IN RE DDI CORPORATION SECURITIES LITIGATION

Full title: In re DDi CORPORATION SECURITIES LITIGATION. This Document Relates To: ALL…

Court: United States District Court, C.D. California

Date published: Jul 20, 2005

Master File No. CV 03-7063 NM (SJHx), Consolidated with Nos. CV 03-7883, CV 03-7999, CV 03-8344, CV 04-0735 (C.D. Cal. Jul. 20, 2005)

Opinion

Master File No. CV 03-7063 NM (SJHx), Consolidated with Nos. CV 03-7883, CV 03-7999, CV 03-8344, CV 04-0735.

July 20, 2005

OPINION ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS THE SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT [119, 120, 123]

NORA MANELLA, District Judge

I. INTRODUCTION

This is a consolidated securities class action arising out of a February 14, 2001 secondary public offering of DDi Corporation ("DDi") common stock and convertible subordinated notes. On February 22, 2005, Plaintiffs filed a Second Amended Consolidated Class Action Complaint ("SAC") asserting claims under sections 11, 12(a)(2), and 15(a) of the Securities Act of 1933 against various persons and entities associated with DDi and/or this offering. Before the court are three motions to dismiss the SAC. For the reasons set forth below, these motions are GRANTED in part and DENIED in part.

II. FACTUAL AND PROCEDURAL BACKGROUND

DDi specialized in creating prototype Printed Circuit Boards ("PCBs") on an expedited basis — often within 24 hours — for a premium price. SAC ¶¶ 5, 48-51. In addition to this "quick-turn prototyping," DDi provided "value-added services," including: (1) "[f]ast-track assembly services . . . for the attachment of materials to a small number of PCBs," and (2) "[p]re-production volume services . . . involv[ing] the generation and delivery of a small volume of units." Id. ¶¶ 5, 50. DDi's value-added services had a longer turnaround time and tended to return lower profit margins than its quick-turn prototyping. Id. ¶ 5.

On February 14, 2001, through a firm commitment underwriting, DDi and various shareholders issued 6 million shares of DDi common stock in a secondary public offering (the "Offering") that captured $132 million in proceeds. Id. ¶ 2.¹ As part of the Offering, DDi also issued 5.25% convertible subordinated notes (the "Convertible Notes"), due March 1, 2008, which had an aggregate principal amount of $100 million and generated $97 million in proceeds. Id. The Offering was made pursuant to a Form S-1 Registration Statement filed with the Securities and Exchange Commission ("SEC") on January 31, 2001, and a prospectus filed with the SEC in February 2001 (collectively, the "Prospectus"). Id. ¶ 3.

1 A firm commitment underwriting is one in which the underwriter agrees to buy all the shares to be issued and remains financially responsible for any securities not purchased. See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1215 (1st Cir. 1996).

Plaintiffs allege that the Prospectus "contained false and misleading statements of material fact and omitted to state material facts necessary to make the statements [made therein] not misleading." Id. ¶ 62. Plaintiffs contend that the Prospectus was false and misleading on at least six grounds.

First, Plaintiffs assert that the financial reports included in the Prospectus were false and misleading because they were inflated by "accounting improprieties." Id. ¶ 79. In particular, Plaintiffs allege that DDi, in violation of Generally Accepted Accounting Principles ("GAAP") and its own internal accounting policies, "recognized revenue on (1) the premature shipment of orders to clients . . . prior to the authorized delivery date; and (2) the shipment of orders from one DDi facility to another." Id. ¶ 80. See also id. ¶¶ 86-87.

Second, Plaintiffs allege that the Prospectus "misrepresented the amount of DDi customers and failed to disclose that DDi had lost many of its historically largest customers." Id. ¶ 74. The Prospectus provided:

We currently have over 2,000 customers. Our largest original equipment manufacturer customers in terms of net sales are Alcatel, Ericsson, IBM, Intel and Marconi Communications. . . . We have achieved a net increase of approximately 200 customers since January 1, 2000, excluding increases resulting from acquisitions. . . . We announced that during the fourth quarter we added over 100 new customers to increase our diversified customer base to more than 2,000 original equipment manufacturers and other electronic manufacturing service providers. . . . We have been successful at retaining customers and have worked with our three largest customers since 1991.

Prospectus at 2, 3, 52.² See also SAC ¶ 68. Plaintiffs allege that in reality, DDi had 500 customers, and that "by the fourth quarter 2000, DDi was booking very little or no business from, inter alia, Alcatel, Redback, Intel, Marconi, 3 Com, IBM, Nortel, and Cisco." SAC ¶ 74.

2 The court takes judicial notice of this document. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) (citation omitted) (on Rule 12(b)(6) motion to dismiss, court may consider "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading"), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002).

Third, Plaintiffs allege that the Prospectus was false and misleading because it "misrepresented and omitted to disclose that by no later than the fourth quarter of 2000, DDi's quick-turn and value-added business had suffered precipitous declines and DDi's transaction pipeline had dried up." Id. ¶ 75. While the Prospectus stated that DDi encountered "strong" demand in the fourth quarter of 2000, that DDi's end-markets were "fast-growing," and that DDi was anticipating "near-term increases in customer demand," Plaintiffs allege that in reality, "the overall demand for quick-turn and value-added PCBs [had] dropped off precipitously," "customers [had been] sen[ding] value-added business overseas," "[m]any of the customers . . . [had] tried to cancel [orders]," "many of DDi's customers [had] stopped doing business with [DDi]," "DDi's sales pipeline [had] dried up," and "DDi was forced to implement across the board employee pay cuts." Id. ¶¶ 56, 64, 65, 69, 77.

Fourth, Plaintiffs allege that the Prospectus "misrepresented and omitted to disclose that in 2000, DDi's revenues were as dependent on the high-premiums [that] DDi [was] reap[ing] from its value-added services . . . as . . . [they were on] its quick-turn business, and that by late-2000 DDi was not receiving high-premiums on its value-added services." Id. ¶ 76. According to Plaintiffs, "[b]efore 2000, DDi was focused primarily on quick-turn prototyping because the quick-turn work commanded large premiums due to the fast turn-around times, whereas higher volume value-added services yielded lower profit margins." Id. ¶ 53. However, "[s]tarting in 1999, . . . the overall demand for PCBs grew and industry capacity could not keep up." Id. ¶ 54. Consequently, "DDi customers increased their demand for volume orders of PCBs, paying quick-turn pricing for . . . value-added services." Id. As a result, "DDi turned its focus to and realized at least 50% of its revenues from its value-added services business." Id. Plaintiffs allege that "[t]he public was unaware of this change," id. ¶ 55, and that the Prospectus failed to reveal both that it had occurred and "that by late-2000 DDi was no [longer] receiving high-premiums on its value-added services." Id. ¶ 76.

Fifth, Plaintiffs allege that the Prospectus was misleading in that it asserted that DDi was intending to increase its manufacturing capacity. Id. ¶ 77. While the Prospectus provided that DDi "ha[d] plans to expand both of [its] manufacturing facilities in California, as well as those in Texas and the United Kingdom," Plaintiffs allege that these statements were "misleading and incomplete as DDi experienced significant layoffs and actually reduced operations in early 2001." Prospectus at 3, 5; SAC ¶¶ 70, 77.³

3 Plaintiffs also allege that the Prospectus "stated that [DDi] had sufficient business to maximize its burgeoning facility space." SAC ¶ 70. However, the identified portion of the Prospectus does not make this assertion. See Prospectus at 54 ("Accomplishing [our] operations in time-critical situations, as we do, required the attention of highly-qualified personnel. Furthermore, our manufacturing systems are managed to maximize flexibility to accommodate widely varying projects for different customers with minimal or no turnover time. We seek to maximize the use of our production and manufacturing capacity through the efficient management of time-critical production schedules. We conduct our operations in several buildings that we own or lease. We believe our facilities are currently adequate for our operating needs.").

Sixth, Plaintiffs allege that the Prospectus's "outlook" was false and misleading. SAC ¶ 78. The Prospectus provided:

Outlook. We announced on January 25, 2001 that, while acknowledging recent macro-economic indicators suggesting an economic slowdown, we remain comfortable with our performance estimates for 2001. Unlike many volume printed circuit board manufacturers, we specialize in providing prototype and low-quantity manufacturing services for research and development programs and new product development, with production lead times that can be as short as 24 hours. We believe this focus provides higher margins and lower performance volatility by insulating us from large order cancellation or deferment decisions made in light of softening market forecasts. We believe that our large and diverse customer base also makes us less vulnerable to individual customer shifts in demand. We announced that for 2001 we are targeting increases in net sales and earnings per share in excess of 25% over our 2000 results. A number of factors, including those described below in "Risk Factors," will affect our ability to achieve these goals, and there can be no assurance that we will do so.

Prospectus at 4.⁴ Plaintiffs allege that this "glowing outlook was untenable and incomplete as DDi had suffered a precipitous loss of both value-added and quick-turn business leading up to the . . . Offering such that DDi's sales pipeline was depleted entering 2001." SAC ¶ 78.

4 The Prospectus contained the following "Risk Factors":

• This offering involves a high degree of risk. . . . If any of the following risks . . . actually occur, our business, financial condition and operating results would likely suffer. In that event, the market price of our stock could decline, and you could lose all or part of the money you paid to buy our common stock.

• A downturn in the communications or networking equipment industries would likely negatively impact our revenues.

• A majority of our customers are in the communications and networking equipment industries, which are characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. In addition, these industries are generally subject to rapid technological change and product obsolescence. Furthermore, these industries are subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity or a downturn in the communications or networking equipment industries would likely negatively impact our revenues.

• Our operating results have fluctuated in the past because we sell on a purchase-order basis rather than pursuant to long-term contracts. We are therefore sensitive to variability in demand by our customers. . . . Because of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

• Because we depend on a core group of significant customers, our results of operations may be negatively impacted if key customers discontinue the use of our services.

• As a result of our level of debt and the terms of our debt instruments . . . our vulnerability to adverse general economic conditions is heightened.

Prospectus at 9-14.

Plaintiffs assert that these various false and misleading statements and omissions caused the "Offering of common stock and convertible notes [to be] completed at artificially inflated prices." Id. ¶ 11. In fact, "[o]nce DDi's [true] financial condition became apparent, the Company's stock price fell below $1.00 per share." Id. ¶ 12. On August 20, 2003, DDi announced that it had filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Id. ¶ 4.

On October 1, 2003, the first complaint related to this action was filed. After various other complaints were filed, the court consolidated the actions and appointed Paul Poppe ("Poppe"), LeRoy Schneider ("Schneider"), and Rand Skolmick ("Skolmick") as lead plaintiffs. On July 26, 2004, lead plaintiffs Poppe, Schneider, and Skolmick, along with representative plaintiff Municipal Employees' Retirement System of Louisiana ("MERSL"), filed a Consolidated Amended Complaint ("CAC") on behalf of those who purchased DDi common stock between December 19, 2000 and April 29, 2003, including those who acquired DDi common stock in the Offering.⁵ The CAC asserted that the above-mentioned false and misleading statements and omissions in the Prospectus, as well as a series of other allegedly false and misleading statements issued by DDi between December 19, 2000 and April 29, 2002, were part of a carefully-crafted, fraudulent scheme to mislead investors. The CAC advanced causes of action under: (1) section 11 of the Securities Act of 1933 ("Securities Act"), (2) section 12(a)(2) of the Securities Act, (3) section 15(a) of the Securities Act, (4) section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder, and (5) section 20(a) of the Exchange Act.

5 The CAC did not assert claims on behalf of those who purchased the Convertible Notes.

On January 7, 2005, the court issued an order dismissing the CAC. See In re DDi Corp. Sec. Litig. ("In re DDi"), 2005 U.S. Dist. LEXIS 1056 (C.D. Cal. Jan. 7, 2005). The court found that although Fed.R.Civ.P. 8(a)'s notice pleading model generally applied to Securities Act claims and Fed.R.Civ.P. 9(b)'s heightened pleading model applied to Exchange Act claims, Plaintiffs' entire CAC was "grounded in fraud," and, therefore, subject to the heightened pleading requirements imposed by Rule 9(b). Id. at *57-61.⁶ The court then found that the CAC failed to satisfy Rule 9(b) because it did not particularly allege that any of Defendants' statements were materially false and misleading. Id. at *62-79.

6 Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).

On February 22, 2005, lead plaintiffs Poppe and Schneider, along with a new representative plaintiff, Robert Watson ("Watson"), filed the instant SAC.⁷ The SAC, unlike the CAC, focuses solely on the Prospectus and asserts only Securities Act claims. Additionally, Plaintiffs now purport to assert claims on behalf of those who purchased DDi common stock pursuant to or traceable to the Prospectus, as well as on behalf of those who purchased the Convertible Notes. See SAC ¶ 42. Finally, the SAC, unlike the CAC, asserts that the alleged misrepresentations and omissions in the Prospectus were the result of negligence, not fraud. See, e.g., id. ¶ 41 ("Each of the defendants owed to the purchasers of DDi stock and the Convertible Notes . . . the duty to make a reasonable and diligent investigation of the statements contained in the . . . Prospectus. . . . This duty included performing an appropriate investigation to ensure that the statements contained therein were true, and that there were no omissions of material fact required to be stated in order to make the statements contained in the . . . Prospectus not misleading. . . . [E]ach of the defendants violated these specific duties and obligations.").See also id. ¶¶ 95-96, 113.

7 Despite Defendants' arguments to the contrary, the SAC does not assert any claims based upon allegations previously dismissed with prejudice.

In the SAC, Plaintiffs assert claims under the Securities Act against three groups of defendants. First, they sue the following Individual Defendants: Charles Dimick, Chairman of the Board of Directors of DDi ("Dimick"); Bruce D. McMaster, President and Chief Executive Officer of DDi ("McMaster"); Joseph P. Gisch, Vice President and Chief Financial Officer of DDi ("Gisch"); Gregory Halvorson, Vice President of Operations of DDi ("Halvorson"); John Peters, Vice President of Sales and Marketing of DDi ("Peters"); and Mark R. Benham, a director of DDi from November 1998 to December 31, 2002 ("Benham") (collectively, the "Individual Defendants"). Second, Plaintiffs name: Bain Capital, Inc., a shareholder of DDi ("Bain"); David Dominik, a director of DDi from November 1998 to December 31, 2002 and a managing director of Bain from 1990 until March 2000 ("Dominik"); Stephen G. Pagliuca, a director of DDi and a managing director of Bain ("Pagliuca"); Stephen M. Zide, a director of DDi and a principal at Bain ("Zide"); and Edward W. Conrad, a director of DDi and a principal at Bain ("Conrad") (collectively, the "Bain Defendants"). Third, Plaintiffs name the following defendants for their role as underwriters in the Offering: Credit Suisse First Boston Corporation ("CSFB"); FleetBoston Financial Corporation ("Fleet"), the successor-in-interest to Robertson Stephens, Inc. ("Robertson"); J.P. Morgan Securities, Inc. ("JP Morgan"); and Needham Company, Inc. ("Needham") (collectively, the "Underwriter Defendants"). Id. ¶¶ 36-39.⁸ DDi is not named as a defendant because it has filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Id. ¶ 21. The SAC asserts claims under sections 11, 12(a)(2), and 15(a) of the Securities Act.

8 The Underwriter Defendants were the four lead underwriters in the Offering. SAC ¶¶ 36-39. Plaintiffs allege that CSFB sold and distributed 2,700,000 shares of DDi common stock and $100 million worth of Convertible Notes in the Offering; that Robertson sold and distributed 1,462,500 shares of DDi common stock and $100 million worth of Convertible Notes; that JP Morgan sold and distributed 1,462,500 shares of DDi common stock and $100 million worth of Convertible Notes; and that Needham sold and distributed 375,000 shares of DDi common stock. Id.
Through the Underwriter Defendants, DDi sold 3 million shares, Bain sold 2,296,503 shares, McMaster sold 82,500 shares, Dimick sold 82,500 shares, Gisch sold 22,500 shares, Halvorson sold 22,500 shares, and Peters sold 45,000 shares. Id. ¶¶ 22-26, 28, 60-61. McMaster, Dimick, Gisch, Dominik, Pagliuca, Zide, Conrad, and Benham signed the Prospectus. Id. ¶¶ 22-24, 30-34, 60.

On March 25, 2005, each of the three groups of defendants filed separate motions to dismiss the SAC pursuant to Rule 9(b) and Rule 12(b)(6) of the Federal Rules of Civil Procedure. On April 25, 2005, Plaintiffs filed one opposition to these three motions. On May 6, 2005, the Individual Defendants filed a supplemental brief in further support of their motion to dismiss. On May 20, 2005, Plaintiffs filed an opposition to the Individual Defendants' supplemental brief.

III. LEGAL STANDARD

A court should dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996).

Review is generally limited to the contents of the complaint.Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). However, material that is properly presented to the court as part of the complaint may be considered as part of a motion to dismiss. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). If a plaintiff fails to attach to the complaint the documents on which it is based, the defendant may attach those documents to a Rule 12(b)(6) motion to show that they do not support the plaintiff's claim. Id. In addition, the court may take judicial notice of facts that are capable of accurate and ready determination by resort to sources whose accuracy cannot be questioned. See Fed.R.Evid. 201.

IV. ANALYSIS

Defendants attack Plaintiffs' three Securities Act claims collectively and individually. First, Defendants argue that Plaintiffs cannot assert any Securities Act claims on behalf of those who purchased the Convertible Notes because: (1) Plaintiffs lack standing to do so, and (2) such claims are time-barred. Second, Defendants contend that the SAC must be dismissed because it, like the CAC, fails to satisfy Rule 9(b)'s heightened pleading requirements for averments of fraud. Third, Defendants argue that Plaintiffs' § 11 claim must be dismissed because: (1) Plaintiffs have failed to allege the material falsity or misleading nature of any statement in the Prospectus, (2) the "negative causation" defense bars Plaintiffs' claim(s), and (3) the allegedly false and misleading statements in the Prospectus are rendered inactionable by the puffery doctrine, the bespeaks caution doctrine, and/or the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"). Fourth, with respect to Plaintiffs' § 12(a)(2) claim, Defendants argue: (1) that the entire claim must be dismissed because the Prospectus was not materially false and misleading, (2) that the claim must be dismissed insofar as it is asserted on behalf of those who purchased DDi common stock "traceable to" the Prospectus, (3) that the claim must be dismissed insofar as it is asserted against the Individual Defendants and Bain because they were not statutory "offerors" or "sellers" under § 12(a)(2), and (4) that the claim must be dismissed insofar as it is asserted against the Underwriter Defendants because Plaintiffs have failed to allege which particular underwriter sold them DDi common stock. Fifth, Defendants argue that Plaintiffs' § 15(a) claim must be dismissed insofar as it is asserted against Bain because Plaintiffs have failed to allege that Bain was a "controlling person."

A. Claims Asserted on Behalf of Convertible Note Purchasers

In the SAC, unlike in the CAC, Plaintiffs assert claims on behalf of those who purchased Convertible Notes. Defendants argue that Plaintiffs cannot assert these claims because: (1) they do not have standing to do so, and (2) the claims are barred by the statute of limitations.

1. Standing

The named plaintiffs purchased DDi common stock; they do not claim to have purchased Convertible Notes. See SAC ¶¶ 19-20. Consequently, Defendants argue that Plaintiffs lack standing to assert claims on behalf of those who did purchase Convertible Notes.

In In re MobileMedia Sec. Litig., 28 F. Supp. 2d 901 (D.N.J. 1998), the District Court of New Jersey encountered a similar situation. There, the court stated:

Defendants challenge the standing of stock purchasers to bring [Securities Act] claims on behalf of the purchasers of . . . Notes. . . . "That a suit may be a class action adds nothing to the question of standing, for even named plaintiffs who represent a class must allege and show that they personally have been injured." Lewis v. Casey, 518 U.S. 343, 357 (1996). In the instant matter, Plaintiffs have alleged an injury traceable to the Secondary Offering — the same offering in which the Notes were issued. Courts have allowed those with valid securities claims to represent the interests of the purchasers of other types of securities in class action suits. Given Plaintiffs have sufficiently alleged individual cognizable injuries pursuant to [the Securities Act], Plaintiffs have standing to bring these claims [on behalf of those who purchased the notes]. Concerns over whether stock purchasers should represent notes purchasers are better addressed at the time of class certification.

Id. at 911 n. 7 (selected citations omitted).

The court agrees with this analysis. Here, lead plaintiffs, Poppe and Schneider, and representative plaintiff, Watson, allege to have purchased DDi common stock from the Offering. Like the plaintiffs in In re MobileMedia, Plaintiffs assert claims not only on behalf of those who purchased stock from this offering, but also on behalf of those who purchased notes traceable to the Offering. "Given Plaintiffs have sufficiently alleged individual cognizable injuries pursuant to [the Securities Act], Plaintiffs have standing to bring these claims." Id. Accordingly, the court denies Defendants' motions insofar as they assert that Plaintiffs lack standing to assert claims on behalf of those who purchased Convertible Notes.

2. Statute of Limitations

Defendants argue that the statute of limitations bars Plaintiffs' claims asserted on behalf of those who purchased the Convertible Notes. The statute of limitations for Securities Act claims is set forth in § 13, which provides that "[i]n no event shall any . . . action be brought to enforce a liability created under [section 11 or section 12(a)(1)] more than three years after the security was bona fide offered to the public, or under [section 12(a)(2)] more than three years after the sale." 15 U.S.C. § 77m.

Here, Plaintiffs did not raise claims on behalf of the Convertible Note purchasers until February 22, 2005, when they filed the SAC. This was far more than 3 years after the February 2001 Offering. Consequently, absent some exception, Plaintiffs' claims are time-barred insofar as they are asserted on behalf of the Convertible Note purchasers.

Recognizing this fact, Plaintiffs argue that the Convertible Note purchasers' claims "relate back" under Rule 15(c) of the Federal Rules of Civil Procedure to the date that the "initial complaint" was filed in this action. See Opp. at 36. Rule 15(c) provides:

An amendment of a pleading relates back to the date of the original pleading when . . . (2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or (3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and, within the period provided by Rule 4(m) for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.

Fed.R.Civ.P. 15(c).

"The Advisory Committee Note to the 1966 Amendment to Rule 15(c) observes that '[t]he relation back of amendments changing plaintiffs is not expressly treated in revised Rule 15(c) since the problem is generally easier' and goes on to comment that 'the attitude taken in revised Rule 15(c) toward change of defendants extends by analogy to amendments changing plaintiffs.'"Immigrant Assistance Project of the Los Angeles County Fed'n of Labor v. Immigration and Naturalization Serv., 306 F.3d 842, 857 (9th Cir. 2002) (emphasis added) (quoting Fed.R.Civ.P. 15(c) advisory committee's note). "In the Ninth Circuit, [a]n amendment adding a party plaintiff relates back to the date of the original pleading only when: 1) the original complaint gave the defendant adequate notice of the claims of the newly proposed plaintiff; 2) the relation back does not unfairly prejudice the defendant; and 3) there is an identity of interests between the original and newly proposed plaintiff." Id. (citingRosenbaum v. Syntex Corp., 95 F.3d 922, 935 (9th Cir. 1996)).

The previous complaints filed in this action did not give Defendants "adequate notice of the claims" of the Convertible Note purchasers. Instead, the prior complaints focused solely on the claims of those who purchased DDi common stock. See, e.g., CAC ¶ 1 ("[Plaintiffs] bring this action on their own behalf and on behalf of all persons or entities who purchased DDi Corp. common stock between December 19, 2000 and April 29, 2002 including all persons who acquired DDi common stock pursuant to, or traceable to, its February 14, 2001 offering."). Cf. Rembold v. Pacific First Fed. Sav. Bank, 1989 U.S. Dist. LEXIS 3953, at *4 (D. Or. Apr. 7, 1989) ("The fact that the . . . plaintiffs instituted litigation concerning the stock transaction of [the defendant] does not put the defendants on notice as to every other person who purchased the stock."). This has remained true throughout this litigation despite the fact that Plaintiffs must have known that the Convertible Notes were issued along with the common stock in the Offering. See Prospectus at Title Page ("Concurrently with this offering, we are offering $100,000,000 aggregate principal amount of 5 1/4% convertible subordinated notes due 2008.").

Furthermore, there is a lack of an "identity of interest" between the "original plaintiffs" — i.e., those who purchased DDi common stock pursuant to or traceable to the Prospectus — and the "newly proposed plaintiffs" — i.e., those who purchased Convertible Notes. In fact, these two groups purchased entirely different securities. Cf. Rosenbaum, 95 F.3d at 935 (no identity-of-interest in securities fraud class action where "newly proposed class members bought stock at different values and after different disclosures and statements"). For both of these reasons, the Convertible Note purchasers' claims do not "relate back" to the previous complaints' filing dates. Accordingly, the statute of limitations bars Plaintiffs'. Securities Act claims insofar as they are asserted on behalf of those who purchased the Convertible Notes.⁹

9 Almost all of the cases cited by Plaintiffs in support of their "relation back" argument are inapplicable to the present case due to the fact that they discuss whether new claims, not new claims by new plaintiffs, "relate back." See Martell v. Trilogy Ltd., 872 F.2d 322 (9th Cir. 1989); E.W. French Sons, Inc. v. Gen. Portland Inc., 885 F.2d 1392, 1395-96 (9th Cir. 1989); Percy v. San Francisco Gen. Hosp., 841 F.2d 975, 978 (9th Cir. 1988); Grattan v. Burnett, 710 F.2d 160, 163 (4th Cir. 1983); Santana v. Holiday Inns, Inc., 686 F.2d 736, 738-40 (9th Cir. 1982); In re Digital Microwave Corp. Sec. Litig., 1992 U.S. Dist. LEXIS 18469, at *5-6 (N.D. Cal. Oct. 19, 1992). Plaintiffs also inappropriately cite an unpublished Ninth Circuit decision. See Viall v. Scott, 1991 U.S. App. LEXIS 22051 (9th Cir. 1991) ("This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by the 9th Cir. R. 36-3."). Finally, Plaintiffs citeIn re Network Assoc., Inc. II Sec. Litig., 2003 U.S. Dist. LEXIS 14442, at *24-25 (N.D. Cal. Mar. 25, 2003), which is inapplicable to the present case due to the fact that the plaintiffs in that case added claims on behalf of new plaintiffs who had purchased the same security as the original plaintiffs, rather than — as is the case here — on behalf of new plaintiffs who purchased an entirely different security.

B. Applicable Pleading Standard

In ruling on the CAC, the court found that all of Plaintiffs' claims, including their Securities Act claims, were "grounded in fraud," and were therefore subject to Rule 9(b)'s heightened pleading requirements for "averments of fraud." See In re DDi, 2005 U.S. Dist. LEXIS 1056, at *57-62. Analyzing Plaintiffs' allegations under Rule 9(b)'s heightened pleading standard, the court concluded that Plaintiffs had failed to particularly allege that any statement in the Prospectus was materially false and misleading. See id. at 62-75.

In the SAC, Plaintiffs have omitted all references to fraud and no longer assert fraud-based Exchange Act claims. Furthermore, they now contend that Defendants' alleged wrongful conduct was the result of negligence, not fraud. Consequently, they argue that the SAC is not "grounded in fraud," is not subject to Rule 9(b), and is instead subject only to Rule 8(a)'s notice pleading model. Defendants disagree, arguing that Rule 9(b) continues to apply because: (1) Plaintiffs are bound to the fraud-based allegations in the CAC, and (2) the SAC independently "sounds in fraud." Because the SAC contains no more detail than the CAC, Defendants conclude that the SAC must be dismissed for failure to satisfy Rule 9(b).

1. Effect of Fraud-Based Allegations in the CAC

Defendants' first argument is that Rule 9(b) continues to apply to Plaintiffs' claims because Plaintiffs are bound by the fraud-based allegations in the CAC. In particular, Defendants argue that Plaintiffs cannot now claim that conduct once alleged to be "fraudulent" was actually "negligent." According to Defendants, these allegations are contradictory, and Plaintiffs are bound to their former fraud-based claims, which are subject to — and fail to meet — Rule 9(b)'s heightened pleading standard.

This argument fails. Although a plaintiff generally cannot amend a complaint to assert facts contradicting those alleged in an earlier complaint, see, e.g., Reddy v. Litton Indus., Inc., 912 F.2d 291, 296-97 (9th Cir. 1990), Defendants cite no authority for the proposition that a plaintiff cannot amend a complaint to assert that conduct once alleged to be intentional or fraudulent was actually negligent. Indeed, the conduct at issue here — the inclusion of false and misleading statements in a prospectus — could just as easily result from negligence as from fraud. Therefore, Plaintiffs were entitled to change the theory of their case to one of negligence, and the SAC has now superseded the CAC and is the operative complaint. See Hal Roach Studios, Inc. v. Richard Feiner Co., Inc., 896 F.2d 1542, 1546 (9th Cir. 1990) ("an amended pleading supersedes the original"). See also Kelley v. Crosfield Catalysts, 135 F.3d 1202, 1204 (7th Cir. 1998) ("It is well-established that an amended pleading supersedes the original pleading; facts not incorporated into the amended pleading are considered functus officio."); Loux v. Rhay, 375 F.2d 55, 57 (9th Cir. 1967) (same); Lubin v. Chicago Title Trust Co., 260 F.2d 411, 413 (7th Cir. 1958) (same); 3 James Wm. Moore et al., Moore's Federal Practice ¶ 15.17[3] (3d ed. 1997) (same). Consequently, Defendants' arguments regarding the proper pleading standard must be based on the allegations in the SAC, not those found in the CAC. See Bullen v. Bretteville, 239 F.2d 824, 833 (9th Cir. 1956) ("Once amended, the [former complaint] no longer performs any function as a pleading and cannot be utilized to aid a defective amendment.") (citations omitted). Accordingly, the court rejects Defendants' argument that Rule 9(b) applies to the SAC because of the CAC's allegations.

2. Allegations in the SAC

Defendants' second argument is that Plaintiffs' Securities Act claims as alleged in the SAC independently "sound in fraud" and are therefore subject to Rule 9(b). This argument also fails.

In In re Daou Sys., Inc., Sec. Litig. ("In re Daou"), 397 F.3d 704 (9th Cir. 2005), the Ninth Circuit recently clarified when Securities Act claims (or certain portions thereof) are subject to Rule 9(b)'s heightened pleading requirements:

Although [the applicable portions of the Securities Act] do not contain an element of fraud, a plaintiff may nonetheless be subject to Rule 9(b)'s particularity mandate if his complaint "sounds in fraud": "[T]he plaintiff may allege a unified course of fraudulent conduct and rely entirely on that course of conduct as the basis of a claim. In that event, the claim is said to be 'grounded in fraud' or to 'sound in fraud,' and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003).

In a case where fraud is not an essential element of a claim, only allegations of fraudulent conduct must satisfy the heightened pleading requirements of Rule 9(b). Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a). As the Fifth Circuit [has written]: "Where averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated.". . . [T]he Eighth Circuit [has] elaborated: "The only consequence of a holding that Rule 9(b) is violated with respect to a [Securities Act] claim would be that any allegations of fraud would be stripped from the claim. The allegations of innocent or negligent misrepresentation, which are at the heart of a [Securities Act] claim, would survive." Thus, if particular averments of fraud are insufficiently pled under Rule 9(b), a district court should "disregard" those averments or "strip" them from the claim. The court should then examine the allegations that remain to determine whether they state a claim.

A district court need not rewrite a deficient complaint however. Rule 9(b) may prove fatal to . . . Securities Act claims "grounded in fraud" when the complaint makes a "wholesale adoption" of the securities fraud allegations for purposes of the Securities Act claims. In such cases, a district court is not required to sift through allegations of fraud in search of some "lesser included" claim of strict liability. It may dismiss. If it does so, it should ordinarily accept a proffered amendment that either pleads with the requisite particularity or drops the defective allegations and still states a claim.

In re Daou, 397 F.3d at 723 (selected citations and quotation marks omitted).

The SAC does not allege "a unified course of fraudulent conduct" implicating Rule 9(b). Instead, it is rooted in allegations of negligence. See, e.g., SAC ¶¶ 41, 44(c), 95-96, 106, 113. Such allegations clearly do not "sound in fraud." See Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) ("[S]everal circuits have distinguished between allegations of fraud and allegations of negligence, applying Rule 9(b) only to claims pleaded under Section 11 and Section 12(a)(2) that sound in fraud."); In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804, 827 (S.D. Tex. 2004) ("When § 11 claims are grounded in negligence and not in fraud there is no scienter requirement, and the plaintiff need only satisfy the liberal pleading requirements of Rule 8(a).").Compare Rombach, 355 F.3d at 178 ("[Plaintiffs'] claims are not subject to the heightened pleading requirements of Rule 9(b), because they sound in negligence: 'each of the Underwriter Defendants owed to the purchasers of the shares of [the company] . . . the duty to make a reasonable and diligent investigation of the statements contained in the Prospectus"), Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) ("the [Securities Act] claim . . . is not premised on fraud . . . [because] the Complaint alleges that defendants failed to make a 'reasonable investigation' of the statements contained in the Registration Statements and Prospectuses") (emphasis omitted),and In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054, 1078 (N.D. Cal. 2003) (following allegation sounds in negligence: "None of the defendants . . . made a reasonable investigation or possessed reasonable grounds for the belief that the challenged statements . . . were accurate and complete in all material respects."), with SAC ¶ 41 ("Each of the defendants owed to the purchasers of DDi stock and the Convertible Notes . . . the duty to make a reasonable and diligent investigation of the statements contained in the . . . Prospectus. . . ."). Consequently, Rule 9(b) does not apply to the entire SAC.¹⁰

10 Defendants attempt to avoid this result by citing a series of cases holding that a complaint may still be "grounded in fraud," and therefore subject to Rule 9(b), despite the fact that it disclaims reliance on fraud. The court concurs with the proposition, but finds the facts of these cases inapposite. See, e.g., Castlerock Management, LTD v. Ultralife Batteries, Inc., 68 F. Supp. 2d 480, 486 (D.N.J. 1999) (complaint alleging that defendants "participated in the alleged wrongdoing, in part, in order to continue and prolong the illusion of [the company's] financial growth, to inflate [the company's] publicly reported revenues and earnings, to conceal the adverse facts concerning [the company's] operations, financial condition and business and to permit [the company] to raise millions of dollars pursuant to the Offering"); In re Anchor Gaming Sec. Litig., 33 F. Supp. 2d 889, 892-93 (D. Ariz. 1999) (complaint alleging that "certain . . . [d]efendants decided to take advantage of the rising price of . . . common stock," that while "the price of stock dropped significantly following [an] announcement, defendants acted quickly to stem this decline," that a particular announcement "had the desired effect" of driving up the price of the company's stock, and that defendants decided to sell a substantial portion of their equity in the company while certain facts were "still concealed"); In re GameTech Int'l, Inc. Sec. Litig., 1999 U.S. Dist. LEXIS 22289, at *13 (D. Ariz. June 1, 1999) (relying, in part, on allegation that defendants "failed to [meet their duty to refrain from misleading investors] by concealing then-existing adverse facts affecting [the company's] business and prospects");In re Computervision Corp. Sec. Litig., 869 F. Supp. 56, 63-64 (D. Mass. 1994) (complaint alleging, among other things, that "in order to give the offerings a coloration of legitimacy and arm's-length pricing and to prop up the immediate aftermarket prices, Shearson manipulated the market for Computervision securities with secret promises and inducements to customers to participate in the Offerings").

Furthermore, the SAC does not contain any particular "averments of fraud" triggering Rule 9(b). Instead, each and every allegation in the SAC is rooted in the assertion that the Prospectus was false and misleading as a result of Defendants' negligence.¹¹ Consequently, Rule 9(b) does not apply to any of the SAC's allegations. Accordingly, Plaintiffs' Securities Act claims are subject to Rule 8(a)'s notice pleading model, not Rule 9(b). All of Defendants' arguments premised upon Rule 9(b) are therefore rejected.

11 Defendants repeatedly argue that the SAC contains "averments of fraud" because it alleges: (1) that Defendants knowingly failed to disclose that DDi had been sluggish beginning in the fourth quarter of 2000; and (2) that Defendants had engaged in "accounting improprieties" to "mask" — i.e., deliberately conceal — DDi's deteriorating financial condition. First, the SAC nowhere alleges that Defendants "knowingly" failed to disclose DDi's financial condition. Second, the SAC alleges that certain accounting improprieties "masked" — i.e., hid from public view — DDi's financial condition, not that Defendants committed the accounting improprieties or that they did so intentionally to conceal DDi's financial condition. See SAC ¶¶ 86, 89.

C. Section 11 Claim

Plaintiffs assert a claim under § 11(a) of the Securities Act against the Underwriter Defendants and those defendants who signed the Prospectus (i.e., Dimick, McMaster, Gisch, Benham, Dominik, Pagliuca, Zide, and Conrad). Plaintiffs' claim is rooted in the allegation that the Prospectus was materially false and misleading for the six reasons outlined above. See supra Part II.¹²

Section 11 establishes liability for false and misleading statements made in a registration statement. See 15 U.S.C. § 77k. It provides as follows:

In case any part of the registration statement . . . contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . may . . . sue —

(1) every person who signed the registration statement;

(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;

(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner; . . . [and]

(5) every underwriter with respect to such security.

Id. To assert a claim under § 11, the plaintiff must allege: "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." In re Daou, 397 F.3d at 722-23. "No scienter is required for liability under § 11; defendants will be liable for innocent or negligent material misstatements or omissions." Id. at 723.

An omission is considered "material" if there is "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder." In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1259 (N.D. Cal. 2000). "Put another way, there must be a substantial likelihood that the disclosure of the omitted fact . . . would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id. (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). See also In re Stac Elec. Sec. Litig. ("In re Stac"), 89 F.3d 1399, 1408 (9th Cir. 1996) (same). A misrepresentation is material when an investor would attach importance to it in making an investment decision. See Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988). "Although a court may dismiss a claim on the ground that a misstatement or omission was not material, the standard for doing so is high." In re Sterling Foster Co., Inc., Sec. Litig., 222 F. Supp. 2d 216, 262 (E.D.N.Y. 2002) (quotation marks omitted). In fact, "a complaint may not properly be dismissed pursuant to Rule 12(b)(6) . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Id. at 262-63 (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)). "Moreover, a court deciding a motion to dismiss shall be mindful that the issue of whether a statement or omission is material is usually a question for the fact finder." Id. (citing TSC Indus., Inc., 426 U.S. at 450).See also In re Stac, 89 F.3d at 1405 ("The 'materiality' of an omission is a fact-specific determination that should ordinarily be assessed by a jury. [O]nly if the adequacy of the disclosure or the materiality of the statement is so obvious that reasonable minds could not differ are these issues appropriately resolved as a matter of law.") (citations and quotation marks omitted). See generally In re Network Assoc., Inc. II Sec. Litig., 2003 U.S. Dist. LEXIS 14442, at *15 (N.D. Cal. Mar. 25, 2003) ("[W]hether a statement or omission is misleading to potential investors requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly one for the trier of fact.") (citations and quotation marks omitted).

Defendants argue that Plaintiffs' § 11 claim must be dismissed because: (1) the Prospectus did not include any material false and misleading statements or omissions, (2) the "negative causation" defense bars Plaintiffs' Securities Act claims, and (3) the allegedly false and misleading statements in the Prospectus are not actionable due to the puffery doctrine, the bespeaks caution doctrine, and/or the PSLRA's safe harbor provision.¹³

13 Defendants also argue that Plaintiffs do not have standing to assert the § 11 claim. While lead plaintiffs Poppe and Schneider may lack standing, see Joint Decl. of Poppe, Schneider, Skolmick, and Rust ¶ 4 (stating earlier in these proceedings that they do not have standing to assert § 11 claim), there is no dispute that representative plaintiff Watson has standing.

1. Material False and Misleading Statements and/or Omissions in the Prospectus

Despite Defendants' arguments to the contrary, Plaintiffs have adequately alleged that the Prospectus was materially false and misleading with respect to at least three matters. First, Plaintiffs adequately allege that the financial reports included in the Prospectus were materially false and misleading. According to Plaintiffs, these financial reports were overstated due to "accounting improprieties," including DDi's tendency to "recognize revenue on (1) the premature shipment of orders to clients ( e.g., Watkins Johnson, Marconi) prior to the authorized delivery date; and (2) the shipment of orders from one DDi facility to another." SAC ¶ 80. Plaintiffs allege that these practices violated GAAP and DDi's own internal accounting policies. Id. ¶ 79.

Defendants contend that Plaintiffs' allegations regarding these accounting improprieties are insufficient because: (1) they fail to meet the particularity requirement of Rule 9(b), and (2) they fail to demonstrate that the Prospectus was "materially" false and misleading. Defendants' first argument fails because Plaintiffs' allegations are subject to Rule 8(a), not Rule 9(b). Defendants' second argument fails due to the fact that Plaintiffs expressly allege that these accounting improprieties caused the Prospectus to be "materially" false and misleading, and because Plaintiffs allege that, as an example, these accounting improprieties were responsible for approximately 25% of one of DDi's facility's quarterly revenues. See id. ¶¶ 80, 89. Given Rule 8(a)'s extremely liberal pleading standard, see In re Initial Public Offering Sec. Litig., 241 F. Supp. 2d 281, 322-24 (S.D.N.Y. 2003), and the fact that a complaint may not be dismissed on materiality grounds unless the misstatements or omissions "are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance," see In re Sterling Foster Co., Inc., Sec. Litig., 222 F. Supp. 2d at 262, the court finds that Plaintiffs have sufficiently alleged that the Prospectus was materially false and misleading as a result of these alleged "accounting improprieties."

Second, Plaintiffs have adequately alleged that the Prospectus "misrepresented the amount of DDi customers. . . ." SAC ¶ 74.See also id. ¶ 68. While the Prospectus stated that DDi had "over 2000 customers," Plaintiffs allege that DDi actually had only 500 customers. Id. ¶¶ 68, 74. Defendants argue that Plaintiffs' allegations regarding this matter fail to satisfy Rule 9(b). However, as mentioned, Rule 9(b) is inapplicable. Defendants also advance certain arguments based upon the allegations found in the CAC. However, as also mentioned, the SAC has superseded the CAC. See Bullen, 239 F.2d at 833. Finally, Defendants argue that this alleged misstatement regarding the number of DDi customers was immaterial. However, it is not "obvious" that a "reasonable investor" would find it immaterial that a company touting its "large and diverse customer base" misrepresented the number of its customers by 300%. See SAC ¶ 67 (quoting Prospectus as stating: "We believe that our large and diverse customer base also makes us less vulnerable to individual customer shifts in demand."). Therefore, Plaintiffs have sufficiently alleged that the Prospectus made a material misrepresentation with respect to the number of DDi customers.¹⁴

14 Defendants also quibble over the definition of "customer" and "customer base." These types of arguments are more appropriate for summary judgment or trial than a Rule 12(b)(6) motion to dismiss.

Third, Plaintiffs have adequately alleged that the Prospectus misrepresented the recent and then-current state of DDi's business affairs. See id. ¶ 75. While the Prospectus represented that DDi had experienced "strong demand" in the fourth quarter of 2000 and included various other statements indicating that DDi had been and was doing well, Plaintiffs allege that in reality, DDi's business was hemorrhaging in the fourth quarter of 2000. Id. ¶¶ 64, 65, 75. For example, Plaintiffs allege that by the fourth quarter of 2000, "the overall demand for quick-turn and value-added PCBs [had] dropped off precipitously," "[m]any of the customers . . . [had] tried to cancel [orders]," "many of DDi's customers [had] stopped doing business with [DDi]," "DDi's sales pipeline [had] dried up," and "DDi was forced to implement across the board employee pay cuts."See id. ¶¶ 56, 64, 65, 69, 77. Defendants argue that these allegations fail to satisfy Rule 9(b), and fail to demonstrate that the Prospectus was "materially" false and misleading. However, Rule 9(b) is inapplicable, and it is not "obvious" that a "reasonable investor" would have found this information immaterial.¹⁵ Consequently, Plaintiffs have adequately alleged that the Prospectus was materially false and misleading with respect to this matter.

15 Defendants also argue that Plaintiffs' allegation that DDi's business was hemorrhaging in the fourth quarter of 2000 is untenable in light of the record financial results that DDi experienced in that quarter. However, this argument ignores the fact that Plaintiffs have adequately alleged that DDi's "record financial results" were inaccurate due to the alleged "accounting improprieties."

Thus, Plaintiffs have sufficiently alleged that the Prospectus was materially false and misleading with respect to at least three matters. The court need not consider whether Plaintiffs have adequately alleged that the Prospectus was materially false and misleading with respect to other matters. See Cooper v. Pickett, 137 F.3d 616, 623 (9th Cir. 1997) ("Since we conclude that, if proved, many of the allegations of the complaint state causes of action, we need not at this juncture in the case opine on some of the closer questions, such as whether the rosy forecasts were known to be false and are therefore actionable. These judgments should be made after discovery is complete.");In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096, 1118 (D. Nev. 1998) (same). See also Sutton v. Bernard, 2001 U.S. Dist. LEXIS 11610, at *14 (N.D. Ill. Aug. 6, 2001) ("Nonetheless, we need not parse through each and every alleged misstatement contained in the complaint to determine if it is actionable. It is sufficient for pleading purposes that at least some of the GAAP violations (and other material misstatements and omissions) alleged by plaintiffs are actionable."); In re Oxford Health Plans, Inc., 187 F.R.D. 133, 141 (S.D.N.Y. 1999) (if court has concluded that some of the statements in document are actionable, "it is unwise" at the pleading stage for "the Court to parse out potentially no statements and at most only very few statements [as not actionable] while other statements remain in the case to be tried."). Accordingly, the court rejects Defendants' argument that Plaintiffs have failed to allege any false and misleading statements (or omissions) in the Prospectus.

2. Negative Causation Defense

Defendants also argue that Plaintiffs' Securities Act claims are barred by the negative causation defense.

Section 11(e) of the Securities Act provides the measure of damages for Securities Act claims:

The suit . . . may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought. . . .

15 U.S.C. § 77k(e).

Because § 11(a) imposes strict liability for misrepresentations contained in a registration statement, any decline in value is presumed to be caused by the alleged misrepresentation. See Akerman v. Oryx Communications, Inc., 810 F.2d 336, 340 (2d Cir. 1987). See also Casella v. Webb, 883 F.2d 805, 808 (9th Cir. 1989) ("the buyer need not show any causal connection between the misrepresentation and his damage"). Section 11(e), however, provides the following affirmative defense:

[I]f the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading, such portion of or all such damages shall not be recoverable.

15 U.S.C. § 77k(e).

"This defense is known as the 'negative causation defense.'"In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d at 867 (citingAkerman, 810 F.2d at 340). "Where a defendant proves that the decline in the value of a security was not caused by the material omissions or misstatements in the registration statement, plaintiff is not entitled to recover any damages." Id. (citingAkerman, 810 F.2d at 340). "The defendant bears the burden of proof on this defense," and the burden is a "heavy" one. Id. at 867-68 (citing Akerman, 810 F.2d at 340). "Loss causation" can be used as a ground for dismissal on a Rule 12(b)(6) motion to dismiss only if the merits of the defense are "apparent on the face of [the] complaint." See In re Alamosa Holdings, Inc., 2005 WL 712001, at *30 (N.D. Tex. Mar. 28, 2005). See also Cats v. Protection One, Inc., 2001 U.S. Dist. LEXIS 25725, at *34 (C.D. Cal. June 4, 2001) (Tevrizian, J.) (same).

Defendants argue that the SAC affirmatively asserts that the alleged misrepresentations and omissions in the Prospectus were not revealed until after the value of DDi common stock plummeted from $22.00 per share to $.06 per share. Consequently, Defendants argue that the SAC demonstrates that the drop in value of DDi common stock was caused by something other than the alleged misrepresentations and omissions in the Prospectus. Therefore, Defendants contend, Plaintiffs' claims are barred by the negative causation defense.

Defendants' argument fails. The SAC does not affirmatively assert that the alleged misrepresentations and omissions in the Prospectus were revealed only after the value of DDi common stock plummeted. For example, it is unclear when the "accounting improprieties" were revealed or when it was disclosed that DDi had only 500 customers. Additionally, although the SAC alleges that "[i]nvestors had no reason to believe that DDi's business began to deteriorate in late-2000 until the Company filed for Bankruptcy [in 2003]," SAC ¶ 90, it also states that "[o]nce DDi's financial condition became apparent, the Company's stock price fell below $1.00 per share, thereby leading to DDi's . . . bankruptcy." Id. ¶ 12. The SAC is at least ambiguous as to whether the alleged misrepresentations and omissions regarding DDi's financial condition were revealed before or after the drop in value of DDi common stock. Thus, it is not "apparent on the face" of the SAC that the loss in value of DDi common stock was caused by something other than the alleged misrepresentations and omissions in the Prospectus. Accordingly, the court rejects Defendants' motions insofar as they rely on the negative causation defense.

3. Puffery, Bespeaks Caution, and the Safe Harbor Provision

Defendants argue that Plaintiffs' Securities Act claims must be dismissed because the alleged false and misleading statements in the Prospectus are protected by the puffery doctrine, the bespeaks caution doctrine, and/or the PSLRA's safe-harbor provision.

a. Puffery

Under the doctrine of "puffery," a corporate insider's vague expressions of optimism or belief generally cannot serve as the basis for a securities law claim. See Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993); In re Verifone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992). This doctrine is not applicable here, at least at this stage in the proceedings. For example, the three above-mentioned misrepresentations in the Prospectus related to DDi's historical financial results, the number of its customers, and its success in the fourth quarter of 2000. They did not relate to "a corporate insider's vague expression of optimism or belief." Furthermore, the court need not determine at this stage whether various other alleged misstatements in the Prospectus are protected by the puffery doctrine. See Cooper, 137 F.3d at 623 (9th Cir. 1997); In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d at 1118. See also Sutton, 2001 U.S. Dist. LEXIS 11610, at *14 ("Nonetheless, we need not parse through each and every alleged misstatement contained in the complaint to determine if it is actionable. It is sufficient for pleading purposes that at least some of the GAAP violations (and other material misstatements and omissions) alleged by plaintiffs are actionable."); In re Oxford Health Plans, Inc., 187 F.R.D. at 141 (if court has concluded that some of the statements in document are actionable, "it is unwise" at the pleading stage for "the Court to parse out potentially no statements and at most only very few statements [as not actionable] while other statements remain in the case to be tried.").

b. Bespeaks Caution and the Safe Harbor Provision

The "bespeaks caution doctrine" provides protection for optimistic projections accompanied by cautionary language containing relevant specific facts or assumptions. In re Worlds of Wonder Sec. Litig. ("WOW"), 35 F.3d 1407, 1413 (9th Cir. 1994). The doctrine arises from the application of two fundamental concepts in securities fraud cases: materiality and reliance. Id. at 1414. When appropriate cautionary language accompanies forward-looking statements, the materiality of the forward-looking statements and the reasonableness of reliance are affected. Id.

The PSLRA's "safe harbor" provision amended the Securities Act,see 15 U.S.C. § 77z-2, and the Exchange Act, see 15 U.S.C. § 78u-5. Similar to the judicially-created bespeaks caution doctrine, these sections provide protection to "forward-looking statements." See In re Infonet Serv. Corp. Sec. Litig. ("In re Infonet"), 310 F. Supp. 2d 1080, 1103 (C.D. Cal. 2003). The safe harbor provision provides that a forward-looking statement cannot be the basis of liability under the Securities Act or the Securities Exchange Act if: (1) the statement is identified as forward-looking and is accompanied by sufficient cautionary statements, 15 U.S.C. § 78u-5(c)(1)(A); or (2) the person who made the forward-looking statement did so without actual knowledge that the statement was false or misleading, 15 U.S.C. § 78u-5(c)(1)(B).

Neither the bespeaks caution doctrine nor the safe harbor provision bars Plaintiffs' Securities Act claims, at least at this stage in the proceedings. As mentioned, Plaintiffs have adequately alleged that the Prospectus misrepresented DDi's historical financial performance, as well as the number of its customers. Neither of these alleged misrepresentations were "forward looking." Consequently, the bespeaks caution doctrine and the safe harbor provision are inapplicable. See In re WRT Energy, 2005 WL 323729, at *8 (S.D.N.Y. Feb. 9, 2005) ("[A]pplication of the 'bespeaks caution' doctrine is limited only to forward-looking representations, not misrepresentations of present or historical facts.") (citing P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 96-97 (2d Cir. 2004)); In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 340 (S.D.N.Y. 2001) (safe-harbor provisions "apply to forward-looking statements only, and not to material omissions or misstatements of historical fact").¹⁶

16 The court need not determine at this time whether other alleged misstatements and omissions in the Prospectus are rendered inactionable by the bespeaks caution doctrine and/or the safe harbor provision. See Cooper, 137 F.3d at 623 ("Since we conclude that, if proved, many of the allegations of the complaint state causes of action, we need not at this juncture in the case opine on some of the closer questions, such as whether the rosy forecasts were known to be false and are therefore actionable. These judgments should be made after discovery is complete."); In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d at 1118. See also Sutton, 2001 U.S. Dist. LEXIS 11610, at *14; In re Oxford Health Plans, Inc., 187 F.R.D. at 141.

Thus, Plaintiffs have alleged that the Prospectus was materially false and misleading with respect to at least three matters. Furthermore, Plaintiffs' allegations regarding these matters are not barred by the negative causation defense, the puffery doctrine, the bespeaks caution doctrine, or the safe harbor provision. Accordingly, despite Defendants' arguments to the contrary, Plaintiffs have sufficiently alleged a § 11 claim on behalf of those who purchased DDi common stock pursuant to or traceable to the Prospectus.

D. Section 12(a)(2) Claim

Plaintiffs assert a claim under § 12(a)(2) of the Securities Act against Bain, certain Individual Defendants (Gisch, McMaster, Dimick, Halvorson, and Peters), and the Underwriter Defendants. Section 12(a)(2) makes it unlawful for any person to use any instrumentality of interstate commerce to offer or sell securities by means of a prospectus or oral communication that includes "an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." 15 U.S.C. § 771(a)(2). Defendants argue: (1) that Plaintiffs' entire § 12(a)(2) claim must be dismissed because the SAC fails to plead that the Prospectus contained a material false and misleading statement, (2) that the § 12(a)(2) claim must be dismissed insofar as it is asserted on behalf of those who purchased DDi common stock "traceable to" the Prospectus, (3) that the § 12(a)(2) claim must be dismissed insofar as it is asserted against Bain and the Individual Defendants because these parties were not "offerors" or "sellers" under § 12(a)(2), and (4) that the § 12(a)(2) claim must be dismissed insofar as it is asserted against the Underwriter Defendants because Plaintiffs have failed to allege which particular underwriter sold them DDi common stock.

1. Material False and Misleading Statements in Prospectus

As mentioned, Plaintiffs have adequately alleged, under Rule 8(a), that the Prospectus was materially false and misleading with respect to at least three matters. First, Plaintiffs have sufficiently alleged that "accounting improprieties" materially skewed the financial results contained in the Prospectus. See supra Part IV.C.1. Second, Plaintiffs have adequately alleged that the Prospectus materially misrepresented the number of DDi customers. See id. Third, Plaintiffs have sufficiently alleged that the Prospectus materially misrepresented the state of DDi's business. See id. Accordingly, Defendants' motions are denied insofar as they assert that Plaintiffs have failed to allege any materially false and misleading statements in the Prospectus.

2. Section 12(a)(2) Claim Asserted on Behalf of Those Who Purchased DDi Common Stock "Traceable To" the Prospectus

Defendants argue that Plaintiffs' § 12(a)(2) claim must be dismissed insofar as it is asserted on behalf of those who purchased DDi common stock "traceable to," rather than "pursuant to," the Prospectus. "[P]urchasers in private or secondary market offerings are precluded from bringing actions under Section 12(a)(2)." In re Sterling Foster Co. Inc., Sec. Litig., 222 F. Supp. 2d at 244. See also In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 693-94 (S.D.N.Y. 2000) (same). Therefore, Plaintiffs' § 12(a)(2) claim is dismissed with prejudice insofar as it is asserted on behalf of those who purchased DDi common stock in private or secondary market offerings.

3. Section 12(a)(2) Claim Asserted Against Bain and the Individual Defendants

Section 12(a)(2) imposes liability on a person who " offers or sells a security . . . by means of a prospectus . . . which includes an untrue statement of material fact or omits to state a material fact." 15 U.S.C. § 771(a)(2) (emphasis added). A person "offers or sells" a security within the meaning of § 12(a)(2) if the person either: (1) passes title to the securities to the plaintiff, or (2) solicits the purchase, motivated in part by his own financial interests. See Moore v. Kayport Package Express, Inc., 885 F.2d 531, 536 (9th Cir. 1989). See also In re Infonet, 310 F. Supp. 2d at 1100; Griffin v. Paine Webber, Inc., 2001 U.S. Dist. LEXIS 8937, at *4 (S.D.N.Y. June 29, 2001). Bain and the Individual Defendants argue that they were not "offerors" or "sellers" under § 12(a)(2).

First, Bain and the Individual Defendants assert that they did not "pass title to the securities to the plaintiff[s]" because the Offering occurred via a firm commitment underwriting. Courts have held that "the issuer and its directors and officers [and selling shareholders] do not pass title to persons who buy in [a] firm commitment underwriting." In re Infonet, 310 F.Supp.2d at 1100. "Instead, title is passed to buyers by the underwriters." Id. The Offering here was a firm commitment underwriting. See Prospectus at 78. Consequently, Bain and the Individual Defendants did not "pass title to the securities to the plaintiff[s]."

Second, Bain and the Individual Defendants argue that they did not "solicit the purchase [of the securities], motivated in part by [their] own financial interests." Indeed, the facts alleged in the SAC indicate that Bain and the Individual Defendants, at most, assisted in preparing and issuing the Prospectus. See SAC ¶ 103. As explained in In re Stratosphere Corp. Sec. Litig., 1 F.Supp.2d 1096 (D. Nev. 1998), a defendant's "simple involvement" in the preparation of a registration statement is insufficient to establish the sort of relationship between a buyer and seller required for liability under § 12(a)(2). Id. at 1121. Similarly, "merely proving that [the defendants] signed the allegedly misleading registration statement or prospectus for a firm commitment offering is insufficient to prove that [they] were sellers under section 12."Id. at 1120. See also In re Infonet, 310 F.Supp.2d at 1101 (same); In re Musicmaker.com Sec. Litig., 2001 WL 34062431, at *14 n. 9 (C.D. Cal. June 4, 2001) (Snyder, J.) (same); Thomas Lee Hazen, Treatise on the Laws of Securities Regulation § 7.2 (4th ed. 2002) ("Even substantial involvement in the preparation of registration and offering materials will not create liability unless there is also active involvement in the negotiations leading to the sale in question.").¹⁷ Thus, Plaintiffs have failed to allege that Bain and the Individual Defendants "solicited" the purchase of securities in the Offering. Accordingly, Plaintiffs have failed to allege that Bain and the Individual Defendants were "offerors" or "sellers" under § 12(a)(2), and Plaintiffs' § 12(a)(2) claim against these defendants is dismissed without prejudice.

17 Plaintiffs request that the court ignore this precedent and side with those courts holding that § 12(a)(2) automatically extends liability to officers and directors who sign the prospectus and registration. See, e.g., In re National Golf Properties Inc. Sec. Litig., 2003 U.S. Dist. LEXIS 4321, at *9 (C.D. Cal. Mar. 18, 2003) (King, J.); In re Proxima Corp. Sec. Litig., 1994 WL 374306, at *5 (S.D. Cal. May 3, 1994); Keegan Mgt. Co. Sec. Litig., 1991 WL 253003, at *8 (N.D. Cal. 1991). The court declines this invitation for the reasons set forth inIn re Infonet, 310 F.Supp.2d at 1100-02.

4. Section 12(a)(2) Claim Against the Underwriter Defendants

The Underwriter Defendants argue that Plaintiffs' § 12(a)(2) claim against them must be dismissed because Plaintiffs have failed to allege which particular underwriter sold them DDi common stock in the Offering. Section 12(a)(2) requires privity between a plaintiff and the seller of the securities at issue — it permits suit against the seller of a security only by "the person purchasing such security from him." 15 U.S.C. § 771(a)(2);In re Itel Sec. Litig., 89 F.R.D. 104, 116 (N.D. Cal. 1981) ("§ 12 contemplates only an action by a buyer against his immediate seller") (citations omitted). "Therefore, this privity requirement means that if a plaintiff wishes to sue a seller of stock under § 12(a)(2), he must have bought the stock from that seller; a plaintiff cannot sue a seller from whom he did not purchase." Danis v. USN Communications, Inc., 189 F.R.D. 391, 400 (N.D. Ill. 1999).

Representative plaintiff Watson alleges that he "acquired 100 shares of DDi common stock [from one of the underwriters] in the February Offering pursuant to the Prospectus." SAC ¶ 20. He does not allege which underwriter(s) sold him these 100 shares. Consequently, the Underwriter Defendants argue that Plaintiffs, apparently represented by Watson with respect to this matter, cannot assert a § 12(a)(2) claim against any particular underwriter.

In In re Westinghouse Sec. Litig. ("In re Westinghouse"), 90 F.3d 696 (3d Cir. 1996), the Third Circuit rejected this argument. Id. at 717-19. The plaintiffs in In re Westinghouse alleged that "[e]ach member of the Underwriter Class sold [company] stock to members of the [plaintiff] class" and that "the underwriter defendants sold [the] securities 'directly to plaintiffs and other Class members.'" Id. at 717. The district court dismissed the plaintiffs' § 12(a)(2) claim, holding:

[P]laintiffs must allege, to state a viable Section 12(2) cause of action, that the underwriter defendants were "sellers" within the meaning of Section 12(2). That is, there must be an allegation that a particular proposed defendant sold or solicited the sale of [the company's] securities to the individual plaintiffs. This element is lacking.

Id. at 718 (quoting district court opinion).

The Third Circuit reversed, stating that although it "agree[d] with the district court that plaintiffs must allege that the underwriter defendants were section 12(2) sellers," there was no support "for the district court's statement that, in order to achieve this, plaintiffs are required [at the pleading stage] to allege which underwriter sold securities to each plaintiff."Id. The court stated that "absent a particularity requirement, plaintiffs must provide a short and plain statement showing that the underwriter defendants are statutory sellers and that plaintiffs purchased securities from them." Id. The court found that the plaintiffs' allegations satisfied this lenient standard:

We find that plaintiffs satisfied this requirement and stated a section 12(2) claim against the underwriter defendants. Taken in the light most favorable to plaintiffs, the first amended complaint alleges that each of the underwriter defendants sold [the company's] securities directly to plaintiffs and that each plaintiff purchased [the company's] securities directly from an underwriter defendant.

Id.

The court finds In re Westinghouse persuasive. Furthermore, Plaintiffs' allegations are similar to those proffered by the plaintiffs in In re Westinghouse. For example, Plaintiffs allege that each of the Underwriter Defendants sold DDi common stock directly to certain plaintiffs in the Offering, see SAC ¶¶ 36-39, and that these plaintiffs, including Watson, purchased the common stock directly from an underwriter defendant. See id. ¶¶ 20, 42-43. Furthermore, as noted in In re Westinghouse, Plaintiffs need not allege "which underwriter sold securities to each plaintiff." Thus, Plaintiffs have adequately alleged that the Underwriter Defendants were statutory sellers under § 12(a)(2). Accordingly, the court rejects Defendants' argument that Plaintiffs' § 12(a)(2) claim against the Underwriter Defendants must be dismissed because Plaintiffs have failed to plead which particular underwriter sold them DDi common stock.¹⁸

18 Insofar as Defendants' argument is related to "standing,"In re Westinghouse states that this concern is better addressed during the class certification stage in the proceedings. See In re Westinghouse, 90 F.3d at 718 n. 22. See also Danis v. USN Communications, Inc., 189 F.R.D. 391, 400 (N.D. Ill. 1999) (addressing argument at class certification stage).

E. Section 15 Claim

Plaintiffs assert a claim under § 15(a) of the Securities Act against Gisch, McMaster, Dimick, Halvorson, Peters, and Bain. Section 15(a) imposes joint and several liability upon every person who controls any person liable under sections 11 or 12. 15 U.S.C. § 77o. Section 15(a) provides:

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

Id. "To state a claim under this section, a plaintiff must allege that the . . . defendants had power or influence over the company and that the . . . defendants were culpable participants in the company's alleged illegal activity." In re Daou, 397 F.3d at 725. Bain contends that it is not a "controlling person" because it meets neither of these requirements. The court disagrees.¹⁹

19 The defendants named in this claim also argue that they cannot be held liable under § 15(a) because DDi, the allegedly "controlled" entity, is not named in this suit. The court need not address this argument because it was raised for the first time in Defendants' reply briefs. See In re Intuit Privacy Litig., 138 F. Supp. 2d 1272, 1275 n. 3 (C.D. Cal. 2001) ("this court does not consider arguments raised anew for the for first time in a reply brief as to so do would unfairly deny the non-moving party an opportunity to respond"). Defendants additionally argue that they cannot be held liable under § 15(a) because there is no underlying violation of § 11 or § 12. This argument fails, as certain portions of Plaintiffs' § 11 and § 12 claims survive the instant motions to dismiss.

First, the Prospectus itself indicates that Bain "had power or influence over" DDi at the time that DDi issued the Prospectus. In particular, the Prospectus provided:

Our current principal stockholders will continue to have significant influence over our business after this offering. . . . Upon completion of this offering, . . . investment funds affiliated with Bain Capital, Inc. will beneficially own approximately 14.2% of our outstanding common stock. In addition, of the eight directors who serve on our board, three are current representatives of Bain Capital, Inc. and two are former representatives of Bain Capital, Inc. By virtue of such stock ownership and board representation, these entities will continue to have a significant influence over all matters submitted to our stockholders, including the election of our directors, and to exercise significant control over our business, policies and affairs.

Prospectus at 12. See also id. at 66 ("Five of our directors are or were affiliated with our principal stockholder, the Bain Capital funds."); id. at 68 (Bain held 20.4% of DDi common stock before Offering). Given the liberal pleading standard imposed by Rule 8(a), this statement in the Prospectus is sufficient at this stage in the proceedings to demonstrate that Bain "had power or influence over" DDi at the time the Prospectus was issued. Cf. No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003) ("Whether [the defendant] is a controlling person is an intensely factual question. . . .").

Second, Plaintiffs have alleged that Bain was a "culpable participant" in the alleged wrongful conduct. For example, Plaintiffs allege that Bain "control[led] the contents of the . . . Prospectus," but did not "ma[ke] a reasonable investigation or possess reasonable grounds for the belief that the statements contained in the . . . Prospectus were true and devoid of any omissions of material fact." SAC ¶¶ 111, 113. Given Rule 8(a)'s liberal pleading standard, this allegation is sufficient. Thus, Plaintiffs have adequately alleged that Bain was a "controlling person" under § 15(a).

V. CONCLUSION

For the foregoing reasons, Defendants' motions to dismiss are GRANTED in part and DENIED in part. First, Plaintiffs' claims asserted on behalf of those who purchased the Convertible Notes are time-barred and are dismissed with prejudice. Second, Defendants' motions to dismiss Plaintiffs' § 11 claim asserted on behalf of those who purchased DDi common stock pursuant to or traceable to the Prospectus are denied. Third, Defendants' motions to dismiss Plaintiffs' § 12(a)(2) claim insofar as it is asserted on behalf of those who purchased DDi common stock in private or secondary market offerings are granted; this portion of Plaintiff's § 12(a)(2) claim is dismissed with prejudice. Fourth, Defendants' motions to dismiss Plaintiffs' § 12(a)(2) claim against Bain and the Individual Defendants are granted; this portion of Plaintiff's § 12(a)(2) claim is dismissed without prejudice. Fifth, the Underwriter Defendants' motion to dismiss Plaintiffs' § 12(a)(2) claim against them is denied. Sixth, Defendants' motions to dismiss Plaintiff's § 15(a) claim are denied.

No later than August 8, 2005, Plaintiffs shall file either an amended complaint or a notice confirming that the SAC will remain the operative complaint. If Plaintiffs choose the latter course of action, Defendants shall file an answer by August 29, 2005.

IT IS SO ORDERED.