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 (collectively, the "Individual Defendants") are current or former officers and directors of Projectavision.
On July 25, 1996, the Court dismissed the plaintiffs' First Amended Complaint without prejudice to the filing of a Second Amended Complaint. See Salinger v. Projectavision, Inc., 934 F. Supp. 1402 (S.D.N.Y. 1996) ("Salinger I "). The Court dismissed the plaintiffs' claim against all 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, as time-barred and for failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b). The plaintiffs' claim against the Individual Defendants for control person liability pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), necessarily fell with dismissal of the underlying Section 10(b) and Rule 10b-5 claim. The Court also declined supplemental jurisdiction over the plaintiffs' claims for common law fraud and negligent misrepresentation pursuant to 28 U.S.C. § 1367(c)(3). Familiarity with that decision is assumed.
On August 23, 1996, the plaintiffs filed a Second Amended Complaint, now nearly 100 pages, in which they again assert a claim against all defendants under § 10(b) and Rule 10b-5 based on the same filings and press releases that were challenged in the First Amended Complaint. The plaintiffs also renew their claim for control person liability under Section 20(a) of the Exchange Act against the Individual Defendants. Finally, the plaintiffs replead their claims for common law fraud and negligent misrepresentation under New York law against all of the defendants. The plaintiffs also seek to certify this suit as a class action on behalf of those purchasers of securities of Projectavision who purchased those securities between November 2, 1992, and April 7, 1995 (the "Class Period").
The defendants now move to dismiss the Second Amended Complaint.
The defendants argue that the plaintiffs' § 10(b) and Rule 10b-5 claim is time-barred and that the plaintiffs have failed to plead scienter properly pursuant to Federal R. Civ. P. 9(b). They also contend that the control person liability claim must be dismissed because there is no valid underlying securities fraud claim alleged. The defendants urge the Court to decline supplemental jurisdiction over the two state law claims if the claims under the Exchange Act are dismissed. For the reasons explained below, the defendants' motion is granted.
On a motion to dismiss, the factual allegations of the complaint are to be accepted as true and all reasonable inferences are construed in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir.), cert. denied, 513 U.S. 836, 130 L. Ed. 2d 63, 115 S. Ct. 117 (1994). Moreover, a court may consider SEC filings, even where they are not referenced in the complaint, see Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir. 1991); Salinger I, 934 F. Supp. at 1405, and the full text of press releases, magazine articles, analyst's reports, and wire service stories that are referred to or quoted from in the complaint, see San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 808-09 (2d Cir. 1996); Salinger I, 934 F. Supp. at 1405. A court should dismiss a complaint under Fed. R. Civ. P. 12(b)(6) 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.'" Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).
The allegations in the Second Amended Complaint substantially duplicate those in the First Amended Complaint. The facts as alleged in the Second Amended Complaint and the relevant provisions of Projectavision's SEC filings are as follows. Projectavision is a company that has attempted to develop a solid state tubeless projection television system that employs a patented depixelization technology and a liquid crystal display. (Second Am. Compl. P 2.) The depixelization technology was developed originally by Dolgoff, (Second Am. Compl. P 33), and in partnership with Maslow, (Second Am. Compl. P 34), Projectavision was formed in 1988. (Second Am. Compl. P 35.) On July 31, 1990, Dolgoff and Maslow took Projectavision public. (Second Am. Compl. P 37.) Projectavision continued as a development company over the next several years, financing its research and development through further sales of its securities. (Second Am. Compl. P 38.) During 1991 and 1992 the company reported no revenue, (Second Am. Compl. P 38), and during 1993 and 1994 it conducted eleven private securities placements raising over $ 12 million. (Second Am. Compl. P 41.) During this time, the company sustained mounting losses: approximately $ 1.6 million in 1991, $ 2 million in 1992, $ 2.7 million in 1993, and $ 5.6 million in 1994. (Second Am. Compl. P 40.)
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 and the state of development of Projectavision's products.
On or about November 2, 1992, Projectavision announced that a major Japanese electronics manufacturer intended to license Projectavision's proprietary depixelization technology. (Second Am. Compl. P 44.) 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." (Second Am. Compl. P 44.) 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. (Second Am. Compl. P 46.) 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." (Second Am. Compl. P 46.) On March 31, 1993, Projectavision disclosed that it had signed a patent license with Matsushita Electric Industrial Co., Ltd. ("Matsushita"). (Second Am. Compl. P 48.) 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." (Second Am. Compl. P 51.)
The market price of Projectavision common 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. (Second Am. Compl. P 50.) The market prices of Projectavision's preferred stock and warrants posted similar gains. (Second Am. Compl. P 50.)
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 allege that the Matsushita license was not a genuine marketing breakthrough and did not represent the beginning of the company's transformation from a development company to a producer of projection television systems. In reality, the plaintiffs contend, the agreement was merely a settlement of Matsushita's alleged infringement of Projectavision's patent. Pursuant to the license Matsushita agreed to remove the infringing technology from its product line and to pay Projectavision a one-time "royalty" of $ 105,000. Although the agreement did include terms governing any future use of Projectavision technology by Matsushita, Matsushita allegedly did not intend to act as a licensee. Subsequent SEC filings reported the receipt of the $ 105,000 payment in 1993, although the plaintiffs complain that Projectavision misrepresented in its quarterly SEC filings that it "began receiving revenue for licensing of its technology," knowing the $ 105,000 was an isolated payment. (Second Am. Compl. PP 58, 98.)
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 to investors." (Second Am. Compl. P 56.) 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 the while under the misimpression that the license represented the company's first genuine marketing relationship rather than the compromise of a patent infringement claim. (Second Am. Compl. PP 61, 104.)
Through the end of 1994 Projectavision entered into several other license agreements with companies such as CMC Magnetics Corp. of Taiwan, (Second Am. Compl. P 64), Samsung Electronics Co., (Second Am. Compl. P 107), and Alternate Realities Corp. (Second Am. Compl. P 109.) 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. (Second Am. Compl. PP 79, 82, 84, 86, 91.) In mid-1994 Projectavision announced it would unveil two new prototype television projectors at the summer Consumer Electronics Show in Chicago. (Second Am. Compl. P 101.) 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. (Second Am. Compl. P 111.)
The plaintiffs allege that the defendants' statements 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." (Second Am. Compl. P 113.)
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." (Second Am. Compl. P 120.) 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 ...." (Second Am. Compl. P 126.) In fact, those same memoranda reveal that Dolgoff himself was blamed for the company's inability to make product advances. (Second Am. Compl. PP 116-19.)
The plaintiffs also 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 mandatory payments or requirements that the licensee use Projectavision's technology. (Second Am. Compl. P 121.) 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. (Second Am. Compl. P 121.)
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 ...