The opinion of the court was delivered by: JONES
UNITED STATES DISTRICT JUDGE
This case involves plaintiffs' investment in a company, defendant American Sensors Inc. ("American Sensors" or the "Company"), that had experienced tremendous growth in its short operating history. When the Company's stock price fell, this suit immediately followed.
Plaintiffs filed this action on behalf of a class of persons who purchased American Sensors' stock through a secondary offering in January, 1995. Plaintiffs contend that the Company, its officers and directors, and the underwriters involved in the offering made material misrepresentations through statements and omissions in the prospectus for the offering and at road shows promoting American Sensors' stock in violation of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (the "1933 Act").
Pending is a motion to dismiss plaintiffs' Consolidated and Supplemental Class Action Complaint (the "Complaint") pursuant to Federal Rules of Civil Procedure 9(b), 12(b)(1), and 12(b)(6) by defendants PaineWebber Incorporated ("PaineWebber") and Schroder Wertheim & Co. Incorporated ("Schroder Wertheim") (collectively, the "Underwriter defendants").
For the reasons stated below, the motion is granted.
FACTUAL ALLEGATIONS AND PROCEDURAL HISTORY1
Defendant American Sensors is a Canadian company that, at the time this suit was filed, manufactured residential carbon monoxide detectors ("CO detectors"), smoke detectors, and other hazardous gas detectors. (Consol. and Supp. Class Action Compl. ("Compl."), dated August 16, 1995, PP 10, 21.) Its growth has primarily been through CO detector sales. (Compl. P 22.) Although incorporated in May, 1993, the Company first went public in December, 1993. (Compl. P 21.)
In January, 1995, Underwriter defendants PaineWebber and Schroder Wertheim led a syndicate that handled American Sensors' secondary public offering through a firm commitment underwriting.
(Prospectus at 49.)
Prior to this secondary offering, in November, 1994, American Sensors filed a preliminary prospectus (the "Prospectus") and registration statement with the SEC. (Compl. P 24.) Given the timing of the filing, the Prospectus made no representations about the quarter ending December 31, 1994, which generated record income for American Sensors. In that quarter, net income - - $ 4.3 million - - was 34% greater than that for the prior quarter ending September 30, 1994 and 59 times greater than that for the comparable quarter ending December 31, 1993. (See Aff. of Dennis Block, dated Oct. 2, 1995, Ex. B (Form 10-Q) at 20; Prospectus at 18.) Rather, the Prospectus reported data through the latest completed quarter - - that ending September 30, 1994.
Also in December, 1994 and early January, 1995, representatives of American Sensors, PaineWebber, and Schroder Wertheim went on a series of "road shows" in various cities, meeting with institutional investors to stimulate market interest in the Company's stock and to determine the price at which it could be sold at the offering. (Compl. PP 26-27, 29-33.) Estimates were provided that American Sensors' earnings would be more than $ 1.00 per share for the fiscal year ending June 30, 1995, and more than $ 1.35 per share for the fiscal year ending June 30, 1996. (Compl. P 28.)
The Prospectus became effective on January 26, 1995, initiating the secondary public offering. Approximately two million shares, at a price of $ 15.00 per share, were acquired. (Compl. PP 10, 37.) Plaintiffs individually purchased American Sensors' stock "pursuant to or traceable to" the offering. (Compl. PP 5-9.)
Consistent with predictions, on February 3, 1995, PaineWebber analyst Jeffrey Sprague ("Sprague") projected that American Sensors would earn $ 1.04 per share for the fiscal year ending June 30, 1995, and $ 1.36 for the fiscal year ending June 30, 1996. (Compl. P 35.)
Slightly one month after the Prospectus became effective, however, on March 1, 1995, American Sensors issued a press release announcing that "the Company anticipates that results of operations for the third quarter of its 1995 fiscal year, covering January, February, and March 1995, may be lower than has been anticipated." (Compl. P 51.) That day, Sprague issued a new report downgrading American Sensors from "buy" to "neutral" in order "to reflect slower than expected carbon monoxide (CO) unit shipments in February and concerns about the near term outlook." (See Compl. P 52 (referencing the report); Aff. of Dennis Block, Exh. F.)
The issuance of American Sensors' March 1, 1995 press release caused the price of its common stock to fall to $ 8.25 per share, down $ 2.375 per share. (Compl. P 55.) Within 48 hours, various purchasers in American Sensors' secondary public offering filed two separate lawsuits alleging violations of federal securities laws. One week later, a third action was filed.
On May 31, 1995, the parties entered into Stipulation and Pre-Trial Order No. 1 consolidating the individual actions under the instant caption and permitting plaintiffs to file a consolidated amended complaint.
On March 25, 1997, American Sensors filed a voluntary petition for reorganization under Canada's Companies' Creditors Arrangement Act, R.C.S. 1985, C-36. The next day, Canada's Ontario Court, General Division entered an order saying all proceedings against American Sensors; the order asked American courts to "act in aid of and to be complementary" to it. On May 5, 1997, this Court granted a stay of the proceedings against American Sensors and the individual defendants.
The Court did not, however, stay the case with regard to the Underwriter defendants.
Thus, the Court proceeds to rule on the motion pending with regard to those defendants.
I. LEGAL STANDARD UNDER RULE 12(b)
In deciding the defendants' motion to dismiss the Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), the Court views the Complaint in the light most favorable to the plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Shapiro v. AOE/Ricoh, Inc., Ricoh Corp., 1997 U.S. Dist. LEXIS 11443, 96 Civ. 7274, 1997 WL 452026, at *2 (S.D.N.Y. August 7, 1997). The Court must accept the factual allegations contained in the Complaint as true and draw all inferences in the plaintiffs' favor. Cooper v. Pate, 378 U.S. 546, 546, 12 L. Ed. 2d 1030, 84 S. Ct. 1733 (1964); Kaluczky v. City of White Plains, 57 F.3d 202, 206 (2d Cir. 1995).
For purposes of this motion, the "Complaint" includes both the documents it references and publicly available disclosure documents. (See supra, n.1.)
The Court may grant a motion to dismiss 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." Sheuer v. Rhodes, 416 U.S. at 236; accord Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994).
As an initial matter, the Underwriter defendants contend that plaintiffs do not have standing to assert their claims under the 1933 Act because they failed to allege (1) that they purchased their shares in the offering and (2) facts sufficient to establish a buyer-seller relationship. The Court disagrees and concludes that plaintiffs have sufficiently alleged standing.
First, because plaintiffs have alleged that they purchased securities "pursuant to or traceable to" a public offering, they have sufficiently alleged that they purchased their shares in the public offering at issue. See In re U.S.A. Classic Secs. Litig., 1995 U.S. Dist. LEXIS 8327, 93 Civ. 6667, 1995 WL 363841, at *3 (S.D.N.Y. June 19, 1995) (finding standing under § 12(2) where plaintiffs alleged purchase "pursuant to" a registration statement); In re AES Corp. Secs. Litig., 825 F. Supp. 578, 593 (S.D.N.Y. 1993) (finding standing where plaintiffs alleged that they purchased securities "traceable to" the public offering at issue).
Second, plaintiffs have adequately plead a buyer-seller relationship with the Underwriter defendants by alleging that (1) the underwriters promoted the offering and solicited buyers at "road shows," and (2) they did so to benefit themselves and American Sensors. See In re Westinghouse Secs. Litig., 90 F.3d 696, 715-16 (3d Cir. 1996) (stating that buyer-seller relationship is demonstrated by allegation that underwriter successfully solicited the purchase of shares, motivated at least in part by a desire to serve its own financial interests or those of the securities owner); Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988); Pallickal v. Technology Int'l. Ltd., 1996 U.S. Dist. LEXIS 4039, 94 Civ. 5738, 1996 WL 153699, at *2 (S.D.N.Y. April 3, 1996); In re U.S.A. Classic Secs. Litig., 1995 U.S. Dist. LEXIS 8327, 1995 WL 363841, at **3-4.
The Underwriter ...