On or about September 16, 1997, the prospectus for the Box Hill
Offering ("Prospectus") became effective. Id. ¶ 16. Commencing on that
date, Box Hill sold, through the Underwriter Defendants in a firm
commitment underwriting, 6,325,000 shares of common stock at an offering
price of $15 per share.*fn5 Id. ¶ 17. of those shares, 3,150,000 were
issued and sold to the Underwriters by Box Hill. Three of the four
Individual Defendants (Mark A. Mays, Benjamin Monderer and Carol Turchin)
who were executives and sole shareholders in the Company at all relevant
times prior to the Offering, sold an additional 2,350,000 shares to the
Underwriters. Id. ¶ 18.*fn6 Finally, the Underwriters purchased the
remaining 825,000 common shares from Box Hill pursuant to an
overallotment option.*fn7 Id.
The total gross proceeds of the Offering were approximately $94.9
million of which Mays, Monderer and Turchin received $32.7 million. The
Company received the remaining $56.6 million, after underwriters' fees
and offering expenses of approximately $5.6 million. Id.
In early January 1998, unusual trading activity in Box Hill's stock
prompted the New York Stock Exchange to request that Box Hill issue a
public statement regarding its financial expectations. Id. ¶ 46. On
January 8, 1998, Box Hill publicly announced that although it was
"comfortable with consensus mean estimates for the 1997 fourth quarter"
revenue, the Company considered consensus mean revenue estimates for its
1998 earnings to be "at the high end of the range." Id. The day after the
announcement, Box Hill's stock declined 28% to $10.875 per share. Id.
Plaintiffs allege that following the January 1998 announcement, the
Company failed to make any disclosures from which investors could
determine that Box Hill had persistent and long-range difficulties
limiting the Company's ability to achieve the growth it projected at the
time of the Offering. Id. ¶ 49. On February 17, 1998, Box Hill's
CEO, Philip Black, appeared on the financial news television channel CNBC
and stated that the Company was not experiencing margin pressures and
that it expected solid growth in sales of its fibre channel products.
Id. Three weeks later, on the business news television channel CNNfn,
Black asserted that Box Hill expected to sustain its earlier growth rate
of 35-45%. Id.
On April 14, 1998, Box Hill announced that its first quarter 1998
revenues and earnings per share would fall short of consensus estimates
by 25% and 49% respectively. Id. ¶ 50. The following day, Box Hill
shares fell 23% to approximately $10 per share. Id. ¶ 51. At the time
Plaintiffs filed their original complaint in November 1998, Box Hill
shares were trading at approximately $5 per share. Id.
On March 19, 1999, Plaintiffs filed the instant Complaint alleging
violations under §§ 11, 12 and 15 of the Securities Act for omissions
and material misrepresentations made by Defendants (i) during the
pre-Offering Road Show; (ii) in the Prospectus; and (iii) after the time
of the Offering. Plaintiffs allege that they purchased Box Hill stock
pursuant to and in reliance upon Box Hill's Prospectus and the Defendants'
oral representations, and that they were damaged when the value of the
Box Hill stock subsequently declined. They seek money damages and
recission of their stock purchases.
Plaintiffs' Complaint sets forth the following eight omissions or
misrepresentations that they allege violate §§ 11 and 12 of the
(a) Defendants failed to disclose that fibre channel
products had not achieved market acceptance;
(b) Defendants failed to disclose that increased
competition in Box Hill's core markets was causing
sales growth to fall below expectations;
(c) Defendants failed to disclose that Box Hill was
materially reducing prices at the time of the
(d) Defendants failed to disclose that Box Hill was
experiencing a lengthening of its sales cycle;
(e) Defendants failed to disclose that Box Hill's
sales force was understaffed and ineffective;
(f) Defendants failed to disclose that Box Hill's
Washington, D.C. office was in disarray;
(g) Box Hill materially overstated the potential
market for Windows NT fibre channel products;
(h) Box Hill's CEO made materially misleading
statements in February and March 1998 regarding
the Company's prospects for growth.
All but one of the alleged omissions or misrepresentations occurred
prior to the Offering.
In their motions to dismiss, Defendants challenge the legal sufficiency
of each alleged omission and misrepresentation as a basis for Plaintiffs'
statutory claims. Defendants also raise a number of general defenses to
A. Sections 11 and 12
Section 11 of the Securities Act, 15 U.S.C. § 77k, imposes
liability when companies offering their shares to the public fail to
provide required information, or include misleading statements, in their
registration statements. Specifically, § 11 provides:
In case any part of the registration statement, when
such part became effective, contained an untrue
statement of a material fact or omitted to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, any person acquiring such security (unless
it is proved that at the time of such acquisition he
knew of such untruth or omission) may, either at law
or in equity, in any court of competent jurisdiction,
sue . . . every person who signed the registration
statement . . . [and] every underwriter with respect
to such security.
15 U.S.C. § 77k(a).
Specific disclosure requirements vary with the type of registration
statement utilized by a company in its offering. In the instant case, Box
Hill used SEC Form S-1. Form S-1 directs registering companies to comply
with a wide array of regulations, including Item 303,
17 C.F.R. § 229.303 (1998). Item 303(3)(i) requires companies to
"[d]escribe any known trends or uncertainties that have had or that the
registrant reasonably expects will have a material favorable or
unfavorable impact on net sales or revenues or income from continuing
operations." 17 C.F.R. § 229.303 (1998). The instructions to the
above-quoted portion of Item 303 explain that "[t]he discussion and
analysis shall focus specifically on material events and uncertainties
known to management that would cause reported financial information not
to be necessarily indicative of future operating results or of future
financial condition." Id.
Section 12 of the Securities Act, 15 U.S.C. § 77l, provides
liability for oral, or written statements made in connection with the
public offering of securities. Section 12 provides:
Any person who . . . offers or sells a security . . .
by means of a prospectus or oral communication, which
includes an untrue statement of a material fact or
omits to state a material fact necessary in order to
make the statements, in the light of the circumstances
under which they were made, not misleading . . . shall
be liable . . . to the person purchasing such security
15 U.S.C. § 77l(a)(2). It is important to note that § 12 does not
provide a general cause of action for all material misstatements made by a
publicly owned and traded company. Rather, § 12 establishes a specific
basis of liability for statements made in connection with the offering
and sale of a security. See Gustafson v. Alloyd Co., 513 U.S. 561, 578,
115 S.Ct. 1061, 131 L.Ed.2d 1 (1995) ("The intent of Congress and the
design of the statute require that § 12 [(a)] (2) liability be
limited to public offerings"). Unlike § 11, § 12 liability is not
limited to material misrepresentations in a written registration