.2002).........................................324
High View Fund, L.P. v. Hall, 27 P.Supp.2d 420 (S.D.N.Y.1998).......................371 Hishon v. King & Spalding, 467 U.S. 69 (1984)......................................323 Hollingerv. Titan Capital Corp., 914 F.2d 1564 (9th Cir.1990) (en banc)................393 Hotel Constructors, Inc. v. Seagrave Corp., 574 F.Supp. 384 (S.D.N.Y. 1983).............356 Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999).................................349 In reAccelr8 Tech. Corp. Sec. Litig., 147 F.Supp.2d 1049 (D.Colo.2001).................374 In re Adams Golf, Inc. Sec. Litig., 176 F.Supp.2d 216 (D.Del.2001).....................343 330 333 In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir.1999)...........................'. 335 In re Aetna, Inc. Sec. Litig., 34 F.Supp.2d 935 (E.D.Pa.1999)..........................355 In re Allaire Corp. Sec. Litig., 224 F.Supp.2d 319 (D.Mass.2002).................. 330, 355 In re Am. Express Co. Shareholders Litig., 39 F.3d 395 (2d Cir.1994)...................397 In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953 (2d Cir.1993)...................375 338 343 In re Ann.Taylor Stores Sec. Litig., 807 F.Supp. 990 (S.D.N.Y.1992)...................' .344 In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir.1989) ........................365 386, 389, In re Blech Sec. Litig., 928 F.Supp. 1279 (S.D.N.Y.1996) ("Blech I")....................390 374, 385, In re Blech Sec. Litig., 961 F.Supp. 569 (S.D.N.Y.1997) ("Blech II")....................387 In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201 (9th Cir.2002)................347 In re Chambers Dev. Sec. Litig., 848 F.Supp. 602 (W.D.Pa.1994).......................340 In re Chaus Sec. Litig., No. 88 Civ. 8641, 1990 WL 188921 (S.D.N.Y. Nov.20, 1990).....338 In re CINAR Corp. Sec. Litig., 186 F.Supp.2d 279 (E.D.N.Y.2002) .....................393 In re Citisource, Inc. Sec. Litig., 694 F.Supp. 1069 (S.D.N.Y.1988) .....................394 In re College Bound Consol. Litig., No. 93 Civ. 2348,1994 WL 172408 (S.D.N.Y. May 4,1994) ("College Bound I")....................................................338 In re College Bound Consol. Litig., No. 93 Civ. 2348 and 94 Civ. 3033, 1995 .. 386, 390, 391, WL 450486 (S.D.N.Y. July 31,1995) ("College Bound IF).......................passim In re Complete Mgmt. Inc. Sec. Litig., 153 F.Supp.2d 314 (S.D.N.Y.2001) ...............369 In re Control Data Corp. Sec. Litig., 933 F.2d 616 (8th Cir.1991).......................377 In re Credit Suisse First Boston Corp. Sec. Litig., No. 97 Civ. 4760, 1998 WL 734365 (S.D.N.Y. Oct.20, 1998).........................................................379 In re Deutsche Telekom AG Sec. Litig., No. 00 Civ. 9475, 2002 WL 244597 (S.D.N.Y. Feb.20,2002)............................................................. 363,393
In re Enron Corp. Sec., Derivative & ERISA Litig., MDL No. 1446, 235 F.Supp.2d 549 (S.D.Tex.2002).............................................................386 In re Equimed, Inc. Sec. Litig., No. 98-CV-5374, 2000 WL 562909 (E.D.Pa. May 9, 2000).........................................................................357 In re First Merchs. Acceptance Corp. Sec. Litig., No. 97-C2715, 1998 WL 781118 (N.D.Ill. Nov.4,1998)...........................................................339 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir.1994) (en banc)...................328 In re Green Tree Fin. Corp. Stock Litig., 61 F.Supp.2d 860 (D.Minn.1999), rev'd on other grounds, 270 F.3d 645 (8th Cir.2001)........................................356 In re Guilford Mills, Inc., Sec. Litig., No. 98 Civ. 7739, 1999 WL 33248953 (S.D.N.Y. July 21, 1999).................................................................368 In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F.Supp. 712 (S.D.N.Y.1989)..........381 In re Health Mgmt, Inc. Sec. Litig., 970 F.Supp. 192 (E.D.N.Y.1997)...................394 In re Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286 (S.D.N.Y. June 1,1998).................................................... 355, 359 In re Hyperion Sec. Litig., No. 93 Civ. 7179, 1995 WL 422480 (S.D.N.Y. July 14, 1995).........................................................................397 In re Independent Energy Holdings PLC Sec. Litig., 154 F.Supp.2d 741 (S.D.N.Y.2001)........................................................352, 393, 397 In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31780181 (S.D.N.Y. Dec.12, 2002)..................................................................374 In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31894620 (S.D.N.Y. Dec. 27, 2002..................................................................398 In re In-Store Adver. Sec. Litig., 878 F.Supp. 645 (S.D.N.Y.1995)......................338 In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 475 (S.D.N.Y.1989)....................377 In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248 (N.D.Cal.2000).............348 In re MobileMedia Sec. Litig., 28 F.Supp.2d 901 (D.N.J.1998).........................342 In re NationsMart Corp. Sec. Litig., 130 F.3d 309 (8th Cir.1997).......................338 In re Navarre Corp. Sec. Litig., 299 F.3d 735 (8th Cir.2002)...................... 333, 334 In re Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d 551 (D.N.J.2001).......................356 In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D. 133 (S.D.N.Y.1999)..............367 In re Party City Sec. Litig., 147 F.Supp.2d 282 (D.N.J.2001) ..........................356 In re PetsMart, Inc. Sec. Litig., 61 F.Supp.2d 982 (D.Ariz.1999)........................356 In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir.2001) ...........................367 In re Silicon Graphics, Inc. Sec. Litig., 970 F.Supp. 746 (N.D.Cal.1997).................355
In re Stac Elec. Sec. Litig., 89 F.3d 1399 (9th Cir.1996)...............................340 In re Sterling Foster & Co., Inc. Sec. Litig., 222 F.Supp.2d 289 (E.D.N.Y.2002)..........385 In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir.1993) ..................... 372, 381 In re Turkcell Iletisim Hismetler, AS. Sec. Litig., 202 F.Supp.2d 8 (S.D.N.Y.2001).....343 In re Twinlab Corp. Sec. Litig., 103 F.Supp.2d 193 (E.D.N.Y.2000)................ 343, 370 In re Ultimate Corp. Sec. Litig., No. 86 Civ. 5944, 1989 WL 86961 (S.D.N.Y. June 30, 1989) (mem.)..................................................................343 In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir.1996) ........................ 340, 341 INS v. National Ctr. for Immigrants' Rights, Inc., 502 U.S. 183 (1991).................337 Internet Law Library, Inc. v. Southridge Capital Mgmt, L.L.C., 223 F.Supp.2d 474 (S.D.N.Y.2002)........................................................... 386,390 IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049 (2d Cir.1993).................335 Jackson v. Stinnett, 102 F.3d 132 (5th Cir.1996) .....................................335 Johns Hopkins Univ. v. Hutton, 422 F.2d 1124 (4th Cir.1970) .........................379 Joseph v. Wiles, 223 F.3d 1155 (10th Cir.2000).......................................344 Kelly v. Schmidberger, 806 F.2d 44 (2d Cir.1986).....................................324 Knapp v. Ernst & Whinney, 90 F.3d 1431 (9th Cir.1996)..............................377 Kohler v. Kohler Co., 319 F.2d 634 (7th Cir.1963) ....................................380 Kramer v. Scientific Control Corp., 365 F.Supp. 780 (E.D.Pa.1973).....................348 Langadinos v. American Airlines, Inc., 199 F.3d 68 (1st Cir.2000)................ 324, 333 Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir.1973) (en banc)..........................394 Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163 (1993) .......................................................322, 324, 328 Lee v. Ernst & Young, LLP, 294 F.3d 969 (8th Cir.2002)..............................344 Levenson v. B. & M. Furniture Co., 120 F.2d 1009 (2d Cir.1941) (per curiam)............333 Levitin v. PaineWebber, Inc., 159 F.3d 698 (2d Cir.1998)..............................379 Lipton v. Domination, Inc., 734 F.2d 740 (11th Cir.1984).............................377 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir.2002)....................... 333, 335 Lirette v. Shiva Corp., 999 F.Supp. 164 (D.Mass.1998)................................355 List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.1965)................................379 Log On Am., Inc. v. Promethean Asset Mgmt, 223 F.Supp.2d 435 (S.D.N.Y.2001).....386
Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 P.3d 363 (5th Cir.2001)........ 339, 341 Luce v. Edelstein, 802 P.2d 49 (2d Cir. 1986).................................... 329, 397 Lucente v. International Bus. Mach. Corp., 310 F.3d 241 (2d Cir.2002) .................397 Lyeth v. Chrysler Corp., 929 P.2d 891 (2d Cir.1991) ..................................326 Lynx Ventures LP v. Canadian Imperial Bank of Commerce, No. CV 99-07160, 2000 WL 33223384 (C.D.Cal. Apr.18, 2000)........................................373 Manufacturers Hanover Trust Co. v. Drysdale Sec. Corp., 801 F.2d 13 (2d Cir.1986).....372 Marbury Mgmt, Inc. v. Kohn, 629 F.2d 705 (2d Cir.1980)........................ 392, 394 Market Co. v. Hoffman, 101 U.S. 112 (1879).................................... 338, 349 Markowski v. SEC, 274 F.3d 525 (D.C.Cir.2001), cert, denied, 123 S.Ct. 96 (2003).....391 Marvel Characters, Inc. v. Simon, 310 F.3d 280 (2d Cir.2002)..........................349 McDaniel v. Compania Minera Mar de Cortes, Sociedad Anonimo, Inc., 528 F.Supp. 152 (D.Ariz.1981).......................................................352 McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226 (1st Cir.1980 .....................328 McHenry v. Renne, 84 F.3d 1172 (9th Cir.1996)......................................324 McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576 (2d Cir.1990)................380 McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044 (2d Cir.1995)........... 344, 351 MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F.Supp.2d 251 (S.D.N.Y.2002)........................................................294, 300, 332 Melder v. Morris, 27 F.3d 1097 (5th Cir.1994).......................................339 Metge v. Baehler, 762 F.2d 621 (8th Cir.1985)........................................393 Metzner v. D.H. Blair & Co., 689 F.Supp. 262 (S.D.N.Y.1988)..........................380 Michaels Bldg. Co. v. Ameritrust Co., 848 F.2d 674 (6th Cir.1988)......................327 Miller v. Steinberg, 268 F.Supp. 255 (S.D.N.Y.1967)..................................361 Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir.1993)............................328 Milman v. Box Hill Sys. Corp., 192 F.R.D. 105 (S.D.N.Y.2000) ........................344 Mishkin v. Ageloff, No. 97 Civ. 2690, 1998 WL 651065 (S.D.N.Y. Sept.23, 1998)..... 393, 395 Missouri Hons. Dev. Comm'n v. Brice, 919 F.2d 1306 (8th Cir.1990)....................324 Montclair v. Ramsdell, 107 U.S. 147 (1883) .........................................349 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)............................338 Morisette v. United States, 324 U.S. 246 (1952)......................................394
Muniz v. United States, 236 F.3d 122 (2d Cir.2001) ..................................349 Nanopierce Techs. Inc. v. Southridge Capital Mgmt. LLC, No. 02 Civ. 0767,.. 372, 386, 391, 2002 WL 31819207 (S.D.N.Y. Oct.10, 2002) ....................................... 392 National Ass'n of Life Underwriters, Inc. v. Commissioner of Internal Revenue, 30 F.3d 1526 (D.C.Cir.1994)........................................................324 Nelson v. Paramount Communications, Inc., 872 F.Supp. 1242 (S.D.N.Y.1994)..........338 Newman v. Silver, 713 F.2d 14 (2d Cir.1983)........................................324 325, 330, 334, Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000).....................................passim O'Brien v. National Prop. Analysts Partners, 936 F.2d 674 (2d Cir.1991)...............325 Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir.1996)......................372 Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir.1990)............................. 326, 328 Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 WL 148558 (M.D.Fla. Mar.25, 1997).........................................................................373 Peil v. Speiser, 806 F.2d 1154 (3d Cir.1986) .........................................375 Phelps v. Kapnolas, 308 F.3d 180 (2d Cir.2002)................................. 331, 342 Phelps v. Wichita Eagle-Beacon, 886 F.2d 1262 (10th Cir.1989)........................328 Pierce v. Marano, No. 01 Civ. 3410, 2002 WL 1858772 (S.D.N.Y. Aug.13, 2002)...........331 PPM Am., Inc. v. Marriott Corp., 853 F.Supp. 860 (D.Md.1994)........................348 Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir.1999)................... 375, 384 Rankow v. First Chicago Corp., 870 F.2d 356 (7th Cir.1989)...........................374 Reingold v. Deloitte Haskins & Sells, 599 F.Supp. 1241 (S.D.N.Y.1984).................376 Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir.2002) ...........396 RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F.Supp.2d 389 (S.D.N.Y.2002).....377 Robbins v. Moore Med. Corp., 788 F.Supp. 179 (S.D.N.Y.1992).........................394 Robinson v. Shell Oil Co., 519 U.S. 337 (1997).......................................348 Rochez Bros., Inc. v. Rhoades, 527 F.2d 880 (3d Cir.1975).............................393 Ross v. AH. Robins Co., Inc., 607 F.2d 545 (2d Cir.1979) ........................ 328, 384 Ross v. Bank South, N.A, 885 F.2d 723 (11th Cir.1989) (en banc)......................377 Ross v. Bolton, 904 F.2d 819, 823 (2d Cir.1970) ......................................325 Ross v. Warner, 480 F.Supp. 268 (S.D.N.Y.1979).....................................338 Rothman v. Gregor, 220 F.3d 81 (2d Cir.2000).......................................374
Ruskin v. TIG Holdings, Inc., No. 98 Civ. 1068, 2000 WL 1154278 (S.D.N.Y. Aug. 14, 2000).........................................................................365 Sandstad v. CB Richard Ellis, Inc., 309 F.3d 893 (5th Cir.2002)........................310 Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) ..................................387 Sarlie v. E.L. Bruce Co., 265 F.Supp. 371 (S.D.N.Y.1967)..............................348 Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 98108 (S.D.N.Y. Mar. 15, 1994).....331 Schaller Tel, Co. v. Golden Sky Sys., Inc., 298 F.3d 736 (8th Cir.2002)..................327 Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir.1974), overruled on other grounds by Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 .....329, 372, 373, (1991)....................................................................... 375 Schmedding v. Tnemec Co., 187 F.3d 862 (8th Cir.1999)...............................324 Schnell v. Conseco, Inc., 43 F.Supp.2d 438 (S.D.N.Y.1999).............................372 Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir.1968) (en banc).......................385 Schoenfeld v. Giant Stores Corp., 62 F.R.D. 348 (S.D.N.Y.1974)........................339 Schoenhaut v. American Sensors, Inc., 986 F.Supp. 785 (S.D.N.Y.1997).................338 Schott Motorcycle Supply, Inc. v. American Honda Motor Co., 976 F.2d 58 (1st Cir. 1992) .....................................................................324 Scone Invs. LP. v. American Third MM, Corp., No. 97 Civ. 3802, 1998 WL 205338 (S.D.N.Y. Apr.28, 1998).................................................... 376, 386 Sears v. Likens, 912 F.2d 889 (7th Cir.1990).........................................339 SEC v. Blech, No. 99 Civ. 4770, 2000 WL 288263 (S.D.N.Y. Mar.20, 2000) ...............386 299 325 SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963) .........................' .382 SEC v. Environmental, Inc., 82 F.Supp.2d 237 (S.D.N.Y.2000).........................386 352 393 SEC v. First Jersey Sec, Inc., 101 F.3d 1450 (2d Cir.1996)....................... 394, 395 SEC v. Schiffer, No. 97 Civ. 5853,1998 WL 226101 (S.D.N.Y. May 5, 1998)..............385 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968) (en banc).............. 379, 383 SEC v. Zandford, 122 S.Ct. 1899 (2002)........................................ 299, 387 Segal v. Gordon, 467 F.2d 602 (2d Cir.1972).................................... 327, 328 Sennott v. Rodman & Renshaw, 424 U.S. 926 (1973)..................................395 Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786 (3d Cir.1984).....327 Shapiro v. UJB Fin. Corp., 964 F.2d 272 (3d Cir.1992)................................339 335, 363, Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir.1994) .................... 364, 369
Shores v. Sklar, 647 F.2d 462 (5th Cir.1981) (en banc) ................................377 Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157 (2d Cir.1999) ................................................................ 356,385 Simpson v. Specialty Retail Concepts, 823 F.Supp. 353 (M.D.N.C.1993).................377 Soo Line R.R. Co. v. St. Louis Southwestern Ry. Co., 125 F.3d 481 (7th Cir.1997).....324 Staples v. United States, 511 U.S. 600 (1994)........................................394 Stearns v. Page, 48 U.S. (7 How.) 819 (1849).........................................325 Steed Fin. LDC v. Nomura Sec. Int'l, Inc., No. 00 Civ. 8058, 2001 WL 1111508 (S.D.N.Y. Sept.20, 2001)........................................................363 Stern v. Leucadia Natl Corp., 844 F.2d 997 (2d Cir.1988).............................329 Stevelman v. Alias Research, Inc., 174 F.3d 79 (2d Cir.1999)..........................365 Stone Motor Co. v. General Motors Corp., 293 F.3d 456 (8th Cir.2002)..................324 372, 373, 374, 375, Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.2001) passim Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir.1995)............... 387, 389 Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) ...................387 322, 323, 333, 340, 342, pas- Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002)................................... sim T.H.C., Inc. v. Fortune Petroleum Corp., Nos. 96 Civ. 2690-91, 1999 WL 182593 (S.D.N.Y. Mar.31, 1999) ........................................................386 T.J. Raney & Sons v. Fort Cobb, Okla, Irrigation Fuel Auth, 717 F.2d 1330 (10th Cir.1983).....................................................................377 Tho Dinh Tran v. Alphonse Hotel Corp., 281 F.3d 23 (2d Cir.2002)................ 324, 346 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)...............................379 United States v. Apfelbaum, 445 U.S. 115 (1980).....................................394 United States v. Charney, 537 F.2d 341 (9th Cir.1976)................................382 United States v. Clark, 359 F.Supp. 128 (S.D.N.Y.1973)...............................387 United States v. Fisher, 6 U.S. (2 Cranch) 358 (1805).................................337 United States v. Gonzales, 520 U.S. 1 (1997).........................................348 United States v. Menasche, 348 U.S. 528 (1955)......................................349 United States v. Mulheren, 938 F.2d 364 (2d Cir.1991)........................... 391, 392 United States v. Nordic Vill, Inc., 503 U.S. 30 (1992)............................ 337, 349 United States v. Pacheco, 225 F.3d 148 (2d Cir.2000).................................383 United States v. Regan, 937 F.2d 823 (2d Cir.1991)...................................382
United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)...........................349 United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am. Inc., 508 U.S. 439 (1993)........................................................... 337, 349 Vandenberg v. Adler, No. 98 Civ. 3544, 2000 WL 342718 (S.D.N.Y. Mar. 31, 2000).....386 Vess v. Ciba-Geigy Corp. USA — F.3d-, No. 01-55834, 2003 WL 203124 (9th Cir. Jan.31, 2003)..............................................................340 Walker v. Thompson, 288 F.3d 1005 (7th Cir.2002)...................................323 Washington Nat'l Ins. Co. of New York v. Morgan Stanley & Co., No. 90 Civ. 3342, 1999 WL 461796 (S.D.N.Y. July 2,1999)..........................................376 Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir.1997)................................355 Weixel v. Board of Educ. of New York, 287 F.3d 138 (2d Cir.2002)......................331 Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir.1990)...........................329 Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir.1997)............................326 Zeid v. Kimberley, 973 F.Supp. 910 (N.D.Cal.1997), reversed on other grounds, 201 F.3d 446 (9th Cir.1999) (table)...................................................356 Ziemba v. Cascade Int'l Inc., 256 F.3d 1194 (11th Cir.2001) ...........................327 Zucker v. Quasha, 891 F.Supp. 1010 (D.N.J.1995)....................................343 People v. Dozier, 424 N.Y.S.2d 1010 (2d Dep't 1980)..................................394 STATE CASES 15 U.S.C. § 77k............................................................... passim § 771.....................................................................299 § 77o............................................................... 299, 314, 351 § 77z-l ..................................................................337 § 77aa, Schedule A................................................... 381, 383 §§ 78a-78mm..............................................................299 § 78i................................................................ 299,361 § 78j................................................................ 299,314, 334 § 78m............................................................... 299,334 § 78n............................................................... 299, 334 § 78p....................................................................299 § 78r....................................................................299 § 78t ............................................................... 299,314 § 78t-l ..................................................................299 § 78u^............................................................. passim §§ 79et seq ...............................................................299 §§ 80a-l et seq ............................................................299 §§ 80b-l et seq............................................................299 26 U.S.C. § 586(d)...............................................................394 28 U.S.C. § 2072(a)..............................................................322 Pub.L. No. 107-204 § 804(a), 116 Stat. 745 ..........................................294 48 Stat. 74 (1933)................................................................349 STATUTES
FEDERAL RULES Fed.R.Civ.P. 8 .................................................................... passim 9 .................................................................... passim 10 ................................................................... 331, 347 11 ........................................................................326 12 ................................................................... passim 15 ................................................................... 356,397 54 ........................................................................323 84 ................................................................... 323,328 App. Form 9 .......................................................... 323, 324, 327 342 App. Form 13 ......................................................... 327' 373 Fed.R.Evid. 201(b)(2)...................................................................357 803(17)....................................................................357 17 C F R ' §' 229.508(e)........................................................... 312, 354, 381, 383 § 240.10b-5........................................................... passim § 240.12b-2................................................................352 § 240.14a-9 ........................................................... 299, 334 § 210.11c 3 ........................................................... 299, 334 § 242.101 ............................................................. 311, 354, 390 § 242.104 ............................................................. 360, 382, 389, 390 FEDERAL REGULATIONS Certain Manipulative Practices in Public Offerings, Exchange Act Release No. 11328, 40 Fed.Reg. 16090,16091-92 (Apr. 2, 1975)..................................304 Exchange Act Release No. 26182 (Oct. 14, 1988), available at 1988 WL 999999...........304 Exchange Act Release No. 10636, 39 Fed.Reg. 7806 (Feb. 11, 1974) ....................304 Exchange Act Release No. 9673 (July 26, 1972)......................................303 Exchange Act Release No. 34-4163, available at 1948 WL 28675 (Sept. 16, 1948) passim Securities Act Release Nos. 5274, 5276, 5277, 5279 (July 26, 1972)......................303 Securities Act Release No. 4358/Exchange Act Release No. 6536 (Apr. 24, 1961), available at 1961 WL 61584 .....................................................301 Report of Special Study of Securities Markets of the Securities and Exchange.. 300, 301, 302, Commission, H.R. Doc. No. 88-95 (1st Sess.1963) ("SEC Special Study").......passim Report of the Securities and Exchange Commission Concerning the Hot ......300, 301, 302, Issues Markets (Aug.1984) ("Hot Issues Report").......................... 303, passim Public Investigation in the Matter of Hot Issues Securities Markets, Ad. File No. 4- 148 (1972) ("SEC File No. 4-148").......................................... 300, 303 U.S. Securities and Exchange Commission Staff Legal Bulletin No. 10, Aug. 25, 2000 available at http://www.sec.gov/interps/legal/slbmr1O.htm ("SEC Legal Bulletin")............................................................300, 307, 390 SEC/NASD AGENCY AUTHORITIES
NASD Rule 2330 ................................................................381 NASD Rule 2440 ........................................................... 313, 381 312, 381, NASD Rule 2710(c)..............................................................383 141 Cong. Rec. 37801 (1995).......................................................331 78 Cong. Rec. 8716 (1934).........................................................350 330, 335, 372 374 S.Rep. No. 104-98 (1995) ........................................................' .396 S.Rep. No. 73-792 (1934) .................................................... 299, 395 S.Rep. No. 73-17 (1933) ..........................................................349 H.R. Conf. Rep. No. 104-369 (1995)................................................358 H.R. Conf. Rep. No. 73-1383 (1934)........................................... 387, 395 H.R.Rep. No. 73-85 (1933)................................................... 295, 349 Federal Securities Act: Hearings before the House Interstate and Foreign Commerce Committee, 73d Cong. 145-46 (1933)........................................349 Securities Act: Hearings before the Senate Banking and Currency Committee, 73d Cong. 87-88, 149-54, 230 (1933)..................................................350 Legislative History of the Securities Act of 1933 and Securities Exchange Act of 193h (J.S. Ellenberger & Ellen P. Mahar eds.1973).................................298 LEGISLATIVE HISTORY OTHER AUTHORITIES 1. Dictionaries and Treatises The American Heritage Dictionary of the English Language (4th ed.2000)..............346 Black's Law Dictionary (7th ed.1999) ......................................... 330,394 Websters Third Int'l Dictionary (1963).............................................394 Arnold S. Jacobs, Disclosure and Remedies Under the Securities Laws (2002)...........389 Michael J. Kaufman, Securities Litigation: Damages (2002) ..........................348 W. Page Keeton et al., Prosser and Keeton on Torts (5th ed.1984)......................379 David L. Scott, Wall Street Words 326 (Rev. ed.1997).................................310 Louis Loss & Joel Seligman, Securities Regulation (3d ed.1992).................. 361, 388 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure (3d.. 325, 326, 328, ed.1998)..................................................................... 329 Restatement (Second) of Torts (1977) ..............................................379
Scholarly Articles> Allen, Samuel N., A Lawyer's Guide to the Operation of Uriderwriting Syndicates, 26 New Eng. L.Rev. 349 (1991)..................................................361 Clurman, David, Controlling a Hot Issue Market, 56 Cornell L.Rev. 74 (1970)...........303 Coffee, John C, Brave New World? The Impact(s) of the Internet on Modern Securities Regulation, 52 Bus. Law. 1195 (1997)...................................376 Conrad, Jr., Winthrop B. and Bruce K. Dallas, The Registration Process—Overview and Selected Considerations, in How to Prepare an Initial Public Offering 2001 157 (Practicing Law Institute Corporate Law and Practice Course Handbook Series No. B0-01BW, 2001).....................................................312 DeSimone, Joseph, Note, Should Fraud on the Market Theory Extend to the Context of Newly Issued Securities?, 61 Fordham L.Rev. S151 (1993) ................377 DeValerio, Glen & Kathleen M. Donovan-Maher, Information and Belief Pleading Under the Private Securities Litigation Reform Act of1995, SF86 ALI-ABA 365 (Course of Study May 10, 2001)..................................................355 Douglas, William O., & George E. Bates, The Federal Securities Act of1933, 43 Yale L.J. 171 (1933) ................................................................350 Hanna, John, The Securities Exchange Act of1934, 23 Cal. L.Rev. 1 (1934)..............350 Ibbotson, Roger G., et al., The Market's Problems with the Pricing of Initial Public Offerings, 6 J. Applied Corp. Fin. (1994)..........................................300 Landis, James M., The Legislative History of the Securities Act of1933, 28 Geo. Wash. L.Rev. 29 (1959).........................................................351 Murray, Brian and Donald J. Wallace, You Shouldn't Have To Plead More Than You Have To Prove, 53 Baylor L.Rev. 783 (2001) ..................................341 Newkirk, Robert G., Comment, Sufficient Efficiency: Fraud on the Market in the Initial Public Offering Context, 58 U. Chi. L.Rev. 1393 (1991).......................377 Note, The Fraud-on-the-Market Theory, 95 Harv. L.Rev. 1143 (1982)..................377 Pastuszenski, Brian E., et al., Post-PSLRA Judicial Treatment of Insider Trading Allegations as a Basis for Pleading Scienter in Securities Fraud Cases, SG091 ALI-ABA 831 (Course of Study May 2-3, 2002) ...................................367 Prentice, Robert, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals For Its Future, 51 Duke L.J. 1397 (2002)................. 300, 376 Ritter, Jay R., The Hot Issue' Market of1980, 57 J. Bus. 215 (1984)....................300 Shulman, Harry, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933)..........350 Steve, Thel, The Original Conception of Section10 (b) of the Securities Exchange Act, 42 Stan. L.Rev. 385 (1990)..................................................298 Turnquist, Krista L., Note, Pleading Under Section11 of the Securities Act of1933, 98 Mich. L.Rev. 2395 (2000).....................................................341
Wysocki, Sandra P., Note, Controlling Personal Liability of Directors Under Section 20(A) of the Securities Exchange Act of 1934, 31 Suffolk U.L.Rev. 695 (1998)........................................................................393 3. Newspaper Articles D.H. Blair Ex-Broker Pleads Guilty to Charges of Stock Fraud in IPOs, Wall. St. J, June 6, 2001, at B10.........................................................358 Greg Ip, et al., Internet Bubble Broke Records, Rules and Bank Accounts, Wall St. J., July 14, 2000, at Al .........................................................358 Howard Kurtz, Risky Business, Wash. Post, Aug. 27, 2000, at W08.....................358 Suzanne McGee, Venture Capitalists R' Us: CacheFlow: The Life Cycle of a Venture-Capital Deal, Wall St. J., Feb. 22, 2000 at C1, available at 2000 WL-WSJ 3018799 ......................................................................309 Patrick McGeehan, Hedge Fund Managers Said to Talk to Grand Jury, N.Y. Times, May 11, 2001, at C1............................................................316 Susan Pulliam & Randall Smith, Linux Deal is Focus of IPO-Commission Probe, Wall St. J., Dec. 12, 2000, at C1..................................................358 Susan Pulliam, et al. SEC Intensifies Inquiry into Commissions for Hot IPOs— Goldman, Bear Stearns and Morgan Stanley Get Requests for Data, Wall St. J., Dec. 13, 2000, at C1....................................................... 358, 359 Susan Pulliam & Randall Smith, Trade Offs: Seeking IPO Shares, Investors Offer to Buy More in After-Market, Wall St. J., Dec. 6, 2000, at Al .........................359 Susan Pulliam & Randall Smith, Trying to Avoid the Flippers, Wall St. J., Dec. 6, 2000 .................................................................... 294, 307 Susan Pulliam & Randall Smith, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000 ........................................................308 Neil Roland, Credit Suisse Pays US$100M Over IPOs: Avoids Fraud Charges, Nat'l Post, Jan. 23, 2002, at FP16.....................................................359 Randall Smith & Susan Pulliam, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000, at C1...................................................359 Bruce Weber, Burning Bridges arid Bridging Disasters: Lampooning@disorganization. com, N.Y. Times, May 14, 2002 ............................................306 4. Miscellaneous Lewis Carroll, Through the Looking Glass..........................................383 John Cassidy, Dot.con: The Greatest Story Ever Sold (2002) ..........................306 Lori Gottlieb & Jesse Jacobs, Inside the Cult of Kibu: And Other Tales of the Millennial Gold Rush (2002)....................................................306 Casey Kait & Stephen Weiss, Digital Hustlers: Living Large and Falling Hard in Silicon Alley (2001)............................................................306 David Kuo, dot.bomb: My Days and Nights at an Internet Goliath....................306
Arthur Levitt, Remarks before the 2000 Annual Meeting of the Securities Industry Association(Nov. 9, 2000)......................................................303 Michael Lewis, The New New Thing: A Silicon Valley Story (2001)....................306 Stephan Paternot, A Very Public Offering: A Rebel's Story of Business Excess, Success and Reckoning (2001)...................................................306 Madsen Pirie, The Book of the Fallacy: A Training Manual for Intellectual Subversives (1985).............................................................388 Jay Ritter, Big Runups of 1975-2000 (Aug.2001) available at http://bear.cba.ufl.edu/ritter/runup750.pdf.........................................306 Jay Ritter, IPO Data, at http://bear.cba.ufl.edu/ritter/ipodata.htm......................300 Jay Ritter, Money Left an the Table in IPOs, Working Paper (Jan. 14, 2003), available at http://bear.cba.ufl.edu/ritter/work_papers/monew.pdf....................369 Jay Ritter & Tim Loughran, Why Has IPO Underpricing Changed Over Time?, Working Paper (Jan. 16, 2003), available at http://bear.cba.ufl.edu/ritter/work_pa- pers/whynew.pdf..............................................................293 Behind the Startup: IceVan.com (Sharon Zezima & Kal Deutsch 2002), available at http://www.icevan.com/.....................................................306 Dotcom: Hot Tubs, Pork Chops and Valium (Brett Singer & Simeon Schnapper 2002).........................................................................306 E-Dreams (Wonsuk Chin & Sam Pai 2002) .........................................306 Proverbs 21:23 (New International Version).........................................324 Start-up.com (Artisan Entertainment 2001).........................................306 What Happened (The Means of Production, Inc.2002) ................................306
CASES CONSOLIDATED AS IN RE INITIAL PUBLIC OFFERING SECURITIES
LITIGATION, 21 MC 92
In re 724 Solutions, Inc. IPO Sec. Litig., 01 Civ. 5333 In re Accelerated Networks, Inc. IPO Sec. Litig., 01 Civ. 5644 In re Aclara Biosciences, Inc. IPO Sec. Litig., 01 Civ. 10050 In re Aether Systems, Inc. IPO Sec. Litig., 01 Civ. 5570 In re Agency.com, Ltd. IPO Sec. Litig., 01 Civ. 5902 In re Agile Software Corp. IPO Sec. Litig., 01 Civ. 9413 In re Agilent Technologies, Inc. IPO Sec. Litig., 01 Civ. 10639 In re AirGate PCS Inc. IPO Sec. Litig., 01 Civ. 9801 In re Airnet Communications Corp. IPO Sec. Litig., 01 Civ. 10161 In re Airspan Networks, Inc. IPO Sec. Litig., 01 Civ. 6747 In re Akamai Technologies, Inc. IPO Sec. Litig., 01 Civ. 6000 In re Alamosa PCS Holdings IPO Sec. Litig., 01 Civ. 11235 In re Alloy Online, Inc. IPO Sec. Litig., 01 Civ. 9742 In re Antigenics, Inc. IPO Sec. Litig., 01 Civ. 9741 In re Apropos Technology, Inc. IPO Sec. Litig., 01 Civ. 9982 In re Ariba, Inc. IPO Sec. Litig., 01 Civ. 2359 In re Ashford.com, Inc. IPO Sec. Litig., 01 Civ. 6275
In re Asialnfo Holdings, Inc. IPO Sec. Litig., 01 Civ. 10901 In re Ask Jeeves, Inc. IPO Sec. Litig., 01 Civ. 9422 In re Aspect Medical Systems, Inc. IPO Sec. Litig., 01 Civ. 7090 In re Audible, Inc. IPO Sec. Litig., 01 Civ. 5258 In re Autobytel.com, Inc. IPO Sec. Litig., 01 Civ. 6825 In re AutoWeb.com, Inc. IPO Sec. Litig., 01 Civ. 3360 In re Avanex Corp. IPO Sec. Litig., 01 Civ. 6890 In re AvantGo, Inc. IPO Sec. Litig., 01 Civ. 9618 In re Avenue A, Inc. IPO Sec. Litig., 01 Civ. 5446 In re Avici Systems, Inc. IPO Sec. Litig., 01 Civ. 3363 In re B2B Internet HOLDRS IPO Sec. Litig. 01 Civ. 2858 In re Backweb Technologies Ltd. IPO Sec. Litig., 01 Civ. 10000 In re Be Free, Inc. IPO Sec. Litig., 01 Civ. 10827 In re Blue Martini Software, Inc. IPO Sec. Litig., 01 Civ. 6241 In re Bookham Technology PLC IPO Sec. Litig., 01 Civ. 9883 In re Bottomline Technologies, Inc. IPO Sec. Litig., 01 Civ. 6824 In re Braun Consulting, Inc. IPO Sec. Litig., 01 Civ. 10629 In re Breakaway Solutions, Inc. IPO Sec. Litig., 01 Civ. 6397 In re Brocade Communications Systems, Inc. IPO Sec. Litig., 01 Civ. 6613 In re BSquare Corp. IPO Sec. Litig., 01 Civ. 6216 In re Buy.com, Inc. IPO Sec. Litig., 01 Civ. 6323 In re Cacheflow, Inc. IPO Sec. Litig., 01 Civ. 5143 In re Caldera Systems, Inc. IPO Sec. Litig., 01 Civ. 6271 In re Calico Commerce, Inc. IPO Sec. Litig., 01 Civ. 2601 In re Caliper Technologies Corp. IPO Sec. Litig., 01 Civ. 5072 In re Capstone Turbine Corp. IPO Sec. Litig., 01 Civ. 11220 In re Carrierl International SA IPO Sec. Litig., 01 Civ. 10940 In re Centra Software, Inc. IPO Sec. Litig., 01 Civ. 10988 In re Chartered Semiconductor Manufacturing, Ltd. IPO Sec. Litig., 01 Civ. 10839 In re Chinadotcom Corp. IPO Sec. Litig., 01 Civ. 5937 In re Choice One Communications, Inc. IPO Sec. Litig., 01 Civ. 10576 In re Chordiant Software, Inc. IPO Sec. Litig., 01 Civ. 6222 In re Clarent Corp. IPO Sec. Litig., 01 Civ. 6322 In re Click Commerce, Inc. IPO Sec. Litig., 01 Civ. 11234 In re Cobalt Networks IPO Sec. Litig., 01 Civ. 10971 In re Commerce One, Inc. IPO Sec. Litig., 01 Civ. 5575 In re CommTouch Software, Inc. IPO Sec. Litig., 01 Civ. 7044 In re Concur Technologies, Inc. IPO Sec. Litig., 01 Civ. 6828 In re Copper Mountain Networks, Inc. IPO Sec. Litig., 01 Civ. 10943 In re Corio, Inc. IPO Sec. Litig., 01 Civ. 10686 In re Corvis Corp. IPO Sec. Litig., 01 Civ. 3857 In re CoSine Communications, Inc. IPO Sec. Litig., 01 Civ.10105 In re Covad Communications Group, Inc. IPO Sec. Litig., 01 Civ. 5834 In re Critical Path, Inc. IPO Sec. Litig., 01 Civ. 6542 In re CyberSource Corp. IPO Sec. Litig., 01 Civ. 7000 In re Daleen Technologies, Inc. IPO Sec. Litig., 01 Civ. 10944 In re Data Return Corp. IPO Sec. Litig., 01 Civ. 10107 In re deCode Genetics, Inc. IPO Sec. Litig., 01 Civ. 11219 In re Delano Technology Corp. IPO Sec. Litig., 01 Civ. 7180 In re Deltathree.com, Inc. IPO Sec. Litig., 01 Civ. 5425 In re Dice, Inc. (Earthweb) IPO Sec. Litig., 01 Civ. 9747 In re Digimarc Corp. IPO Sec. Litig., 01 Civ. 3792 In re Digital Impact, Inc. IPO Sec. Litig., 01 Civ. 4942 In re Digital Insight Corp. IPO Sec. Litig., 01 Civ. 11231 In re Digital Island, Inc. IPO Sec. Litig., 01 Civ. 6887 In re Digital River, Inc. IPO Sec. Litig., 01 Civ. 7355 In re DigitalThink, Inc. IPO Sec. Litig., 01 Civ. 9619 In re Digitas, Inc. IPO Sec. Litig., 01 Civ. 5948 Vicki M. Muller, et al. v. Diversa Corp., et al., 02 Civ. 9699
In re DoubleClick, Inc. IPO Sec. Litig., 01 Civ. 3980 In re DrKoop.com, Inc. IPO Sec. Litig., 01 Civ. 6242 In re Drugstore.com, Inc. IPO Sec. Litig., 01 Civ. 5838 In re E-LOAN, Inc. IPO Sec. Litig., 01 Civ. 7467 In re E.piphany, Inc. IPO Sec. Litig., 01 Civ. 6158 In re eBenx, Inc. IPO Sec. Litig., 01 Civ. 9411 In re EGain Communications Corp. IPO Sec. Litig., 01 Civ. 9414 In re El Sitio, Inc. IPO Sec. Litig., 01 Civ. 5089 In re Eloquent, Inc. IPO Sec. Litig., 01 Civ. 6775 In re Engage Technologies, Inc. IPO Sec. Litig., 01 Civ. 8404 In re Equinix, Inc. IPO Sec. Litig., 01 Civ. 7002 In re eToys, Inc. IPO Sec. Litig., 01 Civ. 5911 In re Evolve Software, Inc. IPO Sec. Litig., 01 Civ. 9800 In re Exchange Applications, Inc. IPO See. Litig., 01 Civ. 9516 In re Exfo Electro Optical Engineering, Inc. IPO Sec. Litig., 01 Civ. 10684 In re Expedia, Inc. IPO Sec. Litig., 01 Civ. 4973 In re Extensity, Inc. IPO Sec. Litig., 01 Civ. 11246 In re Extreme Networks, Inc. IPO Sec. Litig., 01 Civ. 6143 In re F5 Networks, Inc. IPO Sec. Litig., 01 Civ. 7055 In re Fairmarket, Inc. IPO Sec. Litig., 01 Civ. 6948 In re Fatbrain.com, Inc. IPO Sec. Litig., 01 Civ. 10164 In re Finisar Corp. IPO Sec. Litig., 01 Civ. 10813 In re FirePond, Inc. IPO Sec. Litig., 01 Civ. 7048 In re FlashNet Communications, Inc. IPO Sec. Litig., 01 Civ. 10738 In re Focal Communications Corp. IPO Sec. Litig., 01 Civ. 10111 In re Foundry Networks, Inc. IPO Sec. Litig., 01 Civ. 10640 In re FreeMarkets, Inc. IPO Sec. Litig., 01 Civ. 7039 In re Gadzoox Networks, Inc. IPO Sec. Litig., 01 Civ. 5039 In re Gigamedia Ltd. IPO Sec. Litig., 01 Civ. 10884 In re Global Crossing, Ltd. IPO Sec. Litig., 01 Civ. 7023 In re GlobeSpan, Inc. IPO Sec. Litig., 01 Civ. 10741 In re GoTo.com, Inc. IPO Sec. Litig., 01 Civ. 6339 In re GRIC Communications, Inc. IPO Sec. Litig., 01 Civ. 6771 In re GT Group Telecom, Inc. IPO Sec. Litig., 01 Civ. 9748 In re Handspring, Inc. IPO Sec. Litig., 01 Civ. 7033 In re High Speed Access Corp. IPO Sec. Litig., 01 Civ. 9743 In re Hoover's, Inc. IPO Sec. Litig., 01 Civ. 10122 In re iBasis, Inc. IPO Sec. Litig., 01 Civ. 6272 In re iBeam Broadcasting Corp. IPO Sec. Litig., 01 Civ. 6842 In re iManage, Inc. IPO Sec. Litig., 01 Civ. 6277 In re Immersion Corp. IPO Sec. Litig., 01 Civ. 9975 In re IMPSAT Fiber Networks, Inc. IPO Sec. Litig., 01 Civ. 9710 In re Informatica Corp. IPO Sec. Litig., 01 Civ. 9922 In re InforMax, Inc. IPO Sec. Litig., 01 Civ. 10834 In re Inforte Corp. IPO Sec. Litig., 01 Civ. 10836 In re Inrange Technologies Corp. IPO Sec. Litig., 01 Civ. 10800 In re InsWeb Corp. IPO Sec. Litig., 01 Civ. 10969 In re Integrated Information Systems, Inc. IPO Sec. Litig., 01 Civ. 6120 In re Integrated Telecom Express, Inc. IPO Sec. Litig., 01 Civ. 10108 In re InterNAP Network Services Corp. IPO Sec. Litig., 01 Civ. 6084 In re Internet Capital Group, Inc. IPO Sec. Litig., 01 Civ. 3975 In re Internet Infrastructure HOLDRS IPO Sec. Litig., 01 Civ. 7654 In re Internet Initiative Japan IPO Sec. Litig., 01 Civ. 10974 In re Intersil Holding Corp. IPO Sec. Litig., 01 Civ. 5144 In re InterTrust Technologies Corp. IPO Sec. Litig., 01 Civ. 4187 In re Interwave International Ltd. IPO Sec. Litig., 01 Civ. 10598 In re Interwoven, Inc. IPO Sec. Litig., 01 Civ. 9917 In re Intraware, Inc. IPO Sec. Litig., 01 Civ. 9349 In re iPrint Technologies, Inc. (F/k/a Iprint.com) IPO Sec. Litig., 01 Civ. 5365
Chamberlain Mach. Works v. United States, 270 U.S. 347 (1926).......................325 Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir.2002)...................... 331, 347 Chance v. Armstrong, 143 F.3d 698 (2d Cir.1998) ....................................331 Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir.1970)..................... 348, 380 Chiarella v. United States, 445 U.S. 222 (1980) ................................. 381, 384 Chickasaw Nation v. United States, 534 U.S. 84 (2001) ...............................349 Chill v. General Elec. Co., 101 F.3d 263 (2d Cir.1996).................................365 Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.1973)........ 381, 382 Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001)...............................338 Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir.1992).............................375 City of Painesville, Ohio v. First Montauk Fin. Corp., 178 F.R.D. 180 (N.D.Ohio 1998).........................................................................386 City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir.2001)............... 333, 335 322, 323, 331, Conley v. Gibson, 355 U.S. 41 (1957)....................................... 341, passim Conn v. GATX Terminals Corp., 18 F.3d 417 (7th Cir.1994)...........................324 Connecticut Nat. Bank v. Germain, 503 U.S. 249 (1992) ......................... 348, 349 Cortec Indus., Inc. v. Sum Holding LP., 949 F.2d 42 (2d Cir.1991).....................347 Cramer v. General Tel. & Elecs. Corp., 582 F.2d 259 (3d Cir.1978)......................329 Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir.1969)...................387 Credit & Fin. Corp. v. Warner & Swasey Co., 638 F.2d 563 (2d Cir.1981)................327 Cromer Fin. Ltd. v. Berger, 137 F.Supp.2d 452 (S.D.N.Y.2001).........................352 Danis v. USN Communications, Inc., 189 F.R.D. 391 (N.D.Ill.1999)....................376 Bonis v. USN Communications, Inc., 73 F.Supp.2d 923 (N.D.Ill.1999)..................339 Davis v. A.G. Edwards & Sons, Inc., 823 F.2d 105 (5th Cir.1987).......................324 Degulis v. LXR Biotechnology, Inc., 928 F.Supp. 1301 (S.D.N.Y.1996) ..................343 Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204, 1997 WL 20832 (S.D.N.Y. Jan.21,1997)..................................................................343 Demarco v. Edens, 390 F.2d 836 (2d Cir.1968).......................................352 DeMaria v. Andersen, No. 01-7505, 2003 WL 174543 (2d Cir. Jan.28, 2003)......... 344, 380 Denny v. Barber, 576 F.2d 465 (2d Cir.1978) ........................................326 Dietrich v. Bauer, 76 F.Supp.2d 312 (S.D.N.Y.1999)..................................386
DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.1990).................................327 Dirks v. SEC, 463 U.S. 646 (1983)..................................................384 DiVittorio v. Equidyne Extractive Indus., 822 F.2d 1242 (2d Cir.1987)..................325 Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706 (S.D.N.Y. Jan.17, 2003)..................................................................397 Dorchester Investors v. Peak Trends Trust, No. 99 Civ. 4696, 2003 WL 223466 (S.D.N.Y. Feb.3, 2003)..........................................................352 Dougherty v. North Hempstead Bd. of Zoning Appeals, 282 F.3d 83 (2d Cir.2002).....397 Duncan v. Pencer, No. 94 Civ. 0321, 1996 WL 19043 (S.D.N.Y. Jan. 18, 1996)............370 Eckstein v. Balcor Film Investors, 8 F.3d 1121 (7th Cir.1993) .........................376 Ellison v. American Image Motor Co., 36 F.Supp.2d 628 (S.D.N.Y.1999)........... 338, 377 295, 298, 299, 385 387 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).................................passim Federal Deposit Ins. Corp. v. La Antillana, S.A, No. 88 Civ. 2670, 1990 WL 58914 (S.D.N.Y. May 4,1990).........................................................327 Feeney v. Mego Mortgage Corp., 45 F.Supp.2d 1356 (N.D.Ga.1999).....................355 Fellman v. Electro Optical Sys. Corp., No. 98 Civ. 6403, 2000 WL 489713 (S.D.N.Y. Apr.25, 2000)..................................................................377 Felton v. Walston & Co., 508 F.2d 577 (2d Cir.1974)..................................326 Ferber v. Travelers Corp., 785 F.Supp. 1101 (D.Conn.1991)............................363 Ferguson v. Neighborhood Hous. Servs., 780 F.2d 549 (6th Cir.1986) ...................324 First Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891 (10th Cir.1992)............393 First Virginia Bankshares v. Benson, 559 F.2d 1307 (5th Cir.1977).....................381 Fisher v. Offerman & Co., Inc., No. 95 Civ. 2566, 1996 WL 563141 (S.D.N.Y. Oct.2, 1996).........................................................................397 Flickinger v. Harold C. Brown & Co., 947 F.2d 595 (2d Cir.1991).......................324 Foman v. Davis, 371 U.S. 178 (1962)...............................................397 Freeman v. Laventhol & Horwath 915 F.2d 193 (6th Cir.1990)........................376 Friedlander v. Nims, 755 F.2d 810 (11th Cir.1985)...................................327 Friedman v. Salomon/Smith Barney, Inc., No. 98 Civ. 5990, 2000 WL 1804719 (S.D.N.Y. Dec.8, 2000) (`Friedman I")...........................................360 Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir.2002) ("Friedman II") .................................................................... 360,389 G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir.1981)........................393
Gabriel Capital, L.P. v. Natwest Fin. Inc., 122 F.Supp.2d 407 (S.D.N.Y.2000)....... 352, 397 Gabriel Capital, L.P. v. Natwest Fin. Inc., 177 F.Supp.2d 169 (S.D.N.Y.2001)............310 364, 368, 379, 384, Ganino v. Citizens Util. Co., 228 F.3d 154 (2d Cir.2000)...............................395 General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074 (7th Cir.1997).....328 General Elec. Co. v. Joiner, 522 U.S. 136 (1997)......................................347 Gibbs v. PFS Invs., Inc., 209 F.Supp.2d 620 (E.D.Va.2002)............................383 Glazer v. Formica Corp., 964 F.2d 149 (2d Cir.1992)..................................381 Global Intellicom, Inc. v. Thomson Kernaghan & Co., No. 99 Civ. 342, 1999 WL 544708 (S.D.N.Y. July 27, 1999)..................................................386 Goldman v. Belden, 580 F.Supp. 1373 (W.D.N.Y.1984)................................365 Goldman v. Belden, 754 F.2d 1059 (2d Cir.1985)................................ 365, 379 Good v. Zenith Elecs. Corp., 751 F.Supp. 1320 (N.D.Ill.1990) ..........................377 Gordon v. Burr, 506 F.2d 1080 (2d Cir.1974) ........................................394 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir.1999).............................333 Gruber v. Price Waterhouse, 776 F.Supp. 1044 (E.D.Pa.1991)..........................376 Gryl v. Shire Pharm. Group PLC, 298 F.3d 136 (2d Cir.2002)..........................347 Guidry v. U.S. Tobacco Co., 188 F.3d 619 (5th Cir.1999) ......................... 327, 328 Gurary v. Winehouse, 190 F.3d 37 (2d Cir.1999).....................................387 Gustafson v. Alloyd Co., 513 U.S. 561 (1995).........................................299 H.L. Federman & Co. v. Greenberg, 405 F.Supp. 1332 (S.D.N.Y.1975)...................381 Hade v. Capozzi, No. 91 Civ. 5897,1996 WL 426394 (S.D.N.Y. July 30, 1996) ............375 Halperin v. eBanker USA.COM. Inc., 295 F.3d 352 (2d Cir.2002) ......................379 Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774 (7th Cir.1994)...................324 Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873 (7th Cir.1992)...................393 Health-Chem Corp. v. Baker, 915 F.2d 805 (2d Cir.1990)..............................397 Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir.2001) (en banc)..........................332 Henslee v. Union Planters Nat. Bank & Trust Co., 335 U.S. 595 (1949).................397 336, 343, Herman & MacLean v. Huddleston, 459 U.S. 375 (1983)......................... 344, 347 Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir.1999)......................344 Higgs v. Carver, 286 F.3d 437 (7th Cir.2002).........................................324
High View Fund, L.P. v. Hall, 27 P.Supp.2d 420 (S.D.N.Y.1998).......................371 Hishon v. King & Spalding, 467 U.S. 69 (1984)......................................323 Hollingerv. Titan Capital Corp., 914 F.2d 1564 (9th Cir.1990) (en banc)................393 Hotel Constructors, Inc. v. Seagrave Corp., 574 F.Supp. 384 (S.D.N.Y. 1983).............356 Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999).................................349 In reAccelr8 Tech. Corp. Sec. Litig., 147 F.Supp.2d 1049 (D.Colo.2001).................374 In re Adams Golf, Inc. Sec. Litig., 176 F.Supp.2d 216 (D.Del.2001).....................343 330 333 In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir.1999)...........................'. 335 In re Aetna, Inc. Sec. Litig., 34 F.Supp.2d 935 (E.D.Pa.1999)..........................355 In re Allaire Corp. Sec. Litig., 224 F.Supp.2d 319 (D.Mass.2002).................. 330, 355 In re Am. Express Co. Shareholders Litig., 39 F.3d 395 (2d Cir.1994)...................397 In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953 (2d Cir.1993)...................375 338 343 In re Ann.Taylor Stores Sec. Litig., 807 F.Supp. 990 (S.D.N.Y.1992)...................' .344 In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir.1989) ........................365 386, 389, In re Blech Sec. Litig., 928 F.Supp. 1279 (S.D.N.Y.1996) ("Blech I")....................390 374, 385, In re Blech Sec. Litig., 961 F.Supp. 569 (S.D.N.Y.1997) ("Blech II")....................387 In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201 (9th Cir.2002)................347 In re Chambers Dev. Sec. Litig., 848 F.Supp. 602 (W.D.Pa.1994).......................340 In re Chaus Sec. Litig., No. 88 Civ. 8641, 1990 WL 188921 (S.D.N.Y. Nov.20, 1990).....338 In re CINAR Corp. Sec. Litig., 186 F.Supp.2d 279 (E.D.N.Y.2002) .....................393 In re Citisource, Inc. Sec. Litig., 694 F.Supp. 1069 (S.D.N.Y.1988) .....................394 In re College Bound Consol. Litig., No. 93 Civ. 2348,1994 WL 172408 (S.D.N.Y. May 4,1994) ("College Bound I")....................................................338 In re College Bound Consol. Litig., No. 93 Civ. 2348 and 94 Civ. 3033, 1995 .. 386, 390, 391, WL 450486 (S.D.N.Y. July 31,1995) ("College Bound IF).......................passim In re Complete Mgmt. Inc. Sec. Litig., 153 F.Supp.2d 314 (S.D.N.Y.2001) ...............369 In re Control Data Corp. Sec. Litig., 933 F.2d 616 (8th Cir.1991).......................377 In re Credit Suisse First Boston Corp. Sec. Litig., No. 97 Civ. 4760, 1998 WL 734365 (S.D.N.Y. Oct.20, 1998).........................................................379 In re Deutsche Telekom AG Sec. Litig., No. 00 Civ. 9475, 2002 WL 244597 (S.D.N.Y. Feb.20,2002)............................................................. 363,393
In re Enron Corp. Sec., Derivative & ERISA Litig., MDL No. 1446, 235 F.Supp.2d 549 (S.D.Tex.2002).............................................................386 In re Equimed, Inc. Sec. Litig., No. 98-CV-5374, 2000 WL 562909 (E.D.Pa. May 9, 2000).........................................................................357 In re First Merchs. Acceptance Corp. Sec. Litig., No. 97-C2715, 1998 WL 781118 (N.D.Ill. Nov.4,1998)...........................................................339 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir.1994) (en banc)...................328 In re Green Tree Fin. Corp. Stock Litig., 61 F.Supp.2d 860 (D.Minn.1999), rev'd on other grounds, 270 F.3d 645 (8th Cir.2001)........................................356 In re Guilford Mills, Inc., Sec. Litig., No. 98 Civ. 7739, 1999 WL 33248953 (S.D.N.Y. July 21, 1999).................................................................368 In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F.Supp. 712 (S.D.N.Y.1989)..........381 In re Health Mgmt, Inc. Sec. Litig., 970 F.Supp. 192 (E.D.N.Y.1997)...................394 In re Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286 (S.D.N.Y. June 1,1998).................................................... 355, 359 In re Hyperion Sec. Litig., No. 93 Civ. 7179, 1995 WL 422480 (S.D.N.Y. July 14, 1995).........................................................................397 In re Independent Energy Holdings PLC Sec. Litig., 154 F.Supp.2d 741 (S.D.N.Y.2001)........................................................352, 393, 397 In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31780181 (S.D.N.Y. Dec.12, 2002)..................................................................374 In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31894620 (S.D.N.Y. Dec. 27, 2002..................................................................398 In re In-Store Adver. Sec. Litig., 878 F.Supp. 645 (S.D.N.Y.1995)......................338 In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 475 (S.D.N.Y.1989)....................377 In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248 (N.D.Cal.2000).............348 In re MobileMedia Sec. Litig., 28 F.Supp.2d 901 (D.N.J.1998).........................342 In re NationsMart Corp. Sec. Litig., 130 F.3d 309 (8th Cir.1997).......................338 In re Navarre Corp. Sec. Litig., 299 F.3d 735 (8th Cir.2002)...................... 333, 334 In re Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d 551 (D.N.J.2001).......................356 In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D. 133 (S.D.N.Y.1999)..............367 In re Party City Sec. Litig., 147 F.Supp.2d 282 (D.N.J.2001) ..........................356 In re PetsMart, Inc. Sec. Litig., 61 F.Supp.2d 982 (D.Ariz.1999)........................356 In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir.2001) ...........................367 In re Silicon Graphics, Inc. Sec. Litig., 970 F.Supp. 746 (N.D.Cal.1997).................355
In re Stac Elec. Sec. Litig., 89 F.3d 1399 (9th Cir.1996)...............................340 In re Sterling Foster & Co., Inc. Sec. Litig., 222 F.Supp.2d 289 (E.D.N.Y.2002)..........385 In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir.1993) ..................... 372, 381 In re Turkcell Iletisim Hismetler, AS. Sec. Litig., 202 F.Supp.2d 8 (S.D.N.Y.2001).....343 In re Twinlab Corp. Sec. Litig., 103 F.Supp.2d 193 (E.D.N.Y.2000)................ 343, 370 In re Ultimate Corp. Sec. Litig., No. 86 Civ. 5944, 1989 WL 86961 (S.D.N.Y. June 30, 1989) (mem.)..................................................................343 In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir.1996) ........................ 340, 341 INS v. National Ctr. for Immigrants' Rights, Inc., 502 U.S. 183 (1991).................337 Internet Law Library, Inc. v. Southridge Capital Mgmt, L.L.C., 223 F.Supp.2d 474 (S.D.N.Y.2002)........................................................... 386,390 IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049 (2d Cir.1993).................335 Jackson v. Stinnett, 102 F.3d 132 (5th Cir.1996) .....................................335 Johns Hopkins Univ. v. Hutton, 422 F.2d 1124 (4th Cir.1970) .........................379 Joseph v. Wiles, 223 F.3d 1155 (10th Cir.2000).......................................344 Kelly v. Schmidberger, 806 F.2d 44 (2d Cir.1986).....................................324 Knapp v. Ernst & Whinney, 90 F.3d 1431 (9th Cir.1996)..............................377 Kohler v. Kohler Co., 319 F.2d 634 (7th Cir.1963) ....................................380 Kramer v. Scientific Control Corp., 365 F.Supp. 780 (E.D.Pa.1973).....................348 Langadinos v. American Airlines, Inc., 199 F.3d 68 (1st Cir.2000)................ 324, 333 Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir.1973) (en banc)..........................394 Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163 (1993) .......................................................322, 324, 328 Lee v. Ernst & Young, LLP, 294 F.3d 969 (8th Cir.2002)..............................344 Levenson v. B. & M. Furniture Co., 120 F.2d 1009 (2d Cir.1941) (per curiam)............333 Levitin v. PaineWebber, Inc., 159 F.3d 698 (2d Cir.1998)..............................379 Lipton v. Domination, Inc., 734 F.2d 740 (11th Cir.1984).............................377 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir.2002)....................... 333, 335 Lirette v. Shiva Corp., 999 F.Supp. 164 (D.Mass.1998)................................355 List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.1965)................................379 Log On Am., Inc. v. Promethean Asset Mgmt, 223 F.Supp.2d 435 (S.D.N.Y.2001).....386
Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 P.3d 363 (5th Cir.2001)........ 339, 341 Luce v. Edelstein, 802 P.2d 49 (2d Cir. 1986).................................... 329, 397 Lucente v. International Bus. Mach. Corp., 310 F.3d 241 (2d Cir.2002) .................397 Lyeth v. Chrysler Corp., 929 P.2d 891 (2d Cir.1991) ..................................326 Lynx Ventures LP v. Canadian Imperial Bank of Commerce, No. CV 99-07160, 2000 WL 33223384 (C.D.Cal. Apr.18, 2000)........................................373 Manufacturers Hanover Trust Co. v. Drysdale Sec. Corp., 801 F.2d 13 (2d Cir.1986).....372 Marbury Mgmt, Inc. v. Kohn, 629 F.2d 705 (2d Cir.1980)........................ 392, 394 Market Co. v. Hoffman, 101 U.S. 112 (1879).................................... 338, 349 Markowski v. SEC, 274 F.3d 525 (D.C.Cir.2001), cert. denied, 123 S.Ct. 96 (2003).....391 Marvel Characters, Inc. v. Simon, 310 F.3d 280 (2d Cir.2002)..........................349 McDaniel v. Compania Minera Mar de Cortes, Sociedad Anonimo, Inc., 528 F.Supp. 152 (D.Ariz.1981).......................................................352 McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226 (1st Cir.1980 .....................328 McHenry v. Renne, 84 F.3d 1172 (9th Cir.1996)......................................324 McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576 (2d Cir.1990)................380 McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044 (2d Cir.1995)........... 344, 351 MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F.Supp.2d 251 (S.D.N.Y.2002)........................................................294, 300, 332 Melder v. Morris, 27 F.3d 1097 (5th Cir.1994).......................................339 Metge v. Baehler, 762 F.2d 621 (8th Cir.1985)........................................393 Metzner v. D.H. Blair & Co., 689 F.Supp. 262 (S.D.N.Y.1988)..........................380 Michaels Bldg. Co. v. Ameritrust Co., 848 F.2d 674 (6th Cir.1988)......................327 Miller v. Steinberg, 268 F.Supp. 255 (S.D.N.Y.1967)..................................361 Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir.1993)............................328 Milman v. Box Hill Sys. Corp., 192 F.R.D. 105 (S.D.N.Y.2000) ........................344 Mishkin v. Ageloff, No. 97 Civ. 2690, 1998 WL 651065 (S.D.N.Y. Sept.23, 1998)..... 393, 395 Missouri Hons. Dev. Comm'n v. Brice, 919 F.2d 1306 (8th Cir.1990)....................324 Montclair v. Ramsdell, 107 U.S. 147 (1883) .........................................349 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)............................338 Morisette v. United States, 324 U.S. 246 (1952)......................................394
Muniz v. United States, 236 F.3d 122 (2d Cir.2001) ..................................349 Nanopierce Techs. Inc. v. Southridge Capital Mgmt. LLC, No. 02 Civ. 0767,.. 372, 386, 391, 2002 WL 31819207 (S.D.N.Y. Oct.10, 2002) ....................................... 392 National Ass'n of Life Underwriters, Inc. v. Commissioner of Internal Revenue, 30 F.3d 1526 (D.C.Cir.1994)........................................................324 Nelson v. Paramount Communications, Inc., 872 F.Supp. 1242 (S.D.N.Y.1994)..........338 Newman v. Silver, 713 F.2d 14 (2d Cir.1983)........................................324 325, 330, 334, Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000).....................................passim O'Brien v. National Prop. Analysts Partners, 936 F.2d 674 (2d Cir.1991)...............325 Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir.1996)......................372 Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir.1990)............................. 326, 328 Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 WL 148558 (M.D.Fla. Mar.25, 1997).........................................................................373 Peil v. Speiser, 806 F.2d 1154 (3d Cir.1986) .........................................375 Phelps v. Kapnolas, 308 F.3d 180 (2d Cir.2002)................................. 331, 342 Phelps v. Wichita Eagle-Beacon, 886 F.2d 1262 (10th Cir.1989)........................328 Pierce v. Marano, No. 01 Civ. 3410, 2002 WL 1858772 (S.D.N.Y. Aug.13, 2002)...........331 PPM Am., Inc. v. Marriott Corp., 853 F.Supp. 860 (D.Md.1994)........................348 Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir.1999)................... 375, 384 Rankow v. First Chicago Corp., 870 F.2d 356 (7th Cir.1989)...........................374 Reingold v. Deloitte Haskins & Sells, 599 F.Supp. 1241 (S.D.N.Y.1984).................376 Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir.2002) ...........396 RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F.Supp.2d 389 (S.D.N.Y.2002).....377 Robbins v. Moore Med. Corp., 788 F.Supp. 179 (S.D.N.Y.1992).........................394 Robinson v. Shell Oil Co., 519 U.S. 337 (1997).......................................348 Rochez Bros., Inc. v. Rhoades, 527 F.2d 880 (3d Cir.1975).............................393 Ross v. AH. Robins Co., Inc., 607 F.2d 545 (2d Cir.1979) ........................ 328, 384 Ross v. Bank South, N.A, 885 F.2d 723 (11th Cir.1989) (en banc)......................377 Ross v. Bolton, 904 F.2d 819, 823 (2d Cir.1970) ......................................325 Ross v. Warner, 480 F.Supp. 268 (S.D.N.Y.1979).....................................338 Rothman v. Gregor, 220 F.3d 81 (2d Cir.2000).......................................374
Ruskin v. TIG Holdings, Inc., No. 98 Civ. 1068, 2000 WL 1154278 (S.D.N.Y. Aug. 14, 2000).........................................................................365 Sandstad v. CB Richard Ellis, Inc., 309 F.3d 893 (5th Cir.2002)........................310 Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) ..................................387 Sarlie v. E.L. Bruce Co., 265 F.Supp. 371 (S.D.N.Y.1967)..............................348 Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 98108 (S.D.N.Y. Mar. 15, 1994).....331 Schaller Tel, Co. v. Golden Sky Sys., Inc., 298 F.3d 736 (8th Cir.2002)..................327 Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir.1974), overruled on other grounds by Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 .....329, 372, 373, (1991)....................................................................... 375 Schmedding v. Tnemec Co., 187 F.3d 862 (8th Cir.1999)...............................324 Schnell v. Conseco, Inc., 43 F.Supp.2d 438 (S.D.N.Y.1999).............................372 Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir.1968) (en banc).......................385 Schoenfeld v. Giant Stores Corp., 62 F.R.D. 348 (S.D.N.Y.1974)........................339 Schoenhaut v. American Sensors, Inc., 986 F.Supp. 785 (S.D.N.Y.1997).................338 Schott Motorcycle Supply, Inc. v. American Honda Motor Co., 976 F.2d 58 (1st Cir. 1992) .....................................................................324 Scone Invs. LP. v. American Third MM, Corp., No. 97 Civ. 3802, 1998 WL 205338 (S.D.N.Y. Apr.28, 1998).................................................... 376, 386 Sears v. Likens, 912 F.2d 889 (7th Cir.1990).........................................339 SEC v. Blech, No. 99 Civ. 4770, 2000 WL 288263 (S.D.N.Y. Mar.20, 2000) ...............386 299 325 SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963) .........................' .382 SEC v. Environmental, Inc., 82 F.Supp.2d 237 (S.D.N.Y.2000).........................386 352 393 SEC v. First Jersey Sec, Inc., 101 F.3d 1450 (2d Cir.1996)....................... 394, 395 SEC v. Schiffer, No. 97 Civ. 5853,1998 WL 226101 (S.D.N.Y. May 5, 1998)..............385 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968) (en banc).............. 379, 383 SEC v. Zandford, 122 S.Ct. 1899 (2002)........................................ 299, 387 Segal v. Gordon, 467 F.2d 602 (2d Cir.1972).................................... 327, 328 Sennott v. Rodman & Renshaw, 424 U.S. 926 (1973)..................................395 Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786 (3d Cir.1984).....327 Shapiro v. UJB Fin. Corp., 964 F.2d 272 (3d Cir.1992)................................339 335, 363, Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir.1994) .................... 364, 369
Shores v. Sklar, 647 F.2d 462 (5th Cir.1981) (en banc) ................................377 Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157 (2d Cir.1999) ................................................................ 356,385 Simpson v. Specialty Retail Concepts, 823 F.Supp. 353 (M.D.N.C.1993).................377 Soo Line R.R. Co. v. St. Louis Southwestern Ry. Co., 125 F.3d 481 (7th Cir.1997).....324 Staples v. United States, 511 U.S. 600 (1994)........................................394 Stearns v. Page, 48 U.S. (7 How.) 819 (1849).........................................325 Steed Fin. LDC v. Nomura Sec. Int'l, Inc., No. 00 Civ. 8058, 2001 WL 1111508 (S.D.N.Y. Sept.20, 2001)........................................................363 Stern v. Leucadia Natl Corp., 844 F.2d 997 (2d Cir.1988).............................329 Stevelman v. Alias Research, Inc., 174 F.3d 79 (2d Cir.1999)..........................365 Stone Motor Co. v. General Motors Corp., 293 F.3d 456 (8th Cir.2002)..................324 372, 373, 374, 375, Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.2001) passim Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir.1995)............... 387, 389 Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) ...................387 322, 323, 333, 340, 342, pas- Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002)................................... sim T.H.C., Inc. v. Fortune Petroleum Corp., Nos. 96 Civ. 2690-91, 1999 WL 182593 (S.D.N.Y. Mar.31, 1999) ........................................................386 T.J. Raney & Sons v. Fort Cobb, Okla, Irrigation Fuel Auth, 717 F.2d 1330 (10th Cir.1983).....................................................................377 Tho Dinh Tran v. Alphonse Hotel Corp., 281 F.3d 23 (2d Cir.2002)................ 324, 346 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)...............................379 United States v. Apfelbaum, 445 U.S. 115 (1980).....................................394 United States v. Charney, 537 F.2d 341 (9th Cir.1976)................................382 United States v. Clark, 359 F.Supp. 128 (S.D.N.Y.1973)...............................387 United States v. Fisher, 6 U.S. (2 Cranch) 358 (1805).................................337 United States v. Gonzales, 520 U.S. 1 (1997).........................................348 United States v. Menasche, 348 U.S. 528 (1955)......................................349 United States v. Mulheren, 938 F.2d 364 (2d Cir.1991)........................... 391, 392 United States v. Nordic Vill, Inc., 503 U.S. 30 (1992)............................ 337, 349 United States v. Pacheco, 225 F.3d 148 (2d Cir.2000).................................383 United States v. Regan, 937 F.2d 823 (2d Cir.1991)...................................382
United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)...........................349 United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am. Inc., 508 U.S. 439 (1993)........................................................... 337, 349 Vandenberg v. Adler, No. 98 Civ. 3544, 2000 WL 342718 (S.D.N.Y. Mar. 31, 2000).....386 Vess v. Ciba-Geigy Corp. USA — F.3d-, No. 01-55834, 2003 WL 203124 (9th Cir. Jan.31, 2003)..............................................................340 Walker v. Thompson, 288 F.3d 1005 (7th Cir.2002)...................................323 Washington Nat'l Ins. Co. of New York v. Morgan Stanley & Co., No. 90 Civ. 3342, 1999 WL 461796 (S.D.N.Y. July 2,1999)..........................................376 Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir.1997)................................355 Weixel v. Board of Educ. of New York, 287 F.3d 138 (2d Cir.2002)......................331 Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir.1990)...........................329 Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir.1997)............................326 Zeid v. Kimberley, 973 F.Supp. 910 (N.D.Cal.1997), reversed on other grounds, 201 F.3d 446 (9th Cir.1999) (table)...................................................356 Ziemba v. Cascade Int'l Inc., 256 F.3d 1194 (11th Cir.2001) ...........................327 Zucker v. Quasha, 891 F.Supp. 1010 (D.N.J.1995)....................................343 People v. Dozier, 424 N.Y.S.2d 1010 (2d Dep't 1980)..................................394 STATE CASES 15 U.S.C. § 77k............................................................... passim § 771.....................................................................299 § 77o............................................................... 299, 314, 351 § 77z-l ..................................................................337 § 77aa, Schedule A................................................... 381, 383 §§ 78a-78mm..............................................................299 § 78i................................................................ 299,361 § 78j................................................................ 299,314, 334 § 78m............................................................... 299,334 § 78n............................................................... 299, 334 § 78p....................................................................299 § 78r....................................................................299 § 78t ............................................................... 299,314 § 78t-l ..................................................................299 § 78u^............................................................. passim §§ 79et seq ...............................................................299 §§ 80a-l et seq ............................................................299 §§ 80b-l et seq............................................................299 26 U.S.C. § 586(d)...............................................................394 28 U.S.C. § 2072(a)..............................................................322 Pub.L. No. 107-204 § 804(a), 116 Stat. 745 ..........................................294 48 Stat. 74 (1933)................................................................349 STATUTES
FEDERAL RULES Fed.R.Civ.P. 8 .................................................................... passim 9 .................................................................... passim 10 ................................................................... 331, 347 11 ........................................................................326 12 ................................................................... passim 15 ................................................................... 356,397 54 ........................................................................323 84 ................................................................... 323,328 App. Form 9 .......................................................... 323, 324, 327 342 App. Form 13 ......................................................... 327' 373 Fed.R.Evid. 201(b)(2)...................................................................357 803(17)....................................................................357 17 C F R ' §' 229.508(e)........................................................... 312, 354, 381, 383 § 240.10b-5........................................................... passim § 240.12b-2................................................................352 § 240.14a-9 ........................................................... 299, 334 § 210.11c 3 ........................................................... 299, 334 § 242.101 ............................................................. 311, 354, 390 § 242.104 ............................................................. 360, 382, 389, 390 FEDERAL REGULATIONS Certain Manipulative Practices in Public Offerings, Exchange Act Release No. 11328, 40 Fed.Reg. 16090,16091-92 (Apr. 2, 1975)..................................304 Exchange Act Release No. 26182 (Oct. 14, 1988), available at 1988 WL 999999...........304 Exchange Act Release No. 10636, 39 Fed.Reg. 7806 (Feb. 11, 1974) ....................304 Exchange Act Release No. 9673 (July 26, 1972)......................................303 Exchange Act Release No. 34-4163, available at 1948 WL 28675 (Sept. 16, 1948) passim Securities Act Release Nos. 5274, 5276, 5277, 5279 (July 26, 1972)......................303 Securities Act Release No. 4358/Exchange Act Release No. 6536 (Apr. 24, 1961), available at 1961 WL 61584 .....................................................301 Report of Special Study of Securities Markets of the Securities and Exchange.. 300, 301, 302, Commission, H.R. Doc. No. 88-95 (1st Sess.1963) ("SEC Special Study").......passim Report of the Securities and Exchange Commission Concerning the Hot ......300, 301, 302, Issues Markets (Aug.1984) ("Hot Issues Report").......................... 303, passim Public Investigation in the Matter of Hot Issues Securities Markets, Ad. File No. 4- 148 (1972) ("SEC File No. 4-148").......................................... 300, 303 U.S. Securities and Exchange Commission Staff Legal Bulletin No. 10, Aug. 25, 2000 available at http://www.sec.gov/interps/legal/slbmr1O.htm ("SEC Legal Bulletin")............................................................300, 307, 390 SEC/NASD AGENCY AUTHORITIES
NASD Rule 2330 ................................................................381 NASD Rule 2440 ........................................................... 313, 381 312, 381, NASD Rule 2710(c)..............................................................383 141 Cong. Rec. 37801 (1995).......................................................331 78 Cong. Rec. 8716 (1934).........................................................350 330, 335, 372 374 S.Rep. No. 104-98 (1995) ........................................................' .396 S.Rep. No. 73-792 (1934) .................................................... 299, 395 S.Rep. No. 73-17 (1933) ..........................................................349 H.R. Conf. Rep. No. 104-369 (1995)................................................358 H.R. Conf. Rep. No. 73-1383 (1934)........................................... 387, 395 H.R.Rep. No. 73-85 (1933)................................................... 295, 349 Federal Securities Act: Hearings before the House Interstate and Foreign Commerce Committee, 73d Cong. 145-46 (1933)........................................349 Securities Act: Hearings before the Senate Banking and Currency Committee, 73d Cong. 87-88, 149-54, 230 (1933)..................................................350 Legislative History of the Securities Act of 1933 and Securities Exchange Act of 193h (J.S. Ellenberger & Ellen P. Mahar eds.1973).................................298 LEGISLATIVE HISTORY OTHER AUTHORITIES 1. Dictionaries and Treatises The American Heritage Dictionary of the English Language (4th ed.2000)..............346 Black's Law Dictionary (7th ed.1999) ......................................... 330,394 Websters Third Int'l Dictionary (1963).............................................394 Arnold S. Jacobs, Disclosure and Remedies Under the Securities Laws (2002)...........389 Michael J. Kaufman, Securities Litigation: Damages (2002) ..........................348 W. Page Keeton et al., Prosser and Keeton on Torts (5th ed.1984)......................379 David L. Scott, Wall Street Words 326 (Rev. ed.1997).................................310 Louis Loss & Joel Seligman, Securities Regulation (3d ed.1992).................. 361, 388 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure (3d.. 325, 326, 328, ed.1998)..................................................................... 329 Restatement (Second) of Torts (1977) ..............................................379
Scholarly Articles> Allen, Samuel N., A Lawyer's Guide to the Operation of Uriderwriting Syndicates, 26 New Eng. L.Rev. 349 (1991)..................................................361 Clurman, David, Controlling a Hot Issue Market, 56 Cornell L.Rev. 74 (1970)...........303 Coffee, John C, Brave New World? The Impact(s) of the Internet on Modern Securities Regulation, 52 Bus. Law. 1195 (1997)...................................376 Conrad, Jr., Winthrop B. and Bruce K. Dallas, The Registration Process—Overview and Selected Considerations, in How to Prepare an Initial Public Offering 2001 157 (Practicing Law Institute Corporate Law and Practice Course Handbook Series No. B0-01BW, 2001).....................................................312 DeSimone, Joseph, Note, Should Fraud on the Market Theory Extend to the Context of Newly Issued Securities?, 61 Fordham L.Rev. S151 (1993) ................377 DeValerio, Glen & Kathleen M. Donovan-Maher, Information and Belief Pleading Under the Private Securities Litigation Reform Act of1995, SF86 ALI-ABA 365 (Course of Study May 10, 2001)..................................................355 Douglas, William O., & George E. Bates, The Federal Securities Act of1933, 43 Yale L.J. 171 (1933) ................................................................350 Hanna, John, The Securities Exchange Act of1934, 23 Cal. L.Rev. 1 (1934)..............350 Ibbotson, Roger G., et al., The Market's Problems with the Pricing of Initial Public Offerings, 6 J. Applied Corp. Fin. (1994)..........................................300 Landis, James M., The Legislative History of the Securities Act of1933, 28 Geo. Wash. L.Rev. 29 (1959).........................................................351 Murray, Brian and Donald J. Wallace, You Shouldn't Have To Plead More Than You Have To Prove, 53 Baylor L.Rev. 783 (2001) ..................................341 Newkirk, Robert G., Comment, Sufficient Efficiency: Fraud on the Market in the Initial Public Offering Context, 58 U. Chi. L.Rev. 1393 (1991).......................377 Note, The Fraud-on-the-Market Theory, 95 Harv. L.Rev. 1143 (1982)..................377 Pastuszenski, Brian E., et al., Post-PSLRA Judicial Treatment of Insider Trading Allegations as a Basis for Pleading Scienter in Securities Fraud Cases, SG091 ALI-ABA 831 (Course of Study May 2-3, 2002) ...................................367 Prentice, Robert, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals For Its Future, 51 Duke L.J. 1397 (2002)................. 300, 376 Ritter, Jay R., The Hot Issue' Market of1980, 57 J. Bus. 215 (1984)....................300 Shulman, Harry, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933)..........350 Steve, Thel, The Original Conception of Section10 (b) of the Securities Exchange Act, 42 Stan. L.Rev. 385 (1990)..................................................298 Turnquist, Krista L., Note, Pleading Under Section11 of the Securities Act of1933, 98 Mich. L.Rev. 2395 (2000).....................................................341
Wysocki, Sandra P., Note, Controlling Personal Liability of Directors Under Section 20(A) of the Securities Exchange Act of 1934, 31 Suffolk U.L.Rev. 695 (1998)........................................................................393 3. Newspaper Articles D.H. Blair Ex-Broker Pleads Guilty to Charges of Stock Fraud in IPOs, Wall. St. J, June 6, 2001, at B10.........................................................358 Greg Ip, et al., Internet Bubble Broke Records, Rules and Bank Accounts, Wall St. J., July 14, 2000, at Al .........................................................358 Howard Kurtz, Risky Business, Wash. Post, Aug. 27, 2000, at W08.....................358 Suzanne McGee, Venture Capitalists R' Us: CacheFlow: The Life Cycle of a Venture-Capital Deal, Wall St. J., Feb. 22, 2000 at C1, available at 2000 WL-WSJ 3018799 ......................................................................309 Patrick McGeehan, Hedge Fund Managers Said to Talk to Grand Jury, N.Y. Times, May 11, 2001, at C1............................................................316 Susan Pulliam & Randall Smith, Linux Deal is Focus of IPO-Commission Probe, Wall St. J., Dec. 12, 2000, at C1..................................................358 Susan Pulliam, et al. SEC Intensifies Inquiry into Commissions for Hot IPOs— Goldman, Bear Stearns and Morgan Stanley Get Requests for Data, Wall St. J., Dec. 13, 2000, at C1....................................................... 358, 359 Susan Pulliam & Randall Smith, Trade Offs: Seeking IPO Shares, Investors Offer to Buy More in After-Market, Wall St. J., Dec. 6, 2000, at Al .........................359 Susan Pulliam & Randall Smith, Trying to Avoid the Flippers, Wall St. J., Dec. 6, 2000 .................................................................... 294, 307 Susan Pulliam & Randall Smith, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000 ........................................................308 Neil Roland, Credit Suisse Pays US$100M Over IPOs: Avoids Fraud Charges, Nat'l Post, Jan. 23, 2002, at FP16.....................................................359 Randall Smith & Susan Pulliam, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000, at C1...................................................359 Bruce Weber, Burning Bridges arid Bridging Disasters: Lampooning@disorganization. com, N.Y. Times, May 14, 2002 ............................................306 4. Miscellaneous Lewis Carroll, Through the Looking Glass..........................................383 John Cassidy, Dot.con: The Greatest Story Ever Sold (2002) ..........................306 Lori Gottlieb & Jesse Jacobs, Inside the Cult of Kibu: And Other Tales of the Millennial Gold Rush (2002)....................................................306 Casey Kait & Stephen Weiss, Digital Hustlers: Living Large and Falling Hard in Silicon Alley (2001)............................................................306 David Kuo, dot.bomb: My Days and Nights at an Internet Goliath....................306
Arthur Levitt, Remarks before the 2000 Annual Meeting of the Securities Industry Association(Nov. 9, 2000)......................................................303 Michael Lewis, The New New Thing: A Silicon Valley Story (2001)....................306 Stephan Paternot, A Very Public Offering: A Rebel's Story of Business Excess, Success and Reckoning (2001)...................................................306 Madsen Pirie, The Book of the Fallacy: A Training Manual for Intellectual Subversives (1985).............................................................388 Jay Ritter, Big Runups of 1975-2000 (Aug.2001) available at http://bear.cba.ufl.edu/ritter/runup750.pdf.........................................306 Jay Ritter, IPO Data, at http://bear.cba.ufl.edu/ritter/ipodata.htm......................300 Jay Ritter, Money Left an the Table in IPOs, Working Paper (Jan. 14, 2003), available at http://bear.cba.ufl.edu/ritter/work_papers/monew.pdf....................369 Jay Ritter & Tim Loughran, Why Has IPO Underpricing Changed Over Time?, Working Paper (Jan. 16, 2003), available at http://bear.cba.ufl.edu/ritter/work_pa- pers/whynew.pdf..............................................................293 Behind the Startup: IceVan.com (Sharon Zezima & Kal Deutsch 2002), available at http://www.icevan.com/.....................................................306 Dotcom: Hot Tubs, Pork Chops and Valium (Brett Singer & Simeon Schnapper 2002).........................................................................306 E-Dreams (Wonsuk Chin & Sam Pai 2002) .........................................306 Proverbs 21:23 (New International Version).........................................324 Start-up.com (Artisan Entertainment 2001).........................................306 What Happened (The Means of Production, Inc.2002) ................................306
CASES CONSOLIDATED AS IN RE INITIAL PUBLIC OFFERING SECURITIES
LITIGATION, 21 MC 92
In re 724 Solutions, Inc. IPO Sec. Litig., 01 Civ. 5333 In re Accelerated Networks, Inc. IPO Sec. Litig., 01 Civ. 5644 In re Aclara Biosciences, Inc. IPO Sec. Litig., 01 Civ. 10050 In re Aether Systems, Inc. IPO Sec. Litig., 01 Civ. 5570 In re Agency.com, Ltd. IPO Sec. Litig., 01 Civ. 5902 In re Agile Software Corp. IPO Sec. Litig., 01 Civ. 9413 In re Agilent Technologies, Inc. IPO Sec. Litig., 01 Civ. 10639 In re AirGate PCS Inc. IPO Sec. Litig., 01 Civ. 9801 In re Airnet Communications Corp. IPO Sec. Litig., 01 Civ. 10161 In re Airspan Networks, Inc. IPO Sec. Litig., 01 Civ. 6747 In re Akamai Technologies, Inc. IPO Sec. Litig., 01 Civ. 6000 In re Alamosa PCS Holdings IPO Sec. Litig., 01 Civ. 11235 In re Alloy Online, Inc. IPO Sec. Litig., 01 Civ. 9742 In re Antigenics, Inc. IPO Sec. Litig., 01 Civ. 9741 In re Apropos Technology, Inc. IPO Sec. Litig., 01 Civ. 9982 In re Ariba, Inc. IPO Sec. Litig., 01 Civ. 2359 In re Ashford.com, Inc. IPO Sec. Litig., 01 Civ. 6275
In re Asialnfo Holdings, Inc. IPO Sec. Litig., 01 Civ. 10901 In re Ask Jeeves, Inc. IPO Sec. Litig., 01 Civ. 9422 In re Aspect Medical Systems, Inc. IPO Sec. Litig., 01 Civ. 7090 In re Audible, Inc. IPO Sec. Litig., 01 Civ. 5258 In re Autobytel.com, Inc. IPO Sec. Litig., 01 Civ. 6825 In re AutoWeb.com, Inc. IPO Sec. Litig., 01 Civ. 3360 In re Avanex Corp. IPO Sec. Litig., 01 Civ. 6890 In re AvantGo, Inc. IPO Sec. Litig., 01 Civ. 9618 In re Avenue A, Inc. IPO Sec. Litig., 01 Civ. 5446 In re Avici Systems, Inc. IPO Sec. Litig., 01 Civ. 3363 In re B2B Internet HOLDRS IPO Sec. Litig. 01 Civ. 2858 In re Backweb Technologies Ltd. IPO Sec. Litig., 01 Civ. 10000 In re Be Free, Inc. IPO Sec. Litig., 01 Civ. 10827 In re Blue Martini Software, Inc. IPO Sec. Litig., 01 Civ. 6241 In re Bookham Technology PLC IPO Sec. Litig., 01 Civ. 9883 In re Bottomline Technologies, Inc. IPO Sec. Litig., 01 Civ. 6824 In re Braun Consulting, Inc. IPO Sec. Litig., 01 Civ. 10629 In re Breakaway Solutions, Inc. IPO Sec. Litig., 01 Civ. 6397 In re Brocade Communications Systems, Inc. IPO Sec. Litig., 01 Civ. 6613 In re BSquare Corp. IPO Sec. Litig., 01 Civ. 6216 In re Buy.com, Inc. IPO Sec. Litig., 01 Civ. 6323 In re Cacheflow, Inc. IPO Sec. Litig., 01 Civ. 5143 In re Caldera Systems, Inc. IPO Sec. Litig., 01 Civ. 6271 In re Calico Commerce, Inc. IPO Sec. Litig., 01 Civ. 2601 In re Caliper Technologies Corp. IPO Sec. Litig., 01 Civ. 5072 In re Capstone Turbine Corp. IPO Sec. Litig., 01 Civ. 11220 In re Carrierl International SA IPO Sec. Litig., 01 Civ. 10940 In re Centra Software, Inc. IPO Sec. Litig., 01 Civ. 10988 In re Chartered Semiconductor Manufacturing, Ltd. IPO Sec. Litig., 01 Civ. 10839 In re Chinadotcom Corp. IPO Sec. Litig., 01 Civ. 5937 In re Choice One Communications, Inc. IPO Sec. Litig., 01 Civ. 10576 In re Chordiant Software, Inc. IPO Sec. Litig., 01 Civ. 6222 In re Clarent Corp. IPO Sec. Litig., 01 Civ. 6322 In re Click Commerce, Inc. IPO Sec. Litig., 01 Civ. 11234 In re Cobalt Networks IPO Sec. Litig., 01 Civ. 10971 In re Commerce One, Inc. IPO Sec. Litig., 01 Civ. 5575 In re CommTouch Software, Inc. IPO Sec. Litig., 01 Civ. 7044 In re Concur Technologies, Inc. IPO Sec. Litig., 01 Civ. 6828 In re Copper Mountain Networks, Inc. IPO Sec. Litig., 01 Civ. 10943 In re Corio, Inc. IPO Sec. Litig., 01 Civ. 10686 In re Corvis Corp. IPO Sec. Litig., 01 Civ. 3857 In re CoSine Communications, Inc. IPO Sec. Litig., 01 Civ.10105 In re Covad Communications Group, Inc. IPO Sec. Litig., 01 Civ. 5834 In re Critical Path, Inc. IPO Sec. Litig., 01 Civ. 6542 In re CyberSource Corp. IPO Sec. Litig., 01 Civ. 7000 In re Daleen Technologies, Inc. IPO Sec. Litig., 01 Civ. 10944 In re Data Return Corp. IPO Sec. Litig., 01 Civ. 10107 In re deCode Genetics, Inc. IPO Sec. Litig., 01 Civ. 11219 In re Delano Technology Corp. IPO Sec. Litig., 01 Civ. 7180 In re Deltathree.com, Inc. IPO Sec. Litig., 01 Civ. 5425 In re Dice, Inc. (Earthweb) IPO Sec. Litig., 01 Civ. 9747 In re Digimarc Corp. IPO Sec. Litig., 01 Civ. 3792 In re Digital Impact, Inc. IPO Sec. Litig., 01 Civ. 4942 In re Digital Insight Corp. IPO Sec. Litig., 01 Civ. 11231 In re Digital Island, Inc. IPO Sec. Litig., 01 Civ. 6887 In re Digital River, Inc. IPO Sec. Litig., 01 Civ. 7355 In re DigitalThink, Inc. IPO Sec. Litig., 01 Civ. 9619 In re Digitas, Inc. IPO Sec. Litig., 01 Civ. 5948 Vicki M. Muller, et al. v. Diversa Corp., et al., 02 Civ. 9699
In re DoubleClick, Inc. IPO Sec. Litig., 01 Civ. 3980 In re DrKoop.com, Inc. IPO Sec. Litig., 01 Civ. 6242 In re Drugstore.com, Inc. IPO Sec. Litig., 01 Civ. 5838 In re E-LOAN, Inc. IPO Sec. Litig., 01 Civ. 7467 In re E.piphany, Inc. IPO Sec. Litig., 01 Civ. 6158 In re eBenx, Inc. IPO Sec. Litig., 01 Civ. 9411 In re EGain Communications Corp. IPO Sec. Litig., 01 Civ. 9414 In re El Sitio, Inc. IPO Sec. Litig., 01 Civ. 5089 In re Eloquent, Inc. IPO Sec. Litig., 01 Civ. 6775 In re Engage Technologies, Inc. IPO Sec. Litig., 01 Civ. 8404 In re Equinix, Inc. IPO Sec. Litig., 01 Civ. 7002 In re eToys, Inc. IPO Sec. Litig., 01 Civ. 5911 In re Evolve Software, Inc. IPO Sec. Litig., 01 Civ. 9800 In re Exchange Applications, Inc. IPO See. Litig., 01 Civ. 9516 In re Exfo Electro Optical Engineering, Inc. IPO Sec. Litig., 01 Civ. 10684 In re Expedia, Inc. IPO Sec. Litig., 01 Civ. 4973 In re Extensity, Inc. IPO Sec. Litig., 01 Civ. 11246 In re Extreme Networks, Inc. IPO Sec. Litig., 01 Civ. 6143 In re F5 Networks, Inc. IPO Sec. Litig., 01 Civ. 7055 In re Fairmarket, Inc. IPO Sec. Litig., 01 Civ. 6948 In re Fatbrain.com, Inc. IPO Sec. Litig., 01 Civ. 10164 In re Finisar Corp. IPO Sec. Litig., 01 Civ. 10813 In re FirePond, Inc. IPO Sec. Litig., 01 Civ. 7048 In re FlashNet Communications, Inc. IPO Sec. Litig., 01 Civ. 10738 In re Focal Communications Corp. IPO Sec. Litig., 01 Civ. 10111 In re Foundry Networks, Inc. IPO Sec. Litig., 01 Civ. 10640 In re FreeMarkets, Inc. IPO Sec. Litig., 01 Civ. 7039 In re Gadzoox Networks, Inc. IPO Sec. Litig., 01 Civ. 5039 In re Gigamedia Ltd. IPO Sec. Litig., 01 Civ. 10884 In re Global Crossing, Ltd. IPO Sec. Litig., 01 Civ. 7023 In re GlobeSpan, Inc. IPO Sec. Litig., 01 Civ. 10741 In re GoTo.com, Inc. IPO Sec. Litig., 01 Civ. 6339 In re GRIC Communications, Inc. IPO Sec. Litig., 01 Civ. 6771 In re GT Group Telecom, Inc. IPO Sec. Litig., 01 Civ. 9748 In re Handspring, Inc. IPO Sec. Litig., 01 Civ. 7033 In re High Speed Access Corp. IPO Sec. Litig., 01 Civ. 9743 In re Hoover's, Inc. IPO Sec. Litig., 01 Civ. 10122 In re iBasis, Inc. IPO Sec. Litig., 01 Civ. 6272 In re iBeam Broadcasting Corp. IPO Sec. Litig., 01 Civ. 6842 In re iManage, Inc. IPO Sec. Litig., 01 Civ. 6277 In re Immersion Corp. IPO Sec. Litig., 01 Civ. 9975 In re IMPSAT Fiber Networks, Inc. IPO Sec. Litig., 01 Civ. 9710 In re Informatica Corp. IPO Sec. Litig., 01 Civ. 9922 In re InforMax, Inc. IPO Sec. Litig., 01 Civ. 10834 In re Inforte Corp. IPO Sec. Litig., 01 Civ. 10836 In re Inrange Technologies Corp. IPO Sec. Litig., 01 Civ. 10800 In re InsWeb Corp. IPO Sec. Litig., 01 Civ. 10969 In re Integrated Information Systems, Inc. IPO Sec. Litig., 01 Civ. 6120 In re Integrated Telecom Express, Inc. IPO Sec. Litig., 01 Civ. 10108 In re InterNAP Network Services Corp. IPO Sec. Litig., 01 Civ. 6084 In re Internet Capital Group, Inc. IPO Sec. Litig., 01 Civ. 3975 In re Internet Infrastructure HOLDRS IPO Sec. Litig., 01 Civ. 7654 In re Internet Initiative Japan IPO Sec. Litig., 01 Civ. 10974 In re Intersil Holding Corp. IPO Sec. Litig., 01 Civ. 5144 In re InterTrust Technologies Corp. IPO Sec. Litig., 01 Civ. 4187 In re Interwave International Ltd. IPO Sec. Litig., 01 Civ. 10598 In re Interwoven, Inc. IPO Sec. Litig., 01 Civ. 9917 In re Intraware, Inc. IPO Sec. Litig., 01 Civ. 9349 In re iPrint Technologies, Inc. (F/k/a Iprint.com) IPO Sec. Litig., 01 Civ. 5365
Individual Defendants Against Whom the Section 15 Claims Are Dismissed:
INDIVIDUAL DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE DENIED:
A. Individual Defendants for Whom Scienter Has Been Adequately Alleged:
C. Individual Defendants Not Alleged to Have Sold (and/or Owned) Shares:
E. Individual Defendants Alleged to Have Sold Less Than Ten Percent of Their Total Holdings
A. Issuers Not Named as Defendants
ISSUER DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE DENIED:
B.
Issuer Defendants for Whom Scienter Has Been Adequately Alleged:
ISSUER DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE GRANTED:
C. Issuers Against Whom There Are No Allegations of Motive
FootNotes
References to Underwriters' motion and brief are given as "X Und. Mem. at Y," the first number being the volume of the brief, the second being the page number (Underwriters submitted their moving brief in six volumes). References to Plaintiffs' opposition to these briefs are given as "X Pl. Mem. at Y," and Underwriters' reply are given as "X Und. Reply at Y." References to Issuers' brief are given as "Iss. Mem. at X," Plaintiffs' opposition are given as "Pl. Mem. (Iss.) at X." and Issuers' reply are given as "Iss. Reply at X."
The Exchange Act's five explicit provisions include: Section 9, 15 U.S.C. § 78i (liability for certain manipulations of securities traded on stock exchanges); Section 16, 15 U.S.C. § 78p(b) (liability for short-swing profits); Section 18, 15 U.S.C. § 78r (liability for misleading statements in certain periodic reports filed with the SEC); Section 20, 15 U.S.C. § 78t (liability for controlling persons); and Section 20A, 15 U.S.C. § 78t-l (1994) (liability for insider-trading if plaintiff was a contemporaneous trader).
In addition, there are four implied causes of action under the Exchange Act: Section 10b, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5 (general fraud liability provisions); Section 14(a), 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9 (prohibiting fraud in connection with proxy solicitations); Section 14(e), 15 U.S.C. § 78n(e) and Rule 14e-3, 17 C.F.R. § 240.14e-3 (prohibiting fraud in connection with tender offers); and Section 13(e)(1), 15 U.S.C. § 78m(e)(1) (prohibiting fraud in connection with issuer's repurchase of its own shares).
In eleven of these forty-seven IPOs, Plaintiffs have alleged more than two examples of a customer who bought stock because of a Tie-in Agreement. Those IPOs include (number of customers in parenthetical): Agilent Tech. (4), eToys (3), Global Crossing (5), Manufacturers Servs. (3), Netzero (3), Northpoint Comm. Group (3), Perot Systems (5), PSI Techs. (3), Spanish Broadcasting (3), Terra Networks (4), ZDZ (5).
Of course, pleadings are not binding if properly withdrawn or amended, although "the factfinder may very well find that such a contradictory statement reduces the credibility of the witness." Tho Dinh Tran v. Alphonse Hotel Corp., 281 F.3d 23, 32 (2d Cir. 2002).
In re Allaire Corp. Sec. Litig., 224 F.Supp.2d 319, 326 (D.Mass.2002).
Of course, this conclusion rests on the assumption that the phrase "under this chapter" should be interpreted consistently throughout 15 U.S.C. § 78u-4. It would be foolish indeed to interpret the same words differently when used in the same statute, and enacted by the same Congress, given that courts strive to give the same interpretation to identical words in different statutes. See, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 117-18, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001) (applying same interpretation to identical words in similar statutes); Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992) (same).
Here, I have reviewed the certificates "filed with the complaint," as required by the PSLRA, that set forth the damages claimed by lead Plaintiffs. See 15 U.S.C. § 78u-4(a)(2) (requiring each plaintiff to submit a certificate including, among other things, "the transactions of the plaintiff in the security that is the subject of the complaint during the class period specified in the complaint"). It is wellsettled that in deciding a motion to dismiss, a court may consider "documents that are ... attached to the complaint...." Gryl v. Shire Pharm. Group Pic, 298 F.3d 136, 140 (2d Cir.2002). See also Fed.R.Civ.P. 10(c). As the Court of Appeals explained,
[G]enerally, the harm to the plaintiff when a court considers material extraneous to a complaint is the lack of notice that the material may be considered. Accordingly, "[w]here plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint the necessity of translating a Rule 12(b)(6) motion into one under Rule 56 is largely dissipated." Chambers, 282 F.3d at 153 (quoting Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991)). Thus, a document which is "integral" to the complaint may be considered on a motion to dismiss. In a securities fraud class action, the lead plaintiff certification must be considered integral to the complaint because it is required by the PSLRA.
Even if Rule 56 treatment were appropriate, the parties have submitted "all material... pertinent" to such a motion, and I have resolved all disputed issues of fact in favor of the non-moving party. See General Elec. Co. v. Joiner, 522 U.S. 136, 143, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997). While I have relied upon letters submitted by the parties, I have applied only the facts agreed upon by them. See 12/13/02 Letter from Mark Holland, counsel for Underwriters, to the Court (setting forth twenty-one cases where no Plaintiff has Section 11 damages); 12/16/02 Letter from Melvyn I. Weiss to the Court (agreeing with Defendants' factual allegations in seventeen of those cases, and disagreeing in four others); 12/17/02 Letter from Mark Holland to the Court. See also 11/18/02 Tr. at 11-12 (Statement of Robert A. Wallner).
Similarly, I will not address Issuer Defendants' argument that Plaintiffs' Section 11 claims should be dismissed because they have allegedly failed to show that the offering prices of the relevant securities were "inflated [] by a misrepresentation or omission in the registration statement." Iss. Mem. at 58. Although Section 11 (e) does provide that damages should be reduced to the extent that loss is attributable to something other than a misstatement in the registration statement, that provision is an affirmative defense, with the burden of proof explicitly on the defendant. See Adair, 1998 WL 142353 at *7; Beecher v. Able, 435 F.Supp. 397, 406 (S.D.N.Y. 1975). Furthermore, whether losses were attributable to other sources is necessarily a fact question; plaintiffs are certainly not required to plead that the offering price was artificially inflated in order to successfully state a Section 11 claim. See Herman & MacLean, 459 U.S. at 382, 103 S.Ct. 683 (plaintiff "need only show a material misstatement or omission to establish his prima facie case"). Even if this were a pleading requirement, in this Circuit "any decline in value is presumed to be caused by the misrepresentation in the registration statement." McMahan, 65 F.3d at 1048. Drawing every inference in Plaintiffs' favor, as 1 must, any allegation of loss therefore suggests that the offering price was artificially inflated. See, e.g., Cacheflow Compl. H 25 ("Plaintiffs ... have sustained damages because of Defendants' unlawful activities alleged herein.").
Such an introductory statement fails to satisfy paragraph (b)(1) for two reasons. First, it does not "specify, as to each particular allegation... whether that allegation is made upon information and belief or is supported by some document or statement on personal knowledge by a potential witness." Lirette, 999 F.Supp. at 164 (emphasis added). As a result, the court is unable to determine the threshold issue of whether a particular allegation has been properly based on information and belief. Second, Plaintiffs have failed to indicate which facts support those allegations made on information and belief. Yet clearly indicating the facts that support allegations based on information and belief is critical under paragraph (b)(1). Not only must it be determined whether those facts are pled "with particularity," 15 U.S.C. § 78u-4(b)(1), but it must also be decided whether those facts sufficiently support Plaintiffs' information and belief. See Novak, 216 F.3d at 313-14; see also supra Part VI.B.l (discussing paragraph (b)(1)'s requirements). For an example of a case where the Complaint specified the allegations based on information and belief, as well as the underlying facts, see Allaire, 224 F.Supp.2d at 326 n. 4.
The latter two sources—both dated 2002— may plausibly support the formation of Plaintiffs' information and belief, even though these actions were originally filed in 2001, because the Complaints were amended in April 2002. See, e.g., Cacheflow Compl. (amended Apr. 19, 2002).
These holdings are disingenuous. "Rule 11(b) of the Federal Rules of Civil Procedure requires that allegations in a complaint be based upon either personal knowledge or information and belief." In re Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d 551, 569 n. 11 (D.N.J.2001) (emphasis added) (citing Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 166 (2d Cir.1999)). The phrase "on investigation of counsel" merely satisfies Rule 11 by showing that counsel has a sufficient basis to make an allegation in good faith. See In re Green Tree Fin. Corp. Stock Litig., 61 F.Supp.2d 860, 872 (D.Minn. 1999) ("because an attorney is required, under Rule 11 of the Federal Rules of Civil Procedure, to investigate claims before filing a complaint, plaintiffs should not be allowed to avoid the heightened pleading standard by claiming `investigation of counsel.' "), rev'd on other grounds, 270 F.3d 645 (8th Cir.2001). If counsel's investigation involves speaking to her client, the allegation can be made on personal knowledge; otherwise, it must be on information and belief. But no amount of investigation can transform information and belief—hearsay, essentially— into personal knowledge. Thus, for purposes of paragraph (b)(1), the phrase "on investigation of counsel" is meaningless. See, e.g., In re Party City Sec. Litig., 147 F.Supp.2d 282, 303 (D.N.J.2001) (holding that allegations based on investigation of counsel are allegations on information and belief); In re Equimed, Inc. Sec. Litig., No. 98-CV-5374, 2000 WL 562909, at *4 (E.D.Pa. May 9, 2000) ("To distinguish between `information and begraphs lief and `investigation of counsel' is meaningless; it would permit evasion of the clear intent of a statutory mandate. Plaintiffs must state with particularity those facts upon which their allegations are formed, even if made upon `investigation of counsel.' ").
However, to the extent that this portion of the claim is brought against any Defendant other than the Underwriter who issued the analyst report it must fail because such Defendants did not "make any untrue statement of a material fact" or "omit to state a material
In Goldman, the "Complaint alleged that during the period that the class members were buying Sykes common stock, [Vice President and Director John Sykes sold] 40,000... shares of Sykes common stock at those artificially high prices...." 754 F.2d at 1063. The 40,000 shares only constituted 26% of his Sykes common stock. See id.at 1065. Moreover, as the lower court found, the defendant was retiring and thus would logically liquidate some of his stock for that reason. See id. (citing Goldman v. Belden, 580 F.Supp. 1373, 1381 (W.D.N.Y.1984)). Nonetheless, the Second Circuit reversed the district court's dismissal, "concluding] that the Complaint was sufficient to state a claim against John Sykes and that the district court's conclusions [with respect to the retirement] impermissibly reached beyond the scope of the Complaint, and, indeed, invaded the province of the trier of fact." Id. at 1071.
Likewise, in Stevelman, the Complaint alleged that "two Alias vice-presidents sold thousands of their shares of Alias common stock at a price of $25 and above," a price that was substantially higher than the offering given that "the company's stock had gained $12.50 in value since its launch." 174 F.3d at 81-82. In addition, "[Chairman, CEO, President, and Co-founder of Alias Research, Inc., Stephen] Bingham sold 175,000 shares, or about 40% of his Alias stock holdings, earning about $3.5 million." Id. at 82. The Second Circuit held "these sales could clearly be characterized as unusual insider trading activity during the class period which may permit an inference of bad faith and scienter." Id. at 85 (quotation marks and citation omitted).
But there is a significant difference between the allegations in Chill and Acito and those alleged in Novak and here. Unlike Chill and Acito, the allegations in these cases do not apply with equal force to every corporate officer.
When a plaintiff alleges that a corporate insider who owned stock in the company made an "unusual" trade by selling her stock at an inflated price arising from her fraudulent misstatements or omissions, a strong inference arises that she either knew the truth or acted with reckless disregard of it. In other words, unusual trades on the heels of misstatements or omissions that inflate the price of a security strongly imply that the unusual trades were made with knowledge of the artificial inflation and thus the misstatements and omissions. Such an inference is not overly general; it applies only to certain insiders who reap a direct benefit through the stock, rather than indirectly through, for example, higher compensation resulting from higher corporate earnings.
If investors truly valued Cacheflow at $631,875,000 on the day of the offering, then Cacheflow could have made much more money by issuing the same amount of stock at a higher price or issuing more shares at the original price. Cacheflow may have lost a good deal of money because of the Underwriters' underpricing and, if so, may have had no motive to go along with the Underwriters' alleged scheme. However, Plaintiffs correctly note that this analysis "makefs] the assumption that just because these stocks soared into the hinterlands in price that they had [that] true value [e.g., Cacheflow was worth $631,875,000]." 11/1/02 Tr. at 111 (Statement of Melvyn I. Weiss, Plaintiffs' Liaison Counsel). It is equally likely that customers only valued the company at this price because of the manipulative scheme. In that case, Cacheflow's value as reflected in the stock market would have been fictitious—not based on the company's real worth but rather on a speculative fervor primed by the Tie-in Agreement. Under such circumstances, Cacheflow would have benefitted by allowing the Allocating Underwriters to require Tie-in Agreements and hence had a concrete motive to make material misstatements and omissions in the registration statement.
In any event, on a motion to dismiss, alternative theories offered by Defendants cannot defeat the pleading. See Caiola v. Citibank, N.A., 295 F.3d 312, 323 (2d Cir.2002) (holding that where an allegation is subject to two interpretations, "Rule 12(b)(6) obligates us at this point to draw all reasonable inferences in [plaintiff's] favor ... [w]e thus need not and do not decide whether Rule 10b-5 standing would be satisfied under the second theory" because the first theory "incontrovertibly ... give[s] rise to standing").
The structure of the PSLRA provides further support for the proposition that Congress did not intend to require the pleading of loss causation. The paragraph dealing with loss causation—paragraph (b)(4)—is separated from the two paragraphs imposing pleading requirements by paragraph (b)(3) which provides for an automatic stay of discovery during the pendency of any motion to dismiss. Moreover, the PSLRA explicitly instructs courts to "dismiss the complaint if the requirements of paragraphs [b](l) and [b](2) are not met." 15 U.S.C. § 78u-4(b)(3)(A). Conspicuously absent is the requirement that a complaint be dismissed for failure to plead loss causation; rather, loss causation is discussed in terms of plaintiff's burden of proof, the obvious inference being that failure to prove loss causation will defeat a claim, but failure to plead it will not. Indeed, in other circuits, courts have explicitly found that loss causation is not a pleading requirement. See Lynx Ventures LP v. Canadian Imperial Bank of Commerce, No. CV 99-07160, 2000 WL 33223384, at *1 (C.D.Cal. Apr.18, 2000) ("allegations of loss causation need not be pled with particularity.... Rule 9(b) is satisfied if the allegations set forth what is false or misleading and why it is false"); Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 WL 148558, at *6 (M.D.Fla. Mar.25, 1997) ("Plaintiff alleges that `[b]y reason thereof, fit has] been damaged.' Due to the general pleading requirements established by Fed. R.Civ.P. Rule 8, this Court finds that these allegations are sufficient to satisfy the element of causation in a § 10(b) action.") (alterations in original).
While the rule in this Circuit may be too strict, it is nonetheless controlling. Although Swierkiewicz can be read broadly, the Court was careful to limit its holding to cases arising under Rule 8(a). 534 U.S. at 513, 122 S.Ct. 992 ("Rule 8(a)'s simplified pleading standard applies to all civil actions, with limited exceptions. Rule 9(b), for example, provides for greater particularity in all averments of fraud or mistake."). And the Second Circuit has chosen, even post-Swierkiewicz, to insist that plaintiffs alleging securities fraud plead the elements of such claims. See Caiola, 295 F.3d at 321.
For example, [to show loss causation] the plaintiff would have to prove that the price at which the plaintiff bought the stock was artificially inflated as the result of the misstatement or omission.
H.R. Conf. Rep. No. 104-369, at 41; S.Rep. No. 104-98, at 15.
Defendants also argue that the start and end date of the alleged manipulation may affect which plaintiffs have valid claims. See 2 Und. Mem. at 14-17. While this may be true, it has never been required that all plaintiffs have valid claims under every cause of action alleged or every factual scenario under those causes of action. Which plaintiffs may recover on which claims is properly addressed at the class certification stage. See In re Initial Public Offering Sec. Litig., No. 21 MC 92, 2002 WL 31780181, at *4 (S.D.N.Y. Dec. 12, 2002).
Because the difference between the transaction price and real value of the stock is the measure of damages, see, e.g., In re Credit Suisse First Boston Corp. Sec. Litig., No. 97 Civ. 4760, 1998 WL 734365, at *12 (S.D.N.Y. Oct.20, 1998), a complaint that adequately pleads loss causation necessarily also adequately pleads damages.
Defendants also concede this point—that an illegal market manipulation always gives rise to a duty to disclose—in their briefs. Although Defendants dedicated an entire section to rebut Plaintiffs' argument that Defendants were obliged to disclose that they had "rigged" the market, see 2 Pi. Mem. 25-26, 34, Defendants fail to address the core argument that a properly pled market manipulation claim gives rise to a duty to disclose. Rather, Defendants repeat their arguments, elsewhere, that the market manipulation claim was not properly pled and otherwise insufficient. See 3 Und. Reply 9-10.
Lewis Carroll, Through the Looking Glass (emphasis in original) (quoted in United States v. Pacheco. 225 F.3d 148, 149 (2d Cir.2000)).
17 C.F.R. § 240.10b-5.
Transcript of Oral Argument before Hon. William H. Pauley III on Defendants' Motion to Dismiss, In re Initial Public Offering Antitrust Litig., No. 01 Civ.2014 (S.D.N.Y. Jan. 17, 2003), at 19 (Statement of Robert B. McCaw, counsel to Salomon Smith Barney, Inc.) (emphasis added). Here, of course, Plaintiffs allege investors were "required" to make aftermarket purchases, see MA H 34, thereby alleging conduct that falls on the "impermissible" side of the line.
Defendants' only response to these allegations is that "while plaintiffs allege in the passive voice that `one customer [ ] was required or induced' to purchase aftermarket shares in order to obtain IPO shares ... none of these allegations states that an Underwriter Defendant reguired an aftermarket purchase..." 4 Und. Reply at 11 (emphasis and brackets in original) (quoting MA U 34). But drawing every inference in Plaintiffs' favor, it is patently obvious that the unnamed subject of these sentences is the Allocating Underwriters. Written in the active voice, these allegations would read: "Allocating Underwriters required or induced one customer to purchase aftermarket shares in order to obtain IPO shares."
raud" claims. See S.Rep. No. 104-98,
at 7. Section 20 does not require proof of fraud.
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