In re Brightpoint Litigation

Full title: IN RE BRIGHTPOINT, INC. SECURITIES LITIGATION

Court: United States District Court, S.D. Indiana, Indianapolis Division

Date published: Mar 29, 2001

Cause Nos. IP 99-870-C H/G (S.D. Ind. Mar. 29, 2001)

Opinion

Cause Nos. IP 99-870-C H/G.

March 29, 2001.

ENTRY ON DEFENDANTS' MOTION TO DISMISS AND APP

DAVID F. HAMILTON, Judge.

Defendant Brightpoint, Inc. is an international provider of cellular phone equipment and services. After the close of daily stock trading on March 10, 1999, three weeks before the end of its first fiscal quarter of 1999, Brightpoint issued a press release announcing that the company's quarterly earnings would be approximately zero, well below market expectations. The next day, the price of Brightpoint's stock dropped by more than half, from $13.06 to $6.00 per share.

Plaintiffs in this consolidated action purchased common stock of Brightpoint, Inc. between October 2, 1998, and March 10, 1999. They allege that Brightpoint and its senior officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) 78t(a), by issuing false and misleading statements to the investing community on the status of Brightpoint's operations prior to its March 10, 1999, press release. All allegations about the defendants' actions and state of mind are based on "information and belief."

Relying on the heightened pleading standards of both Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, codified in 15 U.S.C. § 78u-4 (b), defendants have moved to dismiss plaintiffs' complaint for failure to state a claim upon which relief can be granted. For the reasons discussed below, defendants' motion is granted, and the claims under section 10(b) are dismissed. Plaintiffs' claims for secondary liability under section 20(a) are dismissed because the primary claims are being dismissed.

Motions to Dismiss in Securities Fraud Cases

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful: "To 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 of the Securities and Exchange Commission specifies the following actions among the types of behavior proscribed by the statute: "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. . . ." 17 C.F.R. § 240.10b-5.

To state a claim for securities fraud under Section 10(b), plaintiffs must allege that the defendant (1) made a misstatement or omission, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, (5) upon which the plaintiffs have relied, and (6) that reliance proximately caused plaintiffs' injuries. In re HealthCare Compare Corp. Securities Litigation, 75 F.3d 276, 280 (7th Cir. 1996); 17 C.F.R. § 240.10b-5. Scienter, as applied to securities fraud claims, refers to "a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). Reckless disregard for the truth is sufficient to meet the scienter requirement, but the Seventh Circuit has cautioned that recklessness is still a demanding standard different from even serious or "inexcusable" negligence:

[R]eckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.

Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977); see also Sanders v. John Nuveen Co., 554 F.2d 790, 793 (7th Cir. 1977) ("In view of the Supreme Court's analysis in Hochfelder of the statutory scheme of implied private remedies and express remedies, the definition of `reckless behavior' should not be a liberal one lest any discernible distinction between `scienter' and `negligence' be obliterated for these purposes.").¹

1 This court agrees with the decisions from several circuit courts that the Private Securities Litigation Reform Act of 1995 did not change the substantive definition of scienter in securities fraud cases. See, e.g., Greebel v. FTP Software, Inc., 194 F.3d 185, 199-200 (1st Cir. 1999) (collecting cases).

In general, a court considering a motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted must accept as true the complaint's well-pleaded factual allegations and draw all reasonable inferences in plaintiffs' favor. E.g., In re HealthCare Compare Corp. Securities Litigation, 75 F.3d at 279; Chakonas v. City of Chicago, 42 F.3d 1132, 1134 (7th Cir. 1994). A defendant is entitled to dismissal of a claim only if it appears beyond doubt that plaintiffs would not be entitled to relief under any set of facts that might be proven within the scope of the complaint's allegations. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Chaney v. Suburban Bus Div. of Regional Transp. Auth., 52 F.3d 623, 626-27 (7th Cir. 1995).

Notwithstanding these relatively generous pleading standards, the combination of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (PSLRA) has raised the bar plaintiffs must clear in private actions alleging securities fraud. Of particular importance to defendants' motion to dismiss are the effects of Rule 9(b) and the PSLRA on the first three elements of plaintiffs' fraud claim: that defendants made misstatements or omissions of material fact, with scienter.

Rule 9(b) requires that when fraud is alleged in a complaint, "the circumstances constituting fraud . . . shall be stated with particularity." The Seventh Circuit has explained that Rule 9(b) requires the complaint to provide the "who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990). The heightened pleading requirement in fraud cases is designed to force the plaintiff to do more than the usual investigation before filing his complaint. Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999).

Rule 9(b) also provides that a defendant's state of mind "may be averred generally." However, even before passage of the PSLRA, a complaint alleging securities fraud still had to "afford a basis for believing that plaintiffs could prove scienter." In re HealthCare Compare Corp. Securities Litigation, 75 F.3d at 281, quoting DiLeo, 901 F.2d at 629; accord, Robin v. Arthur Young Co., 915 F.2d 1120, 1127 (7th Cir. 1990). Rote conclusions that a defendant knew statements were false and misleading have always been insufficient. See Robin, 915 F.2d at 1127; see also Greebel, 194 F.3d at 197 (noting that pre-PSLRA cases from the First Circuit at the motion to dismiss stage had required allegations to raise at least a "reasonable inference" of scienter).

The PSLRA raised the pleading standard in private securities fraud cases even higher, especially with respect to allegations of fraudulent scienter and allegations based only on "information and belief." As amended by the PSLRA, the law now provides:

(b)(1) In any private action arising under this chapter in which the plaintiff alleges that the defendant —

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

(2) In 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.

(3) (A) In 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.

15 U.S.C. § 78u-4(b) (emphasis added).

Congress passed the PSLRA in response to perceived abuses in which issuers of securities would be sued based on little more than a significant drop in their stock prices after announcing bad news. See Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) ("Legislators were apparently motivated in large part by a perceived need to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries."), citing H.R. Conf. Rep. No. 104-369, at 31 (1995) (noting "significant evidence of abuse in private securities lawsuits," including "the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer," and "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle"), reprinted in 1995 U.S.C.C.A.N. 730, 730.

The heightened pleading requirements in § 78u-4(b) further increase plaintiffs' pre-complaint investigatory responsibilities and further discourage claims of so-called "fraud by hindsight." See Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (coining term where plaintiff had "simply seized upon disclosures made in later annual reports and alleged that they should have been made in earlier ones"); see also, e.g., In re Carter-Wallace, Inc., Securities Litigation, 220 F.3d 36, 42 (2d Cir. 2000) (affirming judgment on the pleadings for defendants); In re Advanta Corp. Securities Litigation, 180 F.3d 525, 537-39 (3d Cir. 1999) (affirming dismissal for failure to state a claim); Arazie v. Mullane, 2 F.3d 1456, 1467-68 (7th Cir. 1993) ("fraud by hindsight" is not actionable; temporal proximity between positive statements stressing a firm's strengths and announcements of poor economic performance do not create an inference that the earlier statements were fraudulent).

Section § 78u-4(b) requires a court to dismiss a complaint that fails to (1) identify each of the allegedly material, misleading statements, (2) state facts that provide a basis for allegations made on information and belief, or (3) state with particularity "facts giving rise to a strong inference that the defendant acted with the required state of mind." Courts have described the requirement of pleading facts giving rise to a "strong inference" of scienter as the most salient feature of the PSLRA. See, e.g., Greebel, 194 F.3d at 196. Another significant component of the PSLRA is its explicit protection for "forward-looking statements." See 15 U.S.C. § 78u-5 (defining term and setting forth the statutory safe harbors); see also In re Comshare, Inc. Securities Litigation, 183 F.3d 542, 549 n. 5 (6th Cir. 1999) (noting that the PSLRA requires plaintiffs to allege facts that raise a strong inference that the defendants had actual knowledge of a forward-looking statement's falsity).

For purposes of applying the pleading standard under § 78u-4(b), it is useful to focus first upon the allegedly misleading material statements plaintiffs have identified, and then to assess those statements in light of the complaint as a whole to determine both whether the allegations meet the specificity requirements of Rule 9(b) and § 78u-4(b)(1), and whether the allegations raise a "strong inference" of scienter. The court first sets forth each of the allegedly misleading misstatements and omissions, and then applies the requirements of Rule 9(b) and the PSLRA.

Discussion

I. The Allegedly Fraudulent Statements

A. Brightpoint's Financial Results During the Class Period

Plaintiffs allege that defendants engaged in fraudulent practices between October 2, 1998, and March 10, 1999. A brief history of Brightpoint's earlier financial performance — as presented in plaintiffs' complaint — provides helpful background information. For the first six months of 1998, Brightpoint reported an 86% increase in net income as compared to the same period in 1997 ($0.33 per share and $0.20 per share, respectively). Cplt. ¶ 53. Sales, however, had declined in the second quarter of 1998 as compared to the first quarter of the year. Cplt. ¶ 54. In the third quarter of 1998, Brightpoint narrowly missed its projected net income of $0.19 per share and reported net income of $0.18 per share. Cplt. ¶¶ 66, 68. Entering the fourth quarter of 1998, Brightpoint's stock stood at approximately $6.75 per share and had fallen from highs of around $21.00 per share achieved earlier in the year. Cplt. ¶¶ 51, 58.

Brightpoint's stock staged a steady climb during the fourth quarter and was trading at over $19.00 per share as of January 8, 1999. Cplt. ¶ 15. Brightpoint's 1998 fourth quarter results were mixed. The company's reported fourth quarter net income, excluding non-recurring charges, was $0.24 per share. Cplt. ¶ 81. This figure met expectations. Cplt. ¶ 76. However, a non-recurring charge of about $0.24 per share related to elimination of the company's trading division was enough to wipe out the fourth quarter earnings. Cplt. ¶ 76.² The company took an additional non-recurring charge of $8 million ($0.12 per share after taxes) against fourth quarter earnings to account for losses related to the company's decision to terminate relationships with various distributors. Cplt. ¶ 76.

2 A newspaper article quoted in the complaint explains the business of trading in this industry as "acting as an additional layer of middleman between wholesalers and retailers." Cplt. ¶ 93. This is consistent with Brightpoint's own description of trading: "The trading division engages in the purchase of products from suppliers other than the manufacturers and the sale of those products to customers other than network operators or their dealers and other representatives." Cplt. ¶ 59 (quoting text of Brightpoint press release). Presumably, trading activities create an additional supply channel and compete with manufacturers for wholesale business in certain markets. See Cplt. ¶ 93 (indicating that trading raises the price of products and had alienated manufacturers).

Total revenue for 1998 was approximately $1.6 billion, which was an improvement over the $1.0 billion achieved in 1997. Cplt. ¶ 81. Securities analysts projected further revenue growth in 1999 and expected total 1999 revenue of approximately $2.1 billion. Cplt. ¶ 71. As late as January 6, 1999, the company stated that it was "comfortable with analysts' 1999 consensus earnings per share estimates." Cplt. ¶ 76.

On March 10, 1999, however, the company issued a warning that revenues and earnings for the first quarter of 1999 would fall below expectations. Cplt. ¶ 87. Earlier estimates had called for quarterly revenue of $500 million and earnings of $0.22 per share. The March 10 press release said that Brightpoint now expected that revenues would fall between $375 million and $400 million, and that earnings for the quarter would be $0.00 per share. Cplt. ¶¶ 76, 87, 91, 93. Moreover, due to a change in an accounting principle, the company expected to record a "cumulative effect adjustment" of $12 million to $15 million for the quarter. Cplt. ¶ 87. The day after this announcement, Brightpoint's stock dropped from $13.06 per share to $6.00 per share. Cplt. ¶ 88. On April 29, 1999, Brightpoint announced its actual first quarter financial results: revenue of $372 million and a net loss of $0.02 per share. Cplt. ¶ 98.

Brightpoint cited several reasons for its disappointing first quarter in the March 10, 1999, and April 29, 1999, announcements, according to Paragraphs 87 and 98 of the complaint. First, the company had eliminated its trading division during the fourth quarter of 1998 and was unable to replace the revenues that the division had previously generated. Second, two major agreements — with Iridium Gateways Operators and Kyocera Corporation — had failed to produce the expected revenue and operating income. Third, the devaluation of the Brazilian Real on January 13, 1999, had adversely affected the Latin America division. Fourth, Brightpoint experienced difficulties in procuring an adequate supply of product in the Asia-Pacific region. Fifth, the company had lost sales to competitors who were willing to offer lower prices and more liberal credit terms than Brightpoint thought was prudent at that time. Brightpoint expected these developments to affect the remaining quarters of 1999. Plaintiffs' allegations of fraud surround these same developments in Brightpoint's business outlook.

B. Allegedly Misleading Statements Made During the Class Period

Plaintiffs allege that the increase in Brightpoint's share price from under $7 per share in October 1998 to nearly $20 per share in January 1999 was fueled by fraud. In their brief, plaintiffs organize the allegations in the complaint around four Brightpoint press releases and a Brightpoint conference call with securities analysts. According to plaintiffs, these five communications form the basis of defendants' liability under the Securities and Exchange Act because each of the five communications contained statements that were misleading in light of the circumstances under which they were made. Plaintiffs allege the communications contained false statements and misleading omissions concerning the following: (1) Brightpoint's decision to eliminate its trading division; (2) Brightpoint's alleged inordinately risky contracts, credit policies, and revenue recognition practices; (3) problems in Brightpoint's international markets — principally in the Asia-Pacific and Latin America divisions; and (4) a detrimental accounting change related to the amortization of Brightpoint's start-up activities.

1. Brightpoint's October 2, 1998, Press Release

The first allegedly misleading communication identified in plaintiffs' brief is Brightpoint's October 2, 1998, press release announcing a plan to eliminate the trading division. The announcement explained the decision as follows:

Brightpoint, Inc. (NASDAQ:CELL) announced today that it will be eliminating its trading division during the fourth quarter of 1998, consistent with its strategy of emphasizing relationships with wireless equipment manufacturers and network operators. The trading division engages in the purchase of products from suppliers other than the manufacturers and the sale of those products to customers other than network operators or their dealers and other representatives. Brightpoint's established global infrastructure allows it to provide the requisite services to the manufacturers and network operators without the trading business. Brightpoint intends to accelerate its migration to a services-based organization, focusing on providing integrated services to wireless equipment manufacturers and network operators. The services will be designed to assist these customers in performing mission critical business functions in the most efficient and effective manner. The Company will recognize, in the fourth quarter of 1998, a one-time charge which is expected to range from $13 million to $18 million ($9 million to $13 million or $0.17 to $0.23 per share after giving effect to taxes) related to the elimination of the trading division, which will include the loss on the sale of certain assets, severance payments for terminated employees and write-off of certain assets including leasehold improvements and certain information systems costs. Also included in the charge will be a reserve for estimated accrued liabilities. The elimination of the trading division is expected to reduce 1999 selling, general and administrative expenses by an amount ranging from approximately $4 million to $5 million from previously planned spending levels. Excluding the impact of the one-time charge, the elimination of the trading division is not expected to have a negative impact on results of operations for the third or fourth quarter of 1998.

"Eliminating this working-capital intensive business and focusing on our integrated services will allow us to achieve our primary goal — delivering exceptional and sustainable growth in shareholder value," stated Robert J. Laikin, Chairman and Chief Executive Officer of Brightpoint, Inc. "We believe that the acceleration of our movement to providing integrated, outsourced services to world class manufacturers and network operators is critical to providing value to our customers and our stockholders in the long-run, as well as in the short-term. Our newly-established operations in Europe, Asia and Latin America allow us to exit this business much like we curtailed sales to other distributors in these regions in recent periods."

Cplt. ¶ 59 (emphasis added by plaintiffs). Thus, according to the announcement, Brightpoint eliminated the trading division in order to focus strategically on providing integrated services directly to manufacturers and network operators.

The October 2, 1998, announcement corresponds with the beginning of the alleged class period. Plaintiffs allege that the statement was materially misleading in several respects:

(1) It failed to disclose that the primary reason for discontinuing the trading division involved "problems with the division which were the direct result of impaired receivables and `inappropriate' business activities by the Company's own employees and certain third parties." Cplt. ¶ 60.

(2) It failed to disclose that the trading division was discontinued at a substantial loss so that defendants Robert J. Laikin and J. Mark Howell could launch a competing trading business without violating the non-compete clause in their employment contracts. Cplt. ¶¶ 13(b), 30, 63, 64. Other Brightpoint officers and directors with similar employment contracts also held shares in Laikin's and Howell's new company. Cplt. ¶ 64.

(3) It touted the benefits of the decision but failed to disclose that the strategy would significantly impair future revenue and income — at least in the short term. Cplt. ¶ 13(c). Specifically, the announcement stated that the "elimination of the trading division is expected to reduce 1999 selling, general and administrative expenses by an amount ranging from approximately $4 million to $5 million," but failed to disclose that Brightpoint would be unable to replace the trading division's revenue stream of $50 million per quarter. Cplt. ¶¶ 13(c), 59, 81.

(4) It failed to disclose "the known impact on product supply and sales in the Asia-Pacific region that the discontinuation of the trading division would have on Brightpoint, a Company which was already desperate for cash." Cplt. ¶ 62.

2. Brightpoint's October 22, 1998, Press Release

Brightpoint reported its third quarter financial results in a press release issued on October 22, 1998. The press release contained several statements concerning the company's performance:

Brightpoint, Inc. (Nasdaq:CELL) reported its financial results for the quarter ended September 30, 1998. Net sales for the third quarter of 1998 increased 83% to $445,772,000 as compared to $243,210,000 for the third quarter of 1997. Net income of $9,418,000 or $0.18 per share, for the third quarter of 1998 increased 59% (50% on a per share basis) from $5,928,000, or $0.12 per share, for the same period of 1997. . . . The increases in net sales reflect continued strength in the demand for wireless products and for the Company's value-added logistics services. The Company believes that it has continued to increase its share of the global wireless handset market during the first nine months of 1998. Net sales in the third quarter of 1998 grew 35% when compared to the second quarter of 1998 due primarily to the rapid migration from sales to other distributors to direct sales, taking advantage of the Company's newly-established in-country presences in the Europe, Middle East and Africa and Asia-Pacific divisions.

Cplt. ¶ 68 (emphasis added by plaintiffs). Plaintiffs again claim that the press release was misleading for several different reasons:

(1) The company's 1998 revenue and profits had been, and were being, inflated artificially by high-risk contracts, liberal credit policies, and improper revenue recognition policies. Cplt. ¶¶ 13(f), 13(g), 115; Pl. Br. at 9-10.

(2) The company was supposedly plagued by internal inefficiencies with respect to forecasting, financial control, inventory control, and execution. Cplt. ¶ 13(i).

(3) Although defendants allegedly knew that 1998 revenues and profits were overstated and that 1999 targets were unattainable, the press release touted the "continued strength" in the demand for Brightpoint's services, Brightpoint's increased global market share, and Brightpoint's success in focusing on direct sales as opposed to sales to other distributors. Such positive statements, plaintiffs contend, put Brightpoint's prospects in a false light. Cplt. ¶ 85(h).

3. Brightpoint's January 6, 1999, Press Release

Brightpoint's January 6, 1999, press release is the third allegedly misleading communication identified in plaintiffs' brief. Pl. Br. at 10-11. The press release, as reproduced in the complaint, stated:

Brightpoint, Inc. (Nasdaq:CELL) announced today information related to charges to be taken in the fourth quarter of 1998 and anticipated fourth quarter results of operations. On October 2, 1998 the Company announced that it would discontinue its trading division, its lowest margin division, which bought products from sources other than the manufacturers and sold the products to customers other than network operators or their representatives. The discontinuation has proceeded according to plan, and feedback received from manufacturers of wireless equipment and network operators has been very favorable. The non-recurring charge related to the trading division to be recorded in the fourth quarter of 1998 is expected to be approximately $17.6 million ($0.24 per share after giving effect to applicable taxes) which is consistent with the previously-announced estimate.

Also during the fourth quarter, the Company will record a charge related to its shift from the use of other distributors to the development of direct relationships with network operators and their representatives. Historically, the Company used other distributors to reach markets in which the Company had no in-country presence. As the Company has built its infrastructure and increased its in-country presence in various markets around the world, it has, as planned, increased its provision of outsourced distribution and logistics services to network operators and their representatives in such markets, thereby decreasing its dependence on other distributors (announced on July 14, 1997 for the Company's North and Latin America divisions and on July 21, 1998 for the Company's Europe, Middle East and Africa and Asia-Pacific divisions). In connection with this strategic shift in business focus, which was substantially completed by the Company in the fourth quarter of 1998, the Company has determined that the value of certain assets related to its business activities with other distributors, including accounts receivable generated by the sale of products to such distributors and supplier credits related to the Company's purchase of products for these channels, has been impaired as a result of the Company's termination of the related business relationships. Accordingly, the values for both classes of assets will be written down in the fourth quarter to their estimated fair value, resulting in a non-recurring charge of approximately $8 million ($0.12 per share after giving effect to the applicable taxes).

Demand remained strong for the Company's products and services in the fourth quarter and the Company expects net sales for the quarter to be between $495 million and $515 million. The Company also expects net income per share for the fourth quarter of 1998, on a diluted basis and excluding the charges discussed above, to be in the range of $0.22 to $0.24 per share. The Company has experienced some downward pressure on operating margins due to weakness in demand for its integrated services in Brazil, but believes that this weakness is due primarily to the timing of the selection of outsourced logistics vendors by both A-band and B-band network operators in Brazil. The Company expects to report fourth quarter results of operations on January 28, 1999. The Company currently is also comfortable with analysts' 1999 consensus earnings per share estimates.

Cplt. ¶ 76 (emphasis added by plaintiffs). Plaintiffs contend that the press release was misleading as to each of the four main topics covered: (1) the previously announced elimination of the trading division, (2) anticipated fourth quarter 1998 results, (3) the $8 million non-recurring charge against fourth quarter earnings, and (4) the statement that the company was comfortable with analysts' consensus estimates for first quarter 1999 performance.

As to the trading division, the announcement stated that the elimination of the division had "proceeded according to plan, and feedback received from manufacturers of wireless equipment and network operators has been very favorable." Cplt. ¶ 76. Plaintiffs contend the statement failed to disclose (a) the "inappropriate" conduct in the trading division that hurt the company's financial results, (b) the existence of Laikin and Howell's alleged competing venture, and (c) the negative impact the strategy would have on future operating revenues. Pl. Br. at 11. In essence, plaintiffs contend that the January 6, 1999, statement perpetuated the inadequacies of the October 2, 1998, statement concerning the trading division.³

3 The January 6, 1999, statement disclosed a non-recurring charge of $17.6 million that was "related to the trading division" and "consistent with the previous-announced estimate." Cplt. ¶ 76. The amount of this charge was within the $13 million to $18 million estimate announced at the beginning of the class period on October 2, 1998. Cplt. ¶ 60. Plaintiffs find fault with the defendants' characterization of the charge, contending that defendants had a duty to be more specific as to the source and reason for the charge. Cplt. ¶¶ 58, 60, 61, 65.

The statements concerning anticipated results for the fourth quarter 1998 are alleged to be misleading for the same reasons that the October 22, 1998, press release was misleading. Again, the accusation is that the company used various risky and improper means to inflate artificially the reported revenues and profits.

The third topic covered by the press release was a previously undisclosed, non-recurring charge of approximately $8 million that was to be taken for the fourth quarter of 1998. The company stated that the charge was related to Brightpoint's "shift from the use of other distributors to the development of direct relationships with network operators and their representatives." Cplt. ¶ 76. Plaintiffs attribute the $8 million charge to "the misconduct described by the Company" in an April 1, 1999, 10-K statement. Cplt. ¶ 62. The alleged nexus is that the misconduct caused distributors to be eliminated from the company's supply channels with a "calculated impact of approximately $8 million in receivables that had to be written off." Cplt. ¶ 62. Although the complaint is cryptic on this point, the substance of this allegation appears to be that the defendants knew of the "inappropriate activities" and "misconduct" before January 6, 1999, and therefore should have announced the $8 million non-recurring charge and the reasons for the charge earlier than they did. Failure to do so, from plaintiffs' viewpoint, was either intentionally or recklessly misleading.

The final sentence of the January 6, 1999, press release was a so-called "comfort" statement, which indicated that the company believed it was on track to meet analysts' 1999 consensus earnings estimates. Plaintiffs offer several reasons why the comfort statement was misleading.

First, defendants allegedly were aware of supply problems in the Asia-Pacific region that would hurt 1999 earnings. Plaintiffs contend that the supply problems were a "known" consequence of discontinuing the trading division and that, by January 1999, "Brightpoint was experiencing significant internal difficulties in obtaining adequate supply of product from its vendors, primarily Nokia, which materially affected the Company's revenue stream in its Asia-Pacific region, i.e., China and Taiwan." Cplt. ¶¶ 13(d), 62.⁴

4 Plaintiffs do not attempt to quantify the effect of the supply problem on Brightpoint's financial statements. However, statements from third parties reproduced in the complaint indicate that the Asia-Pacific division represented over 30% of Brightpoint's business and that, during 1998, Nokia had become Brightpoint's largest vendor-supplier due to a significant increase in demand for Nokia products. Cplt. ¶¶ 54, 71.

Second, defendants allegedly were aware that several of the company's most significant contracts were imprudent and would not be profitable during 1999. Plaintiffs specifically identify the company's agreements with Iridium, Kyocera, and Star Digital as "high risk" contracts that, along with other improper revenue recognition policies, had created artificial demand for wireless products and for Brightpoint's services. Cplt. ¶ 85(f) (g).

Third, the defendants allegedly knew that the company would not be able to replace the revenue previously generated by the trading division. In the fourth quarter of 1997, for example, trading activities had accounted for about $50 million in revenue. Cplt. ¶¶ 81, 85(c).

Fourth, the defendants allegedly knew that Brightpoint would have to make a substantial accounting adjustment during 1999 that would hurt its financial position. Cplt. ¶ 85(h).

4. Brightpoint's January 28, 1999, Press Release

Brightpoint issued a press release on January 28, 1999, discussing its fourth quarter 1998 revenues and earnings. Plaintiffs contend that the press release was misleading because it presented a false picture of the company's actual performance ( i.e., defendants had inflated artificially revenue and demand during 1998), and because it implied that the company's outlook remained positive despite defendants' alleged knowledge to the contrary ( i.e., defendants knew that international markets were in trouble, that elimination of the trading division would have deleterious future consequences, and that various agreements would be unprofitable). The press release stated:

Brightpoint, Inc. (Nasdaq:CELL) reported its financial results for the quarter ended December 31, 1998. Revenue for the fourth quarter of 1998 increased 37% to $509,704,000 as compared to $373,243,000 for the fourth quarter of 1997. Net income (excluding the charges described below) of $12,748,000 or $0.24 per share (diluted), for the fourth quarter of 1998 increased 37% (33% on a per share basis) from $9,299,000, or $0.18 per share (diluted), for the same period of 1997. Revenue for the year ended December 31, 1998 increased by 57% to $1,628,622,000 as compared to $1,035,649,000 for 1997. Net income (excluding the charges and investment gains described below) of $39,725,000, or $0.74 per share (diluted), for 1998 increased 61% (45% on a per share basis) from $24,661,000, or $0.51 per share (diluted), for the same period of 1997. Revenue. [sic] Revenue in the quarter and year ended December 31, 1998 increased 37% and 57%, respectively, when compared to the same periods in the prior year. These increases reflect the continued growth in demand for the Company's distribution and integrated logistics services in markets around the world. The Company believes that it has continued to increase its share of the global wireless handset market during 1998. Effective October 1, 1998, the Company eliminated its trading division and ceased its trading activities. The trading division engaged in the purchase of products from sources other than wireless equipment manufacturers and sold such products to purchasers other than network operators or their representatives. In the fourth quarter of 1997, the trading division recorded sales of approximately $50 million, all of which were generated in the Company's Asia-Pacific and Europe, Middle East and Africa divisions. Without the impact of these sales, revenue growth in the fourth quarter of 1998, compared to the 1997 fourth quarter, would have been 10% and 41% for the Asia-Pacific and Europe, Middle East and Africa divisions, respectively.

Cplt. ¶ 81 (emphasis added by plaintiffs).

5. Brightpoint's January 28, 1999, Conference Call

On January 28, 1999, the same day that Brightpoint issued its fourth quarter 1998 financial results, company officers held a conference call with securities analysts. According to the complaint, the company "expressed confidence" and stated that the Latin American market was "stable." Cplt. ¶¶ 82, 89, 91. The company also allegedly stated that the recent devaluation of the Brazilian Real on January 13, 1999, would have a positive impact on Brightpoint. Cplt. ¶¶ 82, 89.

Plaintiffs contend that defendants knew at the time of this conference call that the devaluation of the Brazilian Real would result in lower revenues and operating income, primarily due to the fact that nearly all of the company's transactions in Brazil were denominated in the local currency. Cplt. ¶¶ 87, 90, 91. As a result, plaintiffs argue, the company's statements in the conference call were false and misleading.

C. Other Allegations

In addition to the allegedly false and misleading statements discussed above, plaintiffs also contend that "throughout the Class Period, defendants continued to flood the financial community with numerous announcements concerning Brightpoint's alleged growth and viability." Cplt. ¶ 9. Most of these statements were reports that Brightpoint had reached agreements with various network operators and other companies. Cplt. ¶¶ 72-74, 78-80. Plaintiffs have not alleged that these statements were false or inaccurate. Instead, plaintiffs claim the statements were misleading because defendants released this "positive" news to the financial community at the same time that they actively concealed adverse information about the company. Plaintiffs' apparent argument is that against a backdrop of allegedly false statements, such positive statements serve only to compound investors' inability to assess the company's prospects.

If plaintiffs adequately allege the existence of a fraudulent scheme to defraud investors through the other substantive allegations described above, these "positive" statements might be seen as a (somewhat trivial) component of that larger scheme. However, the routine release of accurate statements describing business activities — such as the statements reproduced in paragraphs 72-74 78-80 of the complaint — lends no independent support to plaintiffs' allegations of securities fraud.⁵ In other words, Brightpoint's accurate "positive" statements have meaning only in relation to the allegations detailed in Sections I-B-1 through I-B-5 above, and plaintiffs' complaint will stand or fall based on those allegations.

5 The complaint reveals that Brightpoint had routinely reported such agreements and other business activities such as acquisitions prior to the alleged class period. See, e.g., Cplt. ¶¶ 49, 50, 52, 56.

The complaint also alleges that throughout the class period, defendants used securities analysts as a conduit to communicate misleading information to investors. The statements allegedly made to the securities analysts were, in content, timing and effect, essentially identical to the statements covered in the four press releases and the conference call that plaintiffs highlighted in their brief. If there is no adequate basis for liability as to the press releases, there is similarly no adequate basis for liability in repeating the same statements or making the same alleged omissions to securities analysts.

II. Application of Pleading Standards to Plaintiffs' Complaint

Defendants argue that plaintiffs failed to plead fraud with particularity, failed to set forth the factual basis for allegations made on information and belief, and failed to plead facts giving rise to a strong inference of scienter. The common pattern established in the complaint, defendants contend, is that plaintiffs have relied upon facts disclosed by the company in March and April 1999, and have alleged in conclusory terms that the defendants both knew and had an obligation to disclose those facts at an earlier point — classic "fraud by hindsight" in response to a drop in stock price caused by the release of bad news.

The court agrees that plaintiffs' complaint is deficient. The claims are either insufficiently particularized or, where particularized, do not permit a strong inference of scienter. See, e.g., Greebel, 194 F.3d at 201 (affirming grant of defendants' renewed motion to dismiss; company's public statements, alleged improper activities, and alleged material omissions were substantially similar to the allegations brought in this case). The analysis proceeds according to the various topics covered by the allegedly misleading statements: (1) the elimination of the trading division; (2) problems in Brightpoint's international markets; (3) undisclosed high-risk contracts, liberal credit policies, and improper revenue recognition policies that inflated 1998 revenues and profits; and (4) an accounting adjustment taken in the first quarter of 1999.

A. Brightpoint's Decision to Eliminate the Trading Division

The crux of the allegations surrounding Brightpoint's decision to eliminate its trading division is that the public statements concerning the decision involved materially misleading omissions. Plaintiffs fail to state a claim for securities fraud as to these alleged omissions primarily because the complaint does not plead facts that give rise to a strong inference of scienter. Central to the court's conclusion is an evaluation of the alleged omissions in light of what Brightpoint did disclose.

1. Brightpoint's Disclosures

The complaint itself shows that Brightpoint announced the decision to eliminate the trading division and accurately estimated the amount of the associated non-recurring charge at the very beginning of the class period, on October 2, 1998. On that date, the company estimated the decision would require a non-recurring charge of between $13 million and $18 million in the fourth quarter of 1998. Cplt. ¶ 59. On January 6, 1999, the company reported that the trading division had been eliminated as planned and also provided a more exact estimate of the non-recurring charge: $17.6 million. Cplt. ¶ 76. The actual amount of the charge was $17.7 million, which was within the range of the original October 1998 estimate. Cplt. ¶ 60.

Notwithstanding Brightpoint's early and accurate estimate of the non-recurring charge associated with the decision to eliminate the trading division, plaintiffs contend that Brightpoint's statements were inadequate. Each of the alleged omissions from the company's statements concerning the trading division can be tied directly to disclosures by the company that occurred between January and April 1999. In some instances, the alleged link between the material omission and the later disclosure has no reasonable foundation at all. In other instances, plaintiffs plead only fraud by hindsight. Whether viewed alone or in combination, the alleged omissions in Brightpoint's statements about the trading division fail to plead fraud with particularity and/or fail to establish a strong inference of scienter.

2. Motive Opportunity: Laikin's and Howell's Internet Business

Plaintiffs have attempted to establish a "strong inference" of scienter by alleging that the individual defendants had the motive and opportunity to communicate misleading information about the decision to eliminate the trading division. Specifically, the complaint alleges that Brightpoint eliminated the trading division, at least in part, so that two individual directors — defendants Laikin and Howell — could establish a trading business of their own without violating non-competition clauses in their employment contracts.

The circuit courts are split as to whether plaintiffs can establish a "strong inference" of scienter by pleading facts that show only a defendant's "motive and opportunity" to engage in fraud. Compare, e.g., Novak v. Kasaks, 216 F.3d at 311 (PSLRA did not change the basic pleading standard for scienter in Second Circuit; strong inference of scienter may arise where the complaint sufficiently alleges that the defendants benefitted in a concrete and personal way from the purported fraud, engaged in deliberately illegal behavior, knew facts or had access to information suggesting that their public statements were not accurate, or failed to check information they had a duty to monitor), and In re Advanta Corp. Securities Litigation, 180 F.3d at 534-35 (plaintiffs may establish a strong inference of scienter either by alleging facts to show that defendants had both motive and opportunity to commit fraud, or by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness), with, e.g., In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 978-79 (9th Cir. 1999) (a mere showing of motive and opportunity would not suffice to survive a motion to dismiss).

The Seventh Circuit has yet to address the question. This court agrees with the cases holding that the PSLRA did not limit the types of facts a plaintiff may allege in an effort to establish a "strong inference" of scienter. See, e.g., Greebel, 194 F.3d at 197 ("Without adopting any pleading litany of motive and opportunity, we reject defendants' argument that facts showing motive and opportunity can never be enough to permit the drawing of a strong inference of scienter."); Chu v. Sabratek Corp., 100 F. Supp.2d 815, 823 (N.D.Ill. 2000) ( Chu I) ("The types of facts with which a plaintiff pleads scienter factor little into our analysis, as long [as] the overall facts give rise to `a strong inference' of scienter.") (emphasis in original).

Even assuming, however, that facts showing a defendant's motive and opportunity can be enough to plead a strong inference of scienter in some cases, the allegations here do not provide an adequate foundation for such a finding. Under the standard of any circuit that finds evidence of "motive and opportunity" at least relevant to defendants' scienter, a plaintiff cannot allege scienter based merely upon a defendant's position within the company, a desire to increase incentive compensation, or similar factors that would be true for nearly all corporate executives. See, e.g., Phillips v. LCI International, Inc., 190 F.3d 609, 621-23 (4th Cir. 1999) (allegations that defendant desired to retain a position on the corporation's board and obtain a higher price for his stock were not sufficient to support scienter under even the most lenient standard possible under the PSLRA); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068-69 (5th Cir. 1994) (affirming dismissal of claims alleging scienter based on motive and opportunity before enactment of PSLRA).

Even if individual directors or officers engaged in stock trades during the class period, the trading "must be unusual, well beyond the normal patterns of trading by those defendants" before it will be found probative of scienter. Greebel, 194 F.3d at 197-98, 206; see also, e.g., In re Spyglass, Inc., Securities Litigation, No. 99 C 512, 1999 WL 543197, at *7 (N.D.Ill. July 21, 1999) (denying motion to dismiss where individual defendants had engaged in unusual trading activity). Without such limitations on attempts to plead motive and opportunity, corporations and their directors would be vulnerable to a securities fraud class action every time the company's stock price fell. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (affirming dismissal).

In this case, the complaint contains no allegations that any defendant engaged in any "insider" trading of securities — unusual or otherwise — during the class period. Most of plaintiffs' allegations clearly fall in the category of "motives" and "opportunities" that are common to nearly all corporate executives and directors. See, e.g., Cplt. ¶ 103 ("By virtue of their positions with Brightpoint and because of the significant reputational and monetary benefits they stood to gain from a positive public perception of Brightpoint . . . defendants had both the opportunity and motive to commit the acts alleged herein."); Cplt. ¶ 104 (defendants "controlled press releases, corporate reports, communications with analysts, public filings, and the reporting of the Company's financials"); Cplt. ¶ 105 (defendants participated in Brightpoint's bonus compensation plan and were eligible to receive Brightpoint common stock and stock options based on company performance); Cplt. ¶ 109 (defendants were privy to confidential and proprietary information). These facts would have been insufficient to plead fraudulent motive or intent under even the pre-PSLRA standard. See In re HealthCare Compare Corp. Securities Litigation, 75 F.3d at 283-84 (on interlocutory appeal, reversing denial of motion to dismiss; allegations that defendants made fraudulent statements to allow officers to retain their positions and compensation and to perpetuate the inflated value of their substantial personal holdings in company securities did not adequately plead motive to support inference of scienter).

Potentially the strongest allegation of motive and opportunity to support a "strong inference" of scienter is the claim that defendants eliminated the trading division — and portrayed the strategy to be in Brightpoint's best interest — so that defendants Laikin and Howell could establish their own Internet trading company, TelStreet.com, Inc. The alleged motive, as indicated above, was that Laikin and Howell (as well as other Brightpoint officials with stock in the Internet company) would profit from the new venture without violating their Brightpoint employment contracts. However, there are significant shortcomings in plaintiffs' attempt to plead motive and opportunity based on Laikin's and Howell's Internet venture.

Like virtually all of the other substantive allegations in the complaint, the allegation that Laikin and Howell sought to eliminate the trading division in order to establish a separate business that conducts the same international trading activities is based upon information and belief. The PSLRA requires that the complaint "state with particularity all facts" that establish the basis for such allegations. 15 U.S.C. § 78u-4(b)(1); In re Silicon Graphics Inc. Securities Litigation, 183 F.3d at 985 ("This means that a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief."). Given the nature of the allegation, the complaint lacks facts that might support a basis for believing that TelStreet.com is engaged in the same trading activities formerly undertaken by Brightpoint. The complaint states only that TelStreet.com offers "business telecommunications products, accessories and service to domestic and international customers through an online storefront." Cplt. ¶ 13(b). This description of TelStreet.com's operations (which is set-off in quotations without citation in the complaint), suggests that TelStreet.com is an Internet retailer and contrasts with the complaint's description of "trading" as an extra layer of middlemen in the supply chain between international wholesalers and retailers. Cplt. ¶ 93.

Without more, plaintiffs' allegation that Laikin's and Howell's Internet business is engaged in "trading" (at least in any sense relevant here) lacks an adequate foundation under the PSLRA. It amounts to nothing more than bald speculation, perhaps loosely based upon information Brightpoint disclosed in an April 15, 1999, proxy statement filed with the SEC:

The Company may provide product distribution, fulfillment and other integrated logistics services to a privately-held company that proposes to engage in the business of selling wireless communication products and related accessories through the Internet. Although there is currently no agreement between the Company and this entity, such an agreement may exist in the future. Messrs. Laikin and Howell are directors and stockholders and certain of the Company's officers and directors are stockholders of this entity.

See Def. Br., Ex. B at 18 (also available through the SEC's EDGAR database at http://www.sec.gov/Archives/edgar/data/918946/0000950137-99-000962. txt).⁶ Since plaintiffs have failed to plead particular facts that might reasonably support the belief that TelStreet.com is a "trading" company (and have actually pled facts suggesting that it is not a trading company), the further allegation that defendants orchestrated Brightpoint's departure from trading to save Laikin and Howell from violating the non-compete agreements in their employment contracts adds speculation on top of speculation. Plaintiffs have failed to raise a strong inference of scienter based on this inadequately supported theory of "motive."

6 The complaint does not explicitly refer to the April 15, 1999, proxy statement. However, for the limited purpose of determining what statements the documents contain, the court may properly consider the content of this and other public documents filed with the SEC without converting the motion to dismiss to a motion for summary judgment. See Henson v. CSC Credit Services, 29 F.3d 280, 284 (7th Cir. 1994) (a court may take judicial notice of matters of public record without converting a Rule 12(b)(6) motion into one for summary judgment); accord, Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1276 (11th Cir. 1999) ("After a thorough review of the relevant case law, we approve of the Second Circuit's practice of judicially noticing relevant documents legally required by and publicly filed with the SEC at the motion to dismiss stage."); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996); Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991). Although the court mentions a few such documents in this Entry to add context to both plaintiffs' allegations and defendants' disclosures, the publicly filed documents not specifically referenced in the complaint are not essential to the outcome of the case.

To the extent plaintiffs contend that defendants' failure to disclose the existence of TelStreet.com was itself a misleading omission under Rule 10b-5, this prong of plaintiffs' case would encounter a decisive obstacle even if there were some reasonable factual basis for believing that TelStreet.com was a "trading" company. At bottom, plaintiffs allegation is that Laikin, Howell, and other defendants with stock in TelStreet.com stole a corporate opportunity and concealed this misconduct from the market. Such theories of alleged misconduct by officers and directors are not actionable under Rule 10b-5. See Panter v. Marshall Field Co., 646 F.2d 271, 288 (7th Cir. 1981) ("In the wake of [ Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977),] courts have consistently held that since a shareholder cannot recover under 10b-5 for a breach of fiduciary duty, neither can he `bootstrap' such a claim into a federal securities action by alleging that the disclosure philosophy of the statute obligates defendants to reveal either the culpability of their activities, or their impure motives for entering the allegedly improper transaction.").

3. Alleged Failure to Disclose "Improper" Activities Associated with Trading

Brightpoint stated as early as October 2, 1998, that it was eliminating the trading division as part of its overall business strategy to emphasize relationships with wireless equipment manufacturers and network operators. The company also indicated that trading was a low-margin business and that it sought to focus on the higher margin delivery of logistics services. Investors were told that the decision to eliminate the trading division would require a non-recurring charge of $13 million to $18 million.

In an April 1, 1999, 10-K statement filed with the SEC, Brightpoint disclosed a more detailed breakdown of the $17.7 million non-recurring charge associated with the elimination of the trading division. The 10-K statement revealed that a substantial portion of the $17.7 million charge was "the result of certain inappropriate business activities carried out by individuals and third-party trading companies in 1998 that were inconsistent with the best interests of the Company." Cplt. ¶ 61.

Plaintiffs contend that Brightpoint's failure to mention these "inappropriate activities" during the class period was a materially misleading omission from the company's explanation of the decision to eliminate the trading company. Plaintiffs apparently contend that defendants had a duty, in addition to disclosing the decision to eliminate the trading division, the amount of the associated non-recurring charge, and some of the reasons the decision had been made, to disclose every motivating factor behind the business decision. The court disagrees. See, e.g., Greebel, 194 F.3d at 207 (allegation that defendants had explained increase in accounts receivable by pointing to increased sales, but did not further explain that the increased sales were subject to return rights, was "too slight" to survive motion to dismiss).

The company's public statements gavet investors the most relevant information at the very outset of the class period: they were told that Brightpoint had decided to exit the trading business and that the company would have to take a substantial non-recurring charge in connection with the decision. The early estimate of the charge was accurate. In light of these substantial, early, and admittedly accurate disclosures, it is difficult to view any delay in disclosure of the details of the source of the non-recurring charge as materially misleading. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (a misleading statement is material for purposes of Rule 10b-5 if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available"); cf. Stransky v. Cummins Engine Co., 51 F.3d 1329, 1332-33 (7th Cir. 1995) (cautioning that materiality is typically an issue to be resolved by the finder of fact).

Even if the omission of details about reasons were material, though, Brightpoint's early and accurate disclosures undermine plaintiffs' attempt to plead a strong inference of scienter. Assuming that defendants had some knowledge of the "inappropriate" activities in the trading business throughout the class period, their simultaneous public statements communicated the known impact of this information. The fact that Brightpoint's press releases emphasized how the elimination of trading division meshed with the company's broader strategic plan, as opposed to how the decision would distance the company from the "inappropriate" activities in the trading business, may have been an example of corporate spin, but it fails to support a strong inference of scienter.

4. The Alleged Failure to Disclose an $8 Million Non-Recurring Charge

On January 6, 1999, in the middle of the alleged class period, Brightpoint disclosed that it would incur an $8 million non-recurring charge for the fourth quarter of 1998. The press release stated that the charge resulted from a write-down of impaired receivables and supplier credits caused by the company's decision to cut ties with distributors in various countries:

Historically, the Company used other distributors to reach markets in which the Company had no in-country presence. As the Company has built its infrastructure and increased its in-country presence in various markets around the world, it has, as planned, increased its provision of outsourced distribution and logistics services to network operators and their representatives in such markets, thereby decreasing its dependence on other distributors (announced on July 14, 1997 for the Company's North and Latin America divisions and on July 21, 1998 for the Company's Europe, Middle East and Africa and Asia-Pacific divisions). In connection with this strategic shift in business focus, which was substantially completed by the Company in the fourth quarter of 1998, the Company has determined that the value of certain assets related to its business activities with other distributors, including accounts receivable generated by the sale of products to such distributors and supplier credits related to the Company's purchase of products for these channels, has been impaired as a result of the Company's termination of the related business relationships.

Cplt. ¶ 76.

Plaintiffs do not contend that Brightpoint misstated the amount of the $8 million non-recurring charge. They also do not allege that the $8 million charge was something other than a write-down of impaired receivables and supplier credits. What plaintiffs do allege is that the company knew about the $8 million charge as early as October 1998 and failed to disclose both the charge and the detailed reasons for the charge in a timely manner. Cplt. ¶ 62.⁷ Of course, the mere allegation that the company "must have known" the bad news before the date of disclosure is the essence of fraud by hindsight and will not sustain a securities fraud claim. To survive a motion to dismiss, plaintiffs must plead a factual basis for believing that defendants knew about the $8 million charge prior to its disclosure.

7 The company disclosed the existence of the charge and the amount of the charge on January 6, 1999, which was two months prior to the end of the class period. Plaintiffs do not allege that the disclosure of the $8 million charge in early January 1999 had any material effect on Brightpoint's stock price. Thus, plaintiffs are again complaining about defendants' failure to disclose the reason for the $8 million charge. They contend the failure to disclose the reason buoyed the stock price and harmed investors during the class period. Because Brightpoint disclosed the relevant information regarding the charge well before the drop in Brightpoint's stock, it is unlikely that the alleged failure to disclose the detailed causes of the charge was a material omission. In any event, as discussed in the main text, the complaint creates no reasonable link between the $8 million charge and what the defendants allegedly knew prior to January 1999. As a result, it becomes unnecessary to determine whether plaintiffs are more concerned about the fact of the $8 million charge or the reason for it.

The complaint attempts to create a link between the $8 million charge and information the defendants had in October 1998. The alleged connection, which travels through the decision to eliminate the trading division, takes several steps. First, Brightpoint disclosed on April 1, 1999, that an internal investigation had revealed "inappropriate activities" carried out by individuals and third party trading companies during 1998. Second, these "inappropriate activities" caused losses in the trading division that were rolled into the $17.7 million non-recurring charge taken in the fourth quarter of 1998. Third, plaintiffs allege that the "inappropriate activities" related to the trading business also caused distributors to be eliminated from Brightpoint's supply and sales channels. Cplt. ¶ 62. Putting all this information together, plaintiffs contend that, because the company knew about the "inappropriate activities" as early as October 1998, and because the "inappropriate activities" caused Brightpoint to terminate its business relationships with certain distributors, the defendants must have also known in October 1998 that terminating those relationships would cost the company $8 million in impaired receivables.

For plaintiffs' confusing claim to have any force at all, the complaint must alleged a factual basis for believing that the "inappropriate activities" in the trading division affected Brightpoint's use or non-use of other distributors to reach markets in which the company had no in-country presence. The complaint does allege that Brightpoint was eliminating the trading division at the same time that it was terminating its business relationship with certain distributors. The complaint also suggests that Brightpoint eliminated trading and distributor relationships as distinct components of its overall strategic plan to focus on direct relationships with manufacturers and network operators. However, plaintiffs have not alleged a single fact that would support a claim that undisclosed "inappropriate activities" in the trading business were the common cause of both losses in the trading division and losses incurred as a result of terminating distributor relationships.

At bottom, plaintiffs' allegation is that "inappropriate activities" in the trading division must have been the cause of the $8 million charge disclosed on January 6, 1999, because they were the cause of the $17.7 million charge disclosed on October 2, 1998. Such allegations fail to plead fraud with particularity under Rule 9(b) and do not support a strong inference of scienter.

5. Brightpoint's Inability to Replace Trading Revenues

On March 10, 1999, Brightpoint disclosed in a press release that one reason for its anticipated failure to meet earnings targets for the first quarter of 1999 was that the company had been unable to replace the revenue that had been generated by the trading division. Plaintiffs contend that defendants knew as early as October 1998 that trading revenues would be impossible to replace during the 1999 fiscal year. As a result, plaintiffs further contend that defendants' statements prior to March 10, 1999, contained a material omission and were materially misleading to the extent that they expressed optimism regarding Brightpoint's prospects for 1999.

This allegation also amounts to pleading fraud by hindsight. Brightpoint had disclosed at the outset of the alleged class period that it was eliminating the trading division and that it intended "to accelerate its migration to a services-based organization, focusing on providing integrated services to wireless equipment manufacturers and network operators." Cplt. ¶ 59. Any reasonable investor who considered the matter for half a moment would have known that eliminating the trading division would also eliminate revenue from that division. A reasonable investor also would have realized that there was some risk associated with accelerating Brightpoint's migration to a new business model. See, e.g., Greebel, 194 F.3d at 190, 207 (dismissing claims where defendant CEO had stated that company's new ventures were off to a good start and would help the company achieve its revenue objectives; company later disclosed that revenues had fallen).

Mismanagement, a poorly timed shift in business strategy, or even negligence on the part of Brightpoint's management as to its optimism for 1999, will not support a claim of securities fraud. See United States v. Morris, 80 F.3d 1151, 1163-65 (7th Cir. 1996) (reviewing a criminal conviction); DiLeo, 901 F.2d at 627 ("Securities laws do not guarantee sound business practices"). In some circuits, it is also generally assumed that no reasonable investor would rely on management's vague statements of optimism and puffery. See, e.g., In re Advanta Corp. Securities Litigation, 180 F.3d at 538-39; Grossman v. Novell, Inc., 120 F.3d 1112, 1119-20 n. 6 (10th Cir. 1997). The Seventh Circuit has declined to adopt a per se rule that optimistic predictions of growth are not material, finding that even these statements include implicit representations that the statements are made in good faith and with a reasonable basis. See Stransky v. Cummins Engine Co., 51 F.3d at 1333. Nonetheless, where a statement lacks the specificity to be considered anything but optimistic rhetoric, it may still be deemed immaterial. See Searls v. Glasser, 64 F.3d 1061, 1066-67 (7th Cir. 1995) (holding on summary judgment that statements that a company was "recession-resistant" and that it would maintain a "high" level of growth were too vague to constitute material statements of fact).

Here, defendants expressed nothing more than vague optimism about the future results of their strategic decision to eliminate the trading division and to focus on direct relationships with manufacturers. These statements are not actionable under Searls. Even if the statements were specific enough to be actionable, plaintiffs have alleged no facts that would support a strong inference that the statements were made in bad faith or with no reasonable basis.

Brightpoint also asserted in January 1999 that it felt "comfortable" with analysts' projections for 1999 revenue. To the extent that these beginning of the year "comfort" statements included implicit representations (such as the belief that Brightpoint would be able to replace the trading division's revenue), plaintiffs again fail to provide a basis for treating these projections as having no reasonable foundation. See In re HealthCare Compare Corp. Securities Litigation, 75 F.3d at 281-83 (plaintiffs alleging fraud based on "comfort statements" failed to plead facts showing either lack of a reasonable basis for the comfort statements or neglect of a duty to correct; dismissing complaint under pre-PSLRA standard where company had issued a March 30 press release to revise an early February "comfort" statement about year-end revenues).

Significantly, Brightpoint substantially revised its estimates for the first quarter of 1999 and for the year as a whole on March 10, 1999 — before the end of the first quarter. Plaintiffs argue simply that defendants must have known at an earlier point that Brightpoint's service-based strategies would not immediately replace the earnings of the trading division. Again, this is fraud by hindsight. The complaint does not contain allegations supporting the assertion on information and belief that defendants knew before March 10, 1999, that they could not replace trading revenues.

Further, to the extent Brightpoint's January 1999 "comfort" statements, either alone or in combination with its statements about the shift away from trading, may have created a duty to correct an erroneous impression, the defendants' March disclosures satisfied that duty. Grossman v. Novell, Inc., 120 F.3d at 1125 (finding no duty to disclose disappointing earnings prior to announcement of actual earnings despite earlier optimistic statements by financial officer that merger activities would not dilute "future earnings"); In re HealthCare Compare Corp. Securities Litigation, 75 F.3d at 282-83 (no duty to correct where internal information that conflicts with prior public statements is merely tentative and subject to revision). The timing of Brightpoint's March disclosures is not sufficiently suspicious to raise an inference of scienter by itself, and plaintiffs' allegations may not rest on a mere hunch that defendants had concrete, incriminating information concerning Brightpoint's future revenues at an earlier point. As the court explained in Grossman: "Requiring premature quarterly earnings forecasts itself could give rise to potential claims of liability if the forecasts should turn out to be inaccurate." 120 F.3d at 1125.

6. The Trading Division and Product Supply in the Asia-Pacific Region

On March 10, 1999, Brightpoint acknowledged that supply problems had hampered first quarter performance in the Asia-Pacific region:

Beginning in late January, the Company experienced difficulties in procuring adequate supply of product in the Asia-Pacific region, specifically in China and Taiwan. The Company has adopted a strategy in China of procuring its supply from manufacturers in China. This strategy resulted in inadequate supply of product for the first quarter. In addition, trading companies selling product into China from other markets have continued to create price instability, thereby lowering the Company's margins.

Cplt. ¶ 87.

Plaintiffs claim that the supply problems were a known consequence of discontinuing the trading division and that "defendants knew in January of 1999, at the latest, that these product shortfalls would have a material effect on Brightpoint's financial condition." Cplt. ¶¶ 13(d), 62. At that time, "Brightpoint was experiencing significant internal difficulties in obtaining adequate supply of product from its vendors, primarily Nokia, which materially affected the Company's revenue stream in its Asia-Pacific region, i.e., China and Taiwan." Cplt. ¶ 13(d).

A March 1999 newspaper story reproduced in the complaint corroborates plaintiffs' allegation that Brightpoint had problems receiving products from Nokia. The article states that Nokia had been unable to manufacture enough telephones at its plants in China. As a result of heavy demand, Nokia began to ration telephones to distributors and gave Brightpoint only half the supply it requested. Brightpoint could not augment its supply from elsewhere due to import restrictions. Cplt. ¶ 94.

Another press release supports the claim that Brightpoint's "internal" problems with product supply were not a market-wide phenomenon. Plaintiffs allege that Brightpoint's primary competitor, CellStar Corporation, suffered no similar product shortfall in the Asia-Pacific region during the same time period. Cplt. ¶ 97.

Accepting plaintiffs' supporting facts regarding Nokia and CellStar as true, the complaint still fails to support a "strong inference" of scienter for defendants' January 1999 forward-looking statements concerning Brightpoint's revenue and income projections for the upcoming year. See 15 U.S.C. § 78u-5(c)(1)(B) (plaintiffs must prove that forward-looking statements were made or approved by an individual with actual knowledge that the statements were false or misleading). Plaintiffs fail to explain why the supply problems with Nokia were a known consequence of discontinuing the trading division or how continuing trading activities obviously would have alleviated the product shortfalls such that Brightpoint's optimistic January 1999 statements lacked a reasonable basis. See, e.g., In re Advanta Corp. Securities Litigation, 180 F.3d at 536 (complaint did not plead any specific facts to support an inference that anyone at defendant company had actual knowledge of forward-looking statement's falsity); Arazie v. Mullane, 2 F.3d 1456, 1465-67 (7th Cir. 1993) (plaintiffs failed to plead particular facts showing defendants' allegedly fraudulent statements lacked a reasonable basis: "Plaintiffs' references to unreleased or internal information that allegedly contradict the public statements are scanty.").

Rather than supporting a strong inference of intentional or reckless fraud, the facts as alleged are more consistent with a conclusion that CellStar's supply strategy simply left it better prepared than Brightpoint to deal with an unexpected supply shortage during a period of high demand. See, e.g., Cplt. ¶ 57 (statement of third party indicating that the two companies had a different supply strategy). "A plaintiff need not disprove every conceivable rationale a defendant might put forward to explain why a particular statement was made. However, if the facts alleged do not exclude other plausible explanations that would undercut a plaintiff's circumstantial inference of scienter, then that plaintiff's facts cannot be fairly said to raise a `strong inference' that the defendant acted with the required state of mind." Bryant v. Avado Brands, Inc., 100 F. Supp.2d 1368, 1376 (M.D.Ga. 2000). This court agrees, and that analysis applies to the supply shortage issue here. This analysis is exacting review of a complaint on a motion to dismiss, but that is what the PSLRA requires, especially where the heart of the complaint is alleged based on information and belief.⁸

8 A third-party statement reproduced in the complaint indicates that demand for at least some cellular products in China remained high during the first quarter of 1999. See Cplt. ¶ 94. Strong demand would actually confirm some of Brightpoint's early optimism as to its prospects in international markets, despite the allegation that its supply problems left it unable to take full advantage of the demand.

Plaintiffs argue in their brief that Brightpoint ignored an obvious "red flag" regarding problems in Asia because defendants knew in January 1999 that sales in the Asia-Pacific division had decreased 10% in 1998 as compared to 1997. See Pl. Br. at 17 n. 17; citing Cplt. ¶ 84. The allegation is based on a misreading of the financial report in paragraph 84 of the complaint. Plaintiffs have mistaken a decline in the percentage of sales from the Asia-Pacific region for an actual decline in sales. The difference is significant. The source plaintiffs cite for their claim of falling sales in Asia actually states that the "Asia-Pacific region accounted for 32 percent of sales [in 1998], down from 42 percent of sales during 1997." Cplt. ¶ 84. That same article actually compliments Brightpoint on the "striking balance" the company had achieved among its several geographic markets during 1998. Id. The balance was achieved through particularly strong sales increases in other regions, not through a 10% decrease in sales in the Asia-Pacific region. Id. Elsewhere in the complaint, plaintiffs have reproduced financial information indicating that 1998 sales in the Asia-Pacific region increased by over $100 million as compared to 1997 sales. See Cplt. ¶ 71.

The timing of Brightpoint's disclosures concerning its supply problems is certainly not inherently suspicious or sufficient to support a "strong inference" of scienter. Brightpoint disclosed the supply problems before the end of the quarter in which plaintiffs allege the problems began. Even corporations with sophisticated internal reporting systems are not expected to announce publicly each emerging revenue trend before they have a reasonable opportunity to investigate the scope of the problem and to make a reasonably certain estimate of its bottom-line impact. See Grossman v. Novell, Inc., 120 F.3d at 1125. The allegations concerning Brightpoint's supply problems are yet another instance where the plaintiffs have failed to surpass the hurdle of claiming something more than that defendants "must have known" about the problem at the time of their upbeat statements in January 1999.

B. The Devaluation of the Brazilian Real

In addition to Brightpoint's difficulty obtaining an adequate supply of product from its vendors in China, Brightpoint's March 10, 1999, earnings warning also disclosed that the January 1999 devaluation of the Brazilian Real would contribute to Brightpoint's inability to achieve estimated revenue and earnings projections during the first quarter of 1999. Cplt. ¶ 87.

Nearly all of Brightpoint's transactions in Brazil during the relevant period were denominated in the Brazilian Real. Brazil devalued its currency on January 13, 1999. As a result, Brightpoint's Latin American operation's contribution to consolidated revenues fell during the first quarter of 1999. Cplt. ¶ 87. Plaintiffs allege that, in spite of this apparent cause and effect relationship, Brightpoint officials held a conference call on January 28, 1999, where the company stated that Latin America was stable and that the devaluation of the Real would actually have a "positive" impact on Brightpoint. Cplt. ¶ 82. Further, plaintiffs allege, this expression of confidence was made with the knowledge that the "Latin America Division was being adversely impacted due to currency fluctuations both prior to and immediately after the January 13, 1999, devaluation. . . ." Cplt. ¶ 13(e).⁹

9 Plaintiffs do not quantify the significance of the devaluation in dollar terms. Reports excerpted in the complaint indicate that (1) the Latin America division accounted for 12 % of 1998 revenues, Cplt. ¶ 84, (2) Brazil contributed well over half of the division's revenues, Cplt. ¶ 55, and (3) during the first quarter of 1999, the average exchange rate for the Real was approximately 32% lower than the average exchange rate in the fourth quarter of 1998. Cplt. ¶ 98. On a related note, there is no factual foundation alleged in the complaint to support plaintiffs' conclusory allegation that Brightpoint's "Latin America Division was being adversely impacted due to currency fluctuations . . . prior to . . . the January 13, 1999, devaluation." Cplt. ¶ 13(e) (emphasis added).

Plaintiffs do not provide any further information or context for this allegation beyond the assertion that a conference call took place and that an unidentified person stated that the impact of devaluation would be "positive." Cplt. ¶ 82. The only other references to the conference call that appear in the complaint are equally vague. See Cplt. ¶ 89 (quoting electronic messages posted by anonymous members of the public on the Yahoo! Finance Message Board); Cplt. ¶ 91 (quoting commentary from an Internet site stating that Brightpoint told analysts on January 28, 1999, that business was fine and "never warned that the Brazilian devaluation would be a problem").

Vagueness issues aside, the court must still drawing reasonable inferences in plaintiffs' favor. The court therefore assumes that the statement actually referred to the effects of devaluation during the relevant fiscal year. Even allowing this assumption, however, the allegations concerning the devaluation of the Brazilian Real do not support a "strong inference" of scienter. First, Brightpoint publicly reported the negative impact of devaluation within weeks after the actual event and the company's forward-looking statement that devaluation would be positive. Second, there was a reasonable scenario under which devaluation would not necessarily have been damaging to Brightpoint's 1999 revenues. The scenario is explained in a third-party analyst's report quoted in the complaint:

We believe concerns regarding Brightpoint's exposure in emerging markets, particularly China and Brazil, are largely overstated. . . . While a devaluation would likely have near-term top-line impact, margins are largely protected via purchasing product from local manufacturing and foreign exchange contracts. While skeptics note that a devaluation could lessen consumer demand, we counter that teledensity in these market[s] remains low and telecommunications are viewed as vital to long-term national interests. We further note that Brazil maintains waiting lists for telecommunications in excess of one million customers. Any devaluation would likely cap 1999 upside rather than detract from existing estimates.

Cplt. ¶ 55 (securities analyst statement issued on September 14, 1998).

The scenario outlined by the securities analyst allowed for a "near-term top-line" impact without detracting from 1999 consensus estimates. Nothing in the complaint suggests that Brightpoint's alleged statements were inconsistent with such a scenario or that defendants had information in January 1999 that would have made a "positive" view on devaluation so unreasonable as to support an inference of scienter. See Bryant v. Avado Brands, Inc., 100 F. Supp.2d at 1376 (where facts alleged do not exclude other plausible explanations that would undercut an inference of scienter, the allegations do not support a "strong inference" of fraudulent scienter). If plaintiffs believe that the pleading standard unfairly prevents them from discovering facts that would support a plausible claim, the response is that Congress has mandated such a result. Id. at 1377; see also Greebel, 194 F.3d at 196 n. 9 ("In the guise of tinkering with procedural requirements, Congress has effectively, for policy reasons, made it substantively harder for plaintiffs to bring securities fraud cases, through the `strong inference' of scienter requirement.").

C. Brightpoint's Contracts, Credit Policies, and Revenue Recognition Practices

Plaintiffs also claim fraud with respect to alleged high-risk contracts, liberal credit policies, and improper revenue recognition practices. Cplt. ¶¶ 13(f), 13(g), 115. Plaintiffs claim that Brightpoint failed to disclose the risk associated with these practices and concealed the deceptive effect they had on Brightpoint's 1998 financial statements. Instead, say plaintiffs, the company issued repeated positive statements concerning its current and projected earnings. Cplt. ¶¶ 9, 13(j), 14. For example, plaintiffs contend that the following portions of press releases contained misleading statements because they were issued with knowledge that 1998 revenues had been inflated artificially and with knowledge that Brightpoint could not fulfill analysts' earnings and growth expectations:

. . . . Net sales for the third quarter of 1998 increased 83% to $445,772,000 as compared to $243,210,000 for the third quarter of 1997. . . . The increases in net sales reflect continued strength in the demand for wireless products and for the Company's value-added logistics services. The Company believes that it has continued to increase its share of the global wireless handset market during the first nine months of 1998. Net sales in the third quarter of 1998 grew 35% when compared to the second quarter of 1998 due primarily to the rapid migration from sales to other distributors to direct sales, taking advantage of the Company's newly-established in-country presences in the Europe, Middle East and Africa and Asia-Pacific divisions.

Cplt. ¶ 68 (statement of October 22, 1998).

. . . . Revenue in the quarter and year ended December 31, 1998 increased 37% and 57%, respectively, when compared to the same periods in the prior year. These increases reflect the continued growth in demand for the Company's distribution and integrated logistics services in markets around the world. The Company believes that it has continued to increase its share of the global wireless handset market during 1998.

Cplt. ¶ 81 (statement of January 28, 1999).

Plaintiffs' claims concerning Brightpoint's alleged high-risk contracts, liberal credit policies, and improper revenue recognition practices range from fairly specific allegations that simply fail to suggest fraud to very general allegations that any plaintiff could make against any company at any time. These allegations do not support a "strong inference" of scienter.

1. Brightpoint's Agreements with Iridium and Kyocera

In 1998, Brightpoint announced that it had reached new agreements with Iridium, LLC, and Kyocera Corporation. Cplt. ¶¶ 6, 52, 67. The agreements with both companies, at least in part, were related to Iridium's proposed (but ill-fated) satellite-based global wireless network. Cplt. ¶¶ 52, 67.¹⁰ Notwithstanding some obvious risk associated with the fact that the Iridium satellite network was a new project not yet in operation, both Brightpoint and securities analysts expected that these agreements would contribute significantly to 1999 revenues. Cplt. ¶¶ 51, 71, 87.

10 The Iridium network was supposed to be active beginning in September 1998. Cplt. ¶ 51. In addition to providing services for Iridium, Brightpoint had agreed to provide distribution and logistics services for Kyocera products designed specifically for use on the proposed Iridium network. Cplt. ¶ 52.

Brightpoint and securities analysts were wrong about the potential of the company's agreements with Iridium and Kyocera. In its March 10, 1999, press release Brightpoint announced that, due to "the limited activity experienced by Iridium and the later than anticipated availability of Kyocera handsets, these agreements have resulted in only nominal sources of revenue and operating income." Cplt. ¶ 87. Iridium apparently filed for bankruptcy in August 1999. Cplt. ¶ 13(g).

Plaintiffs allege that defendants misled investors and analysts about the value of the Iridium and Kyocera agreements in order to make their claims concerning Brightpoint's market position and potential earnings more believable. Cplt. ¶ 85(j). Specifically, plaintiffs contend that defendants knew or recklessly disregarded that Iridium was fiscally unsound and that the agreements would in fact be unprofitable. Cplt. ¶¶ 13(g), 14. Plaintiffs have pled no additional facts in support of these allegations. The only information that appears in the complaint is that (1) defendants released factually accurate statements concerning the existence of the Iridium and Kyocera agreements in 1998, (2) defendants announced during January 1999 that Brightpoint's financial prospects for 1999 remained in line with expectations, and (3) defendants announced in March 1999 that, in spite of initial expectations, the Iridium and Kyocera agreements had generated only nominal revenues and were a cause of Brightpoint's poor performance during that quarter.

Based on these allegations, there is no reason to infer that defendants knew about or recklessly ignored Iridium's bleak prospects at the time they first announced the agreements or in January 1999 when they expressed confidence in Brightpoint's outlook. Plaintiffs' unsupported allegations are as consistent with a failure to predict the future accurately as they are with fraud. See In re Advanta Corp. Securities Litigation, 180 F.3d at 540 ("At most, the complaint demonstrates that Advanta embarked on a business strategy of aggressively recruiting new customers without adequately accounting for the increased risk this endeavor posed. None of the facts in the complaint suggests this strategy represented an egregious departure from the range of reasonable business decisions, as opposed to simple mismanagement."). The PSLRA requires that such speculative claims be dismissed at the pleading stage.

2. Contract Financing Receivables

Plaintiffs also allege that defendants inflated revenues during the class period through the use of financing arrangements, called "contract financing receivables," whereby Brightpoint loaned purchase money to high-risk, credit-poor customers. Brightpoint then warehoused the products until the units were actually sold. Cplt. ¶ 85(f). Plaintiffs allege that defendants' credit and revenue recognition policies related to contract financing receivables subjected Brightpoint to substantial but unacknowledged credit risk and created artificial demand for the company's products. Cplt. ¶¶ 13(f), 117, 120-21. Thus, contrary to defendants' representations during 1998 and early 1999, plaintiffs contend that "Brightpoint was not on track to generate strong revenue and earnings growth in fiscal 1999." Cplt. ¶ 14.

Despite these relatively specific allegations, plaintiffs cannot credibly contend that investors were deceived by a failure to disclose the use of contract financing receivables in the news wire statements that discussed Brightpoint's financial performance, or that any such failure was made with fraudulent scienter. The complaint itself indicates that Brightpoint's financial statements contained a line item specifically identified as "contract financing receivables." Cplt. ¶ 48. The complaint itself also shows that the alleged risks were known to the investing public well in advance of the class period. A news commentary from January 16, 1998, nine months before the class period began, specifically identified Brightpoint's use of contract financing receivables as a reason to be skeptical about Brightpoint's valuation in comparison to the valuation of its primary competitor, CellStar. Cplt. ¶ 48. The report also indicated that many investors had become active in short-selling Brightpoint's stock specifically because they thought the practice was unsound. Id.

Even if the court fully credits the information-and-belief allegation that the use of contract financing receivables was a high-risk practice that increased revenue during the class period beyond what it otherwise might have been, investors simply cannot claim to have been deceived by the practice. Moreover, the combination of the disclosure in Brightpoint's financial statements and the public discussion of the issue preclude any "strong inference" that the failure to mention the accounting practice in the press releases was supported by fraudulent scienter.

Plaintiffs also claim that Brightpoint's recognition of income from the purchase-money financing arrangements violated Generally Accepted Accounting Principles (GAAP). However, the alleged GAAP violation adds insignificant weight to plaintiffs' fraud claim since the company had disclosed to investors what the "contracting financing receivables" were. See, e.g., Chu v. Sabratek Corp., 100 F. Supp.2d 827, 838 (N.D.Ill. 2000) ( Chu II) (alleged GAAP violations due to improper recognition of consignment sales, discount sales, and inventory parking may have been sufficient to establish that financial statements contained misrepresentation, but were insufficient to demonstrate strong inference of scienter where plaintiffs failed to relate alleged violations to any specific financial statement and company had disclosed to investors that it recognized sales upon shipment).

3. Brightpoint's Tightening of Credit Terms During 1999

Plaintiffs also allege that Brightpoint's statements concerning its 1998 revenues and 1999 projected revenues were materially misleading because the company's "credit policies, primarily overseas in its Asia-Pacific and Latin American divisions, were not prudent but rather poorly structured and materially detrimental to Brightpoint's financial condition." Cplt. ¶ 85(f). Defendants allegedly failed to disclose that Brightpoint "regularly offered open account terms to an increasing number of customers in order to `expand operations' which subjected Brightpoint to substantial credit risk." Id.

The origin of this claim is clear. On March 10, 1999, Brightpoint disclosed that, among the causes of its newly pessimistic outlook for 1999, the company had tightened credit policies in response to "recent economic uncertainties" in the Asia-Pacific and Latin America divisions. Cplt. ¶ 87. As a result, Brightpoint acknowledged that it might have lost sales to competitors who were willing to offer better prices and credit terms than Brightpoint believed to be prudent. Id.

Plaintiffs' allegations of fraud on this issue are based on the assumption that, because Brightpoint tightened its credit policies during the first quarter of 1999, the policies that preceded the tightening were so risky as to have been at least reckless. Overly liberal credit policies, plaintiffs contend, raised 1998 revenues beyond sustainable levels and also subjected the company to undisclosed credit risk.

The mere fact that Brightpoint tightened its credit policies obviously does not suggest fraud. In an attempt to add some measure of specificity to support their claim that Brightpoint's credit policies were part of a fraudulent scheme to inflate revenues, plaintiffs have alleged that "Brightpoint is currently attempting to collect $17.1 million from Star Digital for failing to settle a bill for telephone equipment delivered by the Company between November 1997 and February 1999." Cplt. ¶ 85(f). Plaintiffs claim, based on information and belief, that the alleged losses from Star Digital were the result of imprudent credit policies and that defendants failed to write down the value of uncollectible Star Digital receivables — another alleged GAAP violation.

The knowing or reckless dissemination of misleading financial reports caused by an overstatement of earnings (along with accompanying accounting violations) could support a claim of securities fraud. In Chu II, for example, the defendant company had improperly characterized $39 million in research and development expenses as "intangible assets." 100 F. Supp.2d at 839-40. By placing the expenses in the "plus" column of its financial statements, the company was able to report significant net earnings rather than significant losses during the relevant time periods. The district court denied a motion to dismiss, at least as to some defendants, finding that the allegations in the complaint pled the circumstances of fraud with particularity and gave rise to a strong inference of intent or recklessness. Id. In support of their claim, the plaintiffs had relied upon the company's admitted need to restate the assets as expenses, the magnitude of the mischaracterization, an admission from one defendant that the company had worked with its auditor to get the expenses "off the books," and the unexplained and undocumented rise in intangible assets from 1% to 21% of total assets. Id. The plaintiffs' allegations of fraud in this case fall short of the specific facts alleged in Chu II.¹¹

11 The court in Chu II dismissed the portion of the plaintiffs' complaint alleging the company had declared present income from future or non-existent sales, finding that the assertions did not establish a strong inference of fraudulent intent. As to those claims, the level of specificity was comparable to plaintiffs' claims here. See 100 F. Supp.2d at 838-39.

Here, the allegation that Brightpoint recklessly granted credit-poor customers favorable account terms and improperly recognized revenue from those transactions rests exclusively on the existence of Brightpoint's lawsuit against Star Digital. Plaintiffs provide no other factual basis for their claim that Brightpoint made a practice of overstating revenues as a result of its credit policies. Plaintiffs do not allege the total magnitude of the overstatements or losses, they do not connect the claims to any specific financial statements, nor do they identify with any specificity the nature of the credit terms offered. Apart from implying that Brightpoint offered liberal credit terms to Star Digital — which is one of many inferences one might draw from the bare fact that Star Digital apparently did not pay its bills — plaintiffs do not even allege to whom credit was recklessly granted. See, e.g., Greebel, 194 F.3d at 203-06 (dismissing excessively general allegations that company improperly booked contingent sales and failed to reserve adequately for returns; evidence of specific transactions might have shown that some sales had been improperly booked, but it was "a leap from there to show a strong inference of scienter").

The facts alleged in the complaint indicate only that Brightpoint has sued Star Digital for non-payment and that Brightpoint may not receive that money. That does not support a strong inference of scienter regarding the alleged fraudulent credit policies. See DiLeo, 901 F.2d at 627 ("If all that is involved is a dispute about the timing of the writeoff, based on estimates of the probability that a particular debtor will pay, we do not have fraud; we may not even have negligence.").

E. Brightpoint's First Quarter 1999 Accounting Charge

As part of the March 10, 1999, earnings warning, Brightpoint announced that it would take a $12 million to $15 million accounting charge for the first quarter pursuant to the required adoption of American Institute of Certified Public Accountants Statement of Position 98-5 ("SOP 98-5"). Brightpoint explained the charge as follows:

The Company will also record in the first quarter of 1999 a cumulative effect adjustment for a change in accounting principle. The change in accounting principle results from the required adoption of American Institute of Certified Public Accountants Statement of Position 98-5, Reporting the Costs of Start-up Activities, which requires the write-off of unamortized pre-operating and organizational costs that were previously capitalized in accordance with generally accepted accounting principles then in effect. The adjustment for the write-off of these amounts, which will be shown net of tax and after earnings from continuing operations, is expected to range from $12 million ($0.22 per share) to $15 million ($0.28 per share).

Cplt. ¶ 87. Plaintiffs allege that defendants' disclosure of this charge came too late and that the charge was "the result of defendants' failure to act in accordance with the appropriate SEC and GAAP guidelines. . . ." Cplt. ¶ 85(h).

As for the timing of the disclosure, plaintiffs have not alleged that SOP 98-5 applied to Brightpoint before 1999. SOP 98-5 was promulgated on April 3, 1998. Plaintiffs claim that defendants knew as of that date that SOP 98-5 would apply to the company in 1999. Cplt. ¶ 85(h). Thus, the allegation is that Brightpoint should have discovered and revealed prior to March 10, 1999, that the accounting change would have a significant detrimental effect on the company's 1999 financial statements. Cplt. ¶ 85(h).

In November 1998, Brightpoint's public filings with the SEC stated that the company was "currently evaluating the effect that [SOP 98-5] might have on its results of operations and financial position." The SEC filing explained that the pronouncement required the company to expense the cost of certain start-up activities and that "the initial application [of SOP 98-5] must be reported as the cumulative effect of a change in accounting principle." See Brightpoint, Inc., Form 10-Q, at 10 (Nov. 16, 1998) (this document is available through the SEC's EDGAR database at http://www.sec.gov/Archives/edgar/data/918946/0000950124-98-006718.txt).

Plaintiffs have not alleged any facts to support a claim that any defendant knew the actual impact of SOP 98-5 prior to the fiscal quarter in which the change actually applied to the company. Instead, plaintiffs' allegation rests on speculation — perhaps even reasonable speculation — that someone might have known about the multi-million dollar charge prior to March 1999. However, the pleading requirements that apply to securities fraud cases do not allow plaintiffs the leeway to file a lawsuit for the purpose of conducting discovery to investigate their hunches.

Plaintiffs do allege that the special accounting charge resulted from defendants' failure to act in accordance with the appropriate SEC and GAAP guidelines. Cplt. ¶ 85(h). However, the complaint provides no further facts that would connect the accounting charge to SEC or GAAP violations. The fact that SOP 98-5 did not apply to Brightpoint until 1999, without further explanation, contradicts plaintiffs' apparent theory that Brightpoint intentionally violated SEC or GAAP guidelines by not adhering to SOP 98-5 before 1999.¹² Because plaintiffs have alleged no facts suggesting that the accounting charge was caused by fraud, argument about the exact timing of the disclosure — within reasonable bounds — is misplaced. See DiLeo, 901 F.2d at 627 ("Shifting these losses from one group of investors to another does not diminish their amplitude, any more than rearranging the deck chairs on the Titanic prevents its sinking. Revealing the bad loans earlier might have helped the DiLeos, but it would have injured other investors by an equal amount. The net is a wash.").

12 Perhaps plaintiffs' vague claim that Brightpoint was plagued by "internal inefficiencies" with respect to forecasting and financial control was intended to be read as an allegation that these internal deficiencies resulted in defendants' reckless or intentional failure to disclose the significance of SOP 98-5 prior to March 10, 1999. Cplt. ¶¶ 85(i), 114. However, such vague allegations certainly do not satisfy the specificity requirements established by Rule 9(b) and the PSLRA.

III. "Control Person" Liability Under § 20(a)

Plaintiffs allege under § 20(a) of the Securities Exchange Act that the individual defendants are liable as "controlling persons" of Brightpoint. See 15 U.S.C. § 78t(a); Donohoe v. Consolidated Operating Production Corp., 982 F.2d 1130, 1138-39 (7th Cir. 1992) (defendants are control persons if they exercised general control over the operations of the entity principally liable and possessed the power or ability to control the specific transaction or activity upon which the primary violation was predicated, even if such power was not exercised). A claim for recovery under § 20(a) is merely a derivative claim, cognizable only where plaintiffs sufficiently allege a "primary" violation of § 10(b) and Rule 10b-5. See In re Allied Products Corp. Securities Litigation, No. 99 C 3597, 2000 WL 1721042, *2 (N.D.Ill. Nov. 15, 2000). Because the court concludes that plaintiffs have not stated a claim for a primary violation, Count II alleging control person liability is also dismissed.

IV. Leave to Amend

This entry addresses plaintiffs' 62-page "Consolidated Amended Complaint," which superseded the pleadings filed in the several actions consolidated here. The PSLRA expressly mandates dismissal of complaints that do not conform to its requirements, 15 U.S.C. § 78u-4(b)(3)(A), so plaintiffs had every incentive to include all facts in the Consolidated Amended Complaint that might have arguably supported their claims. Plaintiffs also had six months between the date they filed their original complaint and the date they filed the Consolidated Amended Complaint to conduct further investigation, albeit without the benefit of the tools of formal discovery. Plaintiffs have not argued that any new facts have emerged, and it seems unlikely that plaintiffs omitted additional, relevant facts from the Consolidated Amended Complaint on the mistaken belief that they had met the pleading requirements.

Nonetheless, plaintiffs have requested leave to amend their Consolidated Amended Complaint under Fed.R.Civ.P. 15(a) if the court finds it "necessary or desirable" for plaintiffs to do so. Pl. Br. at 30 n. 30. Leave to amend should be granted under Rule 15(a) unless there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment." Ferguson v. Roberts, 11 F.3d 696, 706 (7th Cir. 1993), quoting Foman v. Davis, 371 U.S. 178, 182 (1962).

A footnote in a response brief is an improper vehicle for requesting such leave. However, subject to the constraints imposed by Rule 11, plaintiffs may seek leave to amend by filing the proper motion before this court within 28 days of the date of this entry. If no such motion is filed, the court will enter final judgment dismissing the action.

Conclusion

As explained above, the PSLRA has made it substantially harder for plaintiffs to pursue lawsuits alleging securities fraud. Plaintiffs' allegations on information and belief and their conclusory assertions of fraudulent scienter are not sufficient to withstand a motion to dismiss or to provide plaintiffs the keys to the kingdom of civil discovery. Rule 9(b) and the PSLRA dictate that a drop in stock price, even a big drop, after a public announcement of bad news, is not the equivalent of an invitation for shareholders to think of a plausible theory of fraud, file suit, and then sort out the details later. The complaint is dismissed. If no motion for leave to file an amended complaint is filed by April 26, 2001, the court will enter final judgment dismissing the consolidated case.

So ordered.