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holding that the group pleading doctrine is inconsistent with the Reform Act
Summary of this case from In re AFC Enterprises, Inc. Securities LitigationOpinion
Civil Action No. 1:98-CV-1804-JOF
December 8, 2000
ORDER
This matter is before the court on Defendants' motion to dismiss the third amended consolidated class action complaint. Also before the court is Defendants' motion to file a reply in excess of the page limits established by the local rules of this court, Defendants' motion for leave to file supplemental authority, and Plaintiffs' motion for leave to file supplemental authority.
I. STATEMENT OF THE CASE
A. Procedural History
On August 24, 1998, a motion was made to the court to consolidate twenty-one class action lawsuits filed by Plaintiffs, known collectively as the "Caristo Group," against Premiere Technologies, Inc. ("Premiere"), and certain of its officers, alleging violations of both the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a, et seq., and the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a, et seq. Also on August 24, 1998, a group of five Plaintiffs called the "O'Neill Group" filed suit against Premiere and moved to consolidate. In an order dated November 18, 1998, the undersigned consolidated the actions, appointed co-lead Plaintiffs, and appointed co-lead counsel. In an order dated December 7, 1998, the court directed Plaintiffs to file and serve a consolidated amended complaint by January 8, 1999. Plaintiffs filed their consolidated amended class action complaint on that date, but they subsequently moved for leave to file a second amended consolidated complaint. The court granted Plaintiffs' motion.
In February 2000, Premiere announced that it had changed its name to "PTEK Holdings." (Complaint, at ¶ 24(a)). For purposes of this motion, however, the court will continue to refer to the company as "Premiere."
Defendants then moved to dismiss the second amended consolidated complaint, which alleged several counts under the Exchange Act, as well as violations of §§ 11, 12(a)(1), 12(a)(2), and 15 of the Securities Act. In an order dated December 10, 1999, the court granted in part and denied in part Defendants' motion. Finding that Plaintiffs had failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA" or "Act") of 1995, the court granted the motion and dismissed without prejudice all of Plaintiffs' claims under the Exchange Act. Additionally, the court dismissed with prejudice Plaintiffs' claims under § 12(a)(1) of the Securities Act on the ground that these claims were barred by the statute of limitations. Finally, the court denied Defendants' motion to dismiss as to Plaintiffs' claims under § 11, § 12(a)(2), and § 15 of the Securities Act.
The court subsequently entered a consent order allowing Plaintiffs to file a third amended consolidated class action complaint, and the third amended complaint was filed on February 29, 2000. In this complaint, Plaintiffs allege several violations of the federal securities laws against: Premiere; Boland T. Jones ("B. Jones"), Premiere's Chief Executive Officer ("CEO"); Patrick G. Jones ("P. Jones"), Premiere's Senior Vice President for Finance and Legal; Jeffrey A. Allred, Premiere's Executive Vice President of Strategic Development; George W. Baker, Sr., one of Premiere's directors; and Raymond A. Pirtle, Jr., another of Premiere's directors. Plaintiffs seek to represent a class consisting of all persons or entities that purchased or otherwise acquired Premiere common stock from February 11, 1997 through June 10, 1998 (the "class period"). Plaintiffs additionally seek to represent two subclasses: (1) the "Voice-Tel subclass," consisting of all persons who acquired Premiere common stock pursuant to a prospectus published by Premiere in connection with a public solicitation to purchase independent Voice-Tel Enterprises, Inc. ("Voice-Tel") franchises, conducted between April 1997 and June 1997; and (2) the "Xpedite subclass," consisting of all persons who acquired their Premiere common stock in exchange for previously held shares of Xpedite Systems, Inc. ("Xpedite"), pursuant to a Registration Statement, and a Joint Proxy Statement/Prospectus attached thereto, filed with the Securities Exchange Commission ("SEC") on or around January 28, 1998.
Defendants B. Jones, P. Jones, and Alfred will hereafter be referred to collectively as the "Individual Defendants."
Defendants Baker and Pirtle will hereafter be referred to collectively as the "Section 11 Defendants."
Plaintiffs enumerate six counts in their complaint. Specifically, Plaintiffs allege that: (1) Premiere and the Individual Defendants violated § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R 240.10b-5; (2) the Individual Defendants violated § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); (3) Premiere, B. Jones, and P. Jones violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240. 14a-9; (4) Premiere, B. Jones, P. Jones, and the Section 11 Defendants violated § 11 of the Securities Act 15 U.S.C. § 77k; (5) Premiere violated § 12(a)(2) of the Securities Act, 15 U.S.C. § 771 (a)(2); and (6) the Individual Defendants violated § 15 of the Securities Act, 15 U.S.C. § 77 o. Pursuant to another consent order, Defendants filed a motion to dismiss the third amended consolidated complaint on April 14, 2000.
B. Facts
1. Overview
Premiere provides enhanced communications services, including 800 number services, voice messaging, e-mail and facsimile services, conference calling, and Internet-based communications. (Complaint, at ¶ 24(a)). After an initial public offering in 1996, Premiere pursued an aggressive expansion plan, seeking to create an all-purpose communications company. As part of this expansion plan, Premiere acquired certain communications service providers and entered into strategic alliances with others. ( Id. at ¶¶ 52-53). Among the businesses acquired by Premiere were Voice-Tel and Xpedite. ( Id. at ¶¶ 84-90, 101-02). During the class period, Premiere's common stock was traded on the NASDAQ; the company had more than 45 million shares outstanding. ( Id. at ¶ 35).
According to the third amended complaint, to facilitate Premiere's growth plan, Defendants engaged in a course of conduct designed to mislead the investing public into believing that Premiere was successfully expanding and smoothly integrating the technologies of its acquired businesses into Premiere's existing technologies. Plaintiffs allege, however, that Defendants affirmatively misrepresented several factors related to the successful integration of these new acquisitions, including misrepresentations about its management and engineering personnel, internal structure and controls, and capital investment. According to Plaintiffs, the company did not have the necessary personnel in place successfully to integrate its new acquisitions, nor did the company have either an adequate system of internal controls or the resources to handle the integration process. ( Id. at ¶¶ 3-4). Additionally, Plaintiffs allege that Premiere violated generally accepted accounting principles ("GAAP") by including normal recurring selling, general, and administrative ("SGA") expenses in one-time restructuring charges and by improperly taking advantage of the "pooling of interests" method of accounting. ( Id. at ¶¶ 6-7, 94-97, 103-09, 117-21, 146-48). Finally, Plaintiffs allege that Defendants failed to disclose that two of their largest 800-based services unit customers were not going to be able to meet their financial-obligations to Premiere, thereby reducing anticipated revenues. ( Id. at ¶ 8).
2. The Voice-Tel Acquisition, Local Access, and Orchestrate
Beginning in January 1997, Premiere conducted a general solicitation of independent owners of Voice-Tel franchises, offering them shares of Premiere common stock in connection with the acquisition of approximately ninety franchises. Premiere conducted the solicitation generally by mail and telephone, as well as by a series of "road show" presentations held at Premiere's offices. According to the complaint, these presentations were conducted prior to any investigation of the offerees' financial sophistication. The franchise owners were neither related to nor previously affiliated with Premiere. ( Id. at ¶¶ 84-85). On April 1, 1997, in connection with the solicitation of the Voice-Tel franchisees, Premiere published and circulated a twenty-five-page document consisting of a written press release, an investor "Conference Call Script," and answers to investor questions. ( Id. at ¶ 89). The next day, Premiere issued a press release stating that it had acquired the Voice-Tel data messaging network. The press release stated that the current revenues of Voice-Tel and the independent Voice-Tel franchises would "double the size of Premiere." This statement about doubling Premiere's revenues was repeated in a May 8, 1997 press release. ( Id. at ¶¶ 78, 83).
According to Plaintiffs, the most significant opportunity related to Premiere's acquisition of Voice-Tel concerned local access, via Voice-Tel's local exchange carriers, to Premiere's communications services, as opposed to the more expensive 800 number access then used by Premiere. Related to these issues was the availability of local access to Premiere's Orchestrate product, "a Web-based communications technology that organizes voice-mail, e-mail, fax mail and conference calling capabilities into a single, computer access destination." In a press release dated February 11, 1997, Premiere stated that Orchestrate was scheduled for release in the first quarter of 1997 and that, due to Orchestrate, "Premiere should soon be in a position to begin developing a local access flat-rate service offering for its customers." ( Id. at ¶¶ 69-72). In subsequent press releases and other public communications, Premiere repeatedly referred to local access in connection with the Orchestrate product, stating that Orchestrate was "ready to go." Moreover, Premiere issued statements that the company had tested the Voice-Tel technology "to ensure it can be integrated with Premiere's to offer local service, and Premiere `know[s] it works.'" Finally, a prospectus filed with the SEC on January 28, 1998 commented that "Premiere is currently consolidating" the acquired Voice-Tel franchises "by eliminating duplicative and unnecessary costs, consolidating them under common management, and integrating Voice-Tel's service offerings, operations and systems with those of Premiere." ( Id. at ¶ 72). Similar statements were made by B. Jones and other Premiere representatives in the presentations to the Voice-Tel franchisees. ( Id. at ¶ 73).
Plaintiffs allege that, at the time each of the foregoing statements was made, Defendants knew or deliberately ignored facts that rendered those statements false and misleading. According to the complaint, senior management repeatedly discussed at various times during the class period that Voice-Tel's existing hardware platform could not integrate with Premiere's existing communication services without investing in an upgrade of the Voice-Tel platform. As such, without a plan to upgrade this platform, Orchestrate was inaccessible through the Voice-Tel local exchange caters, and discussions among senior management as early as February 1997 centered on Premiere's inability at anytime in the foreseeable future to market Orchestrate or flat rate local access through Voice-Tel's existing sales channels. ( Id. at ¶ 76(a)-(e)). Also problematic to the successful marketing of Orchestrate were strains on Premiere's engineering personnel, as well as the difficulties in integrating Premiere's DOS-based platform with Orchestrate's UNIX-based operating system. ( Id. at ¶ 76(g)). Moreover, despite the company's statements to the contrary, Defendants knew that no test had been conducted to ensure the integration of the technologies. ( Id. at ¶ 76(i)).
Plaintiffs also allege that Defendants knew, or recklessly disregarded, that Voice-Tel was a highly decentralized collection of locally-based franchises, many of which had declining revenue streams. Moreover, the complaint alleges that Premiere's engineering, infrastructure, and management problems rendered the statements about doubling Premiere's revenues false or misleading. ( Id. at ¶¶ 78-83). Beginning in 1996 and lasting into the class period, B. Jones and two of Premiere's co-founders, Gregg Smith and Larry DeNittis, repeatedly discussed that Premiere was understaffed to manage even its existing operations. As a result of these discussions, B. Jones was made aware, at least by the end of 1996, that Premiere's systems engineers were overextended trying to maintain existing alliances and that the company could not reasonably expect to assimilate the Voice-Tel franchises. ( Id. at ¶ 59(a)). Moreover, at a meeting of the board of directors in early February 1997, Smith and DeNittis communicated that Premiere needed to double its technical and engineering support staff to successfully integrate and upgrade the Voice-Tel platform. Smith and DeNittis, along with director Eduard Mayer, told B. Jones that they could not support the Voice-Tel acquisition without adding human resources to support it, and B. Jones authorized Smith and DeNittis to start hiring additional engineering staff. Once the Voice-Tel acquisitions had been authorized, however, B. Jones ended the-hiring process. ( Id. at ¶ 59(b)-(c)). B. Jones was also informed before February 11, 1997, and at various times during the class period, that due to staffing and morale problems among the company's engineers, the company was in no position to support a general market release of Orchestrate. ( Id. at ¶ 59(d)-(h)).
The complaint alleges that Defendants made false and misleading statements concerning Premiere's management, infrastructure, and ability to integrate its acquisitions throughout the class period. (Complaint, at ¶ 58).
3. Resignations of Senior Management
Due to his conclusion that B. Jones had failed and refused to take the steps necessary to solve the aforementioned infrastructure problems, Smith resigned as a director and senior officer of Premiere effective September 4, 1997. On September 8, 1997, however, Smith drafted a memorandum to Mayer stating that he had temporarily withdrawn his resignation contingent upon several factors, including among other things: a complete review of the company's organization chart, reporting structures, compensation plans and budgets; a review of the organization and number of personnel devoted to the engineering and operations department; the hiring of a senior personnel director and the commencement of a search for a chief operating officer; and the complete independence of the chief financial officer from the CEO. ( Id. at ¶¶ 62-63). After the board of directors decided that the company would continue to be run as before, Smith decided to proceed with his resignation. Mayer also decided to resign from the board of directors, but he was persuaded to remain because of concern over the public perception that might arise from the simultaneous resignations of two directors. ( Id. at ¶ 64). Premiere did not disclose Smith's resignation until October 31, 1997, when it stated in a press release that Smith had resigned "to pursue other interests." The press release also quoted Smith as commenting on Premiere's "great promise" and his own "confidence that the Company will benefit from the experience and perspective of my successors." Plaintiffs allege that these statements were false and materially misleading because they failed to disclose the real reasons underlying Smith's resignation and because they created the false impression that Smith had no disagreements with Premiere's remaining management. ( Id. at ¶¶ 65-66).
4. Premiere's Other Relationships and Financial Information
The complaint alleges that Defendants also made misstatements related to other of Premiere's acquisitions and strategic alliances. For example, in an August 12, 1997 press release in which the company announced its financial results for the second quarter of 1997, Premiere represented that it had licensed its platform technologies to WorldCom, Inc. ("WorldCom"). According to Plaintiffs, however, while Premiere did have an existing agreement with WorldCom that guaranteed Premiere a minimum of $4.5 million in revenues per quarter, this guarantee was set to expire in September 1998. After the expiration of the guarantee, Premiere would receive only what it had generated under the agreement with WorldCom, far less than the $4.5 million guaranteed until September 1998 due to Premiere's lack of resources to devote to the WorldCom venture. ( Id. at ¶¶ 91-92).
The complaint also alleges that a press release dated October 1, 1997 contained false and misleading statements related to Premiere's acquisition of VoiceCom, Inc. ("VoiceCom"). According to Plaintiffs, the press release failed to disclose the aforementioned problems with management and infrastructure, integration, and the Orchestrate product. ( Id. at ¶¶ 99-100) Additionally, the press release failed to disclose that the financial results reported by Premiere in a Form 10-Q on August 14, 1997 effectively overstated operating income and understated operating expenses by including SGA expenses in "restructuring and other special charges." ( Id. at 94-95, 100). The complaint further alleges that the company's subsequent financial results were misleading for similar reasons, along with Premiere's manipulation of the accounting rules regarding pooling of interests. ( Id. at ¶¶ 103-09, 117-21).
5. The Xpedite Merger
On November 4, 1997, Defendants caused Premiere to announce its offer to acquire Xpedite, which possessed a worldwide fax and message distribution network, for $30 per share in Premiere stock. On November 12, Premiere raised its offer to $34 per share. In a press release issued on November 14, Premiere announced its acquisition of Xpedite in a stock-for-stock merger that was expected to close in the first quarter of 1998. The press release noted, however, that the merger might be terminated if the average trading price of Premiere common stock fell below $24 per share. ( Id. at ¶¶ 101-02). On December 5, Defendant Pirtle, at the direction of B. Jones, brokered an agreement between Smith and Equitable Securities whereby Smith agreed not to sell any of his Premiere stock for one year. Plaintiffs allege that the motive behind this agreement was to prevent Smith from releasing substantial shares into the market, which could reduce Premiere's stock to a level where the Xpedite merger would be terminated. ( Id. at ¶ 107).
Premiere filed a registration statement with the SEC on January 28, 1998 and distributed it to shareholders of both Premiere and Xpedite. The registration statement incorporated by reference Premiere's financial results in its Form 10-Q filings for the first, second, and third quarters of 1997. Additionally, Premiere discussed its October 1997 acquisition of VoiceCom, noting VoiceCom's services offerings in "voice messaging, mobile communications, full-service conference calling and voice response programing. . . ." The registration statement communicated that Premiere planned to cross-sell its products to the customer base garnered from the VoiceCom acquisition, which included several Fortune 500 companies. ( Id. at ¶¶ 110-11). Additionally, the registration statement discussed Premiere's relationships with Amway Corporation ("Amway") and DigiTEC 2000, Inc. ("DigiTEC").
Plaintiffs allege that the foregoing statements in the registration statement were false and misleading because Defendants failed to disclose the aforementioned problems concerning management and infrastructure, integration, local access, and Orchestrate. The registration also failed to disclose the true nature of Premiere's financial situation. Additionally, the registration failed to disclose that: Premiere was failing effectively to integrate Voice-Tel and VoiceCom; revenues from each of these companies were declining while expenses were increasing; sales through Amway were declining; the relationship with DigiTEC was generating declining or insignificant revenues; and two of Premiere's largest 800-based service customers had missed payments and there was a substantial risk that the amounts owed would not be collected. ( Id. at 112, 116).
6. The First Quarter 1998 Results
On April 14, 1998, B. Jones sold 300,000 shares of Premiere common stock for proceeds of approximately $9,640,000. Alfred and P. Jones also sold 3,100 and 17,000 shares for proceeds of $100,000 and $500,000, respectively. ( Id. at ¶ 122). On May 7, 1998, Premiere released its financial results for the first quarter of 1998, once again reporting sizable restructuring charges and other special charges. ( Id. at ¶ 124). On that same day, B. Jones told market analysts that revenues for Premiere's voice messaging business were growing at 11.5% from quarter to quarter and specifically grew 11.6% in the first quarter of 1998. ( Id. at ¶ 126). The company Form 10-Q, filed on May 15, 1998, mentioned the efficient integration of its acquisitions, enabling Premiere "to improve operating leverage from increased revenues." ( Id. at ¶ 127). On June 8, however, amid rumors that the company would report earnings below those expected by analysts, the price of Premiere's common stock fell 26 percent. ( Id. at ¶ 132).
According to Plaintiffs, at the time the foregoing statements were made, Defendants knew or recklessly disregarded the management, engineering, integration, and accounting problems mentioned earlier. ( Id. at ¶ 125, 128). Defendants also knew or recklessly disregarded that, contrary to B. Jones' statements about the growth of Premiere's voice messaging revenues, those revenues were actually declining and were specifically down 8.2% for the first six months of 1998. ( Id. at ¶ 126). Finally, Plaintiffs allege that the financial results in Premiere's May 7, 1998 press release and May 15, 1998 Form 10-Q were false and misleading because Premiere failed properly to account for accounts receivable Defendants knew could not be collected. ( Id. at ¶¶ 129-30).
7. The June 10, 1998 Press Release and Following Events
On June 10, 1998, Premiere issued a press release announcing an expected after-tax loss of between $0.07 and $0.11 per share for the quarter and between $0.13 and $0.17 for the year. According to the press release, these expected losses were due in part to the financial difficulties of two customers, one of which filed for bankruptcy protection and the other initiated restructuring with its creditors, accounting for $19 million of the anticipated revenue shortfalls. The press release further indicated that the expected losses were due to Premiere's "difficulty in achieving its anticipated revenue and earnings from its voice messaging business unit due to difficulties in consolidating and integrating its sales functions." Additionally, the press release acknowledged that "unanticipated costs and one-time charges . . . related to Premiere's previously announced new subsidiary, Orchestrate.com, as well as costs associated with the Xpedite acquisition" contributed to the expected loss. The press release also noted that SGA expenses had "remained above targeted levels" due to Premiere's "dramatic internal and acquisition-related growth." ( Id. at ¶¶ 133-34). Finally, the press release quoted B. Jones as saying, "Now is the time to complete our plan by adding experienced key players to Premiere's world class management team, whose talents will help us integrate our businesses and realize the benefits of these exceptional acquisitions." ( Id. at ¶ 135). Premiere's common stock, which had closed at more than $21 per share on June 5, 1998, closed at $10.37 pershare on June 10, 1998.
An analyst report issued the next day stated that "[t]hree primary reasons were given for the shortfall: 1) Rapid personnel additions and other infrastructure building to better manage the larger organization; (2) Sales-force churn from integration of Voice-Tel has caused softer revenue as well as higher SGA; (3) Lower revenue outlook from the loss of two financially troubled customers." ( Id. at ¶ 138). In a July 17, 1998 article, Premiere's new Chief Financial Officer ("CFO") was quoted as saying that the company "did not have the necessary systems in place" to deal with the integration issues and "was racing ahead without an experienced management team in place." The CFO also noted that Premiere did not "have the availability currently on a day-to-day basis to track a lot of [the company's] costs." ( Id. at ¶ 139). By October 14, 1998, Premiere's common stock was trading at $3.06 per share. ( Id. at ¶ 136).
II. DISCUSSION
A. Pleading Requirements for Fraud Claims and Plaintiffs' Allegations of Scienter
To survive a motion to dismiss, allegations of securities fraud must satisfy the requirements of Federal Rule of Civil Procedure 9(b). That rule provides that "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). To provide a sufficient level of factual support for a claim of securities fraud, a plaintiff must accordingly plead the circumstances of fraud in detail. "This means 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). Moreover, the PSLRA added several new pleading requirements to claims arising under the Exchange Act. First, the Act provides that, in any private action premised on an untrue statement or omission of material fact, "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." 15 U.S.C. § 78u-4 (b)(1). Additionally, in an action where recovery is permitted "only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4 (b)(2). Finding that Plaintiffs had not satisfied these pleading requirements, the court previously dismissed without prejudice all claims under the Exchange Act in the second amended complaint.
In their motion to dismiss the third amended complaint, Defendants challenge whether Plaintiffs have satisfied the requirements for pleading scienter under the Exchange Act. To allege a claim of securities fraud under § 10(b) and Rule 10b-5, Plaintiffs must show: (1) a misstatement or omission, (2) of a material fact, (3) made with scienter, (4) on which Plaintiffs relied, (5) that proximately caused their injuries. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir. 1999). Thus, to prevail on their § 10(b) securities fraud claims, Plaintiff must adequately plead that the defendants acted with scienter. Id.
The Supreme Court has expressly reserved the question whether scienter is a necessary element under § 14(a) of the Exchange Act. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090 n. 5 (1991). Several lower courts, however, have held that a claim under § 14(a) and Rule 14a-9 requires only a showing of negligence. See Wilson v. Great American Indus., Inc., 855 F.2d 987, 995 (2d Cir. 1988); Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 777 (3d Cir. 1976). Accordingly, Plaintiffs need not plead or prove scienter to state a claim under § 14(a). Lichtenberg v. Besicorp Group, Inc., 43 F. Supp.2d 376, 385 (S.D.N.Y. 1999). See also Smallwood v. Pearl Brewing Co., 489 F.2d 579. 602 n. 31 (5th Cir. 1974) (avoiding decision but implying that action under § 14(a) requires at least negligence); Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F. Supp. 1260, 1266 (S.D. Fla. 1995) (stating that scienter is not necessary for claim under § 14(a)). Scienter is likewise not required to state a claim under either § 11 or § 12(a)(2) of the Securities Act. See Herman MacLean v. Huddleston, 459 U.S. 375, 382 (1983) (indicating that issuer's liability under § 11 "is virtually absolute, even for innocent misrepresentations"); Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988) (finding that material misrepresentations and omissions of sellers under § 12(2) rendered them strictly liable).
As indicated, the PSLRA requires that Plaintiffs "state with particularity facts giving rise to a strong inference that [Defendants] acted with the required state of mind." 15 U.S.C. § 78u-4 (b)(2). The Eleventh Circuit has interpreted § 78u-4(b)(2) to require a plaintiff to "plead scienter with particular facts that give rise to a strong inference that the defendant acted in a severely reckless manner." Bryant, 187 F.3d at 1287. The Eleventh Circuit has further held:
Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1986). See also Bryant, 187 F.3d at 1284-85 n. 21. Scienter may be shown by detailing either direct or circumstantial evidence of Defendants' actual knowledge and/or reckless state of mind. See Huddleston, 459 U.S. at 390-91 n. 30; In re Sunbeam Sec. Litig., 89 F. Supp.2d 1326, 1338 (S.D. Fla. 1999).
After reviewing the complaint, the court finds that Plaintiffs have satisfied the pleading requirement for scienter as to Premiere and B. Jones. Unlike their second amended complaint, with regard to these two Defendants, Plaintiffs' third amended complaint adequately sets forth "what defendants knew, how they knew it and when they knew it." Feeney v. Mego Mortgage Corp., 45 F. Supp.2d 1356, 1357 (N.D. Ga. 1999) (Moye, J.). For example, Plaintiffs allege that B. Jones and other senior management, including members of the board of directors, knew about the personnel, infrastructure, and integration problems prior to the beginning of the class period through discussions with and memoranda by Smith, DeNittis, Mayer, and others. These problems were repeatedly discussed at various times throughout the class period. (Complaint, ¶¶ 59 (a)-(j), 61). Similarly, Plaintiffs allege that, by or before February 11, 1997, B. Jones knew through discussions among senior management and directors that: Voice-Tel's existing platform could not provide local access for Premiere's existing services; Orchestrate would be inaccessible on the local level without upgrading the Voice-Tel platform; Premiere would not be in the position to market Orchestrate or local access in the foreseeable future; Orchestrate could not interface with Premiere's DOS-based platform; and no test had been conducted prior to Premiere's April 2, 1997 statement to ensure the integration of Voice-Tel's technology. ( Id. at ¶ 76(a)-(i)). Finally, B. Jones allegedly knew, by August 12, 1997, that the company was improperly masking operating expenses as restructuring and special acquisition charges because he joked that continuing acquisitions was a good way to keep reported costs down by rolling operating expenses into acquisition accounting. ( Id. at ¶ 97). See Fine v. American Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990) (stating that violations of GAAP, coupled with knowledge of information's falsity or severe recklessness, may establish scienter); Sunbeam, 89 F. Supp.2d at 1338 (finding sufficient to establish scienter allegations that defendants used fraudulent accounting practices to manipulate financial results and joked about it). The complaint thus pleads with sufficient particularity that B. Jones and Premiere engaged in "highly unreasonable omissions or misrepresentations," the danger of which was known by them or was so obvious in light of the information available to them that "they must have been aware of it." Woods, 765 F.2d at 1010.
B. The "Group Pleading" Doctrine and Allegations Concerning P. Jones and Allred
For the reasons discussed below, Plaintiffs' pleadings are insufficient with regard to the § 10(b) and § 14(a) claims against Defendants P. Jones and Alfred. See infra Section II.B.
Defendants also contend that Plaintiffs fail to allege any specific actionable wrongs by Defendants P. Jones and Alfred, arguing that Plaintiffs' reliance on the "group pleading" doctrine is misplaced in light of the new pleading requirements of the PSLRA. Plaintiffs, on the other hand, maintain that the "group pleading" doctrine survived the PSLRA and that their allegations against P. Jones and Alfred are sufficient under that doctrine. For the following reasons, the court agrees with Defendants.
The "group pleading" doctrine holds that "[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other "group-published information,' it is reasonable to presume that these are the collective actions of the officers." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987). Some courts have held that, under such circumstances, "a plaintiff fulfills the particularity requirement of Rule 9(b) by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations." Id. See also Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997) (applying "group pleading" doctrine); Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 367-68 (1st Cir. 1994) (same). The doctrine generally applies only to corporate insiders. See Berry v. Valence Tech., Inc., 175 F.3d 699, 706 (9th Cir. 1999); In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995). See also Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (finding that "no specific connection between fraudulent representations in the Offering Memorandum and particular defendants is necessary where. defendants are insiders or affiliates participating in the offer of the securities in question"). The court has found no Eleventh Circuit decisions adopting the "group pleading" doctrine, although several district courts in this circuit have applied the doctrine in securities fraud cases. See, e.g., In re Theragenics Corp. Sec. Litig., 105 F. Supp.2d 1342, 1357-58 (N.D. Ga. 2000) (Thrash, J.); In re World Access, Inc. Sec. Litig., No. 1:99-CV-0043-ODE, 2000 WL 1288322, at *9 (N.D. Ga. Mar. 28, 2000) (Evans, J.); Sunbeam, 89 F. Supp.2d at 1341; Future Tech Int'l, Inc. v. Tae Il Media, Ltd., 944 F. Supp. 1538, 1572 (S.D. Fla. 1996); In re Checkers Sec. Litig., 858 F. Supp. 1168, 1178 (M.D. Fla. 1994).
Whatever the status of the "group pleading" doctrine prior to the PSLRA, a split in authority currently exists as to the continued validity of the doctrine in light of the Act's heightened pleading requirements. Plaintiffs correctly point out that the majority of the courts to have considered the issue, including several in this circuit, have held that the doctrine survives the enactment of the PSLRA or have applied the doctrine to post-PSLRA cases. See, e.g., Theragenics, 105 F. Supp.2d at 1357; Polar Int'l Brokerage Corp. v. Reeve, 108 F. Supp.2d 225, 237 (S.D.N.Y. 2000); In re Baan Co. Sec. Litig., 103 F. Supp.2d 1, 17 (D.D.C. 2000); World Access, 2000 WL 1288322, at *9; Sunbeam, 89 F. Supp.2d at 1341; In re BankAmerica Corp. Sec. Litig., 78 F. Supp.2d 976, 988 (E.D. Mo. 1999). Other cases, however, have called into question the continued use of the "group pleading" doctrine, finding the doctrine inconsistent with the specificity required for pleading under the PSLRA. See, e.g., Theoharous v. Fong, No. 1:98-CV-2366-JEC, slip op. at 35-36 (N.D. Ga. Mar. 10, 2000) (Carnes, J.); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.2d 910, 915-16 (N.D. Tex. 1998); Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998). See also In re Ciena Corp. Sec. Litig., 99 F. Supp.2d 650, 663 n. 11 (D. Md. 2000) (suggesting, in dicta, that application of "group pleading" doctrine "would seem to be inconsistent with the strict pleading requirements of the PSLRA"). The court finds these latter cases persuasive.
The "group pleading" doctrine is a judicial construct. When considering questions arising under the federal securities statutes, however, courts should turn first to the language of those statutes. See Central Bank of Denver. N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 173 (1994); Ernst Ernst v. Hochfelder, 425 U.S. 185, 197 (1976). Cf. United States v. DBB, Inc., 180 F.3d 1277, 1281 (11th Cir. 1999) ("The starting point for all statutory interpretation is the language of the statute itself'). As demonstrated, `the PSLRA specifically requires that the untrue statements or omissions be set forth with particularity as to `the defendant' and that scienter be plead in regards to "each act or omission sufficient to give `rise to a strong inference that the defendant acted with the required state of mind.'" Allison, 999 F. Supp. at 1350 (quoting 15 U.S.C. § 78u-4 (b)). As the Allison court explained:
To permit a judicial presumption as to particularity simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant. The group published doctrine permits an inference of wrongdoing not based on defendant's conduct, but based solely on defendant's status as an officer or director of a corporation.Id. See also Coates, 26 F. Supp.2d at 916 ("It is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission."). Accordingly, the court finds that the group pleading doctrine did not survive the enactment of the PSLRA. Because Plaintiffs have relied on group pleading for their claims against P. Jones and Alfred, they have not adequately pled their claims against these Defendants. The court therefore DISMISSES Plaintiffs § 10(b) and Rule 10b-5 claims against P. Jones and Alfred, as well as their § 14(a) and Rule 14a-9 claims against P. Jones.
The court also notes that the complaint does not specifically allege that P. Jones or Alfred were privy to the information about Orchestrate, local access, or Premiere's infrastructure, management, and integration problems. Accordingly, while Plaintiffs have adequately alleged that B. Jones and Premiere acted with scienter, their pleadings fail with regard to P. Jones and Alfred.
C. Loss Causation
Defendants also contend that Plaintiffs fail adequately to allege loss causation because the allegations of misstatements and omissions on which Plaintiffs' claims are based are unrelated to the reasons given for Premiere's decline in the June 10, 1998 press release. According to Defendants, the press release attributed Premiere's second quarter 1998 financial results to three factors: (1) financial difficulties experienced by a customer and a strategic partner; (2) revenue shortfalls in its voice messaging business unit; and (3) other unanticipated costs and one-time charges. Because they contend that the allegedly false or misleading statements or omissions raised in the complaint do not relate to any of these three factors, Defendants urge the court to dismiss Plaintiffs' claims under the Exchange Act.
Specifically, Defendants contend that the allegations contained in ¶¶ 57 (ii)-(v), 62-66, 68-75, 78-80, 92, 107-09, 113-14, and 116 (c)-(d) are unrelated to the reasons given in the June 10 press release. See Def. Ex. E.
The plaintiff in any private action arising under the Exchange Act "shall have the burden of proving that the act or omission of the defendant alleged to violate [the Exchange Act] caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4 (b)(4). "To prove loss causation, a plaintiff must show `that the untruth was in some reasonably direct, or proximate, way responsible for his loss'." Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997) (quoting Huddleston v. Herman MacLean, 640 F.2d 534, 549 (5th Cir. Unit A 1981)). As explained by the Eleventh Circuit in Robbins, "the plaintiff need not show that the defendant's act was the sole and exclusive cause of the injury he has suffered." Id. (quoting Bruschi v. Brown, 876 F.2d 1526, 1531 (11th Cir. 1989)). Rather, "he need only show that it was substantial, i.e., a significant contributing cause." Id. (internal quotations omitted). "In other words, plaintiff must show that `the misrepresentation touches upon the reasons for the investment's decline in value.'" Id. (quoting Huddleston, 640 F.2d at 549).
This court finds somewhat misleading the formulation of loss causation stating that the untrue statement must be shown to "cause" the loss, as the term "cause" is normally understood. Actually, in these cases the loss never occurs at the time the untrue statement is made. The losses occur when the truth becomes known. In efficient public markets, the price of a security is determined to a substantial extent by what the market believes about a company's stock-factors including its book value, its dividend, its net cash flow, the outlook for its industry and its earnings, its return on capital, the ability and reputation of its management team, and its value relative to its historic valuations and to other valuations in the market. False information touching on any of these factors could have a tendency to cause the market to overvalue the security. If the truth becomes known, the market might very well revalue the security in light of the new information. To carry the day on loss causation, it is Plaintiffs' burden to allege and prove that the valuation at acquisition was based in material part on mistaken belief and that a subsequent decline in value was in substantial part a market reevaluation of the security based on the correct information.
Seizing upon the varying language in the Robbins decision, the parties dispute the exact standard in this circuit for satisfying the loss causation element of a Rule 10b-5 claim. Plaintiffs, citing to Robbins, contend that they need only allege that Defendants' misstatements "touched upon" the reasons for Premiere's decline in value. Defendants, also citing to Robbins, argue that Plaintiffs must show that the misstatements were "substantial" and "a significant contributing cause" of Plaintiffs' losses, maintaining that this standard is higher than that asserted by Plaintiffs.
The court agrees with Plaintiffs and finds Defendants' argument unpersuasive. Although it appears from a linguistic viewpoint that "touch upon" and "substantial" implicate different standards, the court finds that there is no difference in these articulations from a legal viewpoint. In those cases that use both formulations, the Eleventh Circuit has made no distinction between its "touch upon" and "substantial" language. This is most evident in Robbins, where the "touch upon" language is used to illuminate the meaning of "substantial." Robbins, 116 F.3d at 1447. See also Bruschi, 876 F.2d at 1530-31 (11th Cir. 1989) (using both "touch upon" and "substantial" language in discussion of loss causation). Both formulations are used by the Eleventh Circuit to describe the necessary "link between the defendant's misconduct and the plaintiffs economic loss." Robbins, 116 F.3d at 1447.
Alternatively, to the extent that the "touch upon" and "substantial" formulations implicate different standards, the court finds that the former is the proper standard to apply in this case. The Eleventh Circuit lifted its language about the defendant's act being a "substantial" and "significant contributing cause" from a Second Circuit opinion addressing the issue of the plaintiffs reliance on defendant's conduct. See Bruschi, 876 F.2d at 1531 (quoting Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 92 (2d Cir. 1981)). Reliance, however, which is also called "transaction causation," concerns causation in fact and presents a distinct issue from that of loss causation, which turns upon questions of proximate cause. See Currie v. Cayman Resources Corp., 835 F.2d 780, 785 (11th Cir. 1988). Defendants have not raised the issue of transaction causation in their motion to dismiss, and a standard for evaluating reliance is therefore inapplicable to the question before the court. Furthermore, the court in Currie, which is apparently the first decision from the Eleventh Circuit to address the standard of showing loss causation, did so by using the "touch upon" language only. Id. (stating that, in proving loss causation, "a plaintiff must demonstrate that the defendant's fraudulent conduct `touches upon the reasons for the investment's decline in value.'") (quoting Huddleston, 640 F.2d at 549). To the extent that language in subsequent cases cannot be reconciled with that standard, the court is bound to follow the earliest precedent. Combs v. Plantation Patterns, 106 F.3d 1519, 1532 (11th Cir. 1997); United States v. Dailey, 24 F.3d 1323, 1327 (11th Cir. 1994).
Therefore, the court must determine whether the alleged misstatements challenged by Defendants "touch upon the reasons for the investment's decline in value." Currie, 835 F.2d at 785. In other words, the court must determine whether the damage complained of was a foreseeable result of Plaintiffs' reliance on the alleged misrepresentations and nondisclosures made by Defendants. See Weiss v. Wittcoff, 966 F.2d 108, in (2d Cir. 1992). "[I]f false statements are made in connection with the sale of corporate stock, losses due to a subsequent decline of the market, or insolvency of the corporation brought about by business conditions or other factors in no way related to the representations, will not afford any basis for recovery." Bruschi, 876 F.2d at 1530 (citations omitted) (alteration in original). "It is only where the fact misstated was of a nature calculated to bring about such a result that damages for it can be recovered." Id. See also Marbury Management, Inc. v. Kohn, 629 F.2d 705, 708 (2d Cir. 1980) (". . . [O]nly the loss that might be expected to result from action or inaction in reliance on a fraudulent misrepresentation is legally, that is, proximately, caused by the misrepresentation.").
The court finds that Plaintiffs have adequately alleged loss causation as to the bulk of the misstatements at issue. The June 10 press release announced that Premiere expected to report an after-tax loss for both the quarter and the-year. The press release expressly attributed Premiere's losses to revenue shortfalls from two of its customers, difficulty in achieving earnings from the voice messaging business due to consolidation and integration problems, and costs related to Orchestrate and the Xpedite merger. The press release also attributed the losses to costs associated with "Premiere's dramatic internal and acquisition-related growth . . . including the costs necessary to build the larger centralized infrastructure needed to support this growth." (Complaint, at ¶¶ 133-34). The complaint alleges that the market reacted swiftly to these disclosures, dropping to $10.37 per share by the close of trading on June 10, 1998. ( Id. at ¶ 136).
The complaint further alleges that Premiere's stock price continued to decline over the next few months as more information was disclosed. For example, the analyst report released on June 11, 1998 reduced its rating for the company and stated that the reasons given for Premiere's losses were, among other things, the building of infrastructure and the integration of Voice-Tel. Also, Premiere's CFO acknowledged on June 17, 1998 that the company did not have the necessary systems in place sufficiently to track costs and had encountered integration problems due to its pursuit of the acquisition plan without the presence of experienced management. ( Id. at ¶¶ 138-39).
Defendants erroneously assert that the court previously found the statements by Premiere "s CFO to be irrelevant to the loss causation issue. The court actually found that the CFO's comments were nothing more than hindsight and could not satisfy Plaintiffs burden of pleading with particularity the reasons why Defendants' statements were misleading at the time they were made. See Order, at 19. Defendants have not raised this issue in their current motion to dismiss, and the court's previous discussion of the CFO's comments is inapposite to the loss causation issue presently under review.
The circumstances in the causal chain nearest to the decline in Plaintiffs' investment appear to be the comments contained in the press release and the analyst report, as well as the comments made by the CFO. These revealed a change of fortune for Premiere with regard to earnings and showed deficiencies in certain areas where the company had previously assured the market that there were strengths. The drop in the price of Plaintiffs' stock, then, was a foreseeable consequence of their reliance on the alleged misstatements about infrastructure, management, the integration of Voice-Tel, the availability of local access, the marketability of Orchestrate, and the manipulation of accounting rules. ( See id. at ¶¶ 57 (iii), 57(v), 69-75, 78-80, 107-09, 116(c)). Plaintiffs have adequately alleged loss causation as to these misrepresentations.
The court agrees with Defendants, however, that certain of Plaintiffs' allegations do not adequately connect Defendants' misstatements and the drop in Premiere's stock price. Nothing in either the June 10 press release or the disclosures following it reveals information about the resignations of Smith and other senior management, and thus it cannot be claimed that the market's reevaluation resulted from a failure to disclose the discontent within the board. The same is true for Plaintiffs' allegations about Defendants' alleged misstatements concerning the nature of Premiere's licensing agreement with WorldCom and Premiere's relationships with Amway and DigiTEC. Accordingly, the drop in Premiere's stock price was not a foreseeable result of these misrepresentations. Because Plaintiffs have failed adequately to allege loss causation as to these misstatements, the court DISMISSES Plaintiffs' Exchange Act claims to the extent that they rely on the misstatements contained in ¶¶ 57(u), 57 (iv), 62-66, 68, 92, 113-14, and 116(d).
D. Allegations of Corporate Mismanagement
Defendants additionally contend that several of the allegations contained in Plaintiffs' complaint constitute nothing more than "critiques of strategy decisions by Premiere's management and/or subjective disagreements with the judgments and performance of management." Def. Br., at 9. The Supreme Court has held that the federal securities laws do not regulate breaches of corporate fiduciary duty. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977). Accordingly, "claims essentially grounded on corporate mismanagement are not cognizable under federal law." Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 638-39 (3d Cir. 1989). As several courts have recognized, however, false or misleading statements or omissions concerning material facts about management or internal operations may be actionable. See id. at 639 ("Although allegations of a failure to disclose mismanagement alone do not state a claim under the federal securities law, a claim that defendants failed to disclose material facts may be actionable."); Gross v. Medaphis Corp., 977 F. Supp. 1463, 1473 (N.D. Ga. 1997) (Hull, J.) ("[I]f a defendant makes certain statements while that defendant knows that existing mismanagement makes those statements false or misleading, then the statements are actionable."). Cf. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1098 n. 7 (1991) (noting that once statements are made, there is duty not to mislead).
Specifically, Defendants contend that the allegations contained in ¶¶ 57, 58, 59(a)-(j), 61-66, 69, 70-72, 76(a)-(i), 80, 83, 112, 116, 118, and 139 are barred because they allege nothing more than corporate mismanagement. See Def. Ex. G.
The court finds that the bulk of the allegations challenged by Defendants sufficiently allege false or misleading statements or omissions and therefore pass muster under the Santa Fe doctrine. Most of Plaintiffs' claims are not based solely on ineffective management or a failure to disclose ineffective management. Rather, Plaintiffs allege that Defendants knew about Premiere's infrastructure, personnel, and management problems, and they knew that these problems were hindering both the process of integrating the new acquisitions and the development of Orchestrate. (Complaint, at ¶¶ 59, 76). Plaintiffs allege that this knowledge rendered many of Defendants' public statements about the company's acquisitions, growth strategy, and product development false and misleading. This was so because, among other things, at the time several of the statements were made Premiere was failing successfully to integrate, and it had no hope of marketing Orchestrate or local access to its services in the foreseeable future. ( Id. at ¶¶ 58, 72, 83, 112, 116, 118). With regard to these issues, the complaint clearly alleges misleading statements and omissions, not mere mismanagement of the corporation. See In re Mobilemedia Sec. Litig., 28 F. Supp.2d 901, 926-27 (D.N.J. 1998) (finding Santa Fe doctrine inapplicable to allegations that defendant had no reasonable basis for believing that it could successfully integrate); Gross, 977 F. Supp. at 1473-74 (finding Santa Fe doctrine inapplicable to allegations that defendants knew about mismanagement and knew that such mismanagement rendered public statements misleading). See also Estate of Soler v. Rodriguez, 63 F.3d 45, 55 (1st Cir. 1995) (indicating that Santa Fe does not place beyond the reach of federal securities laws deliberate fraud involving omissions of material fact); Atchley v. Qonaar Corp., 764 F.2d 355, 358 (7th Cir. 1983) (acknowledging that claims of corporate mismanagement are not cognizable under Santa Fe, but stating that rule does not allow defendants "to make untrue statements of material facts or fail to state material facts necessary to cure misleading statements").
Defendants distinguish Gross by noting that, in that case, the defendants knew at the time they made the infringing statements that they were misleading. Defendants further argue that Plaintiffs have failed to allege with the requisite particularity that Defendants knew the statements in this case were misleading when made. The court has already found that Plaintiffs' complaint adequately pleads scienter as to Premiere and B. Jones, and therefore finds Defendants' distinction of Gross to be without merit.
Additionally, as Plaintiffs point out, Defendants' public statements put the infrastructure, personnel, and management issues in play." See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 282 (3d Cir. 1992)). In Shapiro, the court found that if a defendant characterizes management practices as "adequate," "conservative," and "cautious," while intentionally or recklessly omitting certain facts contradicting such representations, a plaintiff has a cognizable claim under the securities laws. Id. In this case, Defendants issued public statements about the company's "continued diligence in managing our core business," the "efficiencies of infrastructure," the "depth and experience" of senior management "to manage the acquisition process," the company's "successful integrat[ion]" of "strategic acquisitions," and Premiere's "fully integrated worldwide network infrastructure." (Complaint, at ¶ 58). While many of these statements implicate the company's management and business strategy, the allegations that Defendants knew or recklessly disregarded facts contradicting these statements plead a claim under federal law. To the extent that Defendants argue these statements are not actionable because they reflect the Defendants' opinions or "subjective assessment," Def. Reply, at 10, the Supreme Court has held that statements of opinion or belief may be actionable. Virginia Bankshares, 501 U.S. at 1090-93.
Defendants' argument that Shapiro is inapposite because it does not cite to Santa Fe directly is meritless. Shapiro obviously addresses the issue of corporate mismanagement and cites to the Third Circuit's Craftmatic decision — a decision that rests on an evaluation of the Santa Fe doctrine.
This is not to say that all of Plaintiffs' allegations survive Defendants' Santa Fe challenge. Plaintiffs' allegations about the resignations of Smith and other senior management at Premiere concern little more than internal management disputes and, as such, are not actionable. See Weill v. Dominion Res., Inc., 875 F. Supp. 331, 337 (E.D. Va. 1994). Similarly, the allegations that Defendants were not provided with ongoing operating documentation, that there was no structured budgeting process, and that earnings estimates were handed down from B. Jones and P. Jones without proper budgets concern corporate mismanagement and are not actionable. See Craftmatic, 890 F.3d at 639-40 (affirming dismissal of allegations of inadequate cost controls, inadequate accounting controls, and inadequate information systems). Therefore, the court DISMISSES Plaintiffs' claims to the extent that they rely upon the allegations contained in ¶¶ 57(u), ¶ 61-66, and 80.
E. Allegations Concerning Orchestrate
Defendants argue that Plaintiffs' allegations concerning Premiere's Orchestrate product should be dismissed for several reasons. In addition to their argument that the Orchestrate allegations are barred by the Santa Fe doctrine, Defendants contend that Plaintiffs fail to allege any falsity with regard to the statements made about Orchestrate and that meaningful cautionary warnings about Orchestrate bar Plaintiffs' claims under the statutory safe harbors of the PSLRA. The court has already rejected Defendants' Santa Fe challenge in this regard, and for the following reasons, the court finds Defendants' other contentions to be unavailing.
First, Plaintiffs' complaint sufficiently alleges that many of the public statements made about Orchestrate were false or misleading. The complaint alleges, among others, the following statements regarding Orchestrate: "Premiere should soon be in a position to begin developing a local flat-rate service offering for its customers"; "[l]ocal telephone access make Premiere's Orchestrate services more affordable"; "[t]he addition of Voice-Tel's assets allow Premiere to offer the Orchestrate services . . . through a direct sales channel at a lower price to a broader customer base"; "Orchestrate is ready to go" and the company "just needed a way to distribute it"; and Voice-Tel's technology had been tested to ensure integration with Premiere's technology and the company "knows it works." (Complaint, at ¶ 72). Plaintiffs also allege that, at the time these statements were made, Defendants knew that: Voice-Tel's platform could not offer local access to Premiere's services, including Orchestrate, without an upgrade; Premiere had no plan to upgrade the Voice-Tel architecture; Orchestrate would not be marketable at any time in the foreseeable future; and no tests had been conducted to ensure the integration of Voice-Tel's technology with that of Premiere. ( Id. at ¶ 76). The complaint accordingly alleges that the statements about Orchestrate were false or misleading when made.
Plaintiffs clearly allege that some of these false and misleading statements were made in the January 28, 1998 prospectus in relation to the Xpedite merger, as well as in the written and oral communications made in connection with the Voice-Tel solicitation. (Complaint, at ¶¶ 72-74, 88-89). Defendants' arguments to the contrary are without merit.
Second, Defendants have not shown that the statements concerning Orchestrate are entitled to protection under the PSLRA's statutory safe harbor. In enacting the PSLRA, Congress established a rule allowing defendants to avoid liability for forward-looking statements that prove false, if the statement is "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." See 15 U.S.C. § 77z-2 (c)(1)(A)(i); 15 U.S.C. § 78u-5 (c)(1)(A)(i). See also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir. 1999). Under the statutory safe harbor, a defendant may not be liable even in the absence of accompanying cautionary language if the plaintiff fails to prove that the defendant, if a natural person, made the statement with "actual knowledge" that it was "false or misleading." 15 U.S.C. § 77z-2 (c)(1)(B)(i); 15 U.S.C. § 78u-5 (c)(i)(B)(i); Harris, 182 F.3d at 803. Similarly, if the defendant is a business entity, then the plaintiff must prove that the statement was "made by or with the approval of an executive officer" and that such officer had "actual knowledge . . . that the statement was false or misleading." 15 U.S.C. § 77z-2 (c)(1)(B)(ii); 15 U.S.C. § 78u-5 (c)(i)(B)(ii). Defendants here contend that disclosures found in Premiere's December 31, 1997 Form 10-K and the January 29, 1998 Registration Statement filed in connection with the Xpedite merger operate as meaningful cautionary language so as to invoke the statutory safe harbor.
Defendants have attached the Form 10-K and Registration Statement, respectively, as Exhibits D and I to their motion to dismiss. In Bryant, the Eleventh Circuit held that a district court is "authorized at the motion to dismiss stage to take judicial notice of relevant public documents required to be filed with the SEC, and actually filed, for purposes of determining what statements the documents contain." 187 F.3d at 1280. Accordingly, the court hereby takes judicial notice of Exhibits D and I for purposes of determining the statements contained therein.
After reviewing the documents provided by Defendants and the allegations found in Plaintiffs' complaint, the court concludes that the statutory safe harbor does not preclude liability in this case. While some of the statements at issue appear to be forward-looking, Plaintiffs also refer to statements or omissions of historical facts or "hard" facts about current or past conditions. For example, Defendants' alleged statements that Orchestrate was "ready to go" and that tests had been conducted to ensure the integration of Voice-Tel's technology concerned issues of past or present fact, and for the reasons articulated, allegedly neither of the statements was true. Moreover, the statements about Premiere's projected success in integrating Voice-Tel and offering local access to its services were allegedly false and misleading due to existing problems that were omitted from the public statements. Statements and omissions of past and current circumstances cannot be cured by reference to future difficulties and undetected problems. As the court has previously explained in this case, the statutory safe harbor does not protect statements or omissions of past or current conditions. See Harris, 182 F.3d at 803; Gross, 977 F. Supp. at 1473. As such, the safe harbor is inapplicable.
F. Allegations Concerning Accounting
Defendants also contend that Plaintiffs' allegations of accounting fraud warrant dismissal because the complaint does not allege each specific accounting charge taken in violation of GAAP or why each of those charges was wrongful. This argument is without merit. "To state a claim of accounting fraud, a plaintiff must adequately plead facts sufficient to support a conclusion that the defendant prepared false financial statements, and that the alleged financial fraud was material." Carley Capital Group v. Deloitte Touche, L.L.P., 27 F. Supp.2d 1324, 1335 (N.D. Ga. 1998) (Thrash, J.). While particular instances of accounting irregularities must be alleged, the complaint "need not specify the exact dollar amount of each accounting error." Id. See also World Access, 2000 WL 1288322, at *7 ("It is not fatal to the complaint that it does not describe in detail each single specific transaction in which Defendant transgressed, by customer, amount, and precise method.").
Plaintiffs have alleged specific violations of GAAP related to the "pooling-of-interests" method of accounting and Premiere's counting SGA expenses as restructuring charges. (Complaint, at ¶ 7). Plaintiffs allege that an agreement was brokered with Smith to "lock up" his shares of Premiere common stock so as to prevent a decline in price that would halt the Xpedite merger. Despite this agreement, Defendants accounted for the Xpedite merger under the "pooling-of-interests" method of accounting. ( Id. at ¶¶ 107-09). According to the complaint, utilizing this accounting method while restricting the sale of the company's stock violated GAAP. ( Id. at ¶ 147). Additionally, Plaintiffs allege that Defendants violated GAAP by including SGA expenses in special restructuring charges that resulted in the company overstating income and understating expenses in its publicly-released financial-information. ( Id. at ¶ 146). The court has already found that Plaintiffs adequately pled scienter with regard to these accounting irregularities, and these allegations plead more than a mere disagreement with management's accounting treatment. See 17 C.F.R. § 210.4-01 (a)(1) (stating that financial statements filed with SEC and not prepared in conformity with GAAP are presumed to be misleading or inaccurate). Accordingly, Plaintiffs have stated cognizable claims under the securities laws with regard to their accounting allegations. See, e.g., Carley, 27 F. Supp.2d at 1335-36 (finding allegations that defendants violated GAAP with regard to disseminated financial reports sufficient to plead securities fraud claim); Gross, 977 F. Supp. at 1472 (finding allegations that defendants improperly recognized income that they knew should not be recognized under GAAP sufficient to plead both fraud and scienter).
G. The Voice-Tel Subclass and Plaintiffs' Claims Under § 12(a)(2)
Finally, Defendants argue that the § 12(a)(2) claims brought by the Voice-Tel Subclass should be dismissed. First, Defendants contend that Plaintiffs have not alleged that the Voice-Tel Subclass received their shares of Premiere stock pursuant to a prospectus, precluding liability under § 12(a)(2). Second, Defendants argue that Plaintiffs did not receive their shares in a public offering. Third, Defendants contend that the members of the Voice-Tel Subclass executed a release precluding their § 12(a)(2) claims, and they ask the court to reconsider its previous ruling rejecting this argument. For the following reasons, the court finds each of Defendants' arguments to be unavailing.
Section 12(a)(2) provides a cause of action against any person who "offers or sells a security . . . 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 light of the circumstances under which they were-made, not misleading." 15 U.S.C. § 771 (a)(2). Section 2(a)(10) defines "prospectus as any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security." 15 U.S.C. § 77b(a)(10). Plaintiffs' complaint alleges that, in connection with the Voice-Tel solicitation, Premiere published and circulated a package of documents consisting of: a written press release; an investor "Conference Call Script"; a document entitled "QUESTIONS AND ANSWERS — Concerning the Acquisition of Voice-Tel Enterprises and affiliated Entities by Premiere Technologies"; and a document entitled "Project Atlanta — Investor Questions." (Complaint, at ¶ 89). The complaint further alleges that this package of documents contained representations about Premiere's infrastructure, management, and integration, as well as about Orchestrate and local access marketing like those already discussed. ( Id. at ¶ 88). The package of documents, however, allegedly failed to disclose the problems Premiere was experiencing with regard to these topics. ( Id. at ¶ 90). Accordingly, the complaint alleges false and misleading statements contained in a package of written communications that offered for sale shares of Premiere common stock. These allegations adequately plead that Premiere offered a security pursuant to a "prospectus" as defined in § 2(a)(10), and Defendants' first argument is without merit.
Defendants' remaining arguments are likewise without merit. The court has previously explained that whether an offering is public or private is determined by evaluating whether or not registration was required for the offering. See Maldonado v. Domiguez, 137 F.3d 1, 8 (1st Cir. 1998); Flake v. Hoskins, 55 F. Supp.2d 1196, 1228 (D. Kan. 1999). The Supreme Court has indicated that the central question in determining whether an offering should be registered is "the need of the offerees for the protections afforded by registration." S.E.C. v. Ralston Purina Co., 346 U.S. 119, 127 (1953). Whether an offering is public or private, then, constitutes a factual issue that must be resolved in light of the particular circumstances. Mary S. Krech Trust v. Lakes Apartments, 642 F.2d 98, 101 (5th Cir. Unit B 1981). Factors useful in determining whether an offering is exempt from the Securities Act's registration requirement include: (1) the number of offerees and their relationship to the issuer; (2) the number of units offered; (3) the size of the offering; and (4) the manner of the offering. Id. The burden of proving that the offering did not need to be registered falls on the issuer. Ralston Purina, 346 U.S. at 126.
Decisions of the former Fifth Circuit Unit B constitute binding precedent in the Eleventh Circuit. See Stein v. Reynolds Sec., Inc., 667 F.2d 33, 34 (11th Cir. 1982).
Defendants contend that the offering to the Voice-Tel Subclass was not public because it was directed to only 90 Voice-Tel franchise owners who were part of the same franchise and were represented in negotiations with a national law firm. Moreover, Defendants contend that each shareholder individually negotiated his own deal with Premiere. The complaint, however, alleges that Premiere conducted a general solicitation of Voice-Tel franchise owners that were neither related to nor previously affiliated with Premiere. Also, the complaint alleges that the Voice-Tel franchise owners were solicited prior to Premiere's having conducted any investigation of their financial sophistication or suitability. Absent from the complaint are any allegations to support Defendants' contentions of common legal representation or individually-brokered transfer agreements. Therefore, as the court has stated before, Defendants' characterization of the Voice-Tel acquisition is just that — a characterization — that is in large part unsupported by the allegations in the complaint, which must be taken as true.
Defendants correctly assert that the complaint limits the Voice-Tel offer to 90 solicited franchisees. The court, however, disagrees with Defendants that this allegation precludes a finding that the Voice-Tel acquisition was accomplished pursuant to a public offering. While a large number of offerees increases the likelihood that the offering is public, "[t]he number of offerees is not itself a decisive factor in determining the availability of the private offering exemption." Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 901 (5th Cir. 1977). See also Van Dyke v. Colburn Enter., Inc., 873 F.2d 1094, 1098 (8th Cir. 1989) ("The determination of whether an offer is not public has not been relegated to a simple numerical test."). In light of Plaintiffs' allegations that the Voice-Tel franchise owners had no prior relationship to Premiere and were approached in the context of a general solicitation, the court cannot say that the existence of only 90 offerees automatically renders the offering private. See G. Eugene England Found. v. First Fed. Corp., 663 F.2d 988, 990 (10th Cir. 1973) (finding that offering made to only one person, who under circumstances of case needed protections of federal securities laws, was "public" offering).
Defendants also ask the court to reconsider its previous rejection of their argument that the Voice-Tel Subclass is barred from raising its § 12(a)(2) claims because of a general release signed by the Voice-Tel offerees. The court declines to do so. As previously explained to Defendants, there is nothing in the complaint that discusses a general release signed by the Voice-Tel offerees. As such, there is nothing properly before the court at this stage of the proceedings suggesting that a release was executed.
III. CONCLUSION
Defendants' motion to dismiss [55-1] is GRANTED in part and DENIED in part. The motion is GRANTED as to Plaintiffs' § 10(b) and Rule 10b-5 claims against Defendants P. Jones and Allred and Plaintiffs' § 14(a) and Rule 14a-9 claims against Defendant P. Jones. The motion is likewise GRANTED as to Plaintiffs' claims under the Exchange Act to the extent that they rely on ¶¶ 57(u), 57 (iv), 62-66, 68, 92, 113-14, and 116(d). Finally, the motion is GRANTED as to all of Plaintiffs' claims to the extent that they rely on ¶¶ 57 (ii), ¶ 1-66, and 80. The motion to dismiss is DENIED in all other respects.
The court additionally GRANTS Defendants' motion to file a reply in excess of the page limit [59-1]. Defendants' motion for leave to file supplemental authority [61-1], and Plaintiffs' motion for leave to file supplemental authority [62-1].