Opinion
Civ. No. 02-3878 (JAP)
September 10, 2003
Christopher A. Seeger, Seth Katz, SEEGEK WEISS LLP, Newark, NJ, Thomas R. Grady, Susan R. Healy, GRADY ASSOCIATES LPA, Naples, FL, for Plaintiff Beverly Ward
Ellen Nunno Corbo, TAYLOR, COLICCHIO SILVERMAN, LLP, Princeton, NJ, Mitchell A. Lowenthal, CLEARY GOTTLIEB STEEN HAMILTON, New York, NY, for Defendant UBS PaineWebber, Inc.
OPINION
I. INTRODUCTION
Presently before the Court is the Motion of Defendant UBS PaineWebber, Inc. ("Paine Webber") to dismiss the Amended Complaint of Plaintiff Beverly Ward ("Ward") pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act TPSLRA"), 15 U.S.C. § 78u-4(b)(1) and (2). Ward has brought the Amended Complaint on behalf of herself and all others similarly situated, alleging violations of the federal securities laws. Plaintiff opposed the motion and the Court heard oral argument on July 15, 2003. For all the reasons discussed below, the Court dismisses Plaintiffs Amended Complaint for failure to state a claim under the federal securities laws.
II. BACKGROUND
Plaintiff first filed suit against Defendant in the Superior Court of New Jersey, Law Division, Hudson County, on May 24, 2002. Defendant removed the action to this Court on August 9, 2002 alleging exclusive federal jurisdiction over Plaintiffs claims. On September 18, 2002, Defendant moved to dismiss based on complete preemption under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 77p 15 U.S.C. § 78bb(f), and Plaintiff cross-moved to remand. By Opinion and Order dated October 23, 2002, the Court granted Defendant's motion and dismissed Plaintiffs Complaint under SLUSA without prejudice, and granted Plaintiff 30 days to file an amended pleading in compliance with the PSLRA. On November 22, 2002, Plaintiff filed the Amended Complaint that is the subject of the instant motion. Defendant now moves to dismiss the Amended Complaint, arguing that Plaintiff fails to plead fraud with particularity under PSLRA, and as an independent ground for dismissal, that Plaintiffs claims are time-barred.
As discussed in this Court's Oct. 23 Opinion and Order, Plaintiffs claims stem from her purchases of stock in telecommunications company Qualcomm, Inc., stock that she eventually sold for a loss. At the time of the incidents alleged in her Amended Complaint, Ward held a stock brokerage account with Defendant Paine Webber. Am. Compl ¶ 6. Paine Webber, a Delaware corporation with its principal place of business in New Jersey, is one of the nation's largest brokerage groups, providing a variety of financial services. Am. Compl ¶ 7.
Paine Webber employs stock research analysts to prepare and issue reports on publicly traded stock. Am. Compl. ¶ 16. Plaintiff alleges that one analyst in particular, Walter Piecyk, issued "outlandish predictions" that Qualcomm stock would reach a price target of $1000 per share. Am. Compl ¶¶ 25, 33. However, Qualcomm stock never met this price target. Instead, its price rose from $503 a share to an all-time high of $800 per share within a week of Piecyk's $1000 prediction. Am. Compl. ¶¶ 27-28. Shortly thereafter, Plaintiff alleges, Qualcomm stock began a "steep downward slide," never approaching the $1000 price target again. Am. Compl. ¶ 29.
Ward claims that Piecyk's report, and later, ten more Research Notes that he authored, grossly inflated Qualcomm target stock prices in an attempt to garner publicity for Piecyk and to drum up investment banking business for his employer, Paine Webber. Am. Compl. ¶¶ 32-33. Plaintiff alleges that Defendant Paine Webber acted with scienter in allowing Piecyk to release his reports. Am. Compl. ¶¶ 35-39.
Ward alleges she paid artificially inflated prices for Qualcomm stock as a result of Defendant's analysts' reports. Am. Compl. ¶ 46. Ward now brings suit as an individual, as well as on behalf of "all customers of Paine Webber, Inc. who purchased shares of the common stock of Qualcomm, Inc. during the period December 29, 1999, through January 17, 2002, inclusive, seeking to pursue remedies under the Securities Exchange Act of 1934." Am. Compl. ¶ 1.
III. DISCUSSION
A. Legal Standards: Rule 12(b)(6) and Fraud Allegations
"A complaint may be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim where it appears beyond doubt no relief could be granted under any set of facts which could be proved consistent with the allegations." In re Nice Systems, Ltd. Sees. Ling., 135 F. Supp.2d 551, 564 (D.N.J. 2001). In considering a Rule 12(b)(6) motion, the court will accept all of the allegations as set forth in the complaint as true, and draw any reasonable inferences in favor of the plaintiff. Hishon v. King Spalding, 467 U.S. 69, 73 (1984); Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). However, the court need not accept bald assertions or legal conclusions made in plaintiffs papers. Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997). A motion to dismiss does not resolve the ultimate question of liability in a matter; rather, its purpose it to determine whether the plaintiff will be entitled to move forward with discovery. In re Burlington Coat Factory Sees. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997). The Third Circuit has explained that "[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Id. (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).
In general, a court may not consider any material beyond the pleadings, however, factual allegations contained in other documents referred to in the complaint and matters of public record may be referenced if the plaintiffs' claims are based upon those documents. Burlington Coat Factory, 114 F.3d at 1426. The Third Circuit has explained that "a court may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss if the plaintiffs claims are based on the document." Pension Benefit Guar. Corp. v. White Consol. Ind. Inc., 998 F.2d 1192, 1195 (3d Cir. 1993).
Federal Rule of Civil Procedure 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The Third Circuit has held that Rule 9(b) requires plaintiffs to plead with particularity the "circumstances" of the alleged fraud in order to place defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against charges or immoral and fraudulent behavior. Seville Indus. Much. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984). The rule is satisfied where some precision and some measure of substantiation are present in the complaint. Killian v. McCulloch, 850 F. Supp. 1249, 1254 (E.D. Pa. 1994).
B. Plaintiffs Amended Complaint Must Be Dismissed for Failure to State a Claim
There are three primary elements of a claim under Section 10(b) of the Securities Exchange Act of 1934. A plaintiff alleging securities fraud must plead particular facts for each of the elements of the claim: a (1) misrepresentation of (2) a material fact, (3) made by the defendant with the intent to defraud (scienter). In re Cybershop.com Sees. Litig., 189 F. Supp.2d 214, 224 (D.N.J. 2002). Plaintiff does not meet the three essential elements for establishing a claim of securities fraud.
1. Misrepresentation
The PSLRA requires that Plaintiff's Amended Complaint "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78 u-4(b)(1). Under PSLRA, the Plaintiff "may not benefit from inferences flowing from vague or unspecific allegations — inferences that may arguably have been justified under a traditional Rule 12(b)(6) analysis." In re Rockefeller Ctr. Properties, Inc. Sees. Litig., 311 F.3d 198, 224 (3d Cir. 2002).
In her Amended Complaint, under the heading "Defendant's False and Misleading Statements" Plaintiff Ward describes events beginning on or about December 29, 1999, when PaineWebber's telecom analyst Walter Piecyk initiated coverage of Qualcomm by issuing a prediction that the stock would reach a price of $1000 a share within 12 months' time. Am. Compl. ¶ 25. Plaintiff alleges that this target price was "deliberately inflated" so that Piecyk could receive "enormous" media attention. Am. Compl. ¶ 27. Plaintiff further alleges that despite the fact that the stock reached a zenith of S800 on January 3, 2000, only days after Piecyk's forecast, Defendant should not have continued to issue "Buy" recommendations for the stock during a period (January 21 — May 31, 2000) when Qualcomm stock prices were falling precipitously. Am. Compl. ¶ 29. Furthermore, Plaintiff points to the actions of other brokerage firms, which beginning at least in June 2000, began to downgrade their Qualcomm ratings while PaineWebber did not, as evidence that "Defendant could not have continued to issue such erroneous recommendations without complete and conscious disregard for the baselessness of the statements it was disseminating." Am. Compl. ¶¶ 31-32.
At bottom, Plaintiff alleges that Defendant's misrepresentations consisted of the positive "Buy" ratings and favorable stock price predictions issued by analyst Piecyk in a series of reports beginning in December 1999. In response, Defendant argues that these statements were forward-looking statements and Ward has not met her burden at the pleading stage because she has not alleged that they were not genuinely and reasonably believed when made. The Court agrees with the Defendant and finds Plaintiffs allegations deficient under the PSLRA.
Forward-looking statements may be deemed false only if they were not "genuinely and reasonably believe[d]" when made. In re Donald J. Trump Casino Sees. Litig., 7 F.3d 357, 368 (3d Cir. 1993). To adequately plead that Defendant misrepresented facts by issuing forward-looking statements, Plaintiff must allege "hard contemporaneous facts" that the statements had no reasonable basis — not hypothetical statements. Burlington Coat, 114 F.3d 1429 (3d Cir. 1997).
Plaintiffs Complaint does not meet this standard. The Court is unable to discern one fact pleaded that would sustain an inference that Piecyk did not genuinely and reasonably believe his predictions at the time they were issued. Instead, using hindsight and conclusory statements, Plaintiff suggests that Piecyk's statements were so outlandish, Defendant had to know they were false. Plaintiff cannot meet her burden with such allegations. There are no hard, contemporaneous facts pleaded that Piecyk in fact did not genuinely and reasonably believe his reports. In fact, shortly after issuing his $ 1000 price target, the stock skyrocketed and reached $800 a share. Such events, even if short-lived, bely Plaintiffs conclusion that Piecyk's price target was so egregiously outlandish that the Defendant knew it had no basis in fact. Accordingly, the Court finds that Plaintiff has not adequately pleaded falsity with sufficient particularity to satisfy the PSLRA.
2. Materiality
The second element of a securities fraud claim is that Plaintiff must plead that Defendant's alleged misstatement was material as a matter of law. The "bespeaks caution" doctrine provides that specific warnings that accompany statements may be sufficient to make alleged misrepresentations immaterial. In In re Donald J. Trump Casino Sees. Litig., 7 F.3d at 364, 371-72 (holding "cautionary statements must be substantive and tailored to the [Defendant's] specific future projections, estimates or opinions"); see also In re Westinghouse Sees. Litig., 90 F.3d 696 (3d Cir. 1996) (holding boilerplate disclaimers not sufficient).
Defendant argues that Piecyk's Qualcomm reports included specific disclaimers, as well as described the necessary assumptions underlying his predictions, sufficiently bespeaking caution to investors. Plaintiff counters that these disclaimers were boilerplate, generic warnings that did not rise to the level required by the doctrine.
Having found that Plaintiff has failed to sufficiently plead a misrepresentation under PSLRA, the Court declines to address whether such misrepresentations were immaterial as a matter of law.
3. Scienter
Even if Plaintiff had met her burden in pleading the allegedly false statements with particularity, she has failed to adequately plead scienter. Under the PSLRA, plaintiffs are required to "state with particularity facts giving rise to the strong inference that the defendant acted with [an intent to deceive, manipulate, or defraud]." 15 U.S.C. § 78u-4(b)(2); see also In re Advanta Secs. Litig., 180 F.3d 525, 534-35 (3d Cir. 1999) (holding plaintiff must allege "facts establishing a motive and an opportunity to commit fraud, or . . . facts that constitute circumstantial evidence of either reckless or conscious behavior"). In the Amended Complaint, Ward alleges that the Defendant had both motive and opportunity to issue false statements, and behaved recklessly or consciously in issuing the reports. Am. Compl. ¶¶ 35-39.
Pleading motive, Ward alleges that Defendant recommended Qualcomm stock to attract investment banking business from Qualcomm and other companies, and also to drum up publicity for Walter Piecyk in an effort to attract retail customers who sought analysis on "hot" tech stocks. Am. Compl. ¶ 36, 38. Plaintiff claims that Piecyk's reports were intended to "show other companies that defendant would take to support the market for the securities of its investment banking clients." Am. Compl. ¶ 33. And pleading opportunity, Plaintiff alleges that the Defendant `had control over the information disseminated by its company and was therefore directly responsible for the false and misleading statements and/or omissions issued to the public." Am. Compl. ¶ 37.
Defendant argues, inter alia, that the allegations of motive are no more than "generalized theories of motive which are widely held" by every firm in the securities industry. Wilson v. Bernstock, 195 F. Supp.2d 619, 634 (D.N.J. 2002). Courts have found that "facts plead in the complaint must show an unusual, heightened motive, and not merely a rational or plausible motive to commit fraud shared by a significant majority of companies." Id. (internal citations omitted). The Court agrees. Plaintiffs Amended Complaint fails to allege specific facts that show an "unusual, heightened motive." Instead, Plaintiff alleges a motive that arguably all brokerage companies share: an interest in growing new business. This motive is insufficient to establish scienter.
In addition to claiming motive and opportunity, Plaintiff alleges that the Court should infer reckless or intentional scienter based on the "enormous disparity between the target price and actual price" of Qualcomm stock, and its unwillingness to change its "Buy" rating, which reveals Defendant's "complete and conscious disregard" of the baselessness of its analyst's reports. Am. Compl. ¶ 32-39. As discussed in further detail supra, Plaintiffs allegations about the baselessness of Piecyk's reports lack a factual basis. Plaintiff does not allege specific facts to sustain an inference that Piecyk's reports were materially false nor does Plaintiff allege facts sufficient to sustain an inference of reckless or intentional scienter.
2. Plaintiffs Claims are Barred by the Statute of Limitations
Finally, Defendant argues that Plaintiffs Amended Complaint is time-barred. Having already determined that sufficient grounds exist to grant Defendant's motion, the Court need not decide this issue, but exercises its discretion to do so.
The parties dispute the proper application of the Sarbanes-Oxley Act, 107 P.L. 204, Title VIII, § 804(a), 116 Stat. 745, which became effective or July 30, 2002. The Act extended the statute of limitations for federal securities fraud actions to two years (from one) after the discovery of the facts constituting the basis of her claims. Plaintiff filed her initial state court Complaint, which purported to contain only state law claims, on May 24, 2002. That Complaint was properly removed to this Court on August 9, 2002. Finding its allegations an impermissible end run around SLUSA, the Court dismissed it on October 23, 2002 and ordered Plaintiff to amend her complaint to comply with PSLRA.
In her opposition, Plaintiff maintains that she filed her complaint on July 10, 2002. A copy of the original complaint was included as an exhibit to Defendant's motion and bears a date/time stamp of May 24, 2002. The Court is uncertain as to why the disparity exists, but finds it irrelevant to its analysis.
Plaintiff argues that her federal securities fraud action did not commence until she filed her Amended Complaint on November 22, 2002, months after the date the Sarbanes-Oxley Act became effective, and thus entitling her to the expanded two-year statute of limitations. Defendant argues that Plaintiff actually commenced her action when she served her state court complaint on July 10, 2002, and Sarbanes-Oxley does not apply.
The timeliness of a complaint is measured from the date the plaintiff brought her action. In re NAHC. Inc. Sees. Litig., 306 F.3d 1314, 1325 (3d Cir. 2002). The Court finds that Plaintiff brought her action when she filed her initial complaint in state court on May 24, 2002. Having already found that Plaintiffs first Complaint was a carefully drafted attempt to circumvent SLUSA and the pleading requirements of the PSLRA, the Court finds that Plaintiffs "action" was brought at the time of the filing of her initial Complaint. Therefore, the Sarbanes-Oxley Act does not apply to the instant action, and Plaintiffs complaint must have been filed within one year of Ward's discovery of the facts underlying her claim.
The parties dispute when Plaintiff had inquiry notice of her claim. Defendant argues that Ward had inquiry notice at the onset of "storm warnings" and bears the burden to plead she exercised reasonable due diligence and was still unable to discover her injuries. Plaintiff argues that the statute of limitations issue involves issues of fact and may not be resolved at the motion to dismiss stage because the Amended Complaint does not show on its fact that the action is time-barred. See, e.g., Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir. 2002) ("If the bar is not apparent on the face of the complaint, then it may not afford the basis for a dismissal of the complaint under Rule 12(b)(6).").
The Court finds that it is apparent on the face of Plaintiff's Amended Complaint that Ward had inquiry notice of her claim as early as January 2000. Ward alleges that "[w]ithin weeks of Piecyk's first report [released on December 29, 1999], the price of Qualcomm's stock was on a steady downward slide. It was apparent at that time and throughout the remainder of the Class Period that the price of Qualcomm stock would never reach $1000 or even the $800 price target to which Piecyk retreated in the summer of 2000." Am. Compl. ¶ 32 (emphasis added). Plaintiff herself claims that it was apparent, within weeks of the December 29, 1999 report, that the stock would never rise to the levels projected by Defendant's analyst. This discrepancy is cited by Plaintiff as evidence of scienter: the "enormous disparity" between price targets and actual stock prices. Am. Compl. ¶ 32. As these facts underlie Plaintiffs claim, the Court finds that Ward was on inquiry notice at that time, and should have filed her complaint by January 31, 2001. As Plaintiff did not file suit until May 24, 2002, and has not pleaded facts relating to her duty to investigate, the statute of limitations bars her claims. The Court denies Plaintiffs request for leave to amend her Amended Complaint to add such allegations, finding such amendment to be futile in light of the Amended Complaint's aforementioned deficiencies.
Even if the Court had found that Sarbanes-Oxley applied to Plaintiffs claims, the two-year statute of limitations would still be a bar.
IV. CONCLUSION
For all the reasons discussed above, the Court grants Defendant UBS PaineWebber's motion to dismiss Plaintiffs Amended Complaint. An appropriate Order follows.
ORDER
Before the Court's Defendant UBS PaineWebber, Inc.'s opposed motion to dismiss under Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure. For all the reasons set forth in the Court's accompanying written opinion.ORDERED that Defendant UBS PaineWebber, Inc.'s notion to dismiss is GRANTED; and it is further.
ORDERED that this action is DISMISSED WITH PREJUDICE.