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MILMAN v. BOX HILL SYSTEMS CORP.
August 17, 1999
LAWRENCE MILMAN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
BOX HILL SYSTEMS CORP., SALOMON SMITH BARNEY INC., NATIONSBANC MONTGOMERY SECURITIES INC., PHILIP BLACK, BENJAMIN MONDERER, CAROL TURCHIN, AND MARK A. MAYS, DEFENDANTS.
The opinion of the court was delivered by: Scheindlin, District Judge.
Plaintiff Lawrence Milman, on behalf of himself and all others
similarly situated, brings this securities fraud class-action lawsuit
against Box Hill Systems Corp., a corporation in which Plaintiffs
purchased stock through a public offering ("Box Hill" or "the Company");
Salomon Smith Barney Inc. and Nationsbanc Montgomery Securities Inc.,
investment banks serving as underwriters for that offering
("Underwriters" or "Underwriter Defendants"); and four officers of Box
Hill whom Plaintiffs allege received substantial financial benefit as a
result of the public offering ("the Individual Defendants").
Plaintiffs allege that Defendants violated sections 11, 12 and 15 of
the Securities Act of 1933 by making false and misleading representations
and by failing to disclose certain information in connection with and
following a July 1997 public offering of Box Hill stock.*fn1 Defendants
now move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to
dismiss Plaintiffs' Complaint in its entirety for failure to state a
claim upon which relief may be granted. For the reasons that follow,
Defendants' motions are denied in part and granted in part.*fn2
Dismissal of a complaint pursuant to Rule 12(b)(6) is proper "only
where it appears beyond doubt that the plaintiff can prove no set of
facts in support of the claim that would entitle him to relief." Scotto
v. Almenas, 143 F.3d 105, 109-10 (2d Cir. 1998) (internal quotations
omitted). "The task of the court in ruling on a Rule 12(b)(6) motion is
merely to assess the legal feasibility of the complaint, not to assay the
weight of the evidence which might be offered in support thereof." Cooper
v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotations
omitted). Thus, in deciding such a motion, the court must accept as true
all material facts alleged in the complaint and draw all reasonable
inferences in the nonmovant's favor. See Thomas v. City of New York,
143 F.3d 31, 36 (2d Cir. 1998). Nevertheless, "[a] complaint which
consists of conclusory allegations unsupported by factual assertions
fails even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears,
Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996) (internal quotations
In considering a Rule 12(b)(6) motion, the district court must limit
itself to "facts stated in the complaint or in documents attached to the
complaint as exhibits or incorporated in the complaint by reference."
Newman & Schwartz v. Asplundh Tree Expert Co., 102 F.3d 660, 661 (2d
Cir. 1996). In addition, in securities fraud actions, the court "may
review and consider public disclosure documents required by law to be and
which actually have been filed with the SEC." Cortec Indus. Inc. v. Sum
Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991). See also Kramer v. Time
Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991); Salinger v.
Projectavision, Inc., 934 F. Supp. 1402, 1405 (S.D.N.Y. 1996).*fn3
The following allegations, taken from the Consolidated Amended Class
Action Complaint ("Complaint"), are presumed true for the purposes of
this motion to dismiss.
Box Hill is a small high-technology company registered and based in New
York. Complaint ¶ 5. Box Hill manufactures and sells computer storage
hardware devices which are marketed primarily to high-end customers in
data intensive industries such as financial, corporate and academic
institutions. Id. ¶ 19. Box Hill also provides consulting and support
services in connection with its products. Id.
From 1992 through 1996, the demand for Box Hill's products and services
grew rapidly, and the Company experienced an increase of more than 233%
in its annual sales revenue for the period December 1992 to June 1997.
Id. ¶¶ 21, 24. Box Hill's products were particularly popular among New
York-based financial institutions, because those customers tended to rely
heavily on the types of product support services Box Hill offered. Id.
¶ 21. In addition, Box Hill was one of the few computer data storage
companies based in New York (rather than California) during the early to
By the beginning of 1997, however, the market for computer data storage
products began to experience significant change which negatively impacted
Box Hill's sales. Id. ¶ 22. First, Box Hill's customers had become
more sophisticated with respect to traditional data storage products such
as SCSI and RAID.*fn4 Id. ¶ 35. As a result, they no longer required
— and were no longer willing to pay for — the support
services offered by Box Hill. Id. Instead, many of Box Hill's customers
began to purchase lower-priced data storage products from mail-order
catalogs or other manufacturers. Id. ¶ 35. Moreover, in early 1997,
Box Hill's largest competitor, California-based Andataco, opened a New
Jersey office in order to directly compete with Box Hill in the New
York/New Jersey markets. Id. ¶ 41. In response to these changes in
the market for data storage products, Box Hill was forced to lower its
prices in order to remain competitive. Id. ¶ 38.
Second, in January 1997, Box Hill began to market and sell its newly
developed next generation storage technology: "fibre channel products".
Id. ¶ 34. Box Hill hoped these products would provide the Company
with a new source of high-margin sales earnings to offset the decline in
sales of the older SCSI and RAID products. Id. ¶ 36. However, the
introduction of these new products was unsuccessful. Id. ¶ 37. Box
Hill's customers were reluctant to invest in an expensive upgrade to the
unproven fibre channel technology. Id.
On July 23, 1997, Box Hill filed a Form S-1 Registration Statement with
the SEC for an initial public offering of Box Hill common stock ("Box
Hill Offering" or "Offering"). Id. ¶ 15. Box Hill hired the
Underwriter Defendants to act as co-lead underwriters for the Offering.
Id. ¶ 7.
Prior to the Offering, Defendants went on a "Road Show" to promote Box
Hill to the investment community. Id. ¶ 44. The Road Show included
presentations by the Individual and Underwriter Defendants during which
they spoke in positive terms about Box Hill's short and long term profits
and made optimistic earnings projections for the remaining quarters of
1997 and into 1998. Id. Shortly after the Road Show, the Underwriters
issued "booster shot" reports (favorable analyst reports) which again
discussed Box Hill in highly positive terms. Id. ¶ 45.
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