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IN RE N2K

January 31, 2000

IN RE N2K INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: Baer, District Judge.

AMENDED MEMORANDUM & ORDER

The plaintiffs bring this class action lawsuit against defendant corporation N2K, Inc. ("N2K") and six named officers of N2K for alleged violations of Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. § 77k and 77o, in connection with the plaintiffs' purchase of common stock sold by N2K in a public offering on April 15, 1998.*fn1 The defendants move pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the consolidated amended class action complaint. For the reasons discussed below, the defendants' motion is GRANTED.

I. BACKGROUND

The well-pleaded facts of this case, taken as true on this motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), are as follows:

The plaintiffs and other class members are purchasers of N2K common stock sold in connection with the April 15, 1998 offering.

On August 7, 1997, N2K filed a registration statement with the SEC for an initial public offering (the "IPO") of 3,330,221 shares of common stock at $19.00 per share. The IPO was completed on October 17, 1997. By March 1998, N2K sought to raise additional capital through a secondary offering (the "offering") of its common stock. On March 4, 1998, N2K filed a registration statement and preliminary prospectus with the SEC for the sale of just over 3.1 million shares of common stock. Included with these documents were N2K's annual financials for the years 1994 through 1997, and quarterly results for the periods between March 31, 1996 and December 31, 1997. The registration statement was later declared effective on April 14, 1998. It did not include N2K's first quarter results for the quarter ending March 31, 1998, a key factor in this litigation.

On April 15, 1998, pursuant to the registration statement and prospectus, N2K completed the offering of 3,125,722 shares of common stock at $33.00 per share. The company received gross revenues from this secondary offering of approximately $60 million, roughly $16 million more than was anticipated at the time the registration statement was filed.*fn2

N2K announced on April 23, 1998 its results for the quarter ending March 31, 1998, this announcement coming twenty-three days after the quarter ended and nine days after the effective date of the registration statement. The company reported revenues of $7,031,000 and a net loss of $13,704,000, a loss of $1.13 per share, nine cents more per share than analysts' expectations. By the end of trading on April 24, 1998, the price for N2K's shares had fallen nearly $8 per share to close at $25 1/4. As of the date of the complaint, the price of N2K's common stock had not recovered and had, in fact, slipped to $13 13/16 per share.

The plaintiffs maintain that at the time the registration statement became effective on April 14, 1998, the defendants possessed undisclosed information regarding N2K's revenues, expenses, and losses for the first quarter of 1998. The defendants deny any such knowledge and rely in part on the fact that said financials were released when they became available on April 23, 1998. The amended complaint alleges that the defendants' possession of this information*fn3 is evidenced by N2K's having "release[d] accurate financial results for the fourth quarter and year ended December 31, 1997 . . . just twelve days after the close of those reporting periods."*fn4 (Compl. ¶ 49.) The defendants therefore knew, the argument continues, at the time the registration statement became effective that N2K's first quarter numbers failed to meet analysts' expectations which, when disclosed to investors, would likely cause a significant decline in the price of N2K shares. According to the plaintiffs, since the price of N2K's stock was likely to be "materially adversely affected" upon public disclosure, the defendants — hoping to maximize the revenue received from the offering — concealed the first quarter information by not including it in the registration statement and prospectus.

The plaintiffs commenced this suit on May 8, 1998, and filed their consolidated amended class action complaint on August 4, 1998. The first cause of action is brought against all defendants, pursuant to Section 11 of the Securities Act ("Section 11"), 15 U.S.C. § 77k, based upon the omitted financial data. The second cause of action is brought against the individual defendants, pursuant to Section 15 of the Securities Act ("Section 15"), 15 U.S.C. § 77o, which imposes derivative liability upon "controlling persons" for violations of Section 11 by N2K.

II. DISCUSSION

A. Standards for Motion to Dismiss

Dismissal of a complaint pursuant to Rule 12(b)(6) is permitted "only where it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Scotto v. Almenas, 143 F.3d 105, 109-10 (2d Cir. 1998). "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) (quoting Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984)). In deciding a 12(b)(6) 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). On a motion to dismiss a complaint brought under the ...


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