KAPLAN, District Judge.
Plaintiff ATSI Communications, Inc. ("ATSI") brings this action for alleged violations of federal securities laws and on various state law theories in connection with its sales of convertible preferred securities to certain defendants. A majority of the defendants move to dismiss.1 They argue, among other things, that the complaint fails to plead fraud with particularity as required by Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA").2
The third amended complaint ("Complaint") centers around an alleged scheme involving ATSI convertible preferred stock.3 According to the Complaint, defendants Levinson and Rose Glen allegedly defrauded plaintiff into selling multiple series of this stock to entities they controlled or were controlled by.4 The preferred was convertible into common stock based on a conversion price that was at or below the price of ATSI common stock.5 The number of shares of common stock that the holders of the preferred would receive upon conversion therefore stood to increase if the price of common stock decreased. This feature, plaintiff contends, created an incentive for defendants to manipulate the price of the common stock downwards.6 Although the shares of common stock would fall in price, defendants who had sold short could use the common issued upon conversion to cover their positions.7
To induce plaintiff to sell the preferred, Levinson and Rose Glen allegedly promised, inter alia, that they and the entities they controlled would not put pressure on the price of ATSI common stock.8 Despite these assurances, the defendants allegedly used short sales and other devices to manipulate downward the price of ATSI common stock.9 They allegedly profited from the scheme by covering their short positions using the common stock issued upon conversion.10
Jurisdiction is based on the federal question presented by the securities claims. The Complaint alleges that the Levinson defendants, Rose Glen, and Trimark violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act")11 and Rule 10b-512 thereunder. It alleges control person liability under Section 20(a) of the Exchange Act13 against the remaining defendants.
This Court previously granted motions by the Rose Glen and Levinson defendants to dismiss the first amended complaint for failure to satisfy the pleading requirements of Rule 9(b) and the PSLRA.14 Plaintiff has done little to correct the shortcomings in its pleading.
The Complaint asserts claims for misstatements and omissions15 and manipulation 16 against Rose Glen and the Levinson defendants, as well as a manipulation claim against Trimark.
A. Standards Governing Motions to Dismiss
In deciding a Rule 12(b)(6) motion, the Court accepts as true all well-pleaded factual allegations in the complaint and draws all reasonable inferences in the plaintiffs favor.17 Dismissal is inappropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."18 Although such motions are addressed to the pleadings, a district court may consider also the full text of documents "integral" to the Complaint and relied upon by plaintiffs.19 Accordingly, review of certain exhibits attached to defendants' moving papers is appropriate.20
As this is a securities fraud case, the complaint must meet the heightened pleading requirements of Rule 9(b) and the PSLRA. The PSLRA requires that a complaint alleging misstatements or omissions "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading."21 In addition, where allegations of misstatements and omissions are made on information and belief, the complaint must "state with particularity all facts on which that belief is formed."22
Two requirements of Rule 9(b) are relevant to this motion. First, Rule 9(b) requires that plaintiffs alleging fraud state "the circumstances constituting fraud ... with particularity."23 Allegations that are "conclusory" or "unsupported by assertions of fact" are insufficient.24 Second, the rule generally does not permit information and belief allegations except for matters that are "peculiarly within the opposing party's knowledge," in which case the allegations must be "accompanied by a statement of facts upon which the belief is founded."25
B. Misstatements and Omissions
The principal misrepresentations allegedly made by the Levinson defendants were that they intended to be long-term investors in ATSI and that they would not put pressure on the stock by, for example, short selling.26 ATSI allegedly relied on these misrepresentations in deciding to sell convertible preferred securities to Shaar Fund, an entity that the Levinson defendants supposedly controlled.27
A failure to carry out a promise made in connection with a securities transaction "does not constitute fraud unless, when the promise was made, the defendant secretly intended not to perform or knew [that] he could not perform."28 Plaintiffs allegations that the Levinson defendants secretly intended not to invest long-term or put pressure on the stock are made on information and belief.29 The sole factual allegation it relies upon to support its belief is that the stock prices of most of the public companies that the Levinson defendants invested in declined within one year of the investment despite an upswing in the market during the same time periods.30 Plaintiff therefore argues that it would be permissible to infer that the Levinson defendants "participated in similar `death spiral' schemes with other companies" and secretly intended to do the same with ATSI.31
Plaintiff seeks to leap too far. It cannot cure an absence of factual allegations to establish one fraud by making equally unsupported allegations that the defendants committed other frauds. The allegations about these other alleged frauds are thin indeed. The Complaint does not identify the other allegedly defrauded companies, the type(s) of investments the Levinson defendants allegedly made, the dates of the alleged investments, the dates of the alleged declines in stock prices, and what the Levinson defendants allegedly did to defraud the companies.32 That most of the companies the defendants invested in experienced drops in their stock prices within one year of the investments does not, by itself, suggest fraud. To conclude otherwise would be to subject many investors in risky or speculative ventures to allegations of securities fraud.33
The remaining allegations against the Levinson defendants are equally deficient. The Levinson defendants allegedly misrepresented that Shaar Fund was an accredited investor and that the money it invested came from a certain family in the United Kingdom.34 In addition, they allegedly failed to disclose that they intended to use "multi-tiered offshore entities" to fund the transaction and that most of the companies they had invested in became "financially impaired."35 The Complaint does not, however, explain how any risk concealed by these alleged misrepresentations and omissions caused plaintiffs losses.36 Plaintiffs allegation that it "would [not] have accepted the Levinson [defendants]... if not for"37 this alleged misconduct suggests transaction causation, not loss causation. "It is long settled that a securities-fraud plaintiff `must prove both transaction and loss causation.'"38
The allegations against Rose Glen also fail to comply with Rule 9(b) and the PSLRA. The Complaint alleges that Rose Glen misrepresented that it intended to invest in ATSI for the long-term, that it would not sell more than ten percent of the volume on any given day, and that it was an accredited investor.39 It alleges also that Rose Glen failed to disclose its intention of putting pressure on the stock and its alleged participation in similar schemes.40 As with the Levinson defendants, the sole factual allegation plaintiff relies upon to support these allegations is that the stock prices of most of the public companies that Rose Glen invested in dropped within one year of the investment.41 These allegations fail for the reasons that the allegations against the Levinson defendants fail—the Complaint fails adequately to allege falsity and loss causation.42
The nub of plaintiffs manipulation claim against Rose Glen and the Levinson defendants is that they used short-selling and other devices to drive down the price of ATSI common stock in order to obtain more shares upon conversion of the preferred.43 These defendants allegedly profited by covering their short positions using the common stock obtained from conversion of the preferred.44
The Complaint does not allege with particularity any trades or other activities that Rose Glen and the Levinson defendants engaged in to manipulate downward the price of ATSI common stock. Nor does it allege with particularity that the defendants sold the common stock they obtained from conversion of the preferred. Instead, plaintiffs manipulation allegations rest entirely on information and belief.45 The Complaint sets forth four categories of factual allegations upon which this belief is based. The inferences that plaintiff would draw are far-fetched, to say the least.
First, plaintiff alleges that "massive" sales and "huge" price declines on four days in April 2000 must have been the result of manipulation by Shaar Fund because it "was one of the few entities that possessed the amount of shares [necessary] to support the volume trading numbers."46 The Complaint alleges that ATSI's chief financial officer and another employee were "intimately familiar" with major shareholders, that they "frequently" contacted those shareholders, and that they were "always" assured by those shareholders that they were not selling.47 From these allegations, plaintiff argues that the heavy trading in April 2000 must have been the result of manipulation by Shaar Fund.48 These vague allegations are far too conclusory to justify a conclusion that Shaar Fund traded on the days in question, let alone that it was engaged in a manipulation.
Second, the Complaint alleges that a drop in ATSI's stock price in the days prior to defendants' conversion of preferred into common resulted in conversion rates more favorable to the defendants and therefore must have been the result of a manipulation.49 According to the Complaint, the number of shares of common stock that the defendants obtained upon conversion of the preferred was based on the "Reference Price," which was an average of the five lowest prices during the ten days prior to the conversion (the "look-back period").50 The Complaint alleges that "[i]f there was no manipulation, the Reference Price should approximate the... average [price of stock during the thirty days prior to the look-back period]."51 In other words, "[t]he ratio of the Reference Price to the ... 30 day average would be approximately 1.0."52 In addition, absent manipulation, "the average daily trading volumes [between the look-back period and prior quarter] should be equal."53
Plaintiff is incorrect. Indeed, its position is ludicrous. Stock prices and trading volume are not constant over time absent fraud. Fluctuations in price and volume are natural and to be expected. Plaintiffs theory is all the more absurd given its premise that an average of the lowest prices during a ten-day trading period must equal or approximate an average of all prices during the preceding thirty days. Although a change in stock price or trading volume favorable to the defendants is relevant to whether a manipulation occurred, it does not, without more, give rise to an inference of fraud.54
Third, the Complaint alleges that the negative reaction of ATSFs stock price to positive news announcements is "evidence of manipulation."55 Plaintiff identifies examples of company announcements between 2000 and 2002 which, it contends, should have resulted in positive market reactions but instead coincided with price drops ranging from 2 to 25 percent.56 But the announcements concern events with no apparent connection to the defendants or this case.57 As these allegations show neither a manipulation nor conduct attributable to the defendants, they fail.
Finally, the Complaint alleges that three charts containing certain trading data for the period December 2002 through January 2003 show manipulation.58 Again, the Complaint fails adequately to explain how the data shows manipulation, let alone how it is linked to any of the defendants.
Nor do the allegations above, when considered together, give rise to an inference of fraud. There is no apparent connection among them. In any case, plaintiff does not allege sufficient facts to link this data to any of the defendants.
The manipulation claim against Trimark is even more tenuous. The only allegations against Trimark are that it "was the principal declared market maker in ATSI stock," that "any manipulation which took place would have involved Knight, who knew or should have known" about the manipulation, and that it "was a cooperating broker-dealer with the defendants."59 These allegations are far too conclusory to past muster under Rule 9(b).
D. Claims Against Other Alleged Primary Violators
The other defendants against whom the Complaint alleges primary violations of the federal securities laws are Corporate Capital Management ("CCM") and MG Securities Group, Inc. ("MG").60 These defendants have not yet moved to dismiss. Nevertheless, the Complaint makes the same fraud claims against these defendants as it does against the Rose Glen and the Levinson defendants.61 As plaintiff already has briefed whether those allegations are sufficient, further briefing is unnecessary and a ruling by the Court on the sufficiency of the Complaint is proper.62 Accordingly, the securities claims against CCM and MG fail for the reasons that the claims against Rose Glen and the Levinson defendants fail—the Complaint fails adequately to allege falsity and loss causation.
E. Control Person Liability
The Complaint alleges control person liability based on alleged primary violations by Rose Glen and the Levinson defendants. As plaintiff has failed adequately to allege a primary violation, its Section 20(a) claims are dismissed.63
The motions of the Levinson and Rose Glen defendants, Trimark, the Citco defendants, Hollman, Quilligan, Langeveld, Bloch, Kaminsky, and Katznelson, [docket items 122, 126-27, 132, 134, 136, 161, and 171] to dismiss the amended complaint are granted. The claims against defendants Corporate Capital Management and MG Security Group are also dismissed. As plaintiff has already had an opportunity to amend, dismissal is with prejudice.
The parties are invited to submit papers on the issue of the appropriateness of sanctions.64 Parties seeking the imposition of sanctions shall file and serve any such papers on or before March 7, 2005. Opposition papers shall be filed and served no later than March 21, 2005. Plaintiffs opposition, if any, should be submitted as a single, consolidated document. Any reply shall be filed no later than March 28, 2005.