Summary
discounting scienter allegations of “former employees” of software developer because “nowhere does the Complaint describe the position held by or work assignments of the former employee or consultant sources, or any other information that would support an inference that the sources would possess the information attributed to them”
Summary of this case from In re Gentiva Sec. Litig.Opinion
No. 99 Civ. 8761 (LTS)(JCF)
December 19, 2003
Richard D. Weiss, Esq., Bruce D. Bernstein, Esq., MILBERG WEISS BERSHAD HYNES LERACH LLP, New York, NY, for Plaintiff's
Steven M. Schatz, Esq., Leo P. Cunningham, Esq., WILSON SONSINI GOODRICH ROSATI, Palo Alto, CA, for Plaintiff's
Marvin S. Robinson, Esq., TANNENBAUM DUBIN ROBINSON, LLP, New York, NY, for Defendants
MEMORANDUM OPINION AND ORDER
Defendants move to dismiss Plaintiffs' Amended Complaint (the "Complaint") under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, and under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) ("PSLRA"), for failure to plead fraud with particularity. Plaintiff's allege that Defendants violated section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 75j(b), Rule 10b-5 promulgated thereunder, and section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a). The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331. For the following reasons, Defendants' motion is granted.
Background
The following factual recitation is taken from the Complaint, the allegations of which are taken as true for purposes fo this motion practice.
The Parties
Plaintiff's bring this action on behalf of themselves and others who purchased Industri-Matematik International Corp. ("IMF") common stock between August 27, 1997 and May 5, 1998 (the "Class Period"). IMI is a Delaware corporation that develops, markets, and supports software for supply chain management. Defendant Stig G. Durlow ("Durlow") has been IMI's President and CEO since May 1, 1995, and Chairman of its Board of Directors since May 1, 1996. Defendant Lars-Goran Peterson ("Peterson") has been IMI's Senior VP-Finance and CFO since 1994. Defendant David Simbari ("Simbari") was IMI's Senior VP-Worldwide Sales and Marketing until his resignation in February 1998.
Defendant Jeffrey A. Harris ("Harris") has been a Director of IMI and a member of its Audit Committee since 1991. Harris has been a Managing Director of Defendant E.M. Warburg Pincus Co. LLC since 1988. Defendant William H. Janeway ("Janeway"), since 1991, has been a Director of IMI. Janeway is also a Managing Director of E.M. Warburg Pincus Co. LLC.
Defendant Warburg Pincus Co. is the sole general partner of defendant Warburg Pincus Investors L.P., which is managed by E.M. Warburg Pincus Co. LLC (collectively "Warburg Pincus"). Harris and Janeway acted as Warburg Pincus' designees on IMI's Board during the Class Period.
Plaintiff's Allegations
Plaintiff's principally allege that, during the Class Period, Defendants made a series of materially false and misleading statements regarding IMI's principal product, "System ESS," and its primary licensing arrangement with Oracle Corporation ("Oracle"), that caused IMI's stock price to be artificially inflated, and, when the investment public learned the truth, IMI's stock price to decline drastically. Plaintiff's filed their original Complaint in this action on February 26, 1999 (the "Original Complaint"). The Original Complaint was dismissed by Opinion and Order of Judge Baer, dated July 14, 2000 (the "2000 Opinion"), for, inter alia, failure to adequately plead facts giving rise to a strong inference of scienter. Plaintiff's thereafter timely filed the instant Complaint.
During the Class Period, IMI's principal product was System ESS, which was software designed to meet complex or high-volume supply chain management requirements. (Compl. ¶ 25.) License and service maintenance revenues related to System ESS accounted for over 98% of IMI's total revenues in fiscal year 1998. (Id. ¶ 26.) Plaintiff's allege that, during the Class Period, System ESS purchasers experienced problems in customizing the software to meet their individual needs, and that the Black Decker Corporation revoked its contract with IMI in late 1997 because of System ESS customization difficulties. (Id. ¶ 30.)
In January 1997, IMI entered into a marketing agreement with Oracle, under which EMI and Oracle agreed to jointly market and license the Oracle CPG Suite, which incorporates System ESS, for a term of three years. (Id. ¶ 27.) Plaintiff's allege that, during the Class Period, there were difficulties "integrating System ESS with the other components of Oracle's CPG suite." (Id. ¶ 32.) The J.M. Smucker Company experienced serious problems attempting "to link System ESS with Manugistics, Oracle Financials, and Oracle GEMS," and IMI ultimately lost the account. (Id.) Plaintiff's allege that IMI's relationship with Oracle was "strained, floundering, and not gaining momentum," in part because of disagreements over revenue sharing and the allocation of customer support responsibilities. (Id. ¶ 38.)
On or about October 22, 1997, Fisher Scientific International, Inc. ("Fisher"), entered into a purchase agreement with Oracle "under which Oracle licensed System ESS software products to Fisher." (Id. ¶ 36.) In or about April 1998, Fisher representatives meet with IMI representatives to discuss "serious problems with System ESS." (Id.) Fisher filed suit against IMI for fraudulent misrepresentation and deceptive trade practices arising from allegations of various problems with System ESS, including allegations that "[w]ithout substantial modifications, System ESS was unfit to handle Fisher's regulatory and other requirements for selling chemicals," and that "System ESS was not designed for high-volume, transnational-intensive business." (Id. ¶ 37.)
Plaintiff's also allege that IMI had trouble closing deals during the Class Period because of the time required for a customer to implement System ESS. plaintiff's list a number of customers, including Campbell Soup, Uncle Ben's, and Star-Kist Foods, that experienced implementation problems. (Id. ¶ 35.) In addition, IMI's customer support staff could not provide adequate support for IMI customers. (Id. ¶ 41.)
According to plaintiff's, because of the problems described above, IMI experienced only weak demand for System ESS during the Class Period. (Id. ¶ 41.) plaintiff's allege that, despite those problems, Defendants made statements in press releases and in various SEC filings throughout the Class Period reporting, for example, that IMI had "successfully released System ESS, Version 5," that "sales cycles are shortening for both small and large deals," that IMI's relationship with Oracle "continues to gain momentum," that "the sales cycle associated with the license of [IMI's] products varies substantially from customer to customer and typically lasts between three and 12 months," that, "[i]n general, relatively little modification to, or customization of, the standard System ESS software is required in order for the software to meet the basic functionality requirements of individual customers," and referring to "high demand for [IMI's] customer-focused supply chain software." (Id., ¶¶ 43, 47, 50, 58, 84.)
Plaintiff's also allege that, during the Class Period, Defendants engaged in "various improper revenue recognition practices" including back-dating contracts and invoices so that IMI could recognize revenue on certain transactions prematurely, and recognizing revenue prior to the signing of a contract with a potential customer. (Id. ¶ 94.) The Complaint does not identify or describe any contracts or invoices that were allegedly back-dated, or any financial statement affected by the alleged improper revenue recognition.
Discussion
In evaluating a motion to dismiss, the Court is obliged to take as true the facts as alleged in the complaint and draw all reasonable inferences in favor of the plaintiff. Grandon v. Merrill Lynch Co., 147 F.3d 184, 188 (2d Cir. 1998). The action must not be dismissed 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.'" Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)); Ganino v. Citizens Utilities Company, 228 F.3d 154, 161 (2d Cir. 2000). The Court may consider statements or documents incorporated in the Complaint by reference, public disclosure documents filed with the SEC, and documents "that the plaintiff's either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000) (internal citations omitted).Section 10(b) and Rule 10b-5 Claims Pleading Requirements
To state a claim under section 10(b) and Rule 10b-5, "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff." Ganino, 228 F.3d at 161. Plaintiff's Rule 10b-5 claims are also subject to the pleading requirements of the PSLRA, which provides that,
In any private action arising under this chapter in which the plaintiff alleges that the defendant [made a material false statement or omitted a material fact], 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.A. § 78u-4(b)(1) (West 1997). Furthermore,
In any [such 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, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.15 U.S.C.A. § 78u-4(b)(2) (West 1997).
Prior to the enactment of the PSLRA, the pleading standard for scienter in the Second Circuit required that a plaintiff allege facts that give rise to a strong inference of fraudulent intent. Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000). The "strong inference" could be established by alleging facts that constituted strong circumstantial evidence of conscious misbehavior or recklessness, or alleging facts to show that defendants had both motive and opportunity to commit fraud. Id. In Novak, the Second Circuit held that the PSLRA, with the exception of the addition of the words "with particularity," adopted the Second Circuit's "strong inference" standard.Id. at 311. Examining pre-PSLRA caselaw for guidance as to how the "strong inference" standard may be met, the court concluded that a strong inference of the required state of mind
[M]ay arise where the complaint sufficiently alleges that the defendants: (1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.Id. (internal citations omitted). A showing of motive and opportunity still may satisfy the PSLRA standard, as long as the plaintiff has alleged facts showing the types of circumstances recognized as rendering motive and opportunity probative of a strong inference of scienter under Second Circuit law. Rothman v. Gregor, 220 F.3d at 90.
Securities fraud complaints must also meet the pleading requirements of Rule 9(b), which requires that the circumstances constituting the alleged fraud be stated with particularity. "A complaint making such allegations must (1) specify the statements the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."Novak, 216 F.3d at 306 (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)).
Application to plaintiff's Claims
The Court first notes that the allegations in the Complaint are made on information and belief; accordingly, paragraph (b)(1) of PSLRA section 78u-4 requires that the Complaint "state with particularity all facts on which that belief is formed." 15 U.S.C.A. § 78u-4(b)(1) (West 1997). plaintiff's argument that, because their allegations are based upon the "investigation of counsel," paragraph (b)(1)'s particularity requirement does not apply, is meritless. See In re Initial Public Offering Securities Litigation, 241 F. Supp.2d 281, 356 n. 91 (S.D.N.Y. 12-19-2003) ("for purposes of paragraph (b)(1), the phrase 'on the investigation of counsel' is meaningless); In re Equimed, Inc. Sec. Litigation, No. 98 Civ. 5374, 2000 WL 562909, *4 (E.D.Pa. May 9, 2000) ("plaintiff's must state with particularity those facts upon which their allegations are formed, even if made upon 'investigation of counsel.'").
The Complaint fails to state with particularity facts sufficient to support plaintiff's belief that Defendants' statements about the success of System ESS, the length of the sales cycle, or IMI's relationship with Oracle were false or misleading. plaintiff's attempt to do so by pleading facts allegedly learned from former employees or consultants of IMI and a former employee of an IMI customer. See Compl. ¶¶ 30-41. Nowhere, however, does the Complaint describe the position held by or work assignments of the former employee or consultant sources, or any other information that would support an inference that the sources would possess the information attributed to them. Consequently, the information in the Complaint allegedly derived from those sources does not satisfy paragraph (b)(1)'s particularity requirement. See Novak, 216 F.3d at 314.
Of course, as the court in Novak noted, plaintiff's need not name their confidential sources as long as they rely on other facts that "provide an adequate basis for believing that the defendants' statements were false." Id. plaintiff's here also rely on the lawsuit filed by Fisher, a System ESS customer, described above. The Complaint does not allege when Fisher's problems with System ESS began, however, and indicates that Fisher did not raise any problems it had with System ESS until April 1998, and did not file suit against IMI until September 1998, five months after the end of the Class Period. See Compl. ¶¶ 36-37. Consequently, the Fisher complaint does not provide adequate grounds for Plaintiffs' belief that Defendants' positive statements about System ESS during the Class Period were false or misleading, and does not provide any ground for Plaintiffs' beliefs concerning statements about the sales cycle or IMI's relationship with Oracle.
The Fisher complaint and information from the sources described above are the only facts proffered in the Complaint to support Plaintiffs' belief that Defendants' statements during the Class Period were false or misleading. Although plaintiff's do not have to plead "every single fact upon which their beliefs concerning false or misleading statements are based," to survive the instant motion, the Complaint must state "with particularity sufficient facts to support those beliefs."Novak, 216 F.3d at 314. As the Court has explained, the information from confidential sources lacking a "sufficient general description," Id., and the allegations in the Fisher complaint are not sufficient to support Plaintiffs' beliefs. Accordingly, the Complaint fails to satisfy the pleading requirements of 15 U.S.C. § 78u-4(b)(1), and must be dismissed.
Even if plaintiff's had satisfied paragraph (b)(1) of the statute, they have also failed to satisfy the additional requirement of paragraph (b)(2) of the same statute that they "plead with particularity facts giving rise to a strong inference that the [Defendants] acted with the required state of mind." plaintiff's have failed to plead scienter under a "recklessness" theory, because the Complaint does not set forth facts sufficient to support an inference that Defendants "knew facts or had access to information suggesting that their public statements were not accurate." Novak, 216 F.3d at 311. References to unidentified "internal corporate documents," Compl. ¶ 22, do not suffice to support such an inference. See San Leandro Emergency Mecial Group Profit Sharing Plan v. Philip Morris Companies, Inc., 75 F.3d 801, 812-813 (2d Cir. 1996). The only other facts offered by plaintiff's to support an inference of scienter are the Fisher complaint and information from unidentified sources, the deficiencies of which the Court has already explained. If the facts alleged in the Complaint are insufficient to support Plaintiffs' belief that false or misleading statements were made, those facts cannot support an inference that Defendants knew or should have known their statements were false or misleading when Defendants made them. See id. at 813 (because the court had determined that "the Complaint fails adequately to allege that defendants' statements were false (affirmatively or through omissions), the Complaint obviously fails to allege facts constituting circumstantial evidence of reckless or conscious misbehavior on the part of defendants in making the statements").
Plaintiff's also attempt to plead scienter through allegations that Defendants engaged in improper revenue recognition in violation of GAAP. "[A]lleged violations of GAAP, without more, do not demonstrate scienter." In re Ultrafem Inc. Securities Litigation, 91 F. Supp.2d 678, 703 (S.D.N.Y. 2000). The Court has already determined that Plaintiffs' non-accounting allegations are not pled with sufficient particularity to establish fraud; "thus, [plaintiff's] cannot buttress a finding of scienter with respect to the alleged GAAP violations."Id. at 704. Plaintiffs' failure to plead facts with particularity that support a strong inference of scienter compels the Court to dismiss the Complaint pursuant to the PSLRA.
In the Complaint, plaintiff's again attempt to plead scienter through allegations that Defendants had the motive and opportunity to commit fraud in connection with insider stock sales. Judge Baer has previously determined, however, that the insider transactions at issue were not unusual in timing or amount, and thus do not give rise to an inference of scienter. See 2000 Opinion at 7 n. 5. Nothing in the Amended Complaint is indicative of unusual insider sales.
Section 20(a) Claims
Plaintiff's have failed to adequately plead a primary violation under Section 10(b); accordingly, their Section 20(a) claims for "controlling person" liability must be dismissed. Id. Dismissal with Prejudice
Defendants request that the Complaint be dismissed without leave to amend. plaintiff's have already had an opportunity to amend their complaint with the guidance of Judge Baer's 2000 Opinion, which detailed their pleading deficiencies. Consequently, any further attempts to amend the complaint would be futile. The Complaint therefore will be dismissed without leave to amend. See Chill v. General Electric Company, 101 F.3d 263, 272 (2d Cir. 1996).
Conclusion
For the foregoing reasons, Defendants' motion is granted, and the Amended Complaint is dismissed with prejudice and without leave to amend.
SO ORDERED.