Opinion
Master File No. 01 Civ. 2938 (JGK) (JCF)
September 30, 2002
OPINION AND ORDER
This action is based on a consolidated class action complaint alleging violations of the federal securities laws allegedly arising out of the April, 2000 initial public offering ("IPO") of shares in the defendant, OPUS360 Corporation ("OPUS"), a Delaware corporation with its principal place of business in New York. The lead plaintiff, Peter Gianoukas, along with the other named plaintiffs, Robert Bean, Raymond Litwin, Michael Silverman, Dewey Yesner, and The Steinberg Family Partnership, (collectively the "plaintiffs"), assert claims against OPUS; ten individuals (the "Individual Defendants"), who were directors or officers of OPUS and signatories to the registration statement filed with the Securities and Exchange Commission ("SEC"); OPUS' underwriters (the "Underwriters") including J.P. Morgan Securities, Inc., Robertson Stephens, Inc., E*Offering Corporation, and Bear Stearns, Co., Inc.; and two large institutional shareholders of OPUS stock (the "Selling Shareholders"), Safeguard Scientifics, Inc. ("Safeguard"), and CompuCom Systems, Inc. ("CompuCom"), who were underwriters for OPUS stock through a subscription program, available only to preexisting Safeguard shareholders.
This action was originally a series of individual lawsuits that were consolidated pursuant to Fed.R.Civ.P. 42(a). Peter Gianoukas was designated the lead plaintiff for the class in the consolidated action pursuant to Section 27(a)(3)(B) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77z-1(a)(3)(B). Thereafter, an Amended Consolidated Class Action Complaint (the "Complaint") was filed asserting (1) violations of § 11 of the Securities Act, 15 U.S.C. § 77k, against all defendants (Counts I and II), (2) violations of § 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a)(2) against OPUS, the Underwriters, and the Selling Shareholders defendants (Count III), and (3) violations of § 15 of the Securities Act, 15 U.S.C. § 77o, against the Individual Defendants (Court IV).
A class has not yet been certified in this action.
The various defendants now move to dismiss the Amended Complaint on several grounds. All the defendants argue that the alleged misrepresentations or omissions that form the basis of the claims under §§ 11, 12(a)(2), and 15 of the Securities Act are not material, a defect that requires dismissal of those claims under Fed.R.Civ.P. 12(b)(6). Second, OPUS moves to dismiss the § 12(a)(2) claims on the grounds that OPUS was not a "seller" of securities as defined by the Securities Act. Third, the Selling Shareholder defendants argue that the plaintiffs lack standing to sue them under either § 11 or § 12 of the Securities Act, because they did not purchase shares through the dedicated Safeguard Shareholder Program ("Subscription Program"), and because their purchases were not solicited by them. Finally, the Underwriters argue that the plaintiffs lack standing to sue them under § 12(a)(2) of the Act, because the plaintiffs did not purchase shares in the IPO, but during an aftermarket transaction.
The original motion to dismiss for lack of materiality was made by all defendants, including the Individual Defendants, with the exception for John Halvey, who has now moved to join the motion to dismiss filed by the others. This motion to join is granted, and the disposition of the motion to dismiss on the grounds of materiality will apply to all of the defendants in this action.
The plaintiffs have also moved to strike exhibits eleven through thirty-two attached to the Affirmation of Andre Cizmarik, ("Cizmarik Affirm.") dated October 24, 2001 and submitted by OPUS and the Individual Defendants in support of their motion to dismiss. These documents, including various articles related to the companies involved in this action and securities trading generally, are not integral to the plaintiffs' claims, relied on by them, or attached to or incorporated by reference in the Consolidated Amended Complaint, and consequently should not be considered by this Court on a 12(b)(6) motion. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991). The plaintiffs' motion to strike is granted, and these exhibits will not be considered in resolving the defendants' motions.
I.
On a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the allegations in the complaint are accepted as true, Cohen v. Koenig, 25 F.3d 1168, 1172-73 (2d Cir. 1994), and all reasonable inferences must be made in the plaintiff's favor. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). The court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the motion should be granted only if it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see Goldman, 754 F.2d at 1065.The Complaint in this case includes quotes from the Prospectus but does not incorporate the Prospectus in its entirety. Nor is the Prospectus attached to the Complaint as an exhibit. Nonetheless, the plaintiffs had the Prospectus and relied on it in bringing this action. Accordingly, the Prospectus may be considered in its entirety for purposes of this motion. See In re Merrill Lynch Ltd. P'ship Litig., 154 F.3d 56, 58 (2d Cir. 1998); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 808-09 (2d Cir. 1996); Kramer v. Time Warner, Inc., 937 F.2d 767, 773-74 (2d Cir. 1991).
Accordingly, the facts as alleged in the Amended Complaint and the relevant provisions of the Prospectus are as follows.
On April 7, 2000 the defendants completed a $70 million IPO of 7,700,000 shares of OPUS stock pursuant to a Prospectus and Registration Statement that was filed with SEC on December 11, 1999. (Compl. ¶ 2; Prospectus at 1.) The purpose of the offering was to raise financing for the continuing operation and expansion of OPUS, an Internet-based company dedicated to providing an online mechanism to coordinate the matching and employment of independent professionals and consultants with various companies seeking such external, temporary assistance. (Id. at 4-6.) At the time of the IPO, OPUS was involved in the development and enhancement of two on-line services that are at the center of this litigation. The Company was selling Opus Xchange ("Xchange"), an Internet-based service that was designed to allow buyers to hire individuals with specific professional skills in an online environment, based on information submitted by individuals to the site. (Id. at 5.) In addition, OPUS was in the process of developing, but had not yet completed or released on a commercial basis, an enhanced version of Opus Xchange ("Enhanced OPUS Xchange") a stand alone application that was heralded as being able to "enable professional service firms, staffing companies and other suppliers of professional resources to procure professionals from each other" through "advanced vendor management, performance tracking, and sophisticated matching capabilities." (Id. at 5, 13.)
The IPO grossed $70 million for OPUS. (Compl. at ¶ 3.) of the 7.7 million shares sold, 7 million were sold by OPUS, while 700,000 shares were sold by Safeguard and CompuCom through the Subscription Program. (Id.; Prospectus at 104-05.) 5.95 million shares sold by OPUS were underwritten by the Underwriters on a firm commitment basis. (Id. at 1, 101.) The Underwriters agreed to purchase 5.95 million shares issued by OPUS which they would then sell to the public at $10 per share. The Selling Shareholders agreed to be the underwriters for up to 1.75 million shares of OPUS, and solely for shares sold through the Safeguard Subscription Program, but not for shares available to the general public. (Id. at 1, 104-05.) These shares were also sold on a firm commitment basis. (Id. at 104-05.) The firm commitment underwriting ensured that OPUS would receive $65 million regardless of whether or not the Underwriters or the Selling Shareholders were able to sell their shares. (Id. at 1, 104.)
The Underwriters and the Selling Shareholder defendants each took a commission for underwriting, a process that includes performing due diligence on OPUS and coordinating the overall offering. The Selling Shareholder defendants, however, delegated their responsibilities to Robertson Stephens, Inc. who received a management fee for all shares sold through the Subscription Program. (Prospectus at 104.)
On the same day as the IPO, OPUS closed a private placement transaction with Dell U.S.A. L.P., an affiliate of Dell Computer Corporation, ("Dell") whereby OPUS sold shares of stock at the IPO price to Dell for $14 million. (Compl. at ¶ 4.)
The class period for this action is from April 7, 2000, the date of the IPO until March 20, 2001. (Id. at ¶ 35.) After the IPO, and during the class period up until September 2000, OPUS continued to attempt to develop and finalize Enhanced OPUS Xchange, but ultimately, was unable to release a commercially marketable product. (See Form 10-Q for the quarter ended March 31, 2000 attached as Ex. 4 to Cizmarik Affirm, at 17; Compl. at ¶¶ 69, 121.) As of the end of the class period, OPUS' stock value had dropped from the original IPO price of $10 per share to $0.1562 per share. (Compl. at ¶ 9.)
The plaintiffs' Securities Act claims are based upon various alleged misstatements and omissions made by the defendants in the Prospectus. First, the plaintiffs allege that OPUS mis-stated its present financial condition with respect to its available cash-flow; failed to disclose that OPUS would need to raise additional financing within twelve months of the IPO to remain solvent, given an expected increase in the company's cash-burn rate; and neglected to inform investors that IPO funds and funds from the Dell transaction were to be used to maintain current operations, and were not simply for expanding OPUS' business. (Id. at ¶¶ 143, 148-49, 164-65.) Second, the plaintiffs allege that the defendants wholly mis-characterized the relationship that OPUS had with potential customers of Xchange and Enhanced OPUS Xchange, by suggesting that current Xchange customers had already agreed to use Enhanced OPUS Xchange, and by failing to indicate explicitly that the two products were completely different software applications. (Id. at ¶¶ 140-42.) Finally, the plaintiffs base their claims on the disclosures regarding the viability of the Enhanced Opus Xchange product. According to the Complaint, Enhanced Opus Xchange was from the outset a fatally flawed application that failed numerous internal tests, was rejected by potential consumers, and contained a significant number of software and security gaps (Id. at ¶¶ 66-69, 123, 127.) The plaintiffs allege that the defendants' failure to disclose these known risks concerning Enhanced Opus Xchange was an omission of a material fact that would have altered the investors' decisions to purchase in the IPO. (See id. at ¶ 139.)
II.
All the defendants seek to dismiss the plaintiffs' Securities Act claims on the grounds that any misrepresentations or omissions were not material.
Section 11 of the Securities Act provides that any signatory to a registration statement, director of the issuer, or underwriter may be held liable to purchasers of registered securities if the registration statement contains "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 . . ." 15 U.S.C. § 77k(a). Section 12(a)(2) of the Act imposes liability for selling or offering securities by using a prospectus "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 in which they were made, not misleading . . ." 15 U.S.C. § 771(a)(2). Materiality is thus a required element for claims under both § 11 and § 12(a)(2). Lasker v. New York State Elec. Gas Corp., 85 F.3d 55, 57-58 (2d Cir. 1996); I. Meyer Pincus Assocs., P.C. v. Oppenheimer Co., Inc., 936 F.2d 759, 761 (2d Cir. 1991); Steinberg v. PRT Group, 88 F. Supp.2d 294, 299-300 (S.D.N.Y. 2000).
A misrepresentation or omission in a prospectus is material if there is a substantial likelihood that a reasonably prudent investor would consider it important in making a decision. Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) ("[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available."); Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539, 540-41 (2d Cir. 1996). Generally, materiality is a mixed question of law and fact ordinarily left to the finder of fact to determine. TSC, 426 U.S. at 450. The question of materiality may be decided as a matter of law on a motion to dismiss if the alleged omission is "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of [its] importance." Feinman 84 F.3d at 540-41 (citations omitted). "The central inquiry in determining whether a prospectus is materially misleading . . . is therefore whether defendants' misrepresentations, taken together and in context, would have [misled] a reasonable investor about the nature of the investment." I. Meyer Pincus, 936 F.2d at 761 (quotations omitted) (second alteration in original).
A.
The plaintiffs' first set of allegations center around the nature of the financial disclosures made by OPUS. The plaintiffs allege that the Prospectus led investors to believe that OPUS had sufficient capital, given the expected proceeds from the IPO, to maintain its planned operations for at least a twelve month period after the IPO. Moreover, the Prospectus created the impression that OPUS would be able to expand its operations with the proceeds from its private placement transaction with Dell, and would not have to rely on those funds to maintain its current operations. The plaintiffs also allege that the defendants failed to disclose that they knew that OPUS would run out of cash in fewer than twelve months, even without increasing its "cash-burn rate," and would be forced to rely on the Dell financing and additional sources of financing when it ran out of cash. These claims are without merit.
First, the Prospectus clearly makes no firm guarantees about OPUS' ability to maintain either its current operations or cash spending rates for any period of time. The Prospectus does state that OPUS "currently anticipate[s] that the net proceeds from this offering, with our current cash and marketable securities and borrowings under our bank facilities, will be sufficient for working capital and capital expenditures for at least the next 12 months." (Prospectus at 53.) This statement is an anticipatory one, giving only some expectation that the IPO financing should be sufficient to maintain operations for the next 12 months, but makes no representation concerning the need for future financing or the actual rate of cash spending. In addition, this language is immediately followed by the following cautionary statements:
In the future, we may need to raise additional funds through public or private financings, or other arrangements to fund our operations and potential acquisitions, if any. We currently have no plans to effect any other offerings. We cannot assure that any financings or other arrangements will be available in amounts or on terms acceptable to us or at all and any new financings or other arrangements could place operating or other restrictions on us. Our inability to raise capital when needed could seriously harm the growth of our business and results of operations.
(Id.) The substance of this cautionary statement, which clearly alerts investors to the possibility of future additional financing and the danger that OPUS could run out of cash in the near future, is repeatedly echoed throughout the Prospectus. (See, e.g., Prospectus at 10 ("Our limited operating history will make it difficult to forecast our future operating results. For example, our ability to forecast operating expenses and revenues based on our historical results will be difficult . . ."); 12 ("If we are unable to obtain additional financing we may not be able to continue to expand our operations.").) These cautionary statements belie any suggestion that OPUS was making any representations regarding its need for financing or its cash-flow situation that were firm, guaranteed, or not subject to substantial uncertainty. Schoenhaut v. Am. Sensors, Inc., 986 F. Supp. 785, 792 (S.D.N.Y. 1997) ("The challenged statements are not financial projections; they do not seek to ensure definite or guaranteed growth, make specific earnings projections, predict future financial performance or set any benchmarks. Rather, the statements are nothing more than loose prophecies of future performance communicating only vague expectations.")
In fact, because these statements "bespeak caution" no reasonable investor would have relied on any representation by OPUS regarding future financing or future cash-flow, and any alleged misrepresentation with regards to these matters is not material. Under the "bespeaks caution" doctrine, if the context of a particular representation contains sufficient warnings that discourage an reasonable investor's optimism about such a representation, such future representations cannot be materially misleading. See I. Meyer Pincus, 936 F.2d at 763 (upholding dismissal of 10b-5 claim for lack of materiality); Steinberg, 88 F. Supp.2d, at 299-300, 311; see also EP Medsystems, Inc. v. Echocath, Inc., 235 F.3d 865, 873 (3d Cir. 2000) ("cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law") (citations omitted). Indeed, all of the statements should be read in the context of a prospectus that plainly laid out the risky nature of any investment. The Prospectus could not be clearer: "We have a limited operating history and have never been profitable . . . We operate in a highly competitive market and expect to incur losses for the foreseeable future." (Prospectus at 5.) The Prospectus' clear warnings following the discussion of the expected use of the proceeds from the IPO placed reasonable investors on notice that the future forecasting concerning OPUS' financial condition should not be relied upon in making a decision to invest.
Second, the plaintiffs' argument that the Prospectus misled investors about OPUS' cash burn rate and expected financial solvency for the twelve month period following the IPO fails because OPUS never actually ran out of cash or became insolvent in that period. In other words, the plaintiffs' claim that OPUS misrepresented its ability to fund its operations fails because the public filings that are not disputed indicate that at all times OPUS had funds to maintain its operations. More than one year after the IPO, on June 30, 2001 the Company had a Positive cash balance of $15.64 million, as well as stockholder equity of $23.6 million. (See Form 10-Q for the period ended June 30, 2001 attached as Ex. 10 to Cizmarik Affirm, at 3.) The plaintiffs counter that while OPUS may have had positive cash reserves, it substantially cut back operations after the IPO and decreased its staff in order to avoid insolvency. While this may be true, the basic fact remains that OPUS never became insolvent, and the Prospectus clearly indicates that a change in plans and payroll is a contingency that stock purchasers should factor into their overall decision to invest. (See generally Prospectus at 10-14.) This absence of actual insolvency renders any possible misrepresentations regarding OPUS' cash flow immaterial.
Finally, the plaintiffs allege that the Prospectus was materially misleading because it indicated that the funds from the Dell transaction were to be used solely to fund OPUS' growth, when in fact the funds were being used to maintain OPUS' current operations. However, there are no statements in the Registration Statement that even suggest that the Dell financing was to be used for any particular purpose or project. In fact, the Prospectus clearly states,
We expect to use the net proceeds from this offering, and the $14.0 million of proceeds from the sale of our common stock to Dell USA in the concurrent placement described below, for working capital and general corporate expenses . . . . The actual amounts expended for the specific purposes set forth above may vary from our current expectations and we may reallocate the proceeds of this offering and the concurrent [Dell] private placement among the categories discussed above or uses a portion of the proceeds from the offering and the concurrent [Dell] private placement for purposes not presently contemplated.
(Prospectus at 30.) The plaintiffs' claim of a misleading disclosure relating to the Dell transaction is plainly contradicted by the plain language of the Prospectus and therefore should be dismissed. See Finkel v. Putnam Convertible Opportunities and Income Trust, No. 96 Civ. 4810, 1997 WL 60847, at *2 (S.D.N.Y. Feb. 11, 1997), aff'd 162 F.3d 1147 (2d Cir. 1997) (table).
For the reasons given the plaintiffs' claims related to OPUS' financial disclosures, cash-flow, and need and use of future financing lack merit and are dismissed.
B.
The plaintiffs' second set of allegations revolve around the Prospectus' statements regarding OPUS' pre-existing relationships and agreements with current and future consumers. The plaintiffs allege that investors were misled into thinking that customers who had already agreed to use Xchange had also agreed to buy Enhanced Opus Xchange. Additionally, the plaintiffs claim that two of the customers listed as Xchange purchasers were not in fact Xchange customers. Finally, the plaintiffs argue that the Prospectus was misleading because it failed to give notice that Enhanced Opus Xchange was actually an enhanced, or later version of, the original Xchange Program. All of these claims lack merit.
First, a reasonable investor could not have believed, based upon the layout of the Prospectus, that existing customers of Xchange had already agreed to become users of Enhanced OPUS Xchange. The Prospectus listed the names of twenty-three companies that "have entered into agreements . . . to post projects to Opus Xchange" (Prospectus at 65.); however, OPUS never represented that those twenty-three companies had agreed to purchase Enhanced Opus Xchange. In fact, the subsequent sentence states that "in addition, [four of the companies listed above] have entered into agreements with us to use our enhanced version of Opus Xchange." (Id.) No reasonable investor could conclude from this language that OPUS had entered into agreements regarding Enhanced Opus Xchange with more than four companies. Also, the discussion of the agreements for Xchange and Enhanced Opus Xchange occurs in separate paragraphs, making it clear that the two customer lists are not identical. Moreover, the four customers who are Enhanced Opus Xchange customers were also customers for the original Xchange product; the fact that their names are the only names repeated in the second list leaves no doubt that the other nineteen Xchange customers have not yet agreed to buy Enhanced Opus Xchange. In sum, the Prospectus is clear and not misleading with respect to who had agreed to buy OPUS' new software program.
Second, while the plaintiffs allege that at least two of the twenty-three Xchange customers were not actually Xchange customers and at least one other customer had cancelled its subscription contracts, there is no explanation as to why these fact are at all material. Given that the original Xchange was never a source of revenue for OPUS and that it was a free service, the actual number of Xchange users would not have affected a reasonable investor's evaluation of OPUS' revenues, and these misstatements could not have been material. (See Prospectus at 5-6; 15.)
Third, no reasonable investor could have been misled into believing that Xchange and Enhanced Opus Xchange were different versions of the same product. Throughout the Prospectus, each product is described separately and with particularity, with numerous indications and warnings that Enhanced Opus Xchange, unlike Xchange, is a new product that is very much in its early developmental stages. (Compare Prospectus at 10 ("[W]e have only recently begun sales of our Opus Xchange" with Prospectus at 16 ("[O]ur enhanced version of Opus Xchange [is] new and [a] commercially untried service and will not be released until the first half of 2000. We may face significant delays in [its] acceptance."); see Prospectus at 62-63 (detailing differences between Xchange and Enhanced Opus Xchange).)
Finally, the Prospectus is replete with warnings indicating that OPUS' existing and future customer relationships were in flux and subject to change, based on a wide variety of factors. These statements caution investors not to rely upon any prior agreements in evaluating OPUS' future revenue prospects. (See, e.g., id. at 15 ("Our plans to charge for project listing fees and project placement fees may limit the number of organizations wiling to list project assignments on Opus Xchange.").
In sum, the plaintiffs' allegations regarding allegedly misleading statements of OPUS' current and future consumer relationships are not material and are dismissed.
C.
The plaintiff's final set of claims allege that the defendants omitted critical facts regarding the Enhanced Opus Xchange software. Specifically, the plaintiffs allege that the Prospectus failed to disclose that the Enhanced Opus Xchange software was known to be a fatally flawed application which had failed all of its internal testing and contained significant software and security problems that were basically incurable.
These claims fail because the Prospectus makes clear that the Enhanced Opus Xchange software had not yet been developed, was still subject to further commercial testing, and might not be a commercially successful product at all. The defendants disclosed that "we have not yet released our . . . enhanced version of Opus Xchange on a commercial basis, and may not succeed in doing so." (Prospectus at 13.) There was also adequate disclosure of the potential flaws in this new software application. For example, one section's bold print reads "Our services may contain defects or errors that could damage our reputation." (Id. at 19.) The Prospectus goes on to say,
The services that we have developed and that we currently plan to introduce are complex and must meet the stringent technical requirements of our customers. We must develop our services quickly to keep pace with the rapidly changing industry in which we operate. However, the services we provide may contain undetected errors or defects, especially when first introduced or when new versions are released. In addition our services may not properly operate. . . .
(Id.) These oft-repeated warnings, present throughout the Prospectus, put investors on notice that OPUS' new software was still in development and subject to failure, and constituted sufficient disclosure on the part of the defendants. Rhodes v. Omega Research, 38 F. Supp.2d 1353, 1363-64 (S.D. Fla. 1999).
Moreover, contrary to the plaintiffs' allegation that Enhanced OPUS Xchange was fatally flawed at the time of the IPO, the plaintiffs pleaded in their Complaint that it was only in September, 2000, five months after the prospectus was issued, that OPUS abandoned its efforts to develop Enhanced Opus Xchange. (See Compl. ¶ 118; Form 10-Q for the quarter ended March 31, 2000 at 17.) The defendants' risk disclosures were adequate.
The plaintiffs also allege that the defendants have conceded that the Prospectus omitted or misrepresented several other facts relating to Enhanced Opus Xchange. These facts include, among other things, that the software was in the final stages of internal testing at the time of the IPO; there were gaping software gaps which would make it impossible for Xchange customers to interact with those offering professional services; the specific functionality promised in the Prospectus was not yet available; and one customer, J.P. Morgan, had already refused to implement the software because it was a failure. These arguments are merely more specific re-characterizations of the plaintiffs' basic allegation that the defendants did not disclose the real status of the Enhanced Opus Xchange in the Prospectus. These arguments were not conceded by the defendants. Moreover, the plaintiffs cite to no portion of the Prospectus, that indicates that there was any basis to make conclusions regarding Enhanced Opus Xchange with respect to specific functionality, security, or viability. The Prospectus spoke only in general terms about the goals of the new software, and did not delve into specifics concerning the software's programming capabilities or status. Finally, the Prospectus' general warnings about the viability of Enhanced Opus Xchange constituted sufficient disclosure regarding the product's risks and potential for failure. See Rhodes, 38 F. Supp.2d at 1363-64 (general risk disclosures regarding software sufficient notice for investors about possible technological glitches); In re Allscripts, Inc. Sec. Litig., No. 00 C. 6796, 2001 WL 743411, at * ¶ (N.D. Ill. June 29, 2001) ("When a company is candid about the risks it faces in selling its product, it has no companion duty to report every glitch that arises. This is especially true in a high-risk industry such as e-commerce, where even the most casual investor could recognize the risks without significant investigation.").
Thus, the clear warnings in the Prospectus indicating that the Enhanced Opus Xchange software was yet to be developed or sold commercially and was subject to multiple future risks sufficiently disclosed the risks that the product would never be commercially successful. No reasonable investor could have thought that investing in OPUS was an investment in a risk-free product. The plaintiffs' claims of omissions with regards to the software sold by OPUS do not satisfy the materiality requirements of § 11 or § 12 of the Securities Act and are dismissed.
D.
The claims under § 11 and § 12(a)(2) are being dismissed for failure to state a claim because the plaintiffs have not identified material misstatements or omissions. However, the plaintiffs have sought leave to replead. This is the first time that this Complaint is being dismissed and it cannot be said that the plaintiffs will be unable to identify material misstatements or omissions if given another opportunity to do so. Therefore, the claims are dismissed without prejudice. See, e.g., Canelle v. Russian Tea Room Realty, No. 01 Civ. 0616, 2002 WL 287750, at *6-7 (S.D.N.Y. Feb. 27, 2002); Baxter v. A.R.Baron Co. Inc., No. 94 Civ. 3913, 1995 WL 600720, at *8 (S.D.N.Y. Oct. 12, 1995).
III.
OPUS also moves to dismiss the Securities Act claims on the ground that it is not a "seller" of securities as defined under § 12(a)(2) of the Act. OPUS argues that it was only the issuer of the securities purchased by the plaintiff. Additionally, OPUS argues that because the IPO was conducted as a firm commitment underwriting, whereby OPUS sold its stock to the Underwriters who in turn sold to the plaintiffs, it is the Underwriters who are liable as sellers under § 12(a)(2) for any alleged misrepresentations contained in the Prospectus.
Section 12 of the Securities Act allows buyers of securities to sue the sellers from whom they purchased those securities. Section 12(a)(1) covers the sale of unregistered securities, while § 12(a)(2) imposes liability against sellers who market securities through the use of a Prospectus. The Supreme Court has held under § 12(a)(1) a seller is anyone who (1) "passed title, or other interest in the security, to the buyer for value" or (2) "who successfully solicits the purchase [of securities], motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988). Additionally, such liability may only be imposed on the "buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers. Thus, a buyer cannot recover against his seller's seller." Id. at 644 n. 21. The Court of Appeals for the Second Circuit has extended Pinter's definition of seller to claims arising under § 12(a)(2) of Securities Act. Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988).
The parties do not dispute that OPUS is not a seller under the first prong of Pinter because OPUS did not pass title of the stock directly to the plaintiffs.
OPUS, relying upon the decisions rendered by the Courts of Appeals and District Courts in other circuits, argues that the plaintiffs' complaint fails to allege sufficient facts to satisfy Pinter's second prong, requiring that OPUS actively solicited the purchases made by the plaintiffs. More precisely, OPUS asserts that there is no allegation that the plaintiffs had any direct interaction with OPUS or its directors and officers or that the plaintiffs purchased his securities as a result of any alleged solicitation.
However, the allegations in the Complaint are sufficient to withstand a motion to dismiss for lack of standing. There are sufficient allegations that OPUS satisfies the second Pinter prong. It is significant that the officers and directors of OPUS signed the registration statement that is the basis of the plaintiffs' claim. See Demaria v. Andersen, 153 F. Supp.2d 300, 307-08 (S.D.N.Y. 2001); In re APAC Teleservice, Inc. Sec. Litig., No. 97 Civ. 9145, 1999 WL 1052004, at *11 (S.D.N.Y. 1999). The signing of a registration statement is significant for purposes of finding that an issuer is a seller, even in the context of a firm commitment underwriting. See Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204, 1997 WL 20832, at *6 (S.D.N.Y. Jan. 21, 1997).
In addition, there are other allegations in the Complaint that OPUS through the Individual Defendants actively solicited the purchases made by the plaintiffs and were motivated by financial interest. The plaintiffs allege that the Individual Defendants participated in the preparation of the Registration Statement and helped promote the IPO through various "road show" presentations. (See Compl. at ¶¶ 17-19; 31; 205.) In the context of a firm commitment underwriting, an allegation that the defendant participated in the preparation of the registration statement and in road shows promoting the IPO, while motivated by the prospect for financial gain, is sufficient to constitute the active solicitation of securities. See Milman v. Box Hill Sys. Corp., 72 F. Supp.2d 220, 229-230 (S.D.N.Y. 1999); In re Am. Bank Note Holographics, Inc. Sec. Litig., 93 F. Supp.2d 424, 439 (S.D.N.Y. 2000). OPUS stood to obtain millions of dollars in the IPO, and the participation by its officers and directors in promoting the stock sale and preparation of the prospectus as well as the hiring of the Underwriters was motivated by the prospect of raising significant capital for OPUS, and constituted solicitation, regardless of whether OPUS actually interacted with the plaintiffs. Capri, 856 F.2d, at 478; In re Indep. Energy Holding PLC Sec. Litig., 154 F. Supp.2d 741, 761-62 (S.D.N.Y. 2001); Milman, 72 F. Supp.2d at 230.
The plaintiffs have sufficiently alleged that OPUS was a seller" under § 12(a)(2), and its motion to dismiss on this basis is denied.
IV.
The Selling Shareholders have also moved to dismiss the plaintiffs' § 11 and § 12(a)(2) claims. For the reasons given, this motion is granted.
The Selling Shareholders argue that the plaintiffs' § 12(a)(2) claims must be dismissed because there is no allegation in the Complaint that the Selling Shareholders sold securities to the plaintiff. As noted earlier, under Pinter a party can only be a seller under § 12 if it actually passed title of a security to the plaintiffs or if it solicited the sale of such a security. Capri, 856 F.2d at 478.
There is no allegation in the Complaint that the Selling Shareholders actually sold the plaintiffs shares of OPUS. The Selling Shareholders were only selling securities through the Subscription Program, which only made OPUS securities available to shareholders of Safeguard. (Prospectus at 104 ("Persons who owned at least 100 shares of Safeguard common stock as of December 16, 1999 are eligible to purchase shares from us under the program.").) There is nothing in the Complaint that indicates that the lead plaintiff, or any of the named plaintiffs, was a Safeguard shareholder, who could have participated in the Subscription Program. In fact, the Complaint makes clear that the plaintiffs purchased their shares through the IPO, rather than the Subscription Program, which the plaintiffs admit was an option available only to Safeguard stockholders. (Compl. at ¶¶ 13-14; 82.) Indeed at argument, counsel for the plaintiffs conceded that there were no Safeguard shareholders who were plaintiffs in this case. (Tr. at 39.) Given the absence of any allegation that any plaintiff was a Safeguard shareholder or that any plaintiff purchased OPUS shares through the Subscription Program, the Selling Shareholders do not fall within Pinter's first category of sellers, namely those who pass title to the plaintiff as direct sellers. Steed Fin. Ldc. v. Nomura Sec. Int'l Inc., No. 00 Civ. 8058, 2001 WL 1111508, at *7 (S.D.N.Y. Sept. 20, 2001).
The Selling Shareholders also do not fall within Pinter's second category of sellers which imposes liability on those who solicit the purchase of securities made by the plaintiffs. The plaintiffs must allege that the Selling Shareholders actually solicited his purchase of shares, and that he purchased OPUS shares as a result of the Selling Shareholders' solicitation. See id. at *7; Griffin v. Painewebber, Inc., No. 99 Civ. 2292, 2001 WL 740764, at *2 (S.D.N.Y. June 29, 2001). The Complaint generally alleges that the Selling Shareholders solicited sales of the shares purchased in the IPO. (Compl. at ¶ 205.) All other allegations in the Complaint regarding the Selling Shareholders speak in general terms without reference to any specific acts. Unlike the allegations raised against the Individual Defendants, there are no specific allegations in the Complaint raised against the Selling Shareholders that involve participation with the preparation of the Prospectus, the underwriting of shares purchased by the plaintiffs, the solicitation of sales through road shows, or the signing of the Prospectus. Without such specific allegations, the plaintiffs have failed to allege that the Shareholder Defendants actually solicited the shares they purchased. Steed, 2001 WL 1111508, at *7; Demaria, 153 F. Supp. 2 d. at 308. Because the plaintiffs have not alleged that the Selling Shareholders were sellers under either prong of Pinter, the § 12(a)(2) claims against the Selling Shareholders are dismissed.
The Selling Shareholders also move to dismiss the plaintiff's § 11 claims. Section 11 imposes liability on underwriters for misrepresentations and omissions contained in a Registration Statement.See 15 U.S.C. § 77k. The plaintiffs allege that the Selling Shareholders are liable under § 11 as underwriters for all the shares sold in the IPO. (Compl. at ¶¶ 195-96 (Count II).) The plaintiffs seek to hold the Selling Shareholders liable for shares sold to the public generally, in addition to those sold to the Safeguard shareholders through the Subscription Program.
The Selling Shareholders cannot be liable under § 11 for shares sold in the IPO, because they were only underwriters for the stock sold in the Subscription Program. Under the specific terms of the Prospectus, all investors were specifically placed on notice that Safeguard and CompuCom were only underwriting those shares that would be purchased by existing Safeguard stockholders. On Page 1, in bold print, the Prospectus states, in no uncertain terms,
Each of Safeguard and CompuCom is an underwriter with respect to the shares offered to the stockholders of Safeguard. Neither Safeguard nor CompuCom is an underwriter with respect to any other shares offered hereby and is not included in the term underwriter as used elsewhere in this prospectus.
(Prospectus at 1.) This make clear that, contrary to the plaintiffs' assertions, the OPUS stock was not being sold as part of a unitary offering, but in two separate sales programs, each being underwritten by entirely separate entities.
Moreover, there were other distinctions between the sales of stock by the Underwriters and those sold by the Selling Shareholders that reinforce the conclusion that the Selling Shareholders were not underwriters for any shares other than those sold through the Subscription program. First, only Safeguard stockholders could purchase stock via the Subscription Program, and the general public could not purchase through this program. Second, the shares sold to each group originated not from a common pool of OPUS stock, but from segregated pools of securities set apart before the IPO. (See Prospectus at 104.) Third, there were restrictions placed on the purchase of stock through the Subscription Program that were not present in the general offering. (See, e.g., id. (Safeguard stockholders may purchase only one share for every 20 shares of Safeguard common stock owned).) Fourth, while the Underwriters did not take on the administrative costs related to the IPO, because they were borne by OPUS, the Selling Shareholders, as limited underwriters, did take on the costs from administrating the Subscription Program. (Id.)
The purposes of holding underwriters liable under § 11 is to allow parties who purchase securities to rely upon the underwriters' activities in assuring that due diligence has been done. See generally Louis Loss Joel Seligman, Securities Litigation 4273-7375 (3rd ed. 2002). In this case, at most, the Selling Shareholders were underwriters for those buyers who were Safeguard shareholders and purchased through the Subscription Program.
Because the Selling Shareholders were only underwriters with respect to those securities sold in Subscription Program, they cannot be liable for the other shares of OPUS sold in the IPO. See 15 U.S.C. § 77b(ll) (defining "underwriter" as limited to those individuals who have some role in or participate in the sale or distribution of a particular security)
V.
The Underwriters have moved to dismiss the § 12(a)(2) claims against them based upon Gustafson v. Alloyd Co. Inc., 513 U.S. 561 (1995), which holds that the only plaintiffs who have standing to raise Section 12 claims for misrepresentations made in a Prospectus are those who purchased securities in the initial public offering, not in the secondary market or in a private placement transaction. Id. at 584;Baxter, 1995 WL 600720, at *5. The Underwriters argue that because the Complaint fails to allege that the lead plaintiff, Mr. Gianoukas, or indeed any of the named plaintiffs, purchased shares in the IPO, the 12(a)(2) claims must be dismissed.
The plaintiffs make a temporal argument, asserting that the Supreme Court's Gustafson decision only requires that individuals have purchased securities in connection with a public offering. Consequently, individuals who purchased close enough in time to the initial sale of securities and relied solely upon a prospectus in making their purchases have standing to raise claims under § 12 of the Securities Act. Alternatively, the plaintiffs argue that it is not necessary that the lead plaintiff be a purchaser in the IPO, so long as one of the named plaintiffs is such a buyer. It is not necessary to reach the merits of these arguments, because the Underwriters' standing arguments, even if correct, would only dispose of the § 12(a)(2) claims against them, and leave the § 11 claims, which are based on the same allegations of material misstatements and omissions made in the Prospectus. See In re Ultrafem Inc. Securities Litigation, 91 F. Supp.2d 678, 694 (S.D.N.Y. 2000) (noting that only § 12 standing is limited to initial purchasers); Lee v. Ernst Young, LLP., 294 F.3d 969, 978 (8th Cir. 2002); (see also Tr. at 13, 37.) The Underwriters have not argued thatGustafson's standing principles apply to the § 11 claims, and their motion would not resolve the issues related to the plaintiff's § 11 claims. Moreover, because the Complaint will be dismissed without prejudice to repleading, it is appropriate to leave for another day the question of whether the lead plaintiff must allege that he purchased shares in the IPO. Consequently, the Underwriters' motion is dismissed as moot.
VI.
Section 15 of the Securities Act provides:
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.15 U.S.C. § 77o. The plaintiffs' § 15 claims against the Individual Defendants, which are premised upon the existence of either § 11 or § 12(a)(2) liability are dismissed without prejudice to re-pleading because, as explained above, the underlying claims are dismissed.
CONCLUSION
The remaining arguments of the parties are either without
merit or moot. For the reasons explained above, the motion made by all defendants to dismiss the Complaint due to the absence of any material misstatement or omission in the Prospectus is granted without prejudice to repleading. OPUS' motion to dismiss the § 12(a)(2) claims is denied. The Selling Shareholders' motion to dismiss is granted with respect to both the § 11 and § 12(a)(2) claims. Finally, the Underwriters' motion to dismiss the § 12(a)(2) claims is denied as moot. The plaintiff may file an Amended Complaint within thirty (30) days.