this district has also held that motive an opportunity alone do not suffice to meet the PSLRA's pleading requirement. In Re Baesa Sec. Litig., 969 F. Supp. 238 (S.D.N.Y. 1997) (Rakoff, J.). In reaching his conclusion, Judge Rakoff relied on the "plain language of the statute" rather than on legislative history. Id. at 242 & n.2. Regardless of whether the route was legislative history or statutory analysis, both decisions point unmistakably the same direction: the law in this district (unless and until and Circuit says otherwise) is that "motive and opportunity" alone will no longer suffice to meet the required pleading standard. Compare In Re Health Management, Inc. Sec. Litig., 970 F. Supp. 192 (E.D.N.Y. 1997) ("motive or opportunity" test survives PSLRA).
That "motive and opportunity" no longer automatically suffices to raise a strong inference of scienter does not mean that facts relating to motive and opportunity are not relevant to the scienter analysis. Such facts must be considered--along with other facts pled--in assessing whether a complaint raises a strong inference of knowing misrepresentation.
Judge Rakoff also discussed an additional matter that requires comment. He concluded that a showing of recklessness did suffice to meet the PSLRA's "required state of mind." 15 U.S.C. § 78u-4(b)(2). As noted above, prior to the PSLRA the Circuit allowed a "strong inference" to be established by circumstantial evidence of either reckless or conscious behavior. Time Warner, 9 F.3d at 269. In Norwood, I concluded that the PSLRA's knowing misrepresentation standard was met when a plaintiff alleged facts indicated conscious behavior by the defendants. Norwood, 959 F. Supp. at 208. Although I did not specifically reject the pre-PSLRA recklessness standard, I cited Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42 (D. Mass. 1997), for the proposition that the PSLRA did not codify the Second Circuit's motive, opportunity or recklessness standard.
Referring to Norwood, Friedberg and Silicon Graphics, Judge Rakoff noted that "while some of the language in these cases suggests that Congress rejected 'recklessness' as sufficient to satisfy the scienter requirement, the cases may also be read as simply reinforcing the requirement that recklessness in this context include a conscious component." Baesa, 969 F. Supp. at 241 n.1.
Let me be clear, or perhaps I should say clearer: the statute did not change the substantive law but merely the pleading requirement necessary to survive a motion to dismiss, i.e. that the complaint state facts raising a strong inference of scienter. The required scienter, however, remains the same, and has long been held in this Circuit (and others) to include conscious recklessness. See Time Warner, 9 F.3d at 269; Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978). I emphasize, however, that recklessness sin this context approximates actual intent, and is not merely a heightened form of negligence. See also Chill v. General Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996).
2. The Complaint
With this pleading standard in mind, I turn to an examination of the facts alleged in the complaint. The only facts alleged that raise an inference of scienter are the sale of shares by defendants during the month of February. "While unusual insider trading activity during the class period may permit an inference of bad faith and scienter," plaintiffs bear the burden of showing that any such sale are in fact unusual. Acito, 47 F.3d at 54 (emphasis added); Duncan v. Pencer, 1996 U.S. Dist. LEXIS 401, No. 94 Civ. 0321 (LAP), 1996 WL 19043 (S.D.N.Y. Jan. 18, 1996). Plaintiffs here point to the high volume of February sale by seven of the eleven individual defendants. As defendants point out, however, such sales were not unusual, as the individual defendants had engaged in such sales in prior months as well, and in fact most sold more stock in 1995 than in 1996.
Furthermore, defendants still owned over 3 million shares of Glenayre stock at the of February, and their sales accounted for only approximately 5% of their holdings.
Compare Acito, 47 F.3d at 54 (sales of 11% of holdings do not raise inference of scienter); Rehm v. Eagle Finance Corp., 954 F. Supp. 1246, 1255 (N.D. Ill. 1997) (scienter cannot be inferred from sale of 6% of holdings). Finally, the Second Circuit has repeatedly noted that "the fact that other defendants did not sell their shares during the relevant class period undermines plaintiffs' claim that defendants delayed notifying the public 'so that they could sell their stock at a huge profit.'" Acito, 47 F.3d at 54 (citation omitted); San Leandro Emergency Medical Group Profit Sharing Plan, 75 F.3d 801, 814 (2d Cir. 1996). The February sales, therefore, do not establish the requisite "strong inference" of scienter.
Having failed to meet the PSLRA's requirements regarding scienter, the complaint must be, and hereby is, dismissed. Because plaintiffs have articulated a troubling factual scenario, however, leave to replead is granted and plaintiffs may file a Second Amended Complaint within 45 days of a the date of this opinion. Such complaint shall indicate, in bold face type of otherwise, those factual allegations that are different from the Amended Complaint here at issue.
C. Outside Directors
The Outside Directors also move to dismiss based on the failure to (a) allege facts identifying their role in issuing the alleged misrepresentations, see Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993) (complaint must link fraudulent statements to particular directors) and (b) the failure to allege facts establishing control person liability, see Sloane Overseas Fund, LTD v. Sapiens Int'l Corp., N.V., 941 F. Supp. 1369, 1378 (S.D.N.Y. 1996) ("Director status alone does not establish control person liability."). Plaintiffs respond by arguing that the defendants can be held liable for the alleged misrepresentations because of their participation in a scheme to defraud and that they need not identify each defendant's specific role before they have had an opportunity to conduct discovery. See Hallet v. Li & Fung, LTD, 1996 U.S. Dist. LEXIS 12513, No. 95 Civ. 8917 (JSM), 1996 WL 487952 at *3-4 (S.D.N.Y. Aug. 27, 1996). As for control person liability, plaintiffs argue that such a determination is a question of fact, though they fail to identify what facts alleged would establish such liability (other than the fact that Glenayre has referred to its Board as "active").
In light of the dismissal of the complaint, the Court reserves judgment on these aspects of defendants' motions. Plaintiffs are encouraged, however, to address these concerns in their Amended Complaint.
D. McConnell's Motion to Dismiss for Insufficient Service
Defendant Alma McConnell moves to dismiss the complaint against her for insufficient service of process. Ms. McConnell lives in Canada and plaintiffs initially served her only at Glenayre offices in New York and North Carolina, even though she resigned from the Board in February 1996, long before suit was filed. Plaintiffs do not defend their U.S. service attempts, but contend in their opposition papers that they have since effectuated service in Canada in accordance with Rule 4(f), a fact which McConnell does not dispute. Because Rule 4(m)'s 120-day rule does not apply to foreign service effectuated pursuant to Rule 4(f), the Court holds that service was proper. Nevertheless, the complaint against McConnell is dismissed for the reasons discussed above.
II. Motion to Transfer Venue
Because leave to replead is granted, the Court addresses defendants' motion to transfer venue to the Western District of North Carolina, where Glenayre's headquarters are located. Defendants concede venue is proper in New York and that 5 of the individual defendants live in New York state. Nevertheless, they argue the case should be transferred because the relevant documents are in North Carolina, the alleged acts occurred there, 25 non-party witnesses from Glenayre reside there, trial in New York would be disruptive to the company and the North Carolina docket is less congested. They also argue that plaintiff's choice of forum is entitled to little deference in class actions. Cf. Eichenholtz v. Brennan, 677 F. Supp. 198, 202 (S.D.N.Y. 1988) (plaintiff's choice of forum given less deference in derivative suit).
Plaintiffs counter that numerous defendants reside in the New York area, numerous analyst witnesses are from New York and the location of documents is irrelevant in the modern age of copying. While defendants make a sympathetic case for transfer, the Court cannot accept their argument that trial in New York would be exceptionally disruptive to the Company. Depositions of relevant persons can take place in North Carolina, documents can be copied and shipped to New York as easily as to an office in North Carolina and the New York based defendants (and plaintiffs) have a right to have the case litigated in this forum. The motion to transfer is DENIED.
For the reasons discussed above, the motions to dismiss are GRANTED, with leave to replead within 45 days. The motion to transfer in DENIED.
Dated: November 4, 1997
New York, New York
Harold Baer, Jr.