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July 26, 2001


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:


This is a securities class action*fn1 brought on behalf of all persons, other than defendants, who purchased or otherwise acquired American Depository Shares ("ADSs") and Ordinary Shares of Independent Energy Holdings PLC ("Independent Energy" or "Company") in a March 28, 2000 secondary offering ("Secondary Offering") of 4.07 million ADSs and on the open market during the class period which extends from February 14, 2000 until September 8, 2000 ("Class Period"). Plaintiffs have sued the Company, the underwriters of its Secondary Offering ("Underwriter Defendants"), two companies related to one of the Underwriter Defendants (the "Related Defendants"), and several officers and directors of the Company ("Individual Defendants"), asserting claims arising under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77k, 771(a)(2), and 77o, and sections 10(b)(5) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Now pending are two separate motions to dismiss, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, filed by the Individual Defendants, and the Underwriter and Related Defendants.*fn2


Dismissal of a complaint for failure to state a claim 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 his claim which would entitle him to relief." Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999); see also Cooper v. Parsky, 140 F.3d 433, 440 (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.") (quotation marks and citation omitted). 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)(quotation marks and citation omitted).

To properly rule on a 12(b)(6) motion, the Court must accept as true all material facts alleged in the complaint and draw all reasonable inferences therefrom in the nonmovant's favor. See Harris, 186 F.3d at 247. The Court must limit itself to facts stated in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference. See Dangler v. New York City Off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999). However, the Court may also consider documents, while not explicitly incorporated into the complaint, that "plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 44 (2d Cir. 1991)).


A. The Parties

Independent Energy is the holding company for Independent Energy UK, its wholly owned subsidiary.*fn3 See Second Consolidated Amended Class Action Complaint ("SAC") ¶ 22.

Independent Energy was an electric company that had the right to supply electricity in the United Kingdom ("U.K.") pursuant to a license granted it under the Electricity Act of 1989. See id. ¶ 23.

Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities"), one of the Underwriter Defendants, is a national investment and merchant bank. See id. ¶ 35. DLJ Securities sold and distributed to the investing public Independent Energy ADSs pursuant to the Secondary Offering. See id.

DLJ Securities is a wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ Inc."), one of the Related Defendants. See id. DLJ Inc. is an integrated investment and merchant bank serving clients both in the United States and internationally. See id. ¶ 34.

Another of DLJ Inc.'s wholly owned subsidiaries is Donaldson, Lufkin & Jenrette International ("DLJ International"), also a Related Defendant in this action. DLJ International frequently served as a financial advisor to the Company. See id. ¶ 36.

The other two Underwriter Defendants are Prudential Securities Incorporated ("Prudential") and Johnson Rice & Company L.L.C., Inc. ("Johnson Rice"). Prudential is a fully-diversified securities firm which provides, among other things, underwriting services. See id. ¶ 37. Johnson Rice is a securities boutique specializing in energy and oil service companies. See id. ¶ 38.

Both Prudential and Johnson sold and distributed to the investing public Independent Energy ADSs in connection with the Secondary Offering. See id.

The Individual Defendants are John L. Sulley, Burt H. Keenan, Herbert L. Oakes, Ian Stewart, Jerry W. Jarrell, Robert E. Jones, and David O. May.*fn4 Each Individual Defendant was a Director of the Company's Board of Directors ("Board") and each signed the Company's March 28, 2000 registration statement and prospectus ("Prospectus"). See id. ¶¶ 26-32. In addition, Sulley was the Company's Chief Executive Officer ("CEO"); Jones was its Operations Executive; Stewart was Independent Energy's Finance Executive; and Oakes was a Non-Executive Chairman of the Board. See id. ¶¶ 26, 28-30. Most of the Individual Defendants also owned Ordinary Shares of Independent Energy. Sulley owned 420,000 Ordinary Shares, approximately 1.1% of the Company's Ordinary Shares issued and outstanding; Keenan, a founder of the Company, owned 1,164,125 Ordinary Shares (approximately 3.1%); Jones owned over 354,200 Ordinary Shares; Jarrell owned 235,100 Ordinary Shares; and May owned 130,000 Ordinary Shares. See id. ¶¶ 26-28, 31, 32.

B. The Company's Background

Founded in 1996, Independent Energy was formed to capitalize on the market opportunities created by the deregulation of the U.K. energy markets.*fn5 See id. ¶ 77. The Company quickly grew to become the largest independent supplier of electricity in the U.K. See id. It operated primarily as a marketer of energy, purchasing electricity from the "Electricity Pool", which serves as a market place for buying and selling electricity in England and Wales, and then reselling electricity to its own customers. See id. ¶¶ 54, 79. In order to participate in the Electricity Pool as a purchaser of electricity, Independent Energy was required to post a letter of credit good for twenty-eight days of electricity trading. See id. ¶¶ 54, 55.

1. The Company's Billing Problems

2. The Company's Attempt to Solve Its Billing

Problems Fail In January 2000, the Company attempted to modify the software employed by Vertex to improve its billing operations. See id. ¶ 100. However, these modifications were not improving the situation. See id. Indeed, notwithstanding these modifications, OFGEM informed the Company in mid-February 2000 that its investigation was now a "formal investigation", the highest level of investigation possible. See id. ¶¶ 6, 102. Plaintiffs contend that by this date, the Company, Sulley, and other senior officials of the company "knew the highly likely consequences of OFGEM's investigation based upon a similar investigation OFGEM had conducted three months earlier against Northern Electric, another licensed electricity provider in the U.K., and the resulting sanction OFGEM had imposed against Northern Electric based upon its billing system failures and customer complaint levels." Id. ¶ 6.

In a meeting in early March 2000, OFGEM informed the Company of its concerns that the new software modifications were not working and that the Company's billing problems were intensifying. See id. ¶ 111. Indeed, during February and early March 2000, the situation deteriorated to the point where 50% of the Company's customer complaints were not being answered. See id. ¶ 109. Then, in mid-March 2000, shortly prior to the Secondary Offering, OFGEM, in response to its increasing concerns, instituted a formal reporting process which required the Company to send OFGEM weekly written reports regarding billing and complaints. See id. ¶ 112.

3. The Company's Liquidity Problems

The Company's problems in the sub-100 kW market began to impact its liquidity. See id. ¶ 113. Toward the end of February 2000, the Company was forced to seek additional credit and to post a ninety-day 60 million letter of credit in order to continue purchasing wholesale electricity. See id. ¶ 114. In connection with the issuance of the letter of credit, the Company and the Company's banker — Barclays Bank PLC — entered into agreements with DLJ Inc. "to reimburse Barclays for amounts drawn down under the letter of credit." Id. ¶ 115. Pursuant to this agreement, DLJ Inc., among other things, received the Company's agreement that, if the Secondary Offering was not completed by April 30, 2000, the Company would issue DLJ Inc. warrants to purchase 5 million of its Ordinary Shares, or approximately 12% of the Company's equity, for 1 pence per share. See id. ¶ 116.

The Company also agreed to pay DLJ Inc. $2.90 million in fees in connection with this line of credit guarantee. See id. ¶ 117.

B. Independent Energy's Secondary Offering and Continuing Problems

On March 28, 2000, Independent Energy's Prospectus for its Secondary Offering became effective. See id. ¶ 118. The following day, the Company announced that the ADSs would be priced at $49.25 per ADS. See id. Following the completion of the Secondary Offering, the Company raised approximately $157.6 million. See id. In connection with the Secondary Offering, three of the Individual Defendants — Sulley, Keenan, and Jones — sold their Ordinary Shares of Independent Energy as ADSs and realized over $30 million dollars in proceeds.*fn7 See id. ¶¶ 26-28. DLJ International sold 250,000 Ordinary Shares of Independent Energy, which constituted 100% of its securities investment in the Company. See id. ¶¶ 36, 220. By this transaction, DLJ International realized proceeds of $12.31 million. See id. ¶ 36. The Underwriter Defendants received $8.90 million in fees for their underwriting services.*fn8 See id. ¶¶ 35, 37, 38, 118.

Even following the Secondary Offering, the software modifications were still not functioning properly and the Company's billing problems were not improving. See id. ¶ 129. As a result, by April or May 2000, the Company attempted to transfer a substantial part of its billing operations to an in-house facility dubbed "Garret's Green." Id.

On May 3, 2000, OFGEM met with senior officials of the Company, including Sulley and Oakes, to discuss the Company's continued billing and customer service problems. See id. ¶ 119. At that meeting, the Company agreed to an OFGEM-imposed license condition. See id. That license condition, announced on May 10, 2000, prohibited the Company from taking on any new business in the sub-100 kW market. See id. ¶ 121. In the two days following the announcement, Independent Energy ADSs fell 34%, from $39 per ADS to $25.62 per ADS. See id. ¶ 124.

The Company's continuing billing and cash collection problems created even greater cash flow pressures. See id. ¶ 144. Consequently, on September 8, 2000, the Company announced that receivers had stepped in on behalf of the Company's lenders and had begun to liquidate the Company. See id. ¶¶ 14, 144. Independent Energy ADSs were halted at $7.56 per ADS. When the Company started trading again on the NASDAQ on October 19, 2000, its ADSs opened at $0.125 per share. See id. ¶ 14. As of March 20, 2001, Independent Energy ADSs were trading at $0.005 per share on the over-the-counter market. See id. ¶ 146.

C. Defendants' Misrepresentations and Omissions

1. Alleged Misrepresentations and Omissions in the

Prospectus The SAC sets forth the following five misstatements or omissions in the Prospectus which plaintiffs allege violate the securities laws:

a. The Prospectus falsely assured investors that the Company had developed system modifications which were likely to correct the Company's billing problems;
b. The Prospectus falsely attributed its billing delays to poor information flow from the regional electricity companies ("RECs"), responsible for reading customer's meters within a particular franchise area;
c. The Prospectus failed to disclose the scope of the Company's collection problems;
d. The Prospectus failed to disclose the high volume of complaints lodged against the Company by customers and the inability of either the Company or Vertex to handle customer inquiries;
e. The Prospectus failed to disclose that the Company was under investigation by OFGEM, and that it faced a serious risk of sanctions.

2. Alleged Misrepresentations and Omissions in Other Publicly-Made Statements

Plaintiffs also allege that throughout the Class Period, the Company and the Individual Defendants issued press releases and made statements that misrepresented and omitted material facts. Specifically, the SAC alleges that the following thirteen statements misrepresented or omitted material facts then known to the Company:

a. The Company's February 14, 2000 press release stating that it "wishes to make clear that successful action is being taken to resolve the billing issue, which relates to only one part of the business. The problem is only one of timing of billing and does not reflect any problem in collection." SAC ¶ 191.
b. A February 14, 2000 report issued by Brean Murray & Co., Inc. ("Brean Murray") which, based upon conversations with Company management and the Company's February 14, 2000 press release, maintained its BUY rating on the Company and stated that the billing problem "is an industry wide problem caused by the RECs." Id. ¶ 192.
c. On February 15, 2000, Sulley was quoted in an article stating that the billing problem would have only a "minimal" effect on profits, that "it's an industry problem", and that "[m]ost of the backlog has been cleared up." Id. ¶ 193.
d. On February 16, 2000, the Company's press release assured investors that "substantial progress on billing issues" was being made, and that the Company "has put in place procedures to overcome the data problems which continue to affect the industry in general." Id. ¶ 195.
e. On February 17, 2000, DLJ Securities issued a report that rated the Company as a BUY and stated that the Company "has resolved the billing problems surrounding its small business/domestic market", and that "the billing problems arose because of the poor transfer of data from the [RECs]". Id. ¶ 196.
f. On May 1, 2000, DLJ Securities issued a report which stated that based on its recent conversation with management, Independent Energy "is on track to be completely caught up [on its billing] by the end of June." Id. ¶ 198.

Even following the announcement of OFGEM-imposed license condition, the Company and its officers issued allegedly misleading statements:

g. On May 10, 2000, Sulley falsely stated in a press release that "[w]e anticipate substantially completing the backlog by the end of June" and that the Company was "confident" that it would "resolve its customer service problems to provide an improved and superior service" "within a short space of time". Id. ¶¶ 127, 199.
h. On May 10, 2000, a Brean Murray report based upon a conversation with Sulley stated that there "is unlikely to be any real negative fallout [from the license condition] as many of [the Company's] problems are industry wide. . . ." Id. ¶ 200.
i. On May 17, 2000, Sulley stated that he expects the billing problems "will be largely resolved within a short period". Id. ¶¶ 131, 201.
j. On May 17, 2000, the Company also stated that it "believes that it now has in place a specific strategy, which includes the new system of validating the front end data and cleaning the backlog of data, to ensure that future bills are dealt with efficiently and effectively." Id. ¶ 201.
k. On May 17, 2000, defendant Sulley stated: "[T]he worst was now behind the company with measures in place that would resolve the situation `within a short period.'" Id. ¶¶ 133, 202.
1. On May 18, 2000, Sulley was quoted saying: "[W]e are solving the billing problems" and that the license condition "doesn't have an impact on ongoing profit or turnover." Id. ¶¶ 135, 203.
m. On May 18, 2000, Johnson Rice issued an analyst report, based upon a conference call with the Company's management, which stated that "[t]here are no `collection' problems, only ...

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