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April 6, 2000


The opinion of the court was delivered by: McMAHON, J.,


Two putative plaintiff classes bring these consolidated actions against American Banknote Corporation ("ABN"), American Bank Note Holographics, Inc. ("Holographics"), their auditors, the underwriters of Holographics' public offering, and several former officers of both corporations, for claims arising under Sections 11, 12(a) and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77(k), 77(l) and 77(o); and Section 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. Defendants Holographics, ABN, the Underwriters and individual defendants Weissman and Macchiarulo, move separately to dismiss all claims against them in the consolidated Holographics' Complaints pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4.*fn1 ABN and individual defendants Weissman, Gentile and Gorman move to dismiss the ABN Complaint pursuant to Rules 9(b), 12(b)(6) and the PSLRA.

For the reasons stated below, Plaintiffs' claim against ABN under Section 11 of the Securities Act is dismissed. All other motions to dismiss the Holographics Complaint are denied. The motions to dismiss the ABN Complaint are also denied.

I. The Parties

A. Class Plaintiffs

Plaintiffs in the consolidated action consist of two putative classes. The Holographics Plaintiffs were investors who purchased common stock issued by American Bank Note Holographics in connection with the Company's initial public offering ("IPO") on July 15, 1998, and/or in the open market during the period July 15, 1998 through February 1, 1999. The ABN Plaintiffs were shareholders of ABN who purchased shares in ABN during the period from May 2, 1996 through January 25, 1999.

The Holographics Plaintiffs have moved separately for class certification under Fed.R.Civ.P. 23(a) and 23(b)(3). Prior to imposition of the automatic stay, the Court had received no motion for class certification from the ABN Plaintiffs.

B. Defendants

American Banknote Corporation ("ABN") is a Delaware holding company with subsidiaries in the United States and other countries. It conducts business in diverse fields, including transaction cards, which includes the production of stored value cards and so-called "smart cards"; transaction processing, which involves the servicing of third-party credit, debt, automated teller machines, and electronic benefit transactions, as well as loyalty and university card programs; and security printing, which involves the printing of, among other items, checks, money orders, passports, foreign currency, and stock and bond certificates.

American Bank Note Holographics ("Holographics") was a wholly-owned subsidiary of ABN, whose primary business was, and continues to be, the production of holographic materials for use in security printing. Holographics commenced an initial public offering on or around July 15, 1998. Subsequent to the IPO, ABN and Holographics continued their operations as separate entities.

Morris Weissman was the founder of ABN. He was at all relevant times the Chairman and CEO of both Holographics and ABN, although he resigned from Holographics on April 9, 1999. He continues to serve as Chairman and CEO of ABN. Joshua C. Cantor was at all relevant times President of Holographics. Richard P. Macchiarulo was at all relevant times Vice President of Finance, Chief Financial Officer, and Chief Accounting Officer of Holographics. Patrick J. Gentile was at all relevant times Vice President and Corporate Comptroller of ABN. John T. Gorman has been Executive Vice President and Chief Financial Officer of ABN since 1990.

Deloitte & Touche, LLP ("Deloitte") served as Holographics' independent public accountant prior to, during and subsequent to the IPO, and was retained by the Audit Committee of the Holographics board to investigate the financial improprieties at issue in this suit. Nationsbanc Montgomery Securities, LLC ("Nationsbanc") served as lead underwriter for the Holographics IPO; *fn2 Lazard Freres, & Co., LLC ("Lazard"), Raymond James & Associates, Inc. ("Raymond James") and Salomon Smith Barney Holdings, Inc. ("Smith Barney") served as co-managers of the IPO (collectively, the "Underwriters").

The two actions here arise out of accounting irregularities in several quarters preceding the IPO that were discovered and disclosed by ABN and Holographics approximately six months after the Holographics IPO.

II. The Factual Allegations

The following factual allegations in the consolidated Complaints are accepted as true for the purposes of this motion.

ABN is a holding company, which through several subsidiaries in the United States, Brazil, Australia and New Zealand, operates in a single industry — secured products and systems. It has three principal product lines: transaction cards and systems; printing services and document management; and security printing solutions. In ABN's Security Printing Solutions Group, the company designs and prints counterfeit-resistant documents, such as checks, passports, visas, birth certificates, Social Security cards, stock and bond certificates and currency.

Until July 1998, Holographics was a wholly owned subsidiary of ABN. During the fiscal years 1996 and 1997 and the first two quarters of 1998 (ending on June 30, 1998), the revenues of Holographics represented approximately 9.5 % of ABN's total revenues. Holographics manufactures mass-produced holograms and holographic material for use in security and counterfeiting-protection applications, such as credit cards, and for non-secure uses such as magazine advertisements and specialized packaging.

In 1996 and 1997, ABN was highly leveraged, and was looking to expanding its foreign presence to grow sales. To fuel its growth and pay for overseas acquisitions, ABN issued a series of debt securities (junk bonds), including 10 3/8% Senior Notes due June 1, 2002 ("10 3/8 Notes") "secured by a pledge of all the issued and outstanding shares of capital stock" of ABN and its then wholly-owned subsidiary Holographics, as well as 65% of the shares of American Banknote Brazil (its Brazilian subsidiary). Through this offering, ABN raised approximately $126.5 million. (ABN Compl. ¶ 35.) Other ABN efforts at financing were less successful. For example, as a result of concerns over the volatility of the economy in Brazil, where ABN derived 40% of its total revenues, ABN was forced to postpone a November 1997 $225 million bond offering. By the end of 1997, ABN's long-term debt had reached $293 million, 43% of which represented the 10 3/8 Notes. (Id.)

During the period from May 1996 through January 1999, the Class Period alleged by the ABN Plaintiffs, ABN filed annual Form 10-K and quarterly Form 10-Q reports with the SEC as required. Each of the filings contained, among other things, a consolidated financial statement for ABN that combined the results of its subsidiaries. ABN issued press releases that coincided with each filing, which discussed or quoted from the financial statements. These financial statements included the financial reports of ABN's subsidiary, Holographics. In its form 10-K for fiscal year 1997, filed with the SEC on March 31, 1998, ABN admitted that its was highly leveraged; its long-term debt of approximately $293 million represented 84% of its total capitalization.

ABN viewed the spin-off and initial public offering of Holographics as a way to resolve its own debt problems. In a May 5, 1998 press release announcing the registration of the Holographics public offering, ABN noted that it intended to use a large portion of the proceeds to retire its senior secured debt, specifically, the 10 3/8 Notes. As ABN CEO Morris Weissman stated in the release: "[W]e intend to de-leverage and are taking the necessary steps to insure the success of the program. In addition, we hope to raise capital for our subsidiaries so that they can continue to grow, unencumbered by the burden of heavy corporate debt."

On July 13, 1998, Holographics filed Amendment 4 to its Registration Statement. On July 15, 1998, it filed its final Prospectus. The final Registration Statement and Prospectus contained financial statements for the years ended December 31, 1996 and 1997, as reported from audited financial statements by Defendant Deloitte, and the three-month periods ending March 31, 1997 and March 31, 1998, as reported from unaudited financial statements. In those financial statements, Holographics reported sales of $28,649,000 for the year ended December 31, 1996, as compared with sales of $30,915,000 for the year ended December 31, 1997. Net income was reported to be $4,820,000 for 1996 and $7,539,000 for 1997. In comparing year-end sales figures in the Registration Statement and Prospectus, Holographics stated:

Sales increased by $2.3 million, or 7.9%, from $28.6 million in 1996 to $30.9 million in 1997. The increase in sales was due primarily to an increase in sales volume of security holograms, including a $6.9 million order from a major customer which was received and completed in December 1997 and which goods were transferred to the Company's on-site secured facility. (Holographics Compl. ¶ 37.)

For the three-months ending March 31, 1997 and March 31, 1998, sales were reported as $5,241,000 and $7,035,000 respectively, with net income reported as $657,000 for the quarter ended March 31, 1997, and $1,793,000 for the quarter ended March 31, 1998. In comparing these figures, the Prospectus stated:

Sales increased by $1.8 million, or $34.2%, from $5.2 million for the three months ended March 31, 1997 to $7.0 million for the three months ended March 31, 1998. The increase in sales was due primarily to increased sales volume of transaction cards and product authentication holograms. The increase in transaction card hologram volume was dues to the growth in loyalty programs, competition among financial institutions resulting in increased multi-card issuance and the increased use of automated teller machine and debit cards. The increase in product authentication hologram sales volume was due to higher demand for this product and new product authentication customers . . . Cost of goods sold decreased by $0.2 million . . . This decrease reflects the Company's focus on controlling costs, improving production yields and the higher margins earned on security holograms. (Holographics Compl. ¶ 38)

The initial public offering of Holographics was commenced on July 15, with an offering of 13,636,000 shares at $8.50 per share.

Morris Weissman, the Chairman and Chief Executive Office of ABN, was named Chairman and CEO of Holographics. ABN received the entire net proceeds of the offering — approximately $106.7 million — which it used to pay off some of its debt. In August, ABN announced a cash tender offer for $70 million of the 10 3/8% Senior Notes it had issued. Following the IPO, ABN, which had sold its entire holdings of Holographics in the IPO, had no remaining ownership of Holographics.

The price of Holographics stock rose from $8.50 per share in the IPO to a high (for the Holographics Class Period) of $18 per share on December 18, 1998. (Holographics Compl. ¶ 53).

On January 19, 1999, Holographics issued a press release indicating that it was investigating certain transactions during the second and third quarters of 1998 that "resulted in the inappropriate recognition of revenue during such quarters" (Holographics Compl. ¶ 50). Holographics noted that there may have been overstatements of revenue results in those two quarters that "may be material." (Id.) According to the January 19, 1999 announcement, "[t]hese overstatements . . . will require re-statements of [Holographics's] financial statements for such periods." (Id.)

ABN issued a press release that same day, announcing that Holographics had issued the aforementioned press release and quoting that press release verbatim. The ABN press release went on to state:

ABN conceded that the required restatement would result in a decrease in operating income and reported returns for the second quarter of 1998. Id.

The price of Holographics stock dropped sharply from $15.12 per share on January 19, 1999 to $4.56 per share on January 20, 1999. Less than one week later, on January 25, 1999, Holographics reported:

Based upon currently available information, the company expects that revenues and net income for the year ended December 31, 1998 will be substantially lower than for the year ended December 31, 1997, and that the Company's interim financial statements for each of the first three quarters of 1998 will require restatement. The Company also currently believes that net income of the Company has been overstated for each of the years ended December 31, 1997 and December 31, 1996 by approximately 10%. Accordingly, the Company's financial statements as of December 21, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and the related Report of Independent Auditors should no longer be relied upon. (Holographics Compl. ¶ 51.)

On February 1, 1999, Holographics announced that the net income for the year ended December 31, 1997 had been overstated by more than 50%, rather than the 10% estimated in the January 25 announcement. Following this announcement, the price of Holographics common stock fell to $1.62 per share.

On February 4, 1999, Holographics announced the resignation of defendants Cantor and Macchiarulo. (Holographics Compl. ¶¶ 16, 17.) On April 9, 1999, Holographics announced the resignation of Weissman from the company. Holographics' new president and chief operating officer stated, "[The Holographics'] board decided it was in [the Company's] best interest to rid itself of those officials under whose watch the company ran into serious financial problems." (Id. ¶ 55.)

On April 15, 1999, Holographics announced that : (a) its annual report on Form 10-K for the year ended December 18, 1998 would be delayed and that it also anticipated that its report on Form 10-Q for the first quarter of 1999, due to be released on May 17, 1999, would also be delayed; (b) its financial statements for the years ended December 31, 1997 and December 31, 1996 as well as the interim financial statements for each of the first three quarters of 1998, would require restatement; (c) it had been notified by its commercial banks, led by the Chase Manhattan Bank, that events of default existed under the Company's Credit Agreement "as a result of the financial statement misstatements and related matters disclosed in the Company's press releases of January 19, January 25, and February 1, 1999; " and (d) the SEC had initiated a formal investigation into the Company's previously disclosed financial misstatements. (Id. ¶ 56.)

On April 20, 1999, ABN announced that its financial statements for the years ended December 31, 1997 and December 31, 1996, as well as the interim financial statements for the first three quarters of 1998, would require restatement concurrent with the restated financial statements of Holographics. (ABN Compl. ¶ 2.) ABN further stated that it would seek a delay in filing its form 10-K for the fiscal year ended December 31, 1998 and disclosed that the SEC had initiated a formal investigation against it relating to Holographics' revenue recognition issues.

At the time the motions were filed, neither ABN nor Holographics had filed a report on Form 10-K for the year ended December 31, 1998, or a report on Form 10-Q for the quarter ended March 31, 1999. On August 3, 1999, the New York Stock Exchange suspended trading in Holographics and ABN stock and delisted both stock issues.

On December 8, 1999, ABN voluntarily filed for bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York. See In re American Banknote Corp., Case No. 99 B 11577 (Bankr.S.D.N.Y. 1999). The automatic stay of proceedings against ABN that was ordered as a result of ABN's voluntary filing of bankruptcy under Chapter 11 has been lifted pursuant to the order of Bankruptcy Judge Carter Beatty for the purposes of deciding the motions before me. See In re American Banknote Corporation, Case No. 99 B 11577 (PCB), Order Modifying Automatic Stay, (Bankr.S.D.N.Y.) (Mar. 16, 2000). I therefore address all the claims brought against the parties who have filed motions to dismiss.

III. Standards on a Motion to Dismiss

On a motion to dismiss under Fed.R.Civ.P. 12(b)(6), this Court must accept the well-pleaded factual allegations in the Complaint as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Cruz v. Beto, 405 U.S. 319, 322 (1972). The Court need not credit conclusory statements unsupported by fact allegations or legal conclusions and characterizations presented as factual allegations. Papasan v. Allain, 478 U.S. 265, 286 (1986). However, if the Complaint, read as a whole, can be construed to state any claim on which relief may be granted, I must not dismiss it. See Stewart v. Jackson & Nash, 976 F.2d 86, 87 (2d Cir. 1992).

This liberal pleading standard is modified by Fed.R.Civ.P. 9(b) in cases where fraud is alleged. In addition, the PSLRA requires application of a heightened pleading standard to claims brought under Section 10(b) of the ...

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