help the plaintiffs. Indeed, it undermines their claims. If the plaintiffs did not believe that the manufacture of Projectavision's products was imminent because a development stage company would encounter delays in actually bringing a product into commercial production, then they were not defrauded by statements that they now allege promised imminent production.
With respect to the defendants' alleged misrepresentation that the licenses were about to generate a steady stream of royalty income, the plaintiffs' allegation that they believed that Projectavision possessed a commercially viable product whose market introduction was imminent is contradicted by the financial results and cautionary language that appeared in Projectavision's SEC filings. (Weyman Aff. Ex. F [April 1993 Form 10-K for 1992] at 8, 21; Weyman Aff. Ex. G [October 1992 Form S-3] at 5-6; Weyman Aff. Ex. H [Dec. 1993 Amendment No. 1 to Form S-3] at 5-6; Weyman Aff. Ex. I [Dec. 1993 Prospectus] at 5-6; Weyman Aff. Ex. J [March 1994 Form 10-K for 1993] at 23-25, F-11.) "The information available in Projectavision's SEC filings, combined with information reported in the very press reports on which the plaintiffs rely and the failure of royalty income to develop would place an investor of ordinary intelligence on notice that the investor should inquire about the truthfulness of any representations that the licenses would be extremely lucrative." Salinger I, 934 F. Supp. at 1412. Thus, the statute of limitations began to run by March 1994 when the plaintiffs were placed on inquiry notice of the alleged fraud.
The plaintiffs also contend that the defendants' fraudulent concealment of material facts rendered any investigation futile. Although it is not clear that the doctrine of fraudulent concealment can toll the statute of limitations for a securities fraud claim, compare Lampf, 501 U.S. at 363 (finding that "the equitable tolling doctrine is fundamentally inconsistent with the 1-and-3-year structure" for the statute of limitations for § 10(b) and Rule 10b-5 claims) with Dodds, 12 F.3d at 352 ("If the defendants actively prevented [the plaintiff] from discovering the basis of her claim, then the statute would be tolled for the period of concealment."), the plaintiffs in any event have failed to plead fraudulent concealment with the particularity required by Fed. R. Civ. P. 9(b).
Under the doctrine of fraudulent concealment, the statute of limitations will be tolled if the plaintiff pleads, with particularity, either active concealment or passive concealment. In order to establish active concealment, the plaintiff must prove that the defendant took subsequent affirmative steps in addition to the original fraud to prevent the plaintiff from discovering the fraud. See Butala v. Agashiwala, 1997 U.S. Dist. LEXIS 1934, 1997 WL 79845, at *6 (S.D.N.Y. 1997); Borden, Inc. v. Spoor Behrins Campbell & Young, Inc., 778 F. Supp. 695, 700-01 & n.7 (S.D.N.Y. 1991). Where there is active concealment, the plaintiff is not required to establish due diligence; the statute of limitations is tolled until the plaintiff has actual knowledge of the defendant's fraudulent conduct. See Robertson v. Seidman & Seidman, 609 F.2d 583, 593 (2d Cir. 1979); Butala, 1997 U.S. Dist. LEXIS 1934, 1997 WL 79845, at *6.
Passive concealment occurs when the defendant commits fraud but then takes no further action to disguise the fraud from the plaintiff. See Butala, 1997 U.S. Dist. LEXIS 1934, 1997 WL 79845, at *7; Clute v. Davenport Co., 584 F. Supp. 1562, 1578 n.4 (D. Conn. 1984). In order to establish passive concealment, the plaintiff must prove that the defendant wrongfully concealed the fraud, that the plaintiff exercised due diligence in pursuing discovery of the fraud, and that the plaintiff failed to discover the fraud within the limitations period. See Butala, 1997 U.S. Dist. LEXIS 1934, 1997 WL 79845, at *7; Griffin v. McNiff, 744 F. Supp. 1237, 1256 (S.D.N.Y. 1990), aff'd, 996 F.2d 303 (2d Cir. 1993).
In pleading either passive or active concealment, the plaintiff must comply with the particularity requirements of Rule 9(b) of the Federal Rules of Civil Procedure. See Butala, 1997 U.S. Dist. LEXIS 1934, 1997 WL 79845, at *7; Greenwald v. Manko, 840 F. Supp. 198, 202 (E.D.N.Y. 1993).
In their Second Amended Complaint, the plaintiffs allege that during the Class Period the defendants fraudulently concealed material facts concerning their wrongful conduct as well as the company's inability to generate substantial licensing revenues or to produce a commercially feasible projection television system. (Second Am. Compl. P 126.) The plaintiffs contend that because of the defendants' fraudulent concealment, the plaintiffs were not given reason to suspect fraudulent wrongdoing, and any inquiry would have been futile. (Second Am. Compl. P 126.) Because the plaintiffs have not alleged any facts showing that they exercised due diligence in pursuing discovery of the alleged fraud, they have not made out a claim for passive concealment. Moreover, although couched in the term of fraudulent concealment, the plaintiffs' allegations amount to no more than an argument that the information in the public domain was insufficient to put them on inquiry notice of the alleged fraud.
As explained above, however, the plaintiffs were on inquiry notice of the alleged fraud for more than one year before they filed their complaint.
The plaintiffs have also failed to alleged active concealment because they have not alleged any facts showing that the defendants took subsequent affirmative steps in addition to the original alleged fraud to prevent the plaintiffs from discovering the fraud. As in Dodds v. Cigna Secs., Inc., 12 F.3d 346 (2d Cir. 1993), cert. denied, 511 U.S. 1019, 128 L. Ed. 2d 74, 114 S. Ct. 1401 (1994), there are no allegations that the defendants prevented or discouraged the plaintiffs from reviewing the disclosure documents that provided adequate notice of the alleged fraud. See id. at 352. Thus, because the plaintiffs have not pleaded either passive or active concealment with particularity, the statute of limitations is not tolled.
Accordingly, the defendants' motion to dismiss the plaintiffs' § 10(b) and Rule 10b-5 claim as time-barred is granted.
The defendants also assert that the plaintiffs' § 10(b) and Rule 10b-5 claim should be dismissed because the plaintiffs have failed to plead scienter properly pursuant to Fed. R. Civ. P. 9(b). Allegations of securities fraud under § 10(b) and Rule 10b-5 are subject to Rule 9(b)'s requirements regarding scienter. See Chill v. General Elec. Co., 101 F.3d 263, 266 (2d Cir. 1996); Acito v. IMCERA Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127-28 (2d Cir. 1994); Salinger I, 934 F. Supp. at 1413. To plead scienter properly a plaintiff must allege facts giving rise to a strong inference of fraudulent intent. The inference may be established either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128; see also Chill, 101 F.3d at 267; In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268-69 (2d Cir. 1993), cert. denied sub. nom Ross v. ZVI Trading Corp. Employees' Money Purchase Pension Plan, 511 U.S. 1017, 128 L. Ed. 2d 70, 114 S. Ct. 1397 (1994); Salinger I, 934 F. Supp. at 1413. Although Rule 9(b) only requires that "malice, intent, knowledge, and other condition of mind of a person may be averred generally," this somewhat more relaxed pleading requirement "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations[,]" Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990), in light of Rule 9's purpose of providing defendants with fair notice of the plaintiffs' claims, safeguarding defendants' reputations from improvident allegations of malfeasance, and protecting defendants against strike suits, see O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991).
As the Court of Appeals for the Second Circuit has explained:
A common method for establishing a strong inference of scienter is to allege facts showing a motive for committing fraud and a clear opportunity for doing so. Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater.