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finding control where individual defendants that either held management or board positions and were responsible for drafting and disseminating the misleading press releases
Summary of this case from Rosi v. Aclaris Therapeutics, Inc.Opinion
Master File No. 01 Civ. 4886 (SWK)
September 17, 2002
For Plaintiffs: Berman DeValerio Pease Tabacco Burt Pucillo, Boston, Massachusetts, By: Jeffrey C. Block, Michael G. Lange, Sara B. Davis, Lead Counsel for Plaintiffs and the Putative Class, Pomerantz, Haudek, Block, Grossman Gross, New York, New York, By: Mark I. Gross, Liaison Counsel for Plaintiffs and the Putative Class.
For Defendants: Willkie Farr Gallagher, New York, New York, By: Michael R. Young, Jeanne M. Luboja.
OPINION AND ORDER
In this consolidated class action brought on behalf of those who purchased the common stock of Emex Corporation ("Emex"), plaintiffs claim that defendants made material misrepresentations of fact in connection with a proposed project financing syndication. Plaintiffs allege that defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78 (t)(a). Defendants move to dismiss the Consolidated Amended Complaint (the "Complaint") pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, the motion is granted in part and denied in part.
BACKGROUND
The following allegations as set forth in the Complaint are accepted as true for purposes of this motion to dismiss. See Kalnit v. Eichler, 264 F.3d 131, 137-38 (2d Cir. 2001).
According to the Complaint, named plaintiffs Keith Masters, Ellen Martin, Steven and Cheryl Tagawa, and Daniel Aranda purchased shares of Emex between April 9, 2001 and May 23, 2001 (the "Class Period"). See Compl. at ¶¶ 20-23.
Defendant Emex is Nevada corporation engaged in energy technologies and resource development. See id. at ¶ 24. The individual defendants are Walter W. Tyler ("Tyler"), President and Chief Executive Officer of Emex; Milton E. Stanson ("Stanson"), Treasurer, Chief Financial Officer and a Director; Vincent P. Iannozzo ("Iannozzo"), a Director; and David H. Peipers ("Peipers"), a Director (collectively the "Individual Defendants") See id. at ¶¶ 25-28. Three other entities are also named as defendants: Stanson Iannozzo ("SI"), a partnership whose sole members are Stanson and Iannozzo; Universal Equities Consolidated, LLC ("Universal Equities"), an entity wholly owned by S I; and Thorn Tree Resources, LLC ("Thorn Tree"), an entity controlled and partially owned by Peipers. See id. at ¶¶ 30-32.
Emex originally engaged in oil and gas exploration; however, since September 2000, its business has involved two main divisions: lands and technologies. See id. at ¶ 34. The technologies division, which is operated through a subsidiary, Blue Star Sustainable Technologies Corp., develops environmentally friendly technologies. See id. at ¶¶ 35-36. Through its technologies division, Emex endeavored to build a commercial, stand-alone plant (the "Plant") capable of producing approximately 500 barrels per day of liquefied synthetic fuel and purity wax. See id. at ¶ 36. On April 3, 2001, Emex announced plans to construct the first such Plant. Id.
Emex, however, lacked the necessary financial resources to fund the Plant, as an outstanding loan from Equistar Consolidated Holdings, LLC ("Equistar") was set to expire on March 31, 2001. See id. at ¶¶ 37-38. On that day, Emex announced that Universal Equities and Thorn Tree had agreed to provide bridge financing until negotiations regarding debt and equity financing were finalized. See id. at ¶ 39. In its Form 10-QSB for the quarter ending March 31, 2001, Emex cautioned that its ability to continue as a going concern was dependent upon the continued support of Equistar or upon obtaining an alternative source of financing. See id. Eventually, Equistar agreed to extend the due date of the existing notes payable to July 31, 2001, but Emex still needed capital to fund Plant construction. See id. at ¶ 40.
On April 9, 2001, Emex issued a press release touting its acceptance of a proposal for the syndication of $100 million in project financing for the Plant. See id. at ¶ 41. The press release stated:
Emex Corp . . . has accepted a proposal from a financial institution to arrange syndication of $100 million in project financing to build the first of a series of commercial plants utilizing the firm's proprietary gas technologies, which will produce clean-burning diesel fuel, high quality waxes, electricity, thermal energy, specialty chemicals and water. The deal was arranged through the efforts of Credit Suisse First Boston, and is contingent on feasibility studies and due diligence.
Id. Plaintiffs allege that this press release was materially false and misleading, and that defendants' use of the term "arrange" was deliberate. See id. at ¶ 43. Plaintiffs also allege that in the investment and commercial banking fields, "arrange" is a term of art referring to a firm responsible for syndicating a loan facility, including committing its own capital to the facility. Id.
Prior to this press release, on March 28, 2001, Tyler, Stanson, Peipers and Iannazzo had a meeting at Credit Suisse First Boston ("CSFB") with Heather Nicolau ("Nicolau"), a CSFB Vice President of Investment Banking, and John Rice ("Rice"), a CSFB Director of Investment Banking. See id. at ¶ 45. During this meeting, Nicolau and Rice informed the Individual Defendants that CSFB would not arrange financing for Emex. See id. Instead, the financing was being arranged by Fieldstone, Inc. ("Fieldstone"). See id.
Plaintiffs allege that the April 9, 2001 press release led the market to believe that CSFB was putting its own capital into the loan syndication. See id. at ¶ 42. In support of their argument, plaintiffs note that on April 10, 2001, Portfolio Management Data reported that Emex had "received a $100M project financing commitment from Credit Suisse First Boston," while on May 1, 2001, Gas to Liguid News reported that "Emex Corp. has agreed to a proposal from Credit Suisse First Boston to the syndication of $100 million in project financing to build the first of a series of commercial GTL plants." Id. As a result, on April 10, 2001, the price of Emex common stock rose from $9.73 to $11 per share. Id. at ¶ 44. By the end of the Class Period, May 22, 2001, the price had risen to $36 per share. Id.
In a letter dated May 18, 2001, CSFB informed Emex that it should "ensure that no potential investors in or lenders to Emex are under the impression that [CSFB] is providing any loans to [Emex] or underwriting or placing any securities on behalf of Emex" and that "[Emex] should not refer to CSFB without our prior written consent." Id. at ¶ 46. CSFB also reported the events to the Securities Exchange Commission ("SEC"). See id.
Then, on May 23, 2001, Dow Jones Newswire reported:
News of a significant financing deal is often all it takes for investors to bid up the stock price of a little company that's trying to get bigger. The news is even more potent when it is a major Wall Street firm that lends its name to the deal
That's [sic] appears to be exactly what happened with EMEX Corp . . . a very small mineral exploration company whose thinly traded shares skyrocketed more than 180% since the company announced in early April that it accepted a $100 million project financing proposal that . . . appeared to have been arranged by Credit Suisse First Boston.
Id. at ¶ 47. The article also quoted a CSFB spokeswoman as stating "CSFB isn't providing any loan to EMEX or underwriting or placing any securities on behalf of the company." Id.
As a result of this report, Emex stock fell 35% in after market trading on May 23, 2001 before being halted by Nasdaq at a price of $26.40 per share. See id. at ¶ 48. On the following day, Dow Jones Newswire reported that CSFB had referred the matter to the SEC, and Nasdaq announced that it had changed the trading halt status to additional information requested. See id. at ¶ 49. Then, on May 30, 2001, Emex issued a press release, which stated:
On April 9, 2001, Emex Corp. (NASDAQ:EMEX) announced in a press release that it had "accepted a proposal from a financial institution" to arrange syndication of $100 million in non-recourse project financing to build the first of a series of commercial plants utilizing the firm's proprietary gas technologies, which will produce clean-burning diesel fuel, high-quality waxes, electricity, thermal energy, specialty chemicals and water. The proposal was from Fieldstone, Inc., headquartered in New York.
Id. at ¶ 50. Following this announcement, Nasdaq resumed trading in Emex stock, which continued to lose value, and closed at $16.98 per share. See id. at ¶ 51. On May 31, 2001 the stock lost an additional 13%, closing at $14.84 per share. See id. at ¶ 53. On June 6, Emex disclosed that it had received notification of a voluntary inquiry from the SEC. See id. at ¶ 54.
Plaintiffs assert the April 9 press release was not the only false and misleading press release. See id. at ¶ 59. On April 24, 2001, Emex issued a press release stating that "representatives of the Department of Energy, Saudi Arabian Oil, Co., Kuwait Foreign Petroleum Exploration, China National Offshore Oil Corp., Conoco Inc., Petroleos de Venezuela, Kuwait Petroleum Corp., Massachusetts Institute of Technology and Merrill Lynch, among others," had visited the company's natural gas facilities in Arvada, Colorado. Id. However, the Wall Street Journal reported on June 6, 2001, that the individual from Merrill Lynch was a stock broker attending a nearby alternative energy conference. See id. at ¶ 60. Moreover, Conoco stated that no one representing the company had visited Emex's facility; and the individual from the Department of Energy stated that she did not have the title given her in the release, was only an advisor to the Government and not an employee, and was not touring the facility as a representative of the Government. See id.
DISCUSSION
I. Legal Standard
On a motion to dismiss made pursuant to Rule 12(b)(6), the Court is required to accept as true the factual assertions in the complaint and to draw all reasonable inferences in plaintiffs' favor. See Kalnit, 264 F.3d at 137-38; Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999). Additionally, the Court may consider documents referenced in the complaint and may also consider documents, while not explicitly incorporated into the complaint, that "plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 44 (2d Cir. 1991)). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, a complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99 (1957).
II. Section 10(b) Claim
To properly state a claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000) (citations omitted). An allegation of securities fraud under Section 10(b) and Rule 10b-5 is subject to the heightened pleading requirements of Rule 9(b):
Section 10(b) provides that it is unlawful
[t]o use or employ, in connection with the purchase or sale of any security . . ., 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 provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To 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 the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally.
Fed.R.Civ.P. 9(b). Rule 9(b) requires a complaint to "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999) (quoting Acito v. IMCERA Group, Inc., 47 F.3d 47, 51 (2d Cir. 1995)).
In 1995, Congress, "motivated in large part by a perceived need to deter strike suits," amended the Exchange Act through passage of the Private Securities Litigation Reform Act ("PSLRA") Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000); see also Pub.L. No. 104-67, 109 Stat. 737 (codified at scattered sections of 15 U.S.C.). "In order to `curtail the filing of meritless lawsuits,' the PSLRA imposed new and more stringent requirements on plaintiffs alleging securities fraud." In re Complete Mgmt., Inc. Sec. Litig., 153 F. Supp.2d 314, 323 (S.D.N.Y. 2001) (citing Novak, 216 F.3d at 306). In relevant part, the PSLRA provides:
[i]n 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 are made, not misleading; the complaint shall specify each statement alleged to have been misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.15 U.S.C. § 78u-4 (b)(1). In addition, the PSLRA also requires that:
[i]n any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.15 U.S.C. § 78u-4 (b)(2). "Under the heightened pleading requirements of Rule 9(b) and the PLSRA, plaintiffs must allege the first two elements of a securities fraud claim — fraudulent acts and scienter — with particularity." Gabriel Capital, L.P. v. Natwest Fin., Inc., 94 F. Supp.2d 491, 500 (S.D.N.Y. 2000) (citations omitted).
A. Scienter
Defendants argue that the Complaint fails to allege a strong inference of scienter. The requisite state of mind, or scienter, in a Section 10(b) action is "an intent to deceive, manipulate or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375 (1976). "Such intent can be established `either (a) by alleging facts showing that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.'" Ganino, 228 F.3d at 168-69 (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)). "Although speculation and conclusory allegations will not suffice, neither [does the Second Circuit] require `great specificity' provided the plaintiff alleges enough facts to support `a strong inference of fraudulent intent.'" Ganino, 228 F.3d at 169 (quoting Stevelman, 174 F.3d at 84).
1. Motive and Opportunity
To adequately plead motive, plaintiffs must allege "concrete benefits that could be realized by one or more of the false statements and wrongful disclosures alleged." Rothman, 220 F.3d at 93; see also Kalnit, 264 F.3d at 139 ("Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from the fraud"). Opportunity is defined as "the means and likely prospect of achieving concrete benefits by the means alleged." Shields, 25 F.3d at 1130.
Plaintiffs have failed to plead particularized factual allegations constituting circumstantial evidence of motive to commit fraud. Plaintiffs do not assert any concrete and personal benefits to the Individual Defendants resulting from the fraud. See Kalnit, 264 F.3d at 139. Instead, plaintiffs only allege defendants committed fraud in order to increase the share price of Emex in advance of a rights offering and a proposed sale of common stock to the public, in other words, "a desire to raise much needed capital." Glickman v. Alexander Alexander Services, Inc., No. 93 Civ. 7594, 1996 WL 88570, *6 (S.D.N.Y. Feb. 29, 1996). The Complaint specifically refers to a May 16, 2001 press release, which announced a plan to offer all current shareholders the right to purchase additional shares of Emex at a 10% discount of the May 15 closing price. See Compl. at ¶ 62. Plaintiffs also identify a proposed sale of common stock to the public stated in Emex's Form 10-KSB, which was filed with the SEC on April 17, 2001. See Rothman 220 F.3d at 88 (for purposes of a motion to dismiss, a complaint includes "public disclosure documents required by law to be, and that have been filed with the SEC").
However, "a desire to raise much needed capital" is an insufficient generalized motive to support an inference of scienter. Glickman, 1996 WL 88570, at *6 (finding that motive allegations of "desire to raise much needed capital for the benefit of the institutional defendant" are of a "generalized, commonplace nature that courts within this circuit have found to provide an insufficient basis for an inference of scienter"); see also Chill v. Gen. Elec. Co., 101 F.3d at 267 (generalized motive to justify investment and have it appear profitable, "one which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter"); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. 1996) (company's desire to maintain a high bond or credit rating does not qualify as sufficient motive, because this desire can be imputed to all companies). Moreover, the Complaint is devoid of any allegations that defendants considered either stock offering when issuing the April 9 press release. See In re Time Warner Inc. Sec. Litig., 9 F.3d 253, 271 (2d Cir. 1993) ("the complaint lacks allegations that give rise to a strong inference that Time Warner began to consider the rights offering significantly before it was announced"); Glickman, 1996 WL 88570, at *9 (finding that there was an absence of facts to connect a private placement transaction with the fraud alleged). Accordingly, the Court finds that plaintiffs have failed to adequately plead motive on the part of defendants.
2. Conscious Misbehavior or Recklessness
However, in the absence of motive, plaintiffs may adequately plead scienter by alleging circumstantial evidence of conscious misbehavior or recklessness, "though the strength of the circumstantial allegations must be correspondingly greater." Kalnit, 264 F.3d at 142 (citation omitted); see also Vogel v. Sands Bros. Co., LTD., 126 F. Supp.2d 730, 739-40 (S.D.N.Y. 2001). Plaintiffs must allege that defendants engaged in conduct, "which is . . . `highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 40-41 (2d Cir. 2000) (quoting Rolf v. Blyth, Eastman Dillon Co., 570 F.2d 38, 47 (2d Cir. 1978). Although determining whether defendants acted recklessly for purposes of Section 10(b) liability necessarily depends on the particular facts of each case, "the actual facts of our securities fraud cases . . . provide the most concrete guidance." Novak, 216 F.3d at 308.
[S]ecurities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation.
Id.
Here, the Complaint sufficiently alleges facts constituting strong circumstantial evidence of recklessness on the part of both Emex and the Individual Defendants. In their Opposition, defendants assert that the term `arrange' is imprecise, and does not support an inference of scienter. However, In re Razorfish, which defendants cite in support of this argument, is distinguishable from the case at hand. In re Razorfish, Inc. Sec. Litig., No. 00 Civ. 9474, 2001 WL 1111502 (S.D.N.Y. Sept. 21, 2001). In Razorfish, the court dismissed a class action complaint alleging securities fraud because the alleged misrepresentations were based entirely on numerous references to the term `integration' and the complaint lacked any other particularized factual allegations to support a claim of fraud. In contrast, plaintiffs here have pled, as discussed below, numerous particularized factual allegations to support an inference of scienter.
i. Emex
On April 9, 2001, Emex issued a press release announcing that it had "accepted a proposal from a financial institution to arrange syndication of $100 million in project financing," and that "[t]he deal was arranged through the efforts of Credit Suisse First Boston, and is contingent on feasibility studies and due diligence." Compl. at ¶ 41. Plaintiffs also allege that on March 28, 2001, Tyler, Stanson, Iannozzo, and Piepers, who were all senior executives or directors of Emex, met with two CSFB investment banking employees, Nicolau and Rice, who informed Emex that CSFB would not arrange the financing. See Compl. at ¶ 45.
The Complaint also alleges that in a letter dated May 18, 2001, CSFB notified Emex that they should "ensure that no potential investors in or lenders to Emex are under the impression that [CSFB] is providing any loans to EMEX or underwriting or placing any securities on behalf of EMEX." Id. at ¶ 46. Then on May 30, Emex issued a press release announcing that the proposal for project financing was in fact from Fieldstone. Id. ¶ 50. Plaintiffs have therefore sufficiently plead that Emex "knew facts or had access to information suggesting that [its] public statements were not accurate." Novak, 216 F.3d at 311. Accordingly, the Complaint contains adequate allegations of scienter with regard to Emex.
ii. Individual Defendants
Plaintiffs allege that the Individual Defendants, as directors and senior executives of Emex, are liable under the group pleading doctrine. In response, the Individual Defendants contend that they did not intend for the April 9, 2001 press release to be misleading.
The group pleading doctrine is an exception to the requirement of Rule 9(b) that the fraudulent acts of each defendant be identified separately in the complaint, and generally only applies to "clearly cognizable corporate insiders with active daily roles in the relevant companies or transactions." Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp.2d 741, 767 (S.D.N.Y. 2001) (quotation omitted). Group pleading permits plaintiffs to "rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective works of those individuals with direct involvement in the everyday business of the company." In re Oxford Health Plans, Inc., 187 F.R.D. 133, 142 (S.D.N.Y. 1999) (quotation omitted).
Nothing in the PLSRA has altered the group pleading doctrine. In Re American Bank Note Holographics, Inc. Sec. Litig., 93 F. Supp.2d 424, 442 (S.D.N.Y. 2000).
Based upon the detailed pleading in the Complaint as to the Individual Defendants' roles at Emex, and the Individual Defendants attendance at the March 28 meeting, the Complaint establishes a strong inference that the Individual Defendants were aware that CSFB declined a role in the financing. Plaintiffs therefore have sufficiently pled that the Individual Defendants knew or should have known that the April 9, 2001 press release contained misrepresentations of material facts related to Emex. See Novak, 216 F.3d at 308. Accordingly, plaintiffs have adequately pled scienter as to the Individual Defendants.
B. Causation
Defendants also argue that the Complaint fails to adequately allege loss causation. "It is well settled that causation under federal securities laws is two pronged: a plaintiff must allege both transaction causation, i.e., that but for the fraudulent statement or omission, the plaintiff would not have entered the transaction; and loss causation, i.e., that the subject of the fraudulent statement or omission was the cause of the actual loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001) (emphasis in original). "While transaction causation is generally understood as reliance, loss causation has often been described as proximate cause, meaning that damages suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission." Castellano v. Young Rubicam, Inc., 257 F.3d 171, 186 (2d Cir. 2001). Consequently, "the loss causation inquiry typically examines how directly the subject of the fraudulent statement caused the loss, and whether the resulting loss was foreseeable outcome of the fraudulent statement, while also taking into account issues such as the presence of intervening causes and the lapse of time between the behavior complained of and the loss." Id. In Castellano, the Second Circuit held that:
plaintiffs may allege transaction and loss causation by averring both that they would not have entered the transaction but for the representations and that the defendants' misrepresentations induced a disparity between the transaction price and the true `investment quality' of the securities at the time of the transaction.
Id. at 188 (quoting Suez Equity Investors, 250 F.3d at 97-98).
Here, plaintiffs have sufficiently pled both transaction and loss causation. They allege transaction causation by invoking the "fraud on the market theory," which creates a presumption of reliance on the misstatements. See Compl. at ¶ 70; see also In re Northern Telecom Ltd. Sec. Litig., 116 F. Supp.2d 446, 455-56 (S.D.N.Y. 2000) (citing Basic v. Levinson, 485 U.S. 224, 245-47 (1988). Plaintiffs also aver that the April 9 press release caused them to purchase shares of Emex at an artificially inflated price. See Compl. at ¶ 6. Plaintiffs therefore argue that defendants' misrepresentations induced a disparity between the transaction price and the true "investment quality" of Emex at the time of the transaction. Liberty Ridge LLC v. Realtech Sys. Corp., 173 F. Supp.2d 129, 138 (S.D.N.Y. 2001). This allegation of loss causation is sufficient to survive a motion to dismiss.
Furthermore, defendants' intervening causation argument is unpersuasive. The April 24, 2001 press release issued by defendants, which touted the touring of Emex's Arvada, Colorado facility by corporate and governmental individuals, is not an independent intervening cause of plaintiffs' injuries that would allow defendants to avoid liability. Cf. First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994) (when factors other than defendant's fraud are an intervening direct cause of plaintiff's injury, no loss causation is shown); Bastian v. Petren Res. Corp., 892 F.2d 680, 685 (7th Cir. 1990) (if ventures failed because of industry-wide phenomena, rather than purported fraud, plaintiff cannot demonstrate loss causation). In this case, defendants own subsequent actions cannot serve as an intervening causation that relieves them of liability. As a result, sufficient allegations of causation have been made against defendants.
III. Control Person Liability
Plaintiffs also plead control person liability against the Individual Defendants, SI, Universal Equities and Thorn Tree under Section 20(a) of the Exchange Act. See Compl. at ¶¶ 82-85. Section 20(a) provides liability for "[e]very person who, directly or indirectly, controls any person liable under" Section 10(b). 15 U.S.C. § 78t(a). To establish a prima facie case of control person liability under Section 20(a), a plaintiff must show "(1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) `that the controlling was in some meaningful sense a culpable participant' in the primary violation." Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998) (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996)); see also Ganino, 228 F.3d at 170.
Plaintiffs argue that the proper standard for pleading a Section 20(a) violation does not include pleading culpable participation in the fraudulent activity. The Court rejects this contention. The Second Circuit clearly states that a prima facie case requires a showing of culpable participation in addition to control status. See, e.g., Suez Equity Investors, 250 F.3d at 101; Ganino, 228 F.3d at 170; Boguslavsky, 159 F.3d at 720; First Jersey Securities, 101 F.3d at 1472.
With respect to the first element, as discussed above, plaintiffs have adequately pled a violation of Section 10(b) by Emex, the alleged controlled person. See Steed Fin. LDC v. Nomura Sec. Int'l, Inc., No. 00 Civ. 8058, 2001 WL 1111508, *10 (S.D.N.Y. Sept. 20, 2001).
The next element, control of the primary violator, "may be established by showing that the defendant possessed `the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'" First Jersey, 101 F.3d at 1472-73 (quoting 17 C.F.R. § 240.12b-2). At the motion to dismiss stage, plaintiffs need only plead facts supporting a reasonable inference of control. See Indep. Energy Holdings, 154 F. Supp.2d at 770 (citations omitted).
Here, in addition to pleading that the Individual Defendants held either high-level management positions or were members of the board, plaintiffs also plead that the Individual Defendants directly managed Emex, including drafting and disseminating the allegedly false and misleading April 9, 2001 press release and other press releases. See Compl. at ¶ 77. These allegations are sufficient to prevent dismissal of this claim as a matter of law. See In re Quintel Entm't Inc., Sec. Litig., 72 F. Supp.2d 283, 298 (S.D.N.Y. 1999) (control alleged where complaint specified that the high-level executive defendants had access to internal documents and public filings, and had the ability to prevent issuance of and to correct the statements).
Plaintiffs also plead that Universal Equities and Thorn Tree each owned over 45% of Emex's outstanding shares, and that Universal Equities was 100% owned by SI. See Compl. at ¶¶ 30-31. Such allegations are sufficient to support a reasonable inference that SI, Universal Equities and Thorn Tree controlled Emex. See First Jersey, 101 F.3d at 1472-73. Plaintiffs have therefore plead facts supporting a reasonable inference of control against the Individual Defendants, SI, Universal Equities and Thorn Tree, and thus satisfy the second element.
The last element, culpable participation, is subject to the PLSRA's heightened pleading requirements. See Cromer Fin. Ltd. v. Berger, 137 F. Supp.2d 452, 484 (S.D.N.Y. 2001). While the Second Circuit "has not yet addressed the meaning of culpable participation at length, other than to state that a determination of § 20(a) liability requires an individualized determination of a defendant's particular culpability, courts have required a showing of both fraudulent conduct and a culpable state of mind." Steed Fin. LDC, 2001 WL 1111508, at *10 (quotation and citations omitted). Accordingly, plaintiffs may plead either conscious misbehavior or recklessness to satisfy the culpable participation requirement. See Indep. Energy Holdings, 154 F. Supp.2d at 771.
With respect to the Individual Defendants, the Court has already determined that plaintiffs have alleged scienter under Section 10(b), see Section II (A) (ii), supra, and, as a result, plaintiffs have therefore also done so under Section 20(a). See In re Cinar Corp. Sec. Litig., 186 F. Supp.2d 279, 320 (E.D.N.Y. 2002). Accordingly, the Complaint has adequately plead control person liability as to the Individual Defendants.
In regard to SI, Universal Equities and Thorn Tree, "[a] controlling person need not be a Section 10(b) actor in order to culpably participate in the primary violation." Independent Energy Holdings, 154 F. Supp.2d at 771. Rather, by failing to exercise control to prevent the primary violation, the controlling person is deemed a culpable participant in the primary violation by the controlled person. See id. "Therefore, plaintiffs need only plead that the controlling person failed to take any action to prevent the primary violation by the controlled person." Id.
The Complaint alleges that SI, Universal and Thorn Tree exercised their power and influence to cause Emex's primary violation. See Compl. at ¶ 84. Besides this allegation, the Complaint is silent as to SI, Universal Equities or Thorn Tree's role in Emex's fraudulent conduct. The Complaint therefore fails to provide any particularized facts as to what SI, Universal Equities or Thorn Tree are alleged to have done or failed to do as a participant in Emex's primary violation. See Mishkin v. Ageloff, No. 97 Civ. 2690, 1998 WL 651065, *26 (S.D.N.Y. Sept. 23, 1998) ("[T]he Complaint must provide some detail about what [the controlling person] is alleged to have done, and when he did it, in order for [the court] to hold that the Complaint provides particularized facts' of [the controlling person's] culpable participation."); Indep. Energy Holdings, 154 F. Supp.2d at 771. Because of the absence of particularized facts alleging culpable participation, the Section 20(a) claim against SI, Universal and Thorn Tree is dismissed.
CONCLUSION
For the reasons stated above, defendants' motion to dismiss is granted with respect to the Section 20(a) claim against SI, Universal and Thorn Tree (Count II), and denied with respect to: (1) the Section 10(b) claim against Emex and the Individual Defendants (Count I); and (2) the Section 20(a) claim against the Individual Defendants (Count II). A pre-trial conference is hereby scheduled for October 23, 2002, at 10:30 a.m., in Room 906, 40 Centre Street, New York, New York.
SO ORDERED.