The opinion of the court was delivered by: Chin, District Judge.
In this putative class action, plaintiffs allege that
defendants, PRT Group, Inc. ("PRT"), an information technology
("IT") services company, and certain of its directors, officers,
and shareholders, disseminated false and misleading information
in the prospectus and registration statement issued in connection
with a November 1997 initial public offering ("IPO"), in
violation of sections 11, 12(a)(2), and 15 of the Securities Act
of 1933 (the "1933 Act"), 15 U.S.C. § 77k, 77l, & 77o
(1997). Plaintiffs contend that the prospectus contained false
and misleading statements relating to PRT's technological
capabilities, client relationships, future growth potential,
recruiting and staffing abilities, and "Year 2000" ("Y2K")
Defendants move to dismiss the complaint for failure to state a
claim upon which relief can be granted pursuant to Fed.R.Civ.P.
12(b)(6), for failure to plead fraud with particularity pursuant
to Fed. R.Civ.P. 9(b), and for failure to provide a "short and
plain" statement of the claim, pursuant to Fed.R.Civ.P. 8.
For the reasons stated herein, the motions to dismiss are
For purposes of this motion, the facts as set forth in the
amended complaint are assumed to be true. See Luce v.
Edelstein, 802 F.2d 49, 52 (2d Cir. 1986).
PRT, a Delaware corporation, offers IT services
internationally, primarily to large "Fortune 500" companies. The
company maintains offices in Connecticut, Illinois, New Jersey,
New York, and Virginia. (Compl. ¶ 19). In addition, PRT operates
software development centers ("SDCs") in Barbados, West Indies,
and Hartford, Connecticut. (Def. Mem. at 4).
Defendant Douglas K. Mellinger is the Chairman of the Board,
Chief Executive Officer, and President of PRT. Defendant Gregory
S. Mellinger is the Chief Operating Officer and a director of
PRT. Defendant Lowell W. Robinson is the Executive Vice
President, Finance and Administration, and Chief Financial
Officer of PRT. (Compl. ¶¶ 7-9). Douglas Mellinger, Gregory
Mellinger, and Robinson (collectively, the "Individual
Defendants") held their positions during the relevant class
period as well.
Defendant The Mellinger Group ("TMG") is wholly owned by
Douglas and Gregory Mellinger and their brother Paul Mellinger.
TMG sold 299,000 shares of PRT stock in the IPO, and continued to
hold approximately 6.2 million shares of PRT stock after the IPO.
(Compl. ¶ 11).
Plaintiffs purchased PRT common stock in the November 1997 IPO.
(Compl. ¶ 5). Specifically, the Complaint alleges that plaintiffs
purchased the Company's common stock between November 21, 1997
and March 5, 1998 "pursuant to and traceable to" the prospectus.
(Id. ¶ 55).
PRT provides a spectrum of IT services to its clients,
including (1) strategic consulting, which includes management
consulting and IT planning; (2) project solutions, which includes
software development, mass change renovation, and testing
services; and (3) staff augmentation, which includes team or
individual staffing for a range of IT services. (Def. Mem. at 4).
While PRT often received repeat business from existing clients,
each project (or even each stage of a project) usually
represented a separate contractual commitment, and the client was
not obligated to engage PRT again. (Def. Mem. at 10). Certain
clients designated PRT as a "preferred vendor," meaning that PRT
would have the ability, shared with other preferred vendor firms,
to receive proposals from and bid on projects for that particular
client. (Compl. ¶ 20). According to plaintiffs, there could be as
many as 500 preferred vendors for any given company. (Id.).
3. The IPO and PRT's Subsequent Performance
On or about November 21, 1997, PRT commenced an IPO of its
common stock pursuant to a registration statement and prospectus,
signed by all of the Individual Defendants and filed with the
Securities and Exchange Commission (the "SEC"). (Compl. ¶¶ 10,
23-24). The IPO was conducted through a firm commitment
underwriting*fn1 in which the Company offered 4,600,000 shares
of its stock at $13 per share; PRT sold 3,850,000 shares itself,
realizing net proceeds of more than $46 million, and certain
shareholders sold 750,000 shares, realizing net proceeds of more
than $9 million. (Id. ¶ 23). As noted above, plaintiffs
purchased PRT common stock through the November 1997 IPO. (Id.
Several months after the IPO, on February 9, 1998, PRT released
its fourth quarter and 1997 year end financial results,
representing that revenues for 1997 increased 151% and that the
Company earned $1.1 million in the fourth quarter. (Compl. ¶ 34).
Less than a month later, on March 5, 1998, PRT announced that it
expected to report a $3 million net loss in the first quarter of
1998, attributing the decline to customer delays in connection
with Y2K projects. (Id. ¶ 35). Following the March 5
announcement, PRT's stock price dropped; in heavy trading, the
price per share fell from a closing price of $19.125 on March 5
to a closing price of $9.5625 on March 6. (Id. ¶ 36). PRT
continued to lose money, with net losses equaling $12 million for
1998. (Id. ¶ 38).
Plaintiffs commenced the instant suit on September 16, 1998. By
order dated December 18, 1998, I appointed certain individuals as
lead plaintiffs and approved the selection of Milberg Weiss
Bershad Hynes & Lerach and Savett Frutkin Podell & Ryan as lead
counsel. (See 12/18/98 Order). No class has been certified to
Following a conference with the Court, plaintiffs filed an
amended complaint on March 15, 1999.*fn2 These motions followed.
Defendants' primary argument in support of their motions to
dismiss is that plaintiffs have failed to identify an actionable
misstatement or omission in the prospectus.*fn3
A. Motion to Dismiss Standards
In reviewing a motion to dismiss, I must accept the factual
allegations contained therein as true and draw all reasonable
inferences in favor of plaintiffs. See, e.g., King v. Simpson,
189 F.3d 284, 287 (2d Cir. 1999). A complaint may be dismissed
under Rule 12(b)(6) "`only if it is clear that no relief could be
granted under any set of facts that could be proved consistent
with the allegations.'" Olkey v. Hyperion 1999 Term Trust,
Inc., 98 F.3d 2, 5 (2d Cir. 1996) (quoting I. Meyer Pincus &
Assoc. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991)).
"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 Distrib. Corp. v. Merrill Lynch
Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984)).
On a motion to dismiss a complaint brought under the securities
laws, the Court may properly consider a document, such as the
prospectus at issue here, which is incorporated by reference,
even if it is not attached to the complaint. See, e.g., Cortec
Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir.
1991); Pincus, 936 F.2d at 762.
B. Securities Act of 1933
Several principles govern the analysis of plaintiffs' §§ 11 and
A misrepresentation of fact is material under §§ 11 and
12(a)(2) when an investor would attach importance to it in making
an investment decision. See In re APAC Teleservices, Inc. Sec.
Litig., No. 97 Civ. 9145(BSJ), 1999 WL 1052004, at *9 (S.D.N Y
Nov. 19, 1999) (citing cases); see also TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757
(1976). An omission is material if there is a substantial
likelihood that the "`disclosure of the omitted fact would have
been viewed by the reasonable investor as having ...