Opinion
No. C 01-3224 SI and consolidated cases
May 14, 2002
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS
On May 10, 2002, this Court heard argument on defendants' motions to dismiss these actions. Having considered the argument of the parties and the papers submitted, the Court hereby GRANTS defendants' motions for the reasons set forth below.
BACKGROUND
These related cases involve class action lawsuits brought by investors in iAsia Works, Inc. of the Securities Exchange Act of 1934 (the "Act"). In their Consolidated Amended Class Action ("iAsia") against iAsia, its officers and board members, and its underwriters, under §§ 11 and 12(a)(2) Complaint ("Compl."), plaintiffs describe themselves as purchasers of iAsia common stock between August 3, 2000 and November 27, 2000. Compl. at ¶ 1. iAsia is an American company that, until recently, provided high-speed Internet access to business clients in Asian countries. Compl. at ¶ 2. On August 3, 2000, iAsia completed an initial public offering ("IPO") to fund an expansion involving the building of large "Internet Data Centers" ("IDCs") in various Asian countries to house equipment necessary to provide expanded internet-related services. Compl. at ¶ 2. Through its IPO, iAsia sold 9 million shares of common stock at $13 per share, raising $108.8 million in proceeds. Compl. at ¶ 2.
Plaintiffs allege that iAsia's Registration Statement and Prospectus, filed with the SEC on August 3, 2000, "emphasized that the IDCs would cost approximately $20-30 million each, based on an average facility size of approximately 50,000 square feet." Compl. at ¶ 4. Plaintiffs allege that, in fact, iAsia had already begun work on IDCs that were much larger and more expensive. Compl. at ¶ 4. Specifically, plaintiffs allege that, in November 1999, iAsia began construction of a 99,000 square foot IDC in Hong Kong, and that in March 2000, iAsia "signed a lease in Hong Kong for property in excess of 80,000 square feet that would be replaced by the under-construction IDC." Compl. at ¶ 4. Plaintiffs further allege that iAsia "was also preparing to build even larger IDCs on land purchased in Taiwan and South Korea." Compl. at ¶ 4.
As discussed below, the prospectus does not, in fact, contain such a representation.
Plaintiffs allege that these larger IDCs were planned in accordance with iAsia's true business plan, prepared by iAsia and its underwriters but not disseminated to the public, in which iAsia would establish IDCs averaging 120,000 square feet in size and costing in excess of $50 million each to build. Compl. at ¶ 4. Plaintiffs allege that iAsia's prospectus omitted mention of this business plan and of the steps already taken to build the larger IDCs. Compl. at ¶ 4. According to the complaint, had these facts been revealed, investors would have known that the IPO proceeds were inadequate to fund iAsia's business plan. Compl. at ¶ 5.
On November 27, 2000, Asia revealed that the Taiwan data center was 149,800 square feet in size, and that iAsia had borrowed $18.4 million to complete its construction. Compl. at ¶ 6. Plaintiffs allege that the stock price declined upon this announcement, losing 43% of its value in two days, and more than 99% of its value by February 1, 2002. Compl. at ¶ 7. Plaintiffs allege that two other announcements also contributed to the decline in the value of iAsia's stock: one, weeks before the November 27 announcement, that the IDC in South Korea was 115,000 square feet in size, and another, on February 21, 2001, that a third IDC measuring 99,000 square feet would be constructed in Hong Kong to replace the one leased by iAsia prior to the IPO. Compl. at ¶ 6.
As a consequence of these events, six class action lawsuits were filed in the Southern District of New York, and transferred to this district on August 22, 2001. The cases were subsequently related and reassigned to the undersigned. By prior order of this Court, the cases were related, and Frank E. Scott and Radiant Advisors were appointed lead plaintiffs. Plaintiffs allege that the lead plaintiffs "purchased shares of iAsia Works common stock traceable to the IPO." Compl. at ¶ 11. iAsia and its officers and board members (collectively "iAsia") and the underwriter defendants moved to dismiss. Their motions are presently before this Court.
LEGAL STANDARDS
A. Rule 12(b)(6)
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012 (1984). In answering this question, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the pleadings suggest that the chance of recovery is remote, the Court must allow the plaintiff to develop the case at this stage of the proceedings. See United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). However, it is not "proper to assume that [a plaintiff] can prove the facts it has not alleged or that the defendants have violated [laws] in ways that have not been alleged." Associated General California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526, 103 S.Ct. 897, 902 (1983).
B. Rule 9(b)
Civil Rule 9(b) requires that "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally."
Federal Rule of Civil Procedure 9(b) has been applied extensively to securities fraud cases. Federal securities fraud claims, like common law fraud claims, are subject to the special pleading requirements of Rule 9 (b). Semegen v. Weidner, 780 F.2d 727, 730-31 (9th Cir. 1985). Rule 9(b) requires particularity in pleading the circumstances constituting fraud. In In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541 (9th Cir. 1994) (en banc), the Ninth Circuit interpreted the requirements of Rule 9(b) in a class action litigation. Plaintiffs argued that the District Court erred by dismissing their fraud complaint against Glenfed's officers and directors, who allegedly made misrepresentations and omissions to conceal Glenfed's deteriorating financial condition. The Circuit Court concluded that plaintiffs had marginally satisfied Rule 9 (b), but rejected plaintiffs' argument that the particularity required by Rule 9(b) could be satisfied simply by stating facts necessary to identify the transaction complained of. The Court stated that plaintiffs may aver scienter generally, but must state the "time, place, and content" of the alleged misrepresentation; and "an explanation as to why the statement or omission complained of was false or misleading." Id. at 1547-48.
C. The Securities Act
Section 11 of the Securities Act, 15 U.S.C. § 77k(a), states, in relevant part:
§ 77 k. Civil liabilities on account of false registration statement
(a) Persons possessing cause of action; persons liable
In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue — [signatories to the statement; directors or partners in the issuer; auditors; and underwriters].
Section 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a), states in part:
§ 771 Civil liabilities arising in connection with prospectuses and communications
(a) In general
Any person who —
* * *
(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraph (2) of subsection (1) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,
shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction . . . .
DISCUSSION
In its motion to dismiss, iAsia argues that plaintiffs' allegations concerning misstatements and omissions in iAsia's prospectus are disproved by the prospectus itself iAsia also argues that the statements and omissions are immaterial, and that the complaint sounds in fraud and should therefore be held to the heightened pleading requirements of Rule 9(b). Finally, iAsia argues that iAsia was not a "seller" of stock, and that plaintiff Frank Scott lacks standing to sue because he purchased his stock in the aftermarket, not in the iAsia IPO. The underwriter defendants emphasize that the complaint sounds in fraud as against all defendants, and argue that plaintiffs have not alleged particularized claims as to the underwriter defendants.A. Applicable Pleading Standard
The parties dispute the pleading standard applicable to plaintiffs' claims. Defendants argue that, although plaintiffs allege causes of action under §§ 11 and 12(a), plaintiffs' claims are in fact grounded in fraud and must therefore be held to the heightened pleading standard of Federal Rule of Civil Procedure 9(b). iAsia Defs.'s Mot. to Dismiss at 20:5-21:10. Plaintiffs maintain that the particularity requirement of Rule 9(b) does not apply here, because plaintiffs' claims do not allege an intent to deceive. Pls.'s Oppo. at 17:11-19:1. The three cases in this circuit upon which both parties primarily rely are In re Stac Electronics Securities Litigation, 89 F.3d 1399 (9th Cir. 1996), In re Harmonic, Inc. Securities Litigation, 163 F. Supp.2d 1079 (N.D. Cal. 2001), and In re CBT Group PLC Securities Litigation, 2000 U.S. Dis. LEXIS 19214 (N.D. Ca. 2000).
In Stac Electronics, the Ninth Circuit stated that "the particularity requirements of 9(b) apply to claims brought under Section 11 when . . . they are grounded in fraud." Id. at 1404-05. The Stac Electronics court affirmed the trial court's determination that the allegations in that case were grounded in fraud. Id. The plaintiffs had alleged that Stac went public knowing, but not disclosing, that Microsoft was about to introduce a competitive product that would deprive Stac of the market for its software product; that Stac engaged in sham licensing negotiations with Microsoft to forestall the introduction of the new product until after the IPO; and that Stac insiders had committed channel "stuffing" and other fraudulent practices to inflate the price of Stac's stock. Id. at 1402-03. The appeals court dismissed what it described as the plaintiffs' "nominal efforts" to disclaim any allegation of fraud, concluding that "the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims levied at the Prospectus." Id. at * 1405 n. 2. Judge Hamilton reached a similar result based on the complaint in Harmonic, Inc., 163 F. Supp.2d at 1088.
In In re CBT Group PLC Securities Litigation, 2000 U.S. Dis. LEXIS 19214 (N.D. Ca. 2000), in contrast, Judge Whyte determined that the plaintiffs' allegations were not grounded in fraud. Id. at *10-*11. In that case, investors sued EYI, an association of accountants and advisors coordinating the international operations of accounting firm Ernst Young; and EYCA, a member firm of EYI which had performed accounting and audit services for defendant company CBT. Id. at *3. The plaintiffs alleged that CBT's financial statements materially overstated the company's revenues and earnings. Id. at *7. They alleged that EYI and EYCA violated GAAP and GAAS when they improperly approved CBT's revenue recognition as to certain contracts. Id. In addition to allegations against CBT itself, the plaintiffs alleged that EYI and EYCA had failed to reasonably investigate the veracity of the statements contained in the Registration Statement, and lacked reasonable grounds for believing them to be true. Id. In light of these facts, the district court held:
[P]laintiffs have not alleged that EYCA acted fraudulently or intentionally when it certified the allegedly misleading and false financial statements. Plaintiffs also disclaim any allegation of fraud with respect to the Section 11 claim. Even looking past plaintiffs' disclaimer, the court finds that the allegations are grounded in the alleged falsity of the financial information and do not allege that EYCA participated in the preparation of knowingly false financial statements.Id. at *11.
In light of the preceding authority, this Court finds that, in the instant case, plaintiffs' allegations do sound in fraud. The complaint alleges that, at the time of its IPO, iAsia works intended, pursuant to an undisclosed business plan, to establish IDCs averaging 120,000 square feet and costing over $50 million to build, and had in fact begun establishing these large IDCs. See Compl. at ¶ 37. Plaintiffs allege that, instead of revealing their true plans, defendants distributed a prospectus representing the size and cost of the IDCs to be much smaller than they actually were. See Compl. at ¶¶ 42-43. Plaintiffs allege that subsequent statements by defendants continued to use the 50,000 square foot figure, resulting in the market becoming conditioned to believe that the IDCs would not be materially larger than 50,000 square feet. Compl. at ¶ 46. Plaintiffs also allege that defendants' publications failed to disclose the manner in which the larger IDCs would be financed. See Compl. at ¶ 49. Instead, plaintiffs allege, the prospectus stated only that "we may require additional financing," although "[b]uried deep within the Form 10-Q was the Company's true cost estimate" for the IDCs. See Compl. at ¶ 52.
Given these factual allegations, the gravamen of plaintiffs' complaint is that defendants deliberately concealed facts known to them, namely, the true size and cost of the IDCs and the necessity of debt financing to fund their construction, to ensure the success of the iAsia IPO. Plaintiffs allege that, contrary to statements contained in the prospectus, iAsia was proceeding with its "true business plan" which it kept hidden from investors. See Compl. at ¶ 5. Far from the factual allegations in CBT Group, which involved accountants' departure from accounting and auditing standards, the gist of the allegations here is that iAsia's prospectus and other publications were intentionally worded to create a misimpression among investors. See Harmonic, Inc., 163 F. Supp.2d 1079, 1088-89 (finding that plaintiffs' §§ 11 and 12 claims "plainly sound in fraud" when the "essence" of the claims was that defendants had deliberately withheld unfavorable information concerning reductions in sales to two major customers). Accordingly, the Court concludes that plaintiffs' complaint does sound in fraud, and must be held to the heightened pleading standard embodied in Rule 9(b).
B. Whether the Complaint States a Cause of Action Under Rule 9(b)
Defendants argue that the allegations in the complaint do not satisfy the particularity requirement of Rule 9(b) because they are based on information and belief and do not contain sufficient factual detail. Defs.'s Mot. at 21:2-22:7. Plaintiffs do not dispute this, arguing only that if the Court does find their allegations insufficiently detailed, the consequence of such a finding should not be dismissal, but rather merely that "any allegations of fraud would be stripped from the claim," leaving intact the allegations of innocent or negligent misrepresentation. Pls.'s Oppo. at 19:2-11.
The Court finds that the complaint does, in fact, meet the requirements of Rule 9(b) as applied in the securities context. Federal Rule of Civil Procedure 9(b) requires: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). In Glenfed, the Ninth Circuit explained that under Rule 9(b), a complaint must aver with particularity the circumstances constituting fraud. Id. at 1547. TheGlenfed court found that it was insufficient simply to allege the facts necessary to identify the transaction complained of Id. Rather, a plaintiff must identify "[t]he time, place, and content of an alleged misrepresentation," and, in addition, circumstances indicating the falseness of the representation. Id. at 1547-48. Elaborating on this last requirement, the court explained that "a plaintiff must set forth . . . an explanation as to why the disputed statement was untrue or misleadingwhen made. This can be done most directly by pointing to inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants." Id. at 1549.
The complaint in the instant case appears to meet this standard. In the "Substantive Allegations" section of the complaint, plaintiffs identify the statements upon which this lawsuit is based, namely, iAsia's prospectuses, issued in April and August 2000, and specific statements subsequently made by iAsia, its representatives, and its underwriters.See Compl. at ¶¶ 39, 41, 42, 45, 46. The date of each statement is identified; and the "place" requirement is satisfied by the identification of the media source (e.g. PR Newswire) in which each alleged misrepresentation appeared. The complaint satisfies the second requirement of Glenfed by describing specific activities in which iAsia was allegedly engaged, contemporaneously with its making of the complained-of statements, which are at least arguably inconsistent with the public statements. In particular, plaintiffs allege that iAsia had acquired, begun constructing, or begun renovating properties in Hong Kong, Taiwan, and South Korea, which were allegedly materially larger and more expensive than they were revealed to be in the iAsia prospectuses, thus requiring immediate debt financing to complete. See Compl. at ¶ 37. By means of these contemporaneous, allegedly inconsistent facts, plaintiffs have set forth, with the required specificity, why the statements in question are alleged to have been false at that time they were made. See Glenfed, 42 F.3d at 1550. Whether or not these statements actually were materially misleading is discussed in the following section of this order; nonetheless the Court is satisfied that plaintiffs' complaint does comply with Rule 9(b).
C. Whether the Complaint Demonstrates That The Prospectus Was Misleading
The bulk of defendants' briefing is devoted to its argument that plaintiffs' allegations are based on a misreading of the iAsia prospectus, and that the prospectus is not, in fact misleading. Defs.'s Mot. to Dismiss at 10:11-16:5. Review of the contents of a prospectus at the pleadings stage is permitted to determine whether it actually contains the alleged misrepresentations and omits information alleged to have been omitted. See Stac Electronics, 89 F.3d 1399; O'Sullivan v. Trident Microsystems, Inc., 1994 WL 124453 (N.D. Cal. 1994); Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d. Cir. 1996). The appropriate form of review applied to allegations of material omissions has been described as follows:
While the meaning of a prospectus is ordinarily a jury question, where "disclosure is so obvious that reasonable minds cannot differ," the adequacy of disclosure can be determined as a matter of law. Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987), cert. denied, 484 U.S. 944 (1987). The test is a "reasonable investor" test. It asks whether an investor who had been reasonably diligent in reviewing the Prospectus would have been misled. A number of courts have dismissed complaints at the pleadings stage where they have been satisfied that the allegedly omitted information is known.O'Sullivan, 1994 WL 124453 at *4. The Court undertakes to determine whether "reasonable minds cannot differ" as to the adequacy of the disclosures in the iAsia documents at issue. The Court uses a "statement-by-statement" approach, viewing each statement in the context in which it was made. Id. at *3.
1. Disclosures Concerning the Size of the IDCs
Plaintiffs allege that iAsia made a misstatement to its investors when it stated in its prospectus that "most" of the "large-scale" IDCs to be built were "expected to exceed 50,000 square feet." Compl. at ¶ 42;See Defs.'s Request for Judicial Notice, Ex. A ("Prosp.") at 3. Plaintiffs argue that this statement was misleading in light of iAsia having already acquired and constructed IDCs whose size was much greater than 50,000 feet, specifically, that construction had begun on a 99,000 square foot facility in Hong Kong, and a 149,000 square foot building in Taiwan, and that iAsia was seeking properties of between 89,000 and 135,000 square feet in size. See Compl. at ¶ 37; Pls.'s Oppo. at 10:6-27. Plaintiffs argue that the statement that "most" of the facilities would "exceed 50,000 feet," combined with defendants' failure to disclose the size of the IDCs then being built, misled the investing public into believing that "the facilities would measure both slightly less and slightly more than 50,000 square feet." Pls.'s Oppo. at 11:7-18.
Defendants request judicial notice of the iAsia Prospectus, the S-1 Registration Statement, the Form 10-Q filed on November 14, 2000, an iAsia press release dated November 27, 2000, and a chart of daily stock prices for iAsia. Dfs.'s Request for Judicial Notice, Exs. A-E. Defendants' request is unopposed, and the Court finds the documents submitted to be appropriate matters for judicial notice; the request is therefore GRANTED.
Contrary to defendants' assertion, the Court finds that plaintiffs do link the alleged omission to a statement allegedly rendered false by the omission. See Defs.'s Mot. to Dismiss at 14:8-21. Plaintiffs argue that Asia's failure to disclose the size of the three data centers it was constructing rendered misleading its statements concerning the "expected" size of the IDCs.
The Court finds that iAsia's statements and its alleged omissions regarding the size of the IDCs are plainly not misleading. iAsia's statements that the data centers would be "large-scale" and would exceed 50,000 square feet in size were accurate, as was the statement that iAsia planned to build IDCs in the future. iAsia's statements contained no implication of an upper limit to the IDCs' size. The Court therefore concludes that no reasonable investor would have understood the prospectus to mean that all of iAsia's IDCs would be approximately 50,000 square feet in size, nor that iAsia had not yet begun to build IDCs exceeding that size.
2. Disclosures Concerning the Cost of the IDCs
Plaintiffs' allegations concerning the cost of the IDCs depend in part on their allegations, discussed above, concerning the IDCs' size. Plaintiffs point to iAsia's statement:
For budgeting purposes and to estimate the use of proceeds of this offering, we have assumed that it will cost an average of $20 to $30 million to establish each Internet data center. However, based upon our experience to date and due to the factors described above, the actual cost of establishing each Internet data center may be significantly below or above this average cost range.
Prospectus at 31. Plaintiffs allege that defendants arrived at this figure by multiplying an average per-square foot cost of $400-$500 dollars by the 50,000 square foot estimated size of the IDCs. Compl. at ¶ 42. Plaintiffs allege that these representations were misleading because, prior to the IPO, defendants had already spent $50 million in South Korea alone on real estate and construction costs associated with its IDC. Compl. at ¶ 42. In the face of such present knowledge, argue plaintiffs, general statements of the contingency of iAsia's predictions concerning future costs cannot save defendants from liability. Pls.'s Oppo. at 12:21-13:22.
In answer to these allegations, defendants argue that iAsia's statements both revealed that the cost of the IDCs was uncertain, and disclosed that iAsia had entered into costly agreements in Taiwan, Korea, and Hong Kong. Defendant directs the Court to the following language of the prospectus:
Except as set forth above, we are unable to accurately predict the level of our capital expenditures associated with establishing new [IDCs]. . . . [w]e have entered into commitments for fiscal year 2000 and 2001, which are estimated to be $46.2 million and $8.8 million, respectively. Included in these commitments is our agreement to purchase a building and land in South Korea, which we intend to use primarily as an [IDC], our lease of an [IDC] facility in Hong Kong and our agreement to purchase a building and land in Taiwan, which we intend to use primarily as an [IDC]. . . .
Prospectus at 31.
Plaintiffs also point to what they describe as a disparity between cost estimates in the April and August prospectuses. Compl. at ¶¶ 39, 41. The April preliminary prospectus stated:
We intend to use the net proceeds of this offering over an approximate 12 month period. We estimate that we will use between $75 and $125 million of the proceeds for the establishment of additional Internet data center facilities and the remainder for general corporate purposes and acquisitions.
Compl. at ¶ 39. The August prospectus stated:
We intend to use the net proceeds of this offering over an approximate nine month period. We estimate that we will use between $60 and $90 million of the proceeds for the establishment of additional Internet data center facilities, the hiring of additional personnel and the remainder for general corporate purposes and acquisitions.
Compl. at ¶ 41. Plaintiffs allege that this later statement "created the appearance that defendants could complete IDC construction using only nine months' worth of funds provided by the offering." Pls.'s Oppo. at 13:23-14:4. To these allegations, defendants answer that the prospectus disclosed that iAsia's total lease and land purchase obligations alone would total over $64 million over five years, and $124 million over twelve years, of which $55 million was expressly included in the $60 to $90 million cost estimate for the IDCs. Defs.'s Mot. to Dismiss at 13:9-18; Prospectus at 31, F-28.
Upon reviewing the prospectus and registration statement in light of plaintiffs' allegations, the Court finds that these statements, like those concerning the size of the IDCs, would not have misled a reasonable investor. The statements relied upon by plaintiffs are self-evidently cost estimates, and are accompanied by disclaimers to the effect that the costs cannot be predicted and could vary significantly from the estimated amounts. The statements do not purport to represent the true cost of the IDCs. For the reasons described above, statements that the IDCs would "exceed 50,000 square feet" in size were not misleading; moreover, as defendants point out, the $400 to $500 per square foot figure appears nowhere in the prospectus, but is drawn from a statement filed three months after the prospectus, and therefore does not necessarily represent the company's per square foot cost estimate at the time the prospectus was issued. See Defs.'s Reply at 4:18-5:1. As for the alleged inconsistency between iAsia's April and August 2000 disclosures, the Court agrees with defendants that the smaller figure quoted ($60 to $90 million) over a shorter period of time (nine months) is not inconsistent with the larger figure previously quoted ($75 to $125 million) over a longer period of time (twelve months); the two passages from the prospectuses therefore do not demonstrate that the later prospectus was misleading. Accordingly, the Court concludes that plaintiffs have demonstrated no actionable statements or omissions by iAsia concerning the cost of the planned IDCs.
3. Disclosures Concerning the Adequacy of Funding
The final, related category of misstatements and omissions alleged by plaintiffs concerns the adequacy of the funds obtained by iAsia through its IPO to finance the construction of its IDCs. Plaintiffs allege that iAsia "pursued the IPO with an undisclosed intention of immediately seeking further financing to implement and fund its business plan," although its prospectus represented only that iAsia "may require additional financing" for the IDCs. Pls.'s Oppo. at 14:15-16. Plaintiffs assert that the cautionary language accompanying this statement was itself misleading because it concealed the fact that iAsia would certainly pursue debt financing. Pls.'s Oppo. at 14:19-15:1.
Plaintiffs' opposition cites to paragraphs 36 and 49 of the complaint for this proposition; these paragraphs do not, however, make quite the same assertion as the opposition brief.
Again, the Court agrees with defendants that the prospectus was not misleading in this respect. The entire disputed passage states:
Although we believe that the proceeds of this offering, together with our current cash and cash equivalents and our borrowing capacity, will be sufficient to fund our activities for at least the next nine months, we may require additional financing within this time frame and that additional funding, if needed, may not be available on terms acceptable to us or at all. In addition, we are regularly evaluating potential acquisitions, and we may need to rely on additional equity or debt financings to finance future acquisitions.
Prospectus at 32 (emphasis supplied). The first part of this passage discloses iAsia included its "borrowing capacity" in its evaluation of the funds available to it at the time the prospectus issued. The last part indicates that the company might have to go further in debt in the future. The Court concludes that no reasonable investor would have been misled this statement.
Because plaintiffs' claims are contradicted by the prospectuses on their face, plaintiffs' claims are DISMISSED.
CONCLUSION
For the foregoing reasons, the Court concludes that no reasonable investor could have found the statements contained in the iAsia prospectus to be misleading, and defendants' motions to dismiss are therefore GRANTED. [docket # 41, 43]. In their briefing, the parties dispute whether dismissal should be with or without prejudice. At oral argument, however, plaintiffs' counsel stated that, given the information currently in plaintiffs' possession, the defects identified by the Court in plaintiffs' complaint could not be cured by amendment, and he did not request leave to amend further.
Accordingly, plaintiffs' claims are DISMISSED with prejudice.
Having granted defendants' motions to dismiss based on the contents of the prospectus, the Court does not address defendants' arguments concerning iAsia's status as a "seller" of stock, or plaintiff Frank Scott's standing to sue.