The opinion of the court was delivered by: KOELTL
JOHN G. KOELTL, District Judge:
This is an action for securities fraud based on allegedly false representations and omissions by the defendants in Projectavision, Inc.'s filings with the Securities and Exchange Commission ("SEC") its press releases, and other public statements. Projectavision is a Delaware corporation with its principal place of business in New York City. Projectavision's securities are publicly traded on the over-the-counter market and quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") system. Defendants Maslow, Dolgoff, Holleran, and Ladd (the "Individual Defendants") are current or former officers and directors of Projectavision. In the First Amended Complaint, the plaintiffs assert claims against all of the defendants under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Against the Individual Defendants the plaintiffs also assert a claim for control person liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Finally, the plaintiffs assert claims for common law fraud and negligent misrepresentation under New York law against all of the defendants. The plaintiffs seek to certify this suit as a class action on behalf of those purchasers of securities of Projectavision who traded between November 2, 1992 and April 7, 1995 (the "Class Period").
The defendants now move to dismiss the First Amended Complaint.
The defendants argue that the securities fraud claim under § 10(b) is time-barred and also that it fails to state a claim on which relief may be granted pursuant to Fed. R. Civ. P. 12(b)(6), and that the First Amended Complaint fails to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b). The Individual Defendants also argue that the § 20(a) claim for control person liability fails to state a claim and is improperly pleaded. Finally, the defendants urge the Court to decline supplemental jurisdiction over the two state law claims if the claims under the Exchange Act are dismissed.
The plaintiffs resist the motion on all grounds and seek leave to replead should the Court determine that the First Amended Complaint lacks particularity.
For the reasons that follow the defendants' motions are granted under both Fed. R. Civ. P. 12(b)(6) and 9(b).
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, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); see Goldman, 754 F.2d at 1065.
The First Amended Complaint includes quotes from Projectavision's various SEC filings, including its Form 10-K, 10-Q, and S-3 shelf registration filings. (See FAC
PP 46, 48, 56, 57, 65-67, 70, 77.) The First Amended Complaint does not incorporate the SEC filings in their entirety nor are those documents attached as exhibits. Nonetheless, the defendants have submitted complete copies of Projectavision's Form S-1 Registration Statement, Amendments and related Prospectus, Form S-3 Registration Statement, Amendment, and related Prospectus, and Form 10-K's for the years 1992, 1993, and 1994. The defendants cite these documents liberally in their motions to dismiss.
The plaintiffs have objected to the defendants' submission of documents not referred to or incorporated in the First Amended Complaint such as the Form S-1 Registration Statement, the various Amendments to both the Form S-1 and Form S-3 Registration Statements, and the respective Prospectuses. The plaintiffs argue that the Court may not consider documents neither cited in the complaint nor incorporated by reference. The plaintiffs also argue that some of these documents predate the Class Period. Although it is true that these SEC filings were not referenced in the complaint, they are required public disclosure and therefore properly considered on a motion to dismiss under Fed. R. Civ. P. 12(b)(6). Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir. 1991) (text of public disclosure documents filed with SEC may be considered).
The First Amended Complaint also includes myriad references to and direct quotations from press releases, magazine articles, analyst's reports and wire service stories. (See FAC PP 40, 41, 42, 44, 45, 49-55, 58-64, 68, 69, 72-75, 84.) The defendants have supplied the complete text from these sources and the plaintiffs have not objected to the Court's consideration of these submissions. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 808-09 (2d Cir. 1996) (district court may consider full text of documents integral to the complaint even where only limited quotations included).
The facts as alleged in the First Amended Complaint and the relevant provisions of Projectavision's SEC filings are as follows.
Projectavision is a company developing a solid state tubeless projection television system employing a patented depixelization technology and a liquid crystal display. (FAC P 2.) The depixelization technology was developed originally by Dolgoff, (FAC P 33), and in partnership with Maslow, (FAC P 34), Projectavision was formed in 1988. (FAC P 35.) On July 31, 1990, Dolgoff and Maslow took Projectavision public. (FAC P 37.) Projectavision continued as a development company over the next several years, financing its research and development through further sales of its securities. (FAC P 38.) During 1991 and 1992 the company reported no revenue, (FAC P 38), and during 1993 and 1994 it conducted eleven private securities placements raising over $ 12 million. (FAC P 38.) During this time, the company sustained mounting losses: $ 1.6 million in 1991, $ 2 million in 1992, $ 2.7 million in 1993, and $ 5.6 million in 1994. (FAC P 77.)
According to the plaintiffs, the defendants misled the investing public through public announcements and SEC filings in order to prop up the stock price and sustain Projectavision's repeated trips to the capital markets for financing. The alleged misrepresentations and omissions relate principally to the characterizations of certain licensing agreements Projectavision executed beginning in late 1992.
On or about November 2, 1992, Projectavision announced that a major Japanese electronics manufacturer intended to license Projectavision's proprietary depixelization technology. (FAC P 40.) Maslow, now Projectavision's Chief Executive Officer, declared: "We are very excited by these developments. We believe that it affirms the commercial viability of our technology. Most significantly, this event marks our transition from research and product development to the beginning of international distribution and sale of products enhanced by the company's technology." (FAC P 40.) On or about March 1, 1993, Projectavision announced it had agreed to many of the terms of its prospective license agreement, including the amount of royalty payments. (FAC P 41.) Maslow publicly announced the progress towards an agreement, stating in a press release: "This event marks the culmination of our research and product development activity. We are excited about beginning the international sale and distribution of television products utilizing Projectavision's proprietary technology." (FAC P 41.) On March 31, 1993, Projectavision revealed it had signed a patent license with Matsushita Electric Industrial Co., Ltd. ("Matsushita"). Company officials reportedly commented that although the terms of the Matsushita license were confidential, Projectavision expected that "products using [the Projectavision feature] are imminent and Projectavision would be mentioned in Matsushita product literature." (FAC P 44.)
The market price of Projectavision stock nearly doubled from $ 8 3/4 per share at the close of trading just prior to the March 1 press release to $ 16 1/4 per share on the day the agreement with Matsushita was announced. (FAC P 43.) The market prices of Projectavision's preferred stock and warrants posted similar gains. (FAC P 43.)
In its Form 10-K filing for the period ended December 31, 1992, filed April 15, 1993, Projectavision disclosed the following information about the Matsushita license:
On March 29, 1993, [Projectavision] entered into a patent license agreement with [Matsushita] which granted Matsushita the right to use Projectavision's patented depixelization video projection technology in connection with the manufacturing and marketing of an advanced tubeless consumer television system in the United States . . . . Upon signing the [license], [Projectavision] received funds from Matsushita in connection with Projectavision's agreement with Matsushita relating to certain matters concerning Projectavision's proprietary technology. The sum received from Matsushita, as well as other terms and conditions of the Matsushita License, are expressly subject to strict confidentiality provisions set forth in the Matsushita License.
(Weyman Aff., Ex. F [Form 10-K 1992] at 8.)
The plaintiffs contend that there was "no reasonable basis for [Projectavision] to lead investors and the investment community to believe that this agreement would create exciting revenue potential for Projectavision and to continue to tout the existence of the Matsushita licensing agreement." (FAC P 47.) The plaintiffs assert that research analysts based their positive assessment of the prospects for Projectavision's stock on the potential for royalty income from the Matsushita license, all while under the misimpression that the license represented the company's first genuine marketing relationship rather than the compromise of a patent infringement claim. (See FAC PP 50, 71.)
Through the end of 1994 Projectavision entered into several other license agreements with companies such as CMC Magnetics Corp. of Taiwan, (FAC P 53), Samsung Electronics Co., (FAC P 73), and Alternate Realities Corp. (FAC P 74.) The company also continued its research and development efforts, culminating with the demonstration of a prototype projection television at the Consumer Electronics Show in January 1994. (FAC PP 59-63.) In mid-1994 Projectavision announced it would unveil two new prototype television projectors at the summer Consumer Electronics Show in Chicago. (FAC P 69.) Another "debut" of Projectavision's depixelization technology in the form of a prototype fifty-inch rear projection television took place at the next Consumer Electronics Show in early 1995. (FAC P 75.)
The plaintiffs allege that the defendants' misrepresentation of the nature and significance of the Matsushita license conveyed the false impression that Projectavision's depixelization technology was "imminently ready for commercial exploitation by major television and electronics manufacturers, and that, as a result, Projectavision would soon be receiving a steady stream of extremely lucrative licensing revenues." (FAC P 76.)
The plaintiffs also allege that Dolgoff, Projectavision's founder, one-time President and chief scientist, corroborates their contention that the company was misrepresenting the state of its product development. On April 7, 1995 Dolgoff filed a lawsuit in New York Supreme Court alleging that he had warned the other directors that "dissemination to the financial community of technical and commercialization assessments was far too optimistic." (FAC P 83.) Dolgoff attached internal Projectavision documents to his complaint in support of his claim that the there were "severe difficulties . . . in developing and marketing [the] technology . . . ." (FAC P 89.) In fact, those same memoranda reveal that Dolgoff himself was blamed for the company's inability to make product advances. (See FAC PP 79-82.)
Additionally, the plaintiffs allege that even Projectavision's other license agreements with CMC Magnetics, Samsung, and Alternate Realities were one-sided in the sense that there were no mandated payments or requirements that the licensee use Projectavision's technology. (FAC P 84.) The plaintiffs maintain that the defendants failed to disclose this aspect of the licenses, leaving the mistaken impression that these transactions would soon generate a steady royalty stream. (FAC P 84.)
The plaintiffs allege that the market price of Projectavision securities dropped precipitously from the first half of 1993 to the present and that the collapse of Projectavision stock was attributable to the defendants' fraud. (See FAC PP 8, 85, 88.)