Opinion
Master File No. 00-024
December 24, 2000
CLASS ACTION
MEMORANDUM I
On May 1, 2000, a consolidated amended class action complaint was filed against FreeMarkets, Inc. (FreeMarkets), Glen T. Meakem, Sam E. Kinney, Jr. and Joan S. Hooper at the above-captioned civil action number for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The violations are alleged to have occurred in connection with the Initial Public Offering of FreeMarkets' common stock on December 10, 1999. Presently, before the court is defendants' motion to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (the PSLRA), 15 U.S.C. § 78u-4. For the reasons set forth below, the motion will be granted.
Between January 5, 2000 and February 8, 2000, ten related securities fraud class actions were filed against defendants. By order dated February 29, 2000, the actions were consolidated at Civil Action No. 00-024. On March 17, 2000, Lead Plaintiffs and Co-lead Counsel were appointed for the class, and, on May 1, 2000, a consolidated amended class action complaint was filed.
The PSLPA amends the Exchange Act, and applies to private class actions brought pursuant to the Federal Rules of Civil Procedure. See 15 U.S.C. § 78u-4(a)(1).
II
The allegations in plaintiffs' consolidated amended class action complaint, as well as the documents on which plaintiffs' claims are based, may be summarized as follows:
With respect to the court's consideration of the documents submitted by defendants in support of their motion to dismiss, a court may consider undisputedly authentic documents that a defendant attaches as exhibits to a motion to dismiss if the plaintiff's claims are based on those documents. See, e.g., In re Donald J. Trump Casino Sec. Lit., 7 F.3d 357, 368 n. 9 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994).
FreeMarkets creates customized business-to-business online "downward price" auctions for buyers of industrial parts, raw materials and commodities, offering its customers the promise of potential time and cost savings in return for fixed monthly fees and performance incentive payments. (Complaint, ¶ 2). This is a securities fraud class action filed on behalf of all purchasers of FreeMarkets' common stock between December 10, 1999 and January 4, 2000 (the class period). (Complaint, ¶ 1)
At all relevant times, defendant Glen T. Meakem was the CEO, President and Chairman of the Board of FreeMarkets, defendant Sam E. Kinney, Jr. was the Executive Vice President and Secretary of FreeMarkets, and defendant Joan S. Hooper was the Vice President,
Chief Financial Officer and Treasurer of FreeMarkets (collectively, the individual defendants). (Complaint, ¶ 17)
On September 8, 1999, FreeMarkets filed a Registration Statement with the Securities and Exchange Commission (SEC) to inform the investing public of its intent to raise up to $70 million from the Initial Public Offering (IPO) of its stock. This preliminary SEC filing indicated that FreeMarkets had significant and material relationships with some of America's largest companies, including General Motors Corporation (GM) which accounted for 17% of FreeMarkets' business and established its credibility. (Complaint, ¶ 46).
After the filing of its Registration Statement with the SEC, FreeMarkets was followed by analysts from major brokerages, and their reports were distributed to their customers and to the public at large. Also, FreeMarkets regularly issued press releases which were carried by national newswires. As a result, the analyst reports and FreeMarkets' press releases entered the public marketplace, and the market for FreeMarkets' securities promptly digested current information with respect to FreeMarkets from all publicly available sources. (Complaint, ¶ 25).
On November 2, 1999, defendants' plans of taking FreeMarkets public were potentially crippled by GM's announcement that it had joined forces with Commerce One to move into business-to-business e-commerce with an innovative Internet purchasing enterprise that would give GM a venue for holding the same "reverse auction" purchasing processes that FreeMarkets provided. The November 2, 1999 press release announcing the GM-Commerce One deal stated in part:
GENERAL MOTORS JOINS FORCES WITH COMMERCE ONE TO MOVE INTO BUSINESS-TO-BUSINESS E-COMMERCE WITH INNOVATIVE INTERNET PURCHASING ENTERPRISE
GM MarketSite, Powered by Commerce One, Will Be Launched in 1St Quarter; Extends GM's Purchasing Expertise Beyond Automotive Supplier Industry
DETROIT — November 2, 1999 — General Motors Corp. (NYSE::GM) and Commerce One (NASDAQ:CMRC) today announced an innovative move into business-to-business e-commerce through the creation of an Internet enterprise that will help suppliers, dealers and other businesses take advantage of GM's global purchasing expertise.
GM and Commerce One plan to have the site in operation in the first quarter of 2000.
Through an agreement signed Tuesday with Commerce One, the recognized leader in electronic commerce, General Motors will create GM MarketSite — the world's largest "virtual marketplace" for a wide array of products, raw materials, parts and services.
The move represents GM's first major business-to-business, e-commerce initiative. It's the latest element of GM's aggressive strategy to become a worldwide e-commerce leader, initiated with the formation of its e-GM unit in August.
Most e-commerce experts expect business-to-business purchasing via the Internet soon will far exceed the volume of online consumer purchases. More powerful software applications and the move toward Internet-based procurement systems are spurring its growth.
"This is a tremendous opportunity for General Motors, its suppliers and dealers," said G. Richard Wagoner, Jr., GM president and chief operating officer. "This is further proof that we are serious about being an innovator and leader in this rapidly evolving and expanding business sector."
Harold R. Kutner, GM group vice president of worldwide purchasing and North American production control and logistics, said GM MarketSite is a big step toward transforming General Motors into a global e-business. He said it would help businesses increase efficiency and reduce their operational costs by streamlining their purchasing.
The site will allow businesses to reduce purchasing cycle times by automatically handling purchase authorization, accounting and contractual procedures.
"We're moving quickly to make this innovative concept a reality," Kutner said. "While others in the auto industry may be considering similar ventures, nobody can match the purchasing strength, experience, speed and global footprint of General Motors."
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(Complaint ¶ 30, Motion to Dismiss, App. Exh. 1). The November 2, 1999 press release put defendants on notice of the extremely high likelihood that GM would not continue its contract with FreeMarkets, which was confirmed in conversations between the individual defendants and GM following the announcement. (Complaint, ¶ 30).On December 7, 1999, during the week it was expected to go public, FreeMarkets startled the market by raising the IPO price of its stock from $14 to $16 per share to $40 to $42 per share. This increase was described by the media as "rarely ever happen[ing]," "extraordinary" and "unusually high." (Complaint, ¶ 56). On December 9, 1999, the IPO price of FreeMarkets' stock was raised even higher to $48 per share. (Complaint, ¶ 58).
On December 10, 1999, FreeMarkets went public, offering 3.6 million shares of its stock at $48 per share. (Complaint, ¶ 59). On the first day of trading, FreeMarkets' stock leapt from an inflated IPO price of $48 per share to close at $280 per share with more than 7.8 million shares traded. (Complaint, ¶ 71) The IPO raised approximately $170 million for FreeMarkets. (Complaint, ¶ 21).
With respect to the risk factors involved in investing in FreeMarkets' stock, the Prospectus filed with the SEC for the IPO, which was signed by the individual defendants and dated December 9, 1999, stated in relevant part:
* * * RISK FACTORS * * *
We depend primarily on two clients; the loss of either would significantly reduce our revenues and net income
We depend on two clients, United Technologies Corporation and General Motors Corporation, for a substantial portion of our revenues. These two clients represented 77% of our revenues in 1998 and 58% of our revenues in the nine months ended September 30, 1999. Our agreement with United Technologies expires in December 2000, and our agreement with General Motors expires in September 2001. The agreements can be terminated by the respective clients at any time upon prior notice. Although United Technologies would be required to pay us a substantial fee if it terminates its agreement, the fee would not make up for the resulting loss of revenues. General Motors is not required to pay any termination fee if it terminates its agreement.
We may not be able to keep either United Technologies or General Motors as a client in the future. The loss or partial loss of either of these clients would significantly diminish our revenues and operating results, forcing us to curtail our growth plans and incur greater losses. Even if we keep one or both of these clients, we may not be successful in growing and diversifying our client base.
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(Complaint, ¶ 66, Motion to Dismiss, App. Exh. 2).After the close of the markets on January 3, 2000, Bloomberg News "let the cat out of the bag" by publishing the following report:
A General Motors Corp. executive said the world's largest automaker will pull all its business-to-business auctions from FreeMarkets, Inc., an online auction company that gets much of its sales from General Motors.
GM will shift the business to FreeMarkets' rival, Commerce One, Inc., General Motors TradeXchange Director Alan Turfe said in an interview Thursday on www.radiowallstreet.com.
"Although FreeMarkets has done a fine job, that auction and reverse auction functionality is going to be migrated 100 percent to Commerce One," Turfe said in the Internet interview.
(Complaint, ¶ 74)
In a press release issued the following day (January 4, 2000), defendants admitted what they knew, or recklessly disregarded, prior to FreeMarkets' IPO on December 10, 1999 — that GM would cancel its contract with FreeMarkets and funnel all of its online auction business through Commerce One during the first quarter of 2000. (Complaint, ¶ 7). The press release stated:
FreeMarkets Announces Expected Cancellation of General Motors Agreement General Motors Corporation intends to exercise its 90-day cancellation right under the terms of its agreement with FreeMarkets
Pittsburgh, PA — January 4, 2000 — FreeMarkets, Inc. (NASDAQ:FMKT) announced today that it has been informed of General Motors Corporation's intention to exercise its 90-day cancellation right under the terms of its agreement with FreeMarkets. Glen T. Meakem, Chairman and Chief Executive Officer of FreeMarkets, stated, "We are proud to have served General Motors since 1997 with our combination of proprietary Internet technology and in-depth knowledge of supply markets. We do not anticipate that the cancellation of the General Motors agreement will have a material impact on our revenues or results of operation in 2000. We have continued to successfully diversify our revenue base. Although General Motors represented 17% of FreeMarkets' revenue through the nine months ended September 30, 1999, this percentage had declined to approximately 10% in the quarter ended December 31, 1999, and we had expected the percentage to decline further in 2000 even had our agreement continued."
FreeMarkets creates customized business-to-business online auctions for buyers of industrial parts, raw materials and commodities. The company's current clients include United Technologies Corp., The Quaker Oats Co., Emerson Electric Co., Honeywell International Inc. and the Commonwealth of Pennsylvania.
This press release contains forward-looking statements concerning revenue, financial results and other matters. There are risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including, without limitation, the completion of the year-end audit of FreeMarkets' 1999 financial statements, and FreeMarkets' ability to continue to execute agreements with new clients and to increase revenue from existing clients. These and other risk factors are described in detail in FreeMarkets' prospectus dated December 9, 1999, which is included as part of its Registration Statement on Form S-1, filed with the Securities and Exchange Commission on December 9, 1999.
(Motion to Dismiss, Peterson Declaration, Exh. B)
FreeMarkets' stock is listed on the NASDAQ National Market System, a highly developed and efficient market. In purchasing FreeMarkets' stock, plaintiffs and other members of the class relied on the integrity of the market price of FreeMarkets' publicly traded securities. (Complaint, ¶ 25). The revelation of GM's termination of its contract with FreeMarkets was devastating news to the investment community. Far from regarding the news as "expected," numerous analysts expressed shock at the turn of events. Even analysts from investment companies that had underwritten FreeMarkets' IPO were shocked at the announcement. (Complaint, ¶¶ 78, 80).
Upon defendants' belated disclosure on January 4, 2000 (only 17 trading days after the $160 (sic) million IPO) of the true impact of the GM-Commerce One deal on FreeMarkets' business, FreeMarkets stock price plummeted, falling from its high of $350 per share to $278-1/2 per share on heavy trading volume of 2.38 million shares. (Complaint, ¶ 8).
On January 6, 2000, defendant Meakem admitted that the Prospectus filed by FreeMarkets with the SEC did not disclose the effect of the deal that GM had reached with Commerce One, even though he knew about the effect prior to FreeMarkets' IPO on December 10, 1999. (Complaint, ¶¶ 9, 82). Defendant Meakem's admission occurred in an interview on CNN's The Moneyline News Hour. During the interview, the following exchange took place:
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STUART VARNEY, CNN ANCHOR: And here's what's next on Moneyline, a dot.com darling learns firsthand how fickle Wall Street can be. We'll talk to the CEO of FreeMarkets about the stock's free fall.
WILLOW BAY, CNN ANCHOR: Another free fall for FreeMarkets, its stock battered for the second straight day; this after General Motors canceled its pact with the company and shifted to its own business-to-business auction site.
FreeMarkets fell $38.5 today and is off nearly 20 percent since GM's announcement yesterday. But since its IPO last month, FreeMarkets is still up fivefold.
Joining us now, with a look at his company's future, Glen Meakem, Chairman, President and CEO of FreeMarkets. He joins us from Pittsburgh, Pennsylvania. Glen, welcome.
GLEN MEAKEM, CEO, FREEMARKETS: Thank you very much.
BAY: How significant a loss to you is GM's business?
MEAKEM: Well, as we announced yesterday, GM was only ten percent of our — our revenue in the fourth quarter, and that was a decline, a steep decline, from higher levels earlier in the year.
So our business is growing very, very fast, and the growth rate in our business is overwhelming the loss of this one client. So we —
BAY: So really —
MEAKEM: We don't — we do not see it as material for the next year.
BAY: Not material even though they are your second biggest client?
MEAKEM: Yeah. The — we've — we've added so many clients. We've added clients like Eaton Corporation and Emerson Electric and Honeywell International and many others. And so the rate of growth in our business is such that — that this does not negatively impact our financials for 2000.
BAY: When did you get the sense that you may lose GM as a customer?
MEAKEM: Well, when — when we heard that — that Commerce One had — done this deal with GM to create the GM trade exchange, we were concerned; but we had just signed a contract, a new long-term contract, with GM in October. So just only weeks before the — the trade — the Commerce One announcement.
So we — we have been creating results for GM, a lot of savings over the last two-and-a-half years since we started serving them in 1997. So we — we felt pretty secure in our relationship with GM.
BAY: So you had — you did have a new contract with them, but then this — the announcement essentially came as a surprise. Because as you know, there's some concern on the part of analysts that if you had an inkling of this before your IPO —
MEAKEM: Yeah, that —
BAY: — it would have been in your shareholders' best interest to let them know that.
MEAKEM: Right. And that's just not true. We — we fully disclosed the risk in our S-1 during the IPO process, so it was out there for all investors to see.
And — and we just found out Monday that — that GM was going to cancel our contract and we announced it as soon as we — we heard it on Monday morning — or, excuse me, Tuesday morning, yesterday morning.
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(Motion to Dismiss, Peterson Declaration, Exh. A)The price of FreeMarkets' stock has never recovered from the devastating news that GM was moving its on-line auction business to Commerce One. FreeMarkets' stock now trades at levels well below its class period high of $350, closing as low as $50 per share, which is 1/7 of the price to which defendants had artificially inflated the stock during the class period. (Complaint, ¶ 84).
During the class period, the individual defendants, as senior executives and directors of FreeMarkets, were privy to confidential and proprietary information concerning the operations, finances, financial condition, and present and future business prospects of FreeMarkets. The individual defendants also had access to material non-public information concerning FreeMarkets. Because of their possession of such information, the individual defendants knew, or recklessly disregarded, that the effect of the GM-Commerce One deal on GM's contract with FreeMarkets had not been disclosed to, and was being concealed from, the investing public. (Complaint, ¶ 19).
Because of their positions with FreeMarkets, the individual defendants controlled, or possessed the authority to control, the contents of its reports, press releases and presentations to securities analysts, and through them, to the investing public. Thus, each of the individual defendants had the opportunity to commit the alleged securities fraud. (Complaint, ¶ 20).
In addition, each of the individual defendants had substantial motives for committing the alleged securities fraud. The individual defendants, who were aware of the GM-Commerce One deal since at least November 2, 1999, knew that disclosure of GM's imminent defection to FreeMarkets' competitor, Commerce One, in the Registration Statement and Prospectus filed with the SEC in connection with FreeMarkets' IPO would derail the IPO. The false and misleading statements and omissions in FreeMarkets' Registration Statement and Prospectus were intended to allow, and did allow, FreeMarkets to successfully complete its IPO. (Complaint, ¶ 21).
III
To state a claim of securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5, a private plaintiff must plead the following elements: "(1) that the defendant made a misrepresentation or omission of (2) a material (3) fact; (4) that the defendant acted with knowledge or recklessness and (5) that the plaintiff reasonably relied on the misrepresentation or omission and (6) consequently suffered damage."In re Advanta Corp. Sec. Lit., 180 F.3d 525, 537 (3d Cir. 1999), citing, In re Westinghouse Sec. Lit., 90 F.3d 696, 710 (3d Cir. 1996).
Section 10(b) of the Exchange Act provides that "[i]t shall be unlawful for any person, directly or indirectly, . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful for any person to: . . . "(b) . . . make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. . . ." 17 C.F.R. § 240.10b-5.
Plaintiffs also assert a claim against the individual defendants under Section 20(a) of the Exchange Act based on their status as "controlling persons." However, controlling person liability under the Exchange Act can exist only if primary liability has been established as to the controlled defendant. See, e.g., Goldberg v. Hankin, 835 F. Supp. 815 (E.D.Pa. 1993), aff'd, 30 F.3d 1486 (3d Cir. 1994).
To survive a motion to dismiss, a plaintiff alleging securities fraud must comply with the heightened pleading standards imposed by Rule 9(b) of the Federal Rules of Civil Procedure and the PSLRA. In this connection, in Walsingham v. Biocontrol Technology, Inc., 66 F. Supp.2d 669 (W.D.Pa. 1998), the Honorable Robert J. Cindrich of this court stated:
The purpose of the PSLRA was to restrict abuses in securities fraud class action suits, including the following: (1) the practice of filing lawsuits against issuers of securities in response to any significant change in stock price, regardless of defendants' culpability; (2) the targeting of "deep pocket" defendants; (3) the abuse of the discovery process to coerce settlement; and (4) manipulation of clients by class action attorneys. In re Advanta Corp. Sec. Lit., 180 F.3d 525, 531 (3d Cir. 1999).
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Section 10(b) claims sound in fraud, thus, the allegations of fraud must be stated with particularity pursuant to Fed.R.Civ.P. 9(b). In re Westinghouse Securities Litigation, 90 F.3d 696, 710 (3d Cir. 1996). (citation omitted). "Rule 9(b) requires a plaintiff to plead (1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." Id. (citation and quotation omitted).
A plaintiff must also satisfy the heightened pleading requirements of Section 21D(b) of the Exchange Act, which provides at 15 U.S.C. § 78u-4(b)(1) that
In any private action arising under this chapter in which the plaintiff alleges that the defendant — (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;
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.
Moreover, 15 U.S.C. § 78u-4(b)(2) provides that "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, [i.e., scienter]."
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66 F. Supp.2d at 674-75.The material omission alleged in the present case is defendants' failure to disclose "GM's imminent defection" in the Registration Statement and Prospectus for FreeMarkets' IPO. (Complaint, ¶ 21). In support of this allegation, plaintiffs rely, inter alia, on the November 2, 1999 press release announcing the agreement between GM and Commerce One. However, it is undisputed that the information set forth in the November 2, 1999 press release was available to the investing public, and plaintiffs allege that "the market for FreeMarkets' securities was an efficient market that promptly digested current information with respect to the Company from all publicly available sources and reflected such information in FreeMarkets' stock price." (Complaint, ¶ 24). If, as plaintiffs allege, the November 2, 1999 press release put defendants on notice of the "extremely high likelihood" that GM intended to cancel its contract with FreeMarkets as a result of its agreement with Commerce One (Complaint, ¶ 30), it should also have put plaintiffs on notice of the same likelihood. Therefore, the court concludes that the November 2, 1999 press release does not support plaintiffs' claim of securities fraud action against defendants.
In fact, plaintiffs also allege in their complaint that, in response to the November 2, 1999 press release, "Commerce One shares leapt 23%." (Complaint, ¶ 31).
The November 2, 1999 press release did not mention FreeMarkets or "reverse auctions."
Plaintiffs also allege that defendants concealed material, non-public information in the Registration Statement and Prospectus for FreeMarkets' IPO. Specifically, plaintiffs allege that "the extremely high likelihood that GM would not continue its contract with FreeMarkets" (Complaint, ¶ 30), or "that GM would funnel its business to FreeMarkets' competitor — Commerce One — in the first quarter of 2000" (Complaint, ¶ 31), "was confirmed in conversations the Individual Defendants had with GM following the [November 2, 1999 press release]." (Complaint, ¶ 30). If properly pled, this allegation would support plaintiffs' claim of securities fraud against defendants. However, plaintiffs fail to identify any participant in the alleged conversations, the substance of the alleged conversations or when and where the alleged conversations took place. Clearly, the allegation falls far short of satisfying the heightened pleading standards discussed above, which have been described as requiring securities fraud plaintiffs to plead "the who, what, when, where, and how: the first paragraph of any newspaper story." In re Advanta Corp. Sec. Lit., 180 F.3d 525, 534 (3d Cir. 1999),quoting, DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990).
In their memorandum of law in opposition to defendants' motion to dismiss, plaintiffs do not address defendants' argument concerning the inadequacy of the pleadings relating to the alleged conversations between the individual defendants and GM prior to FreeMarkets' IPO, and defendants have interpreted this failure as an abandonment of this allegation by plaintiffs. (Reply Memorandum, pp. 1-2). However, at oral argument, plaintiffs' counsel indicated that plaintiffs have not abandoned the allegation.
Plaintiffs have also failed to meet the requirements of the PSLRA in other respects. When the allegations of an action under the Exchange Act are based upon "information and belief," the PSLRA requires "the complaint to state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1) In addition, a plaintiff bringing a private action under the Exchange Act is required to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). A review of plaintiffs' consolidated amended class action complaint, however, reveals plaintiffs' failure to meet either of these requirements.
In In re Silicon Graphics Inc. Sec. Lit., 183 F.3d 970 (9th Cir. 1999), an investor filed a securities fraud class action, alleging that a corporation and six of its top officers made a series of misleading statements to inflate the value of the company's stock while they engaged in "massive" insider trading. The action was consolidated with another action filed by an investor based on the same events. The district court dismissed both complaints, and the investors appealed. Regarding the PSLRA's pleading requirements with respect to complaints based upon "information and belief" and with respect to scienter, the United States Court of Appeals for the Ninth Circuit stated:
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According to Brody, the officers conducted several meetings during which they entered into a "conspiracy of silence" whereby they agreed to downplay the seriousness of the company s problems. However, Brody does not plead facts to corroborate her allegations. Instead, she merely provides a list of sources from which she allegedly obtained her information. The boilerplate section of her complaint, titled "Basis of Allegations," states that:
Plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of SGI's SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants, and believe that substantial evidentiary support will exist for the allegations after a reasonable opportunity for discovery.
This paragraph is an insufficient basis for fraud allegations because it fails to state "with particularity all facts on which [her] belief is formed." See 15 U.S.C. § 78u-4(b)(1). This means that a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief. It is not sufficient for a plaintiff's pleadings to set forth a belief that certain unspecified sources will reveal, after appropriate discovery, facts that will validate her claim. In this case, Brody's complaint does not include adequate corroborating details. She does not mention, for instance, the sources of her information with respect to the reports, how she learned of the reports, who drafted them, or which officers received them. Nor does she include an adequate description of their contents which we believe — if they did exist — would include countless specifics regarding ASIC chip shortages, volume shortages, negative financial projections, and so on. We would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability.
In the absence of such specifics, we cannot ascertain whether there is any basis for the allegations that the officers had actual or constructive knowledge of SGI's problems that would cause their optimistic representations to the contrary to be misleading. In other words, in the absence of such specifics, we cannot determine whether there is any basis for alleging that the officers knew that their statements were false at the time they were made — a required element in pleading fraud. See, e.g., Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978). Brody would have us speculate as to the basis for the allegations about the reports, the severity of the problems, and the knowledge of the officers. We decline to do so.
Brody is required to state facts giving rise to a strong inference of deliberate recklessness or intent. It is not enough for her to state facts giving rise to a mere speculative inference of deliberate recklessness, or even a reasonable inference of deliberate recklessness. The PSLRA requires, to repeat, that Brody state with particularity facts giving rise to a strong inference of the required state of mind, i.e., at least deliberate recklessness. See 15 U.S.C. § 78u-4(b)(2). We understand this to mean that Brody must plead in great detail facts demonstrating, at a minimum, a degree of recklessness that strongly suggests the required degree of intent. . . .183 F.3d at 985.
Unlike the plaintiffs in In re Silicon Graphics Inc. Sec. Lit., plaintiffs in the present case have not even attempted to plead facts to corroborate their allegation, based on "information and belief," that the individual defendants had conversations with GM after the November 2, 1999 press release which confirmed their belief prior to FreeMarkets' IPO that it was extremely likely that GM would terminate its contract with FreeMarkets or that GM intended to move all of its on-line auction business to Commerce One. Plaintiffs' failure to identify the basis of their belief that these conversations took place before FreeMarkets' IPO fails to satisfy the requirements of the PSLRA.
At oral argument on defendants' motion to dismiss, defense counsel invited plaintiffs' counsel to state on the record any facts supporting their allegation that the individual defendants had conversations with GM prior to FreeMarkets' IPO in which they were made aware of the imminent loss of GM's business. Plaintiffs' counsel failed to do so. In this regard, the court notes that the first of these consolidated class actions was filed on January 5, 2000, only one day after FreeMarkets' press release announcing GM's intent to cancel its contract with FreeMarkets and move all of its on-line auction business to Commerce One. The court agrees with defendants that this fact alone strongly suggests a lack of investigation into the allegations against defendants. (Memorandum in Support, p. 2).
As to the issue of scienter, a plaintiff in a securities fraud action under the Exchange Act may plead scienter by alleging either facts establishing a motive to commit fraud and an opportunity to do so, or facts constituting circumstantial evidence of either reckless or conscious behavior. See In re Advanta Corp. Sec. Lit., 180 F.3d 525, 534-35 (3d Cir. 1999). With respect to the required showing of motive and opportunity, after the PSLRA, blanket assertions are no longer sufficient to plead scienter. Id. at 535. A review of plaintiffs' consolidated amended class action complaint, however, reveals nothing more than blanket assertions concerning defendants' alleged motive and opportunity to commit securities fraud. According to plaintiffs, defendants were motivated to inflate the price of FreeMarkets' stock prior to its IPO by a desire to successfully complete the IPO, and their opportunity to do so is simply alleged to be based on the individual defendants' positions with FreeMarkets. As noted by defendants, these allegations are clearly insufficient. (Memorandum in Support, p. 19).
See, e.g., Chill v. General Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996) (generalized motive, one which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994) (alleged motive to inflate stock to successfully bring to fruition public offering was insufficient); In re Boeing Sec. Lit., 40 F. Supp.2d 1160, 1175 (W.D.Wash. 1998) (allegations of motive that are generally held by similarly positioned executives and companies, i.e., to improve the company's financial health or reputation, are insufficient to demonstrate scienter); Coates v. Heartland Wireless Comm. Inc., 26 F. Supp.2d 910, 919 (N.D.Texas 1998) (alleged motive to inflate stock price so as to successfully complete public offering was insufficient to raise strong inference of scienter).
Significantly, there is no allegation in this case of insider trading by any of the individual defendants. Therefore, it is difficult to perceive the motive of the individual defendants to temporarily inflate FreeMarkets' stock. See, e.g., In re Burlington Coat Factory Sec. Lit., 114 F.3d 1410 (3d Cir. 1997) (general allegations that individual officers sought to inflate the company's stock price so as to "protect, perpetuate and enhance their executive positions and the substantial compensation, prestige and other perquisites of executive employment" does not help plaintiffs in adequately alleging scienter because they fail to explain how a temporary inflation of the company's stock price would help management increase its compensation or preserve its jobs).
Similarly, the court concludes that plaintiffs have failed to adequately plead a strong inference of recklessness on the part of defendants. A reckless statement or omission is one involving not merely simple, or even inexcusable neglect, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Advanta, supra, 180 F.3d at 535. As noted above, defendants' alleged knowledge of GM's intent to cancel its contract with FreeMarkets is based upon conversations between the individual defendants and GM which have not been pled with sufficient particularity, and, if it was so obvious to defendants from the November 2, 1999 press release regarding the GM-Commerce One deal, which did not mention FreeMarkets or "reverse auctions," that the termination of GM's contract was imminent, it should also have been obvious to plaintiffs.
As to plaintiffs' argument that they have adequately pled a securities fraud action based on defendants' admissions following FreeMarkets' IPO, the court concludes that the alleged admissions do not establish a strong inference of recklessness on defendants' part. With respect to defendant Meakem's comment during his interview on CNN's The Moneyline News Hour on January 6, 2000 that he was "concerned" about FreeMarkets' contract with GM when he read the November 2, 1999 press release, the court agrees with defendants that this statement cannot be construed as an admission when read in conjunction with defendant Meakem's subsequent statements during the interview. In fact, defendant Meakem specifically denied knowledge of GM's imminent defection prior to FreeMarkets' IPO, noting that (a) GM had signed a new long-term contract with FreeMarkets shortly before the announcement of its deal with Commerce One and (b) FreeMarkets had been producing good results for GM over the previous 2 1/2 years. Based on those facts, defendant Meakem stated that he felt "pretty secure" in FreeMarkets' relationship with GM. Clearly, defendant Meakem's statements during his interview on CNN's The Moneyline News Hour cannot be construed as an admission that defendants withheld material information from the investing public prior to FreeMarkets' IPO.
Regarding defendants' alleged admission in FreeMarkets' January 4, 2000 press release that the cancellation of GM's contract with FreeMarkets was "expected," the court agrees with defendants that the word "expected" in the caption of the press release cannot be construed as referring to defendants' knowledge prior to FreeMarkets' IPO because "when it issued the January 4 press release, FreeMarkets, like everyone else, did indeed then expect GM to cancel the FreeMarkets contract. Consequently, the press release's characterization of the cancellation as `expected' obviously refers only to FreeMarkets' understanding on the date it issued the press release." (Reply Memorandum, p. 9).
Based on the foregoing, the court concludes that defendants' motion to dismiss plaintiffs' consolidated amended class action complaint should be granted due to plaintiffs' failure to comply with the heightened pleading standards applicable to securities fraud actions under the Exchange Act. However, the court further concludes that the dismissal should be without prejudice to plaintiffs' right to file a second consolidated amended class action complaint to attempt to cure the pleading deficiencies in their first consolidated amended class action complaint.
Based on the court's conclusion that defendants' motion to dismiss should be granted due to the failure of plaintiffs' consolidated amended class action complaint to comply with the pleading standards of Fed.R.Civ.P. 9(b) and the PSLRA, the court declines to address the other arguments raised by defendants in support of their motion to dismiss. However, defendants will not be precluded from raising such arguments, if appropriate, in response to a second consolidated amended class action complaint.
An order follows.
ORDER
AND NOW, this 24th day of December, 2000, in accordance with the foregoing memorandum, it is hereby ORDERED that the motion of defendants to dismiss plaintiffs' consolidated amended class action complaint (Document No. 15) is granted without prejudice to plaintiffs' right to file a second consolidated amended class action complaint, on or before January 24, 2001, that meets the requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4, for pleading a securities fraud action under the Securities Exchange Act of 1934.