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STEINBERG v. PRT GROUP

March 28, 2000

DAVID J. STEINBERG, CAROL BLUM AND DAVID BLUM, CHARLES M. BOYETT, RICHARD GLOTZER, G.M. AND ELLEN LEITENBERGER, JAGADISH PATEL, AND ANTHONY SKETTINO ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
V.
PRT GROUP, INC., DOUGLAS K. MELLINGER, LOWELL W. ROBINSON, GREGORY S. MELLINGER, AND THE MELLINGER GROUP, DEFENDANTS.



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

  OPINION

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") consulting business.

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 granted.

BACKGROUND

A. The Facts

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).

1. The Parties

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).

2. PRT's Operations

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).

PRT's business operates on a proposal/bid system; PRT receives proposals from various potential clients seeking bids to perform IT services. (Compl. ¶ 20). When a proposal is received, the PRT account manager responsible for that particular account prepares a bid, which consists not only of the proposed costs of the services to be rendered but also the resumes of the proposed IT personnel who would perform the work for the client. (Id. at ¶ 21). These IT professionals were generally not employees of PRT, but rather were independent contractors hired by PRT for a particular assignment (id.); because PRT would need IT personnel for a project only if it were awarded the job, it hired IT professionals as it needed them, on a project-by-project basis. These independent contractors were subject to approval by the company seeking the IT services. (Id.). Thus, to prepare a bid, PRT would have to locate and assemble groups of qualified IT professionals, and identify those professionals in the bid. (Id.). In addition to the independent contractors it hired, PRT also employed a staff of full-time IT professionals. (Def. Mem. at 33).

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. ¶ 5).

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).

B. Procedural History

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 date.

Following a conference with the Court, plaintiffs filed an amended complaint on March 15, 1999.*fn2 These motions followed.

DISCUSSION

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

1. Sections 11 and 12

Section 11 of the 1933 Act provides that any signer of a registration statement or director of the issuer may be held liable to purchasers of registered securities if any part of the registration statement contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading. See 15 U.S.C. § 77k(a). Section 12(a)(2) imposes liability for selling or offering a security by means of a prospectus that includes an untrue statement of material fact or omits a material fact necessary to make such statements not misleading. See 15 U.S.C. § 77l (a)(2). Thus, to state a cognizable claim under either §§ 11 or 12(a)(2) of the 1933 Act, plaintiffs must demonstrate that the prospectus*fn4 for PRT's November 1997 IPO contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. See In re Donna Karan Int'l Sec. Litigation, No. 97 Civ. 2011(CBA), 1998 WL 637547, at *4 (E.D.N.Y. Aug. 14, 1998) ("[A] prerequisite to recovery under either § 11 or § 12(a)(2) is a misstatement or omission concerning a material fact.").

Several principles govern the analysis of plaintiffs' §§ 11 and 12 claims.

a. Materiality

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 ...


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