Opinion
3:01-CV-1087-D, 3:01-CV-1152-D, and 3:01-CV-1203-D)
August 8, 2002
MEMORANDUM OPINION AND ORDER
In these consolidated securities fraud actions, the court holds that plaintiffs have failed to plead fraud in conformity with the requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4, and Fed.R.Civ.P. 9(b). It therefore grants defendants' motion to dismiss and directs plaintiffs to replead.
I
Defendant InterVoice-Brite, Inc. ("IVB") develops, sells, and services interactive voice response systems that provide automated customer service and self-help applications that permit individuals to access and/or provide information to computer data bases. IVB acquired Brite Voice Systems, Inc. ("Brite") in April 1999 and thereafter represented in press releases and toWall Street analysts that the merger of the two companies was a success. When IVB announced in June 2000 that it would report a loss and lower than projected revenues and earnings per share this litigation followed.
The instant cases are consolidated securities fraud putative class actions that allege fraud-on the-market involving shares of common stock of IVB. Plaintiffs are purchasers of IVB shares during the period October 12, 1999 through June 6, 2000 (the "class period"). Defendants are IVB and seven of its senior officers or directors: Daniel D. Hammond ("Hammond"), IVB's Chairman of the Board and, until June 2000, its Chief Executive Officer; Rob-Roy J. Graham ("Graham"), IVB's Chief Financial Officer; David W. Brandenburg ("Brandenburg"), an IVB director during the period in question who, before 1994, was IVB's President and since June 2000 has been its CEO; David A. Berger ("Berger"), IVB's President and Chief Operating Officer; Gordon H. Givens ("Givens"), IVB's Senior Vice President-Business Systems; M. Gregory Smith ("Smith"), IVB's Senior Vice President-Business Systems Sales and Marketing Communications, and Harold D. Brown ("Brown"), IVB's Vice President-Human Resources (collectively, the "individual defendants"). Plaintiffs allege in count I of their consolidated class action complaint ("complaint") that all defendants are liable for violating § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240. 10b-S (1998), promulgated thereunder. They assert in count II that the individual defendants are liable under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as controlling persons.
The court refers to this period as the "class period" although no class has been certified in this case. See Nathenson v. Zonagen Inc., 267 F.3d 400, 403 (5th Cir. 2001) (noting similarly that, "[d]espite the absence of certification, we will, for clarity's sake, refer to the time in question as the `class period.'").
Although the caption for count II states that the claim is asserted against all defendants, the specific allegations make clear that plaintiffs are suing only the individual defendants. See Compl. ¶ 141.
According to the complaint, in April 1999 IVB acquired Brite in order to expand its customer base and product and service offerings. During the class period, defendants knowingly made materially false statements about IVB's business, financial results, the success of its integration with Brite, and its prospects. They repeatedly represented that the IVB-Brite merger was successful and that, in addition to its creation of a strong pipeline for new sales, the synergies created by combining IVB and Brite would drive sales and revenue growth and earnings per share of $0.75 for fiscal year ("FY") 2000 and $1.15 for FY 2001, resulting in an inflated stock price as high as $38.75 per share. Defendants knew, however, that each of these representations was false when made.
Although the court is not reaching defendants' Rule 12(b)(6) motion, because applying the Rule 12(b)(6) standard will not affect the court's decision, it will accept as true the facts alleged in the complaint and construe them in the light most favorable to plaintiffs. See ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 341 (5th Cir. 2002).
The IVB-Brite merger resulted in the immediate and massive attrition of the former Brite sales force, and IVB immediately alienated Brite's customers because it refused to develop and support products that Brite already sold and serviced. Because IVB sold most of its product updates related to Year 2000 before FY 2001, there was almost no demand for its products. Slow sales were reflected in weekly sales and revenue activity reports that senior management received weekly. These reports showed that as early as March 2000, first quarter FY 2001 revenues would fall well short of public projections. The individual defendants nevertheless took advantage of the artificial inflation caused by their false statements and sold 452, 762 shares of their IVB stock for $11.56 million.
To conceal the effect of slow sales and a depleted sales force, defendants falsely reported quarterly and FY 2000 earnings and revenues on August 31, 1999, November 30, 1999, and February 29, 2000. On June 6, 2000, despite consistently projecting sequential revenue growth and first quarter FY 2001 earnings per share of $0.27, IVB revealed that it would report a loss of $0.03 to $0.05 and revenues of only $67-$68 million for the first quarter of FY 2001 rather than earnings per share of $0.27 and revenues of $89 million as defendants had led the market to expect. Defendants attributed the shortfall on a few sales people who had begun leaving IVB during the quarter, some of whom were unhappy with the integrated company. IVB lowered FY 2001 projections from $1.15 down to $0.60.
On June 8, 2000, after public questions about the veracity of defendants' optimistic statements, IVB cut its FY 2001 earnings forecasts to $0.00, a 100% decline in fewer than two days. Defendants maintained that they had implemented new guidance from SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), three months earlier than planned and that such implementation would require IVB to take an $11.3 million charge in the quarter. IVB stock dropped to as low as $5.75 per share before closing at $6. 125, a decline of 85% from its class period high.
Defendants move to dismiss under Rules 12(b)(6) and 9(b), contending inter alia that plaintiffs' claims based on statements of third-party analysts fail to state a claim on which relief can be granted and that plaintiffs have failed to plead with the particularity required by the PSLRA and Rule 9(b).
Defendants also move to dismiss on the grounds that plaintiffs have failed to plead scienter under the heightened standards of the PSLRA and that the allegedly false statements that the complaint attributes to a defendant are sheltered by the safe harbor provisions of the PSLRA and/or the bespeaks caution doctrine. Because the court holds that the complaint fails at a more fundamental level to meet the pleading requirements of the PSLRA and Rule 9(b), and since the content of an amended complaint that does comply could materially impact the court's analysis of scienter, the safe harbor provisions of the PSLRA, and the bespeaks caution doctrine, the court does not reach these grounds of defendants' motion.
II
Defendants posit that plaintiffs' complaint is comprised almost entirely of sales and earning projections made by independent analysts, not by IVB or the individual defendants. They maintain that of the seventy-four allegedly false statements that plaintiffs identify in their complaint, one or more defendants are alleged to have made only thirteen of them (found at ¶¶ 35, 36, 46, 47, 67, 71, 72, 74, 77, 78, 80, 92, and 94 of the complaint) during the class period. Defendants argue that plaintiffs have not adequately pleaded an exceptional circumstance that would render them liable for statements made by third parties. Plaintiffs respond that defendants can be held liable for false statements made to third-party analysts with the intent that the statements be repeated to investors. They assert that IVB management reviewed and approved analyst reports and projections before they were issued. The court need not resolve definitively all the circumstances under which a defendant can be held liable for statements made to third-party analysts that were thereafter relayed in some form to the market, because plaintiffs' complaint is deficient at a more fundamental level of scrutiny.The pleading requirements of the PSLRA, at a minimum,
incorporate the standard for pleading fraud under Fed.R.Civ.P. 9(b). This statutory language appears to comport with [the Fifth Circuit's] relatively strict interpretation of Rule 9(b), which requires a plaintiff "to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent."
Nathenson v. Zonagen Inc., 267 F.3d 400, 412 (5th Cir. 2001) (citations omitted) (quoting Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997)). As the Fifth Circuit has recently held:
[p]leading fraud with particularity in this circuit requires time, place and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby. We have thus noted that, although the requirement for particularity in pleading fraud does not lend itself to refinement, and it need not in order to make sense, nevertheless, [d]irectly put, the who, what, when, and where must be laid out before access to the discovery process is granted.
ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002) (internal quotation marks and footnotes omitted). More specifically, the PSLRA provides that a plaintiff must allege "that the defendant . . . made an untrue statement . . . or . . . omitted to state a material fact" 15 U.S.C. § 78u-4(b)1. Thus while it may be possible for defendants to be held liable for misrepresentations made to third-party analysts when those statements are thereafter relayed to the market, the defendants' misrepresentations, not the third-party analysts' later statements to the market at large, are the touchstone for determining whether the particularity requirements have been satisfied. The court therefore holds that a plaintiff cannot meet the requirements of the PSLRA and Rule 9(b) merely by pleading the specific time, place, and contents of misleading statements by a specifically identified analyst. Rather, to hold a defendant liable for misleading statements published by a third party, the plaintiff must at least identify the defendant who provided the information that the third party made public to the market. See Raab v. Gen. Physics Corp., 4 F.3d 286, 288 (4th Cir. 1993) ("We do not think that plaintiffs have pled the specific facts required by Fed.R.Civ.P. 9(b) from which the Goldman Sachs research report can be attributed to General Physics, and General Physics cannot be held liable for the independent statement of a third party. . . . The securities laws require General Physics to speak truthfully to investors; they do not require the company to police statements made by third parties for inaccuracies, even if the third party attributes the statement to General Physics."); Suna v. Bailey Corp., 107 F.3d 64, 72-73 (1st Cir. 1997) (holding analysts' statements insufficient to satisfy particularity requirements since plaintiffs failed to plead specific statements made by particular defendant or to describe how such statements were false or misleading).
At this juncture, the court does not base its decision on Rule 12(b)(6), and therefore declines to reach the question whether plaintiffs have in this respect failed to state a claim on which relief can be granted.
This may be based on information and belief, provided the complaint "statets] with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B).
Of the statements attributed to third-party analysts, only two — ¶¶ 42 and 57 — identify specific defendants as having provided information on which an analyst's statements were based. The remaining paragraphs do not comply with the particularity requirements of the PSLRA or Rule 9(b) because they do not identify a specific individual defendant as the source of the analyst's report. Instead, they broadly refer to discussions between "defendants" or "management" as the source of the analysts' information. See Compl. ¶¶ 37-39, 41, 48, 49, 54-56, 58, 60, 62, 68, 75, 76, 84, 89-91, and 93.
See discussion infra at § 111(C) concerning why attributing allegedly false statements to "defendants" or "management" can constitute improper group pleading that is foreclosed by the PSLRA.
Although ¶¶ 42 and 57 name individual defendants as the sources of false statements to third-party analysts, the allegations still fall short. Paragraph 42 pertains to a report issued by a third-party analyst "after . . . extensive discussions with Dan Hammond and Graham, and was based on and repeated information provided by them." Paragraph 57 refers to a different third-party analyst report, but it employs language that is similar to ¶ 42 to address an alleged connection to Hammond and Graham. In neither paragraph do plaintiffs specify any particular statement that Hammond or Graham made, identify which of the two made a particular statement, state when and where the statement was made, and what the speaker obtained thereby. Conclusory assertions about "extensive discussions" and "information provided by them" are inadequate. The allegedly fraudulent statements to third-party analysts have not been pleaded with the minimum requirements of particularity. See Suna, 107 F.3d at 74 ("We also find that appellants have failed to direct us to any facts to support their conclusory allegation that Bailey endorsed the contents of those reports, adopted them as its own, and placed its imprimatur on them." (internal quotation marks omitted)).
Paragraph 42 states, in pertinent part:
On 11/2/99, Tucker Anthony Cleary Gull issued a report "initiating coverage" on InterVoice-Brite by Christin Armacost ("Armacost"). Because this was Tucker Anthony Cleary's first report on InterVoiceBrite, it was issued only after Armacost had extensive discussions with Dan Hammond and Graham, and was based on and repeated information provided by them. InterVoice-Brite management reviewed this report before it was issued and assured Armacost it was accurate.
Paragraph 57 alleges, in relevant part:
On 12/20/99, Jefferies Company issued a report "initiating coverage" on InterVoice-Brite by Joseph Bellace ("Bellace"). Because this was Jefferies' first report on InterVoice-Brite, it was issued only after Bellace had extensive discussions with Dan Hammond and Graham and was based on and repeated information provided by them. InterVoice-Brite management reviewed this report before it was issued and assured Bellace it was accurate. The report forecast FY00 and FY01 EPS of $0.79 and $1.19, rated the stock a Buy, and stated. . . .
Plaintiffs also maintain that, in support of their motion to dismiss, defendants have provided the court with excerpts of transcripts of IVB conference calls that show that, in addition to three of the seven named defendants, most of IVB's executive officers participated in discussions with analysts. See Ps. Br. at 22. This assertion does not adequately address the deficiencies the court has identified, because the complaint does not identify a mis-statement that a specific defendant made.
The court therefore holds that plaintiffs have failed adequately to plead securities fraud based on statements allegedly made to, and in turn disseminated to the market by, third-party analysts.
III
Defendants next argue that, of the remaining statements — ¶¶ 35, 36, 46, 47, 67, 71, 72, 74, 77, 78, 80, 92, and 94 (the thirteen attributed to one or more defendants during the class period) — only four (¶¶ 36, 46, 47, and 78) are alleged to have been false when made, only two of these four (¶¶ 46 and 78) identify a particular defendant as the speaker, and plaintiffs have not pleaded the necessary facts to show why each of the four statements was false when made. Defendants contend that plaintiffs have violated the PSLRA and Rule 9(b) by grouping all the statements together and periodically positing a global, conclusory allegation regarding why the statements in the group are false and misleading. They maintain that plaintiffs are admittedly attempting to hold them liable for alleged statements based on a group pleading theory. Defendants also assert that plaintiffs are relying impermissibly on fraud by hindsight.
Plaintiffs appear to respond that the allegedly false statements fall into three general categories: statements that the IVB merger was a success; statements that the products order backlog during the period in question was strong; and statements that overstate revenue via improper accounting. They maintain they have complied with the PSLRA and Rule 9(b) as to all these allegations. Plaintiffs also request in the alternative that the court reconsider its previous rulings barring group pleading in cases to which the PSLRA applies.
Plaintiffs' brief is structured so that at times it is unclear to which particular argument they are responding. From reading the brief, the arguments the court has identified appear to be the ones that are responsive to defendants' contentions.
A
The court turns first to defendants' contention that, of the thirteen statements at issue, only the four set out in ¶¶ 36, 46, 47, and 78 are alleged to have been false when made, only two (¶¶ 46 and 78) identify a particular defendant, and plaintiffs do not allege the necessary facts concerning why each statement was false when made.
1
The court sets to one side the allegations in ¶ 36 and 47. These paragraphs refer to a series of false statements that defendants allegedly made, but they are not pleaded with sufficient particularity because plaintiffs do not identify the defendant who made the statement in question. As the court has already noted, the PSLRA and Rule 9(b) require that plaintiffs identify the speaker. Paragraph 36 refers only to what IVB "management" told participants during a conference call. In ¶ 47, plaintiffs list a series of allegedly false statements that Hammond and Graham made, but they fail to specify which defendant made a particular statement. These two paragraphs do not, therefore, comport with the particularity requirements of the PSLRA and Rule 9(b).
Paragraph 36 alleges, in relevant part:
Subsequent to the release of its 2Q FY00 results, InterVoice-Brite held a conference call for analysts, money and portfoho managers, institutional investors and large InterVoice-Brite shareholders to discuss InterVoice-Brite's 2Q results, its business and its prospects. During the call — and in follow-up conversations with analysts — InterVoice-Brite management told participants:
Paragraph 47 alleges:
On 12/16/99, subsequent to the release of its 3Q FY00 results, InterVoice-Brite held a conference call for analysts, money and portfolio managers, institutional investors and large InterVoice-Brite shareholders to discuss InterVoice-Brite's 3Q results, its business and its prospects. During the call — and in follow-up conversations with analysts — Dan Hammond and Graham stated:
The integration with Brite was proceeding well, such that synergy cost savings were already being realized.
Management was ahead of its transition plan for merging with Brite.
Backlog continued to be strong which would lead to revenue growth in future quarters.
InterVoice-Brite was on track to report EPS of $0.76+ and $1.25 in FY00 and FY01, respectively.
(emphasis deleted).
2
The court now considers defendants' challenges to ¶¶ 46 and 78, which are narrowed to whether plaintiffs allege the necessary facts concerning why each statement was false when made. Although defendants address this issue elsewhere in their motion, the court also considers here the press release-based statement in ¶ 35, which is similar to the one in ¶ 46 (¶ 35 relates to IVB's statement of second quarter earnings in FY 2000 and ¶ 46 pertains to third quarter earnings).
The PSLRA mandates that "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 upon which that belief is formed." Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002) (quoting 15 U.S.C. § 78u-4(b)(2)). Rule 9(b) imposes a similar obligation. See Nathenson, 267 F.3d at 412 (holding that, under Rule 9(b), plaintiff must "specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.").
At ¶ 35, plaintiffs allege that IVB issued a press release that misrepresented its financial results for the second quarter of FY 2000, and that Hammond made a false statement. Paragraph 46 alleges:
On 10/12/99, InterVoice announced its 2Q FY00 results in a release which reported revenues of $79,860,176 and $119,936,937 for 2Q and first six months of its FY00 compared to $33,070,279 and $63,070,616 for the same periods of the prior fiscal year which do not include the revenues of Brite. In addition, Dan Hammond stated:
Daniel D. Hammond, InterVoice-Brite's Chairman and Chief Executive Officer said, "I am very pleased with our second quarter performance. Almost every InterVoice-Brite employee was impacted by the process of integrating the operations of InterVoice and Brite. Despite this disruption, we focused on maintaining our sales momentum and made a tremendous amount of progress toward implementing our synergy savings goals."
The quarterly results reported in its 10/12/99 press release were false for the reasons stated in ¶¶ 109-123.
Id (emphasis in original; bold font deleted).
Plaintiffs allege in ¶ 46 that IVB issued a press release that misrepresented its financial results for the third quarter of FY 2000, and that Hammond made a false statement. Paragraph 46 alleges:
On 12/15/99, InterVoice-Brite announced its 3Q FY00 results in a press release which stated: InterVoice-Brite announced today revenues of $82,034,870 and $201,971,807 for the third quarter and first nine months of its fiscal 2000.
* * *
The Company generated a profit of $7,109,740, or $0.21 per diluted share, during the third quarter, and a loss of $22,730,437 or $0.76 per diluted share, during the first nine months of fiscal 2000. The Company would have reported earnings per diluted share of $0.52 for the first ninth months of fiscal 2000 without second quarter charges totaling $41.6 million, net of tax, and a second quarter one time tax benefit of $2.3 million. The second quarter charges and tax benefit resulted from the merger of InterVoice and Brite and from certain other second quarter transactions. The second quarter charges and one time tax benefit are described in the Company's press release of October 12, 1999.
* * *
Daniel D. Hammond, InterVoice-Brite' s Chairman and Chief Executive Officer said, "I am very pleased with our third quarter performance. We continued to focus on maintaining our sales momentum and are ahead of plan in implementing our synergy savings goals, as demonstrated by our better than expected earnings. These synergies, as well as an intense concentration on Balance Sheet control, allowed the company to repay $25 million of its merger related borrowings on December 10, 1999, significantly ahead of schedule."
The quarterly results reported in its 12/15/99 press release were false for the reasons stated in ¶¶ 109-123.
Id (emphasis in original; bold font deleted).
In ¶ 78, plaintiffs assert that IVB misrepresented in an April 3, 2000 press release its year-end revenue and earning results, and that Hammond made false statements. Paragraph 78 alleges:
On 4/11/00, InterVoice-Brite released its 4Q and FY00 results in a press release which stated: InterVoice-Brite announced today revenues of $84,254,172 and $286,226,519 for the Company's fourth quarter and fiscal year 2000. This compares to $38,823,310 and $136,904,131 for the same periods of the prior fiscal year. The Company's operating results for the prior fiscal year to [sic] not include the revenues of Brite Voice Systems, Inc. (Brite) which merged with the Company during the second quarter of fiscal 2000. The merger was accounted for using the purchase method of accounting under which the operating results of Brite are included with the operating results of the Company only from June 1, 1999 forward. If the prior fiscal year's results included Brite' s revenue, then revenue growth for the fourth quarter and fiscal year 2000, versus the same periods of the previous fiscal year, would have been 6% and 18%, respectively. One customer constituted 10% or more of the Company's sales during the fourth quarter and fiscal year 2000.
* * *
Dan Hammond, InterVoice-Brite's Chairman and Chief Executive Officer said, "Our management team has met the challenges of the Inter Voice-Brite merger plan, achieving our financial and operational goals. As a result, we repaid another $15 million of our merger related borrowings on March 10, 2000, again ahead of schedule. With the merger plan virtually complete, we are now focusing on growth in fiscal 2001 and beyond."
During the fourth quarter, the Company's revenue growth came from its Network Systems sales while sales of Business Systems and Services were approximately the same as in the third quarter. "Fourth quarter Business System sales were affected by Year 2000 concerns and product transition plans among our prospective and existing customers," said Mr. Hammond. "However, we are encouraged by the pipeline of sales opportunities for Business Systems."
The year-end revenue and earnings results reported in its 4/3/00 press release were false for the reasons stated in ¶¶ 109-123.
Id (emphasis in original; bold font deleted).
Plaintiffs fail to plead with sufficient specificity why the press release-based statements asserted in ¶¶ 35 and 46 — which relate respectively to second and third quarter revenue and earnings in FY 2000 — are misleading. Paragraphs 35 and 46 (as does ¶ 78) direct defendants to ¶¶ 109 through 123 of the complaint as the places where plaintiffs disclose the reasons for contending that IVB made misleading statements in press releases about its financial performance. In these paragraphs, plaintiffs allege that IVB's accounting practices and, in turn, its revenue reports, violated Generally Accepted Accounting Principles ("GAAP") and SEC rules concerning revenue recognition. When the court sets aside specific references to allegations concerning the fourth quarter of FY 2000 and the first quarter of FY 2001, see id at ¶¶ 119-121, which are not at issue in this part of the court's opinion, and undifferentiated assertions about the "class period" generally, see id. at ¶ 109, 110, 112, 118, 122, plaintiffs are left with allegations concerning a specific GAAP violation that does not clearly pertain to the second and third quarters of FY 2000.
In ¶ 120, plaintiffs refer to SAB 101, but they do so to refute IVB's reliance on it as an explanation for poor financial results for the first quarter ofFY 2001, not to assert that IVB violated GAAP on this basis.
In ¶ 115, plaintiffs cite AICPA Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, and address "the fundamental requirements for revenue recognition for software licenses." Id. at ¶ 115. But the paragraphs that seem to relate to the press releases and Forms 10-Q at issue — ¶¶ 116 and 117 — do not explicitly address software license revenue. Paragraph 116 asserts:
In the Form 10-Qs for 2Q and 3Q FY00, dated 10/15/99 and 1/14/00, respectively, InterVoice-Brite represented that its revenue recognition was as follows: The Company recognizes revenue for sales of systems which do not require customization by the Company at the time of shipment. Revenue for systems which require customization by the Company are recognized by the contract method of accounting using percentage of completion for larger, more complex systems (generally over a $500,000 sales price) and the completed contract method for smaller systems. The Company recognizes revenue from services at the time the service is performed or over the period of the contract for maintenance/support.
Id at ¶ 116.
Paragraph 117 states:
InterVoice-Brite did not disclose that it was recognizing revenue prior to acceptance nor that acceptance was frequently not occurring for months after revenue was recognized.
Id at ¶ 117.
SOP No. 97-2 appears to come into play in the context of the fourth quarter ofFY 2000. See id. at ¶ 119. Therefore, with respect to the press releases and financial statements at issue, plaintiffs have failed to plead a GAAP violation with sufficient specificity to satisfy the "why" requirement of the PSLRA and Rule 9(b). Cf Haack v. Max Internet Communications, Inc. 2002 WL 511514, at *7 (ND. Tex. Apr. 2, 2002) (Fish, C.J.) (addressing scienter) ("Here, [plaintiffi makes specific and detailed allegations about the defendants' violations of GAAP[.]"). Plaintiffs' general allegations in ¶ 122 concerning the requirements of GAAP are also inadequate because they are tethered to nothing more specific than "accounting improprieties[I during the Class Period." Id. at ¶ 122.
The court is addressing here only the detail that is required in these circumstances to plead fraud in compliance with the PSLRA and Rule 9(b). It is not varying from the rule that "[t)he failure to follow GAAP is, by itself, insufficient to state a securities fraud claim." Mortensen v. AmenCredit Corp., 123 F. Supp.2d 1018, 1026 (ND. Tex.) (Fitzwater, J.) (citingln re Comshare, Inc. Sec. Litig., 183 F.3d 542, 553 (6th Cir. 1999); Stevelman v. Ahas Research Inc., 174 F.3d 79, 84 (2d Cir. 1999)), aff'd, 240 F.3d 1073 (5th Cir. 2000) (per curiam) (table).
The court next considers ¶ 78 of the complaint. One requirement for pleading fraud with requisite particularity is that plaintiffs specify what the speaker gained by making the press releasebased statement asserted in ¶ 78, which relates to fourth quarter earnings in FY 2000. "[A] plaintiff pleading a false or misleading statement or omission as the basis for a . . . securities fraud claim must, to avoid dismissal . . . plead with particularity what the person making the misrepresentation obtained thereby[.]" ABC Arbitrage, 291 F.3d at 350.
In ¶ 109 of the complaint, plaintiffs allege that "defendants caused the Company to falsely report its results during the Class Period through improper revenue recognition wherein InterVoiceBrite recognized revenue in advance of earnings or being entitled to the revenue." Compl. ¶ 109. They do not allege specifically what IVB as a company gained from inflated stock prices. Although they assert that defendants benefited from the sale of their shares of IVB stock at inflated prices, see, e.g., id. at ¶ 33, these allegations, even read in conjunction with ¶ 109, are inadequate. This is so because plaintiffs' obligation to plead with particularity what the person making the misrepresentation obtained thereby at least requires — in the case of a misrepresentation by a corporate defendant who is not alleged to have gained anything — that they specifically identify the individual defendant who caused the company to make the misrepresentation. Because plaintiffs have not done so, referring instead to "defendants" collectively, the court holds that ¶ 78 fails to comply with the PSLRA and Rule 9(b).
3
The court next evaluates the statements by Hammond that are the subject of ¶¶ 46 and 78 of the complaint. Plaintiffs address in ¶ 50 the reasons why they contend the statements in ¶¶ 41-49 are false and misleading. They allege that the integration with Brite was not proceeding well; backlog would not lead to future revenue growth; IVB would not post first quarter FY 2001 revenue growth of $0.27; the merger was not a success; because of mass firings and the immediate attrition of the sales force after the merger, IVB's revenue projections were absolutely unattainable; upon completion of the merger, IVB fired all of Brite's upper management and all vice presidents in charge of running the high margin Network Systems division except for Ray Naeini ("Naeini"), Vice President of Global Network Business Division; massive office-wide attrition began soon after the merger, especially with the sales staff, between the date of the merger in August 1999 and June 2000 there was a "steady exodus" of 2-4 sales people per week and key people in other departments left IVB; after the merger, there was 100% turnover in the telecommunications sales force and, by spring 2000, the entire Latin American Sales force had quit; and, among the many sales people that left immediately after the merger and before the November 1999 to March 2000 stock run-up were Tim Walsh, General Manager of North American Sales, and Dave Gillarenz, General Manager of Latin American Sales.
Because the court holds below that plaintiffs have failed to allege that Hammond's statement in ¶ 35 was false when made, it will not address that paragraph.
These assertions fail, however, to allege adequately why Hammond's statement in ¶ 46 is misleading. According to the part of ¶ 46 that plaintiffs emphasize in their complaint, Hammond said: "We continued to focus on maintaining our sales momentum and are ahead of plan in implementing our synergy savings goals, as demonstrated by our better than expected earnings." Id. (emphasis deleted). In this statement, Hammond made two assertions: IVB continued to focus on maintaining sales momentum, and IVB was ahead of plan in implementing its synergy savings goals. Plaintiffs do not plead specifically the facts that demonstrate that these statements were false when made. The complaint does not assert facts that show that IVB was not in fact continuing to focus on maintaining sales momentum or was not ahead of plan in implementing its synergy savings goals. In their response to defendants' motion to dismiss, plaintiffs merely point to other paragraphs in the complaint in which they allege a mass exodus of IVB sales personnel during the class period. See Ps. Br. at 7-8. They do not specifically link fewer sales personnel with a lack of focus on sales momentum. This is significant, because a company might reduce the size of its sales force for the purposes of using their best personnel or achieving cost reductions that enable them to maintain sales momentum. Plaintiffs fail to plead specific facts that connect the number of sales personnel to an absence of focus on maintaining sales momentum. And reductions in personnel after a merger are frequently consistent with "synergy savings goals" and are often a principal reason why two companies deem it in their best interest to merge.
Plaintiffs set out in ¶ 82 the reasons they contend ¶¶ 68, 75-76, 78, and 81 are false and misleading. They maintain that months before June 2000, defendants were well aware that the first quarter would not meet market expectations because there was weak demand for IVB products; many IVB Network Systems customers had already purchased products and updates in preparation for Y2K and were unwilling to increase expenditures in January 2000; the number of sales people leaving "picked up" because many felt that it would be "impossible" to meet first quarter FY 2001 projections since customers were not buying any new product; sales opportunities in North America, Latin America, and Asia "dried up" in 1998 and remained flat through the time of the merger and beyond; in first quarter FY 2001 defendant Graham and other executives were overly optimistic in their sales projections in order to justify the merger with Brite; the reason first quarter FY 2001 was so poor was because by fourth quarter FY 2000, all of Brite's Networks products had been cleared out of the pipeline and there were no new products to sell; in calendar year 2000, IVB made no sales in North America and only one sale in Latin America; and, beginning in the first quarter of FY 2001, during weekly sales/revenue meetings that Naeini conducted, sales activity reports and revenue activity reports showed there were no sales of Network Systems. The statements in ¶ 78 that plaintiffs challenge, however, are these two: "Our management team has met the challenges of the InterVoiceBrite merger plan, achieving our financial and operational goals," and "However, we are encouraged by the pipeline of sales opportunities for Business Systems."
Plaintiffs do not plead specific facts that show that the management team had not met the challenges of the IVB merger plan or achieved its financial and operational goals, or that IVB was not encouraged by the pipeline of sales opportunities for Business Systems. The complaint does not make clear what were the "challenges" or "financial and operational goals." Moerover, Hammond's statement refers to sales opportunities for business systems, but the paragraphs on which plaintiffs rely to allege the statement is false refer to network systems. The complaint itself explicitly differentiates between these two types of systems. See, e.g., Compl. ¶ 21 (referring to business systems and network systems as "two market segments"). The court therefore agrees with defendants that plaintiffs have failed to plead adequately why Hammond's statements in ¶ 78 were false when made.
B
By contending that the statements in ¶¶ 36, 46, 47, and 78 are the only ones that are alleged to have been false when made, see Ds. Br. at 8, and identifying the thirteen statements that a defendant rather than a third party made, see id. at 5, defendants argue that the remaining nine statements (¶¶ 35, 67, 71, 72, 74, 77, 80, 92, and 94) are deficient because plaintiffs do not allege that they were false when made.
Plaintiffs' obligation to plead that a statement was false when made arises from the requirement of the PSLRA and Rule 9(b) that they specify the statements they contend are fraudulent. If a complaint does no more than recount the making of various statements, without indicating in some manner that they were false when made, the party sued cannot discern whether the statements are intended to be the grounds for the plaintiffs' securities fraud claim, or background in understanding why other statements are allegedly fraudulent, or even surplusage.
The methodology that plaintiffs follow in their complaint to aver that a statement was false when made is to plead several statements seriatim, followed by paragraphs under a heading that reads "Why Statements" in prior designated paragraphs "Are False and Misleading[.]" See, e.g., Compl. at 17 ("Reasons Why Statements in ¶¶ 36-39 Are False and Misleading[.]"). Paragraphs 35, 67, 71, 72, 74, 77, 80, 92, and 94 are not included in any such rubric. See Compl. at 17 (omitting reference to ¶ 35); 37 (omitting references to ¶ 67, 71, 72, 74, 77, and 80); ¶ 92 (not alleging that statement was false when made); ¶ 94 (same). The paragraphs in question do not contain assertions that the statements were false when made. Accordingly, although this defect is easily curable if plaintiffs intend to rely on any of these statements as false and misleading, the court holds that plaintiffs have failed to comply with the PSLRA and Rule 9(b) because they have not alleged that the statements contained in ¶¶ 35, 67, 71, 72, 74, 77, 80, 92, and 94 were false when made.
C
In their response to defendants' particularity arguments, plaintiffs point to several paragraphs in the complaint that they contend allege false statements with the requisite particularity. See Ps. Br. at 6-12. The court has already held above that several of them are inadequate. Assuming arguendo that they are not deficient for a reason already set out, the court holds that plaintiffs are attempting to rely impermissibly on group pleading. See Compl. ¶¶ 37-39, 41, 48, 49, 54-56, 58, 60, 62, 68, 75, 76, 84, 89-91, and 93.
1
"The PSLRA codifies a ban against group pleading." Coates v. Heartland Wireless CommunicationS, Inc., 26 F. Supp.2d 910, 916 (ND. Tex. 1998) (Fitzwater, J.) ("CoatesI") ("Any remnant of the group pleading presumption that remained in this circuit before enactment of the PSLRA did not survive it."). "Under the group pleading doctrine, plaintiffs may rely on a presumption that statements in prospectuses and press releases are the collective work of those individuals with direct involvement in the day-to-day affairs of the company." Id. at 915. The group pleading doctrine was commonly accepted prior to enactment of the PSLRA. See, e.g., In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 759 (ND. Cal. 1997), aff'd, 183 F.3d 970 (9th Cir. 1999). Courts applied a presumption that senior executives of a corporate defendant, and any individuals with direct involvement in the day-to-day affairs of the company, could be held personally liable for misrepresentations contained in public statements issued for the corporation.
In Coates I this court relied on two premises to conclude that the doctrine was no longer viable. "First, the PSLRA allows a plaintiff to assert on information and belief that a statement or omission is misleading, provided that the complaint states with particularity all facts on which this belief is formed." Coates I, 26 F. Supp.2d at 916. "Because a plaintiff can plead on the basis of information and belief, he need not rely on group pleading." Id "Second, a plaintiff must state with particularity the facts that give rise to a strong inference that the defendant acted with the required state of mind. This requirement is fairly interpreted to require that a plaintiff allege facts regarding scienter as to each defendant." Id (citations omitted). "It is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission." Id
Plaintiffs request that the court reconsider its holding in Coates I "in light of the split of authority concerning whether the doctrine has survived the PSLRA." Ps. Br. at 12. Plaintiffs are correct that the district courts are divided concerning whether the group pleading doctrine has continuing viability. See Tracinda Corp. v. DaimlerChtysler AG. 197 F. Supp.2d 42, 85 (D. Del. 2002) ("The question of whether group pleading is precluded under the Exchange Act is not as firmly established as Defendants suggest in their briefing. The Court of Appeals for the Third Circuit has not yet addressed the issue, and courts that have considered the issue are split with a majority concluding that the group pleading doctrine has survived the PSLRA. In this circuit treatment of the issue has varied with some courts concluding that the group pleading doctrine does not survive the PSLRA, and others assuming that the group pleading doctrine is still viable." (citations omitted)); In re Azurix Corp. Sec. Litig., 198 F. Supp.2d 862, 892 (S.D. Tex. 2002) (noting split in authority). Several courts have held that the doctrine survived enactment of the PSLRA, see, e.g., In re Sensormatic Electronics Corp. Securities Litigation, ___F. Supp.2d ___ 2002 WL 1352427, at *4 (S.D. Fla. June 10, 2002) (noting that Eleventh Circuit has not yet addressed question and agreeing with multiple other courts that have held that the group pleading doctrine remains viable even in PSLRA cases) (collecting cases), and others have explicitly followed Coates I, see, e.g., P. Schoenfeld Asset Management LLC v. Cendant Corp., 142 F. Supp.2d 589, 620 ("This Court agrees with Coates' and other district courts' refusal to recognize the group published information doctrine after the passage of the PSLRA. Otherwise, the requirement to plead scienter with particularity as to each defendant is meaningless, and the ability to plead on information and belief, unnecessary."), mot. to cerqfy for immediate appeal on other grounds denied, 161 F. Supp.2d 355 (D.N.J. 2001).
Although it is possible that the Fifth Circuit will ultimately opt not to ban group pleading totally, this court remains satisfied that the reasoning of Coates I and like cases is correct. "To permit a judicial presumption as to particularity simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant. The group published doctrine permits an inference of wrongdoing not based on defendant's conduct, but solely on defendant's status as an officer or director of a corporation." Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998). Moreover, most if not all judges of this court continue to hold that group pleading is impermissible in cases governed by the PSLRA. See Kunzweiler v. Zero.Net, Inc., 2002 WL 1461732, at *13 n. 15 (ND. Tex. July 3, 2002) (Solis, J.) (collecting decisions of judges of this court that reject reliance on group pleading). The bar and the litigants they represent are entitled to rely on the settled jurisprudence of this court absent the decision of higher court that abrogates it or at least calls it into question.
Plaintiffs point to Lain v. Evans, 123 F. Supp.2d 344 (ND. Tex. 2000) (Sanders, J.), as evidence of a split of authority on the question whether at least some form of group pleading is permissible. Although Lain does state in dicta that "under the group pleading doctrine, [an allegation made on information and belief] may be sufficient to show Defendants' knowledge of . . . statements" made in press releases and SEC documents, id at 348, this reasoning is not necessarily inconsistent with Coates I, because it appears simply to treat as group pleading a form of particularized pleading that is permitted under the PSLRA. Coates I held that "[b]ecause a plaintiff can plead on the basis of information and belief, he need not rely on group pleading." Coates I, 26 F. Supp.2d at 916. Information and belief pleading — the type of pleading noted with approval in the Lain dicta — is therefore distinct from group pleading in the sense addressed in Coates I. So long as a plaintiff specifically pleads how a defendant's belief has been formed, statements based on such belief can be found sufficient. A court cannot, however, absent such a specific pleading, presume that a statement made on behalf of a company was made by each individual executive. Even if Lain should be viewed, however, as departing from Coates I, this court will follow this court's settled rule. See Schiller v. Physicians Resource Group, Inc., 2002 WL 318441, at *5 (N.D.Tex. Feb. 26, 2002) (Lindsay, J.) ("Although there exists some debate in the district courts whether or not the group pleading doctrine survived the enactment of the PSLRA, this district has come to the resounding conclusion that it does not.").
2
The statements on which plaintiffs rely to satisfying the PSLRA's particularity requirements fail to do so because they rely impermissibly on group pleading. They stem from company press releases, see, e.g., ¶ 46, or broad sources such as "management comments," see id at ¶ 54, and are not attributed to specific defendants. The statements ascribed to broad sources are insufficient as to all defendants, and the press release statements are inadequate concerning the individual defendants.
IV
Having concluded that plaintiffs have failed to comply with the PSLRA and Rule 9(b), the court must decide whether to allow them to replead. Defendants argue that the court should not permit plaintiffs to amend because the complaint assessed in today's opinion is, in effect, their second attempt to plead securities fraud claims (they had earlier filed complaints in each individual case before filing the instant complaint in these consolidated cases).
This court's approach in cases decided under the PSLRA has been to allow plaintiffs at least one opportunity to replead after the court has filed an opinion identifying defects in a complaint. See, e.g., Coates I, 26 F. Supp.2d at 923 ("Although § 78u-4(b)(3)(A) of the PSLRA states that `[i]n any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) are not met,' there is nothing in this language that indicates that district courts are required to dismiss securities fraud claims without first granting leave to amend. . . . Because a more carefully drafted complaint might state a claim upon which relief may be granted, the court grants plaintiffs an opportunity to amend their complaint." (citation omitted)). "In view of the consequences of dismissal on the pleadings and the pull to decide cases on the merits rather than on the sufficiency of pleadings, this and other courts typically give a plaintiff at least one opportunity to cure pleading defects that the court has identified before dismissing the case, unless it is clear that the defect is incurable or the plaintiff advises the court that he is unwilling or unable to amend in a manner that will avoid dismissal." United States ex rel. Coppock v. Northrop Grumman Corp., 2002 WL 1796979, at *15 n. 29 (ND. Tex. Aug. 1, 2002) (Fitzwater, J.). The court will adhere to this procedure in the present case and allow plaintiffs to replead.
* * *
Defendants' motion to dismiss is granted. Plaintiffs shall have 45 days from the date this memorandum opinion and order is filed to file an amended complaint that complies with the PSLRA and Rule 9(b).
SO ORDERED.