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IN RE INITIAL PUBLIC OFFERING SECURITIES

United States District Court, Southern District of New York


February 19, 2003

IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION THIS DOCUMENT RELATES TO ALL CASES

The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge

                OPINION AND ORDER

INTRODUCTORY MATERIAL

These cases allege a vast scheme to defraud the investing public. The scheme — characterized by Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, and concealed by misrepresentations and omissions — was aimed at fraudulently driving up the price of stock in hundreds of companies in the immediate aftermarket of their initial public offerings ("IPOs"). Plaintiffs allege that investment banks routinely required substantial investors to participate in the scheme in order to receive allotments of these valuable IPOs.

The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell their individual holdings at enormous gains. The investment banks profited by receiving kickbacks from the investors who received the IPO allocations. To hide the scheme from the investing public, the investment banks, companies, and officers violated the securities laws by making misleading statements in offering documents and by manipulating the market. Thousands of ordinary investors, who are Plaintiffs in these cases, allege that the value of their holdings plummeted as a result of this unlawful conduct.

I. INTRODUCTION

From January 1998 to December 2000, over 460 high technology and Internet-related companies raised capital by selling ownership of their company to the public.*fn1 Prior to going public, each company hired a group of investment banks to underwrite their IPO. Some, but not all, of the Underwriters allocated the IPO stock for distribution to initial purchasers ("Allocating Underwriters"). On the day of the IPO, the Allocating Underwriters sold the stock directly to those customers, usually institutional investors. The price of the stock was predetermined and set forth in a registration statement filed with the Securities and Exchange Commission ("SEC"). In general, the Underwriters received 7% of the gross proceeds (or some other fixed amount) as compensation for their services, and the Issuer received the remaining capital. See MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F. Supp.2d 251, 253 (S.D.N.Y. 2002). After the offering, those who purchased on the IPO could profit by selling their stock in the aftermarket, i.e., on a stock exchange such as the Nasdaq. Indeed, from 1998 to 2000, customers who bought IPO stock often made large profits as the price of the stock dramatically surged in the aftermarket.*fn2

Plaintiffs who bought stock in the aftermarket for 309 of these high-technology and Internet-related stocks allege that the Allocating Underwriters required their customers to enter into agreements to buy additional shares of the Issuer in the aftermarket as a condition of receiving the right to purchase the IPO stock. In some instances, these customers were also required to make those purchases at predetermined escalating prices. As a result of these "Tie-in Agreements," the Allocating Underwriters created an artificial demand for the company's stock and caused the price of the stock to rise. In addition, the Underwriters used this scheme to enrich themselves by requiring customers to pay them a portion of the profits they made by selling the IPO shares in the aftermarket.

Spurred by newspaper and government investigations into the IPO allocation practices of various investment banks,*fn3 Plaintiffs filed over 1,000 Complaints in this district from January 11 to December 6, 2001, each alleging that the Underwriters perpetrated this scheme in connection with 309 IPOs. See Makaron v. VA Linux Sys., Inc., No. 01 Civ. 242 (first action filed January 11, 2001); Genduso v. Internap Network Servs. Corp., No. 01 Civ. 11247 (last action filed December 6, 2001).*fn4 Plaintiffs are suing three groups of defendants in each IPO case: the Underwriters of the IPO, the company that issued the stock ("Issuer" or "Issuer Defendant"), and the company's officers ("Individual Officers" or "Individual Defendants"). In total, Plaintiffs are suing fifty-five Underwriters, 309 Issuers, and thousands of Individual Defendants.*fn5

In an effort to coordinate the lawsuits and avoid taxing the limited judicial resources of this district, the Assignment Committee of the Southern District of New York directed that all of the actions be transferred to this Court for "coordination and decision of pretrial motions, discovery and related matters other than trial." Order, In re Initial Public Offering Sec. Litig., 21 M.C. 92 (Aug. 9, 2001). This Court subsequently consolidated the lawsuits by Issuer (e.g., In re Cacheflow Securities Litigation), thereby resulting in 309 consolidated cases that are being coordinated in the above-captioned litigation.*fn6

The Underwriters, Issuers, and Individual Defendants now move to dismiss these actions in their entirety.*fn7 In broad terms, the Defendants put forward two grounds for dismissal.

First, they argue that each of the 309 Complaints fails to comply with the pleading requirements of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Second, they contend that even if the allegations are properly pled and assumed to be true, the Complaints must be dismissed for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). For the reasons that follow, these motions are granted in part and denied in part.

II. SYNOPSIS OF HOLDINGS

It is axiomatic that when deciding a motion to dismiss, a court must accept as true the factual allegations of a complaint. Indeed, the court must draw every reasonable inference from those factual allegations in favor of the party bringing suit. It is against this backdrop that the many rulings contained in this Opinion must be understood.

The general requirements for pleading a complaint are found in the Federal Rules of Civil Procedure unless a specific statute sets forth a different pleading standard. Rule 8 requires, only a "short and plain statement of the claim showing that the pleader is entitled to relief." When pleading fraud, under Rule 9, however, "the circumstances constituting fraud . . . [must] be stated with particularity."

In addition, in the field of securities law, the PSLRA imposes a heightened pleading standard with respect to some causes of action by adding two more requirements. First, when pleading that a defendant has made a material misstatement or omission on which the investing public relies, the complaint must specify each statement alleged to have been misleading, the reason the statement is misleading, and, if the misstatement is alleged on information and belief, the facts on which that belief is formed. Second, when a securities fraud claim requires that a defendant act with fraudulent intent, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."

Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in Plaintiffs' favor, Plaintiffs have alleged one coherent scheme to defraud, the entire purpose of which was to artificially drive up the price of the securities. This scheme offends the very purpose of the securities laws, namely "to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing."*fn8 Where insiders conspire to frustrate the efficient function of securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered up that manipulation with lies and omissions. When investors have been injured by these frauds, those insiders may be liable under the securities laws.

Plaintiffs bring six claims against various Defendants. All Defendants are alleged to have made false statements in the registration statement and prospectus related to a particular IPO, in violation of Section 11 of the Securities Act of 1933 (First Claim). The Individual Defendants are alleged to have controlled the Issuers who made those false statement in violation of Section 15 of the 1933 Act (Second Claim). All Defendants are alleged to have made false statements in the registration statement and prospectus with the intent to deceive the investing public, in violation of Section 10(b) of the Exchange Act of 1934 (Third and Fourth Claims). The Allocating Underwriters are also alleged to have engaged in a scheme to manipulate the securities markets in violation of Section 10(b) of the 1934 Act (Fifth Claim). Lastly, the Individual Defendants are alleged to have controlled the Issuers who violated Section 10(b) of the 1934 Act, in violation of Section 20 of that Act (Sixth Claim).

Because these cases are of great importance to the public, and because this Opinion is lengthy and highly technical, a synopsis of its holdings is warranted. The following constitutes, in summary form, the rulings of the Court.

Section 11 Claims

Section 11 was designed to hold those who prepare registration statements in connection with IPOs — such as the Underwriters, Issuers, and Individual Defendants here — to a stringent standard of liability for any material misrepresentations contained in those statements, although certain Defendants may raise their due diligence as an affirmative defense at trial. Pleading under Section 11 is governed solely by Rule 8 because fraud is not an element of a Section 11 claim. Plaintiffs have sufficiently pled, under the standard of Rule 8, that all those who signed the registration statement or prospectus violated Section 11 because those documents failed to disclose the fraudulent scheme — specifically, the Tie-in Agreements and the Undisclosed Compensation. Moreover, on the secondary offerings, the registration documents also failed to disclose that the analyst reports were prepared by analysts employed by the Underwriters, who consistently issued recommendations tainted by undisclosed conflicts of interest. However, those Plaintiffs who sold their shares above the offering price have no damages as a matter of law, and their claims must be dismissed.

Section 15 Claims

Section 15 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 11. Pleading a Section 15 claim is also governed by Rule 8, and thus only requires an allegation that the defendant controlled a person or entity that violated Section 11. Here, the Individual Defendants are alleged to have controlled the Issuers who violated Section 11. While the Individual Defendants may raise lack of knowledge as an affirmative defense at trial, Plaintiffs need not plead that the Section 15 Defendants acted with the intent to defraud. Thus, the Section 15 claims are dismissed only in those cases where the Section 11 claims have been dismissed for lack of damages.

Section 10(b) Claims for Material Misstatements and Omissions

Section 10(b) — the general "securities fraud" provision in the 1933 and 1934 Acts — was designed to punish intentionally manipulative or deceptive practices employed as part of a scheme to defraud. One prohibited practice is intentionally making materially false or misleading statements concerning publicly traded securities. In such a case, a plaintiff must comply with either the PSLRA or Rule 9, depending on the particular element, because Section 10(b) claims are claims of fraud. Thus, Plaintiffs must plead the misleading statements themselves, the basis to believe those statements are misleading, and the Defendants' intent to defraud investors under the PSLRA. Plaintiffs must also plead that those misstatements and omissions were material, and that those Defendants had a duty to disclose the information. Finally, Plaintiffs must plead, under Rule 9, that they purchased the stock after relying on those material misstatements and were damaged as a result.

Plaintiffs have successfully pled that all of the Underwriters (both Allocating and Non-Allocating) made material misstatements and omissions, which they had a duty to disclose, with the intent to defraud the investing public. Plaintiffs have also alleged, with the required particularity, that they purchased stock based on their falsely inflated market price, and that the misrepresentations caused a significant disparity between the price of the securities and their real value, resulting in significant financial damages.

Nonetheless, Plaintiffs have failed to plead that some of the Issuers and Individual Defendants acted with the required intent to defraud. Specifically, when an Issuer exploited the inflated value of the company to engage in a merger or acquisition, or to raise even more money through further stock offerings, the intent requirement has been satisfied. Likewise, when an Individual Defendant sold large amounts of her shares at a significant profit relatively close in time to the IPO, the requisite intent has been demonstrated. In all other instances, the pleading of intent to defraud is inadequate and therefore the claims against those Issuers and Individual Defendants must be dismissed.

Section 10(b) Claim for Market Manipulation

In addition to punishing material misstatements and omissions, Section 10(b) was designed to prohibit any intentional conduct that deceives or defrauds investors by controlling or artificially affecting the price of securities. Such claims are typically described as "market manipulation" claims. Plaintiffs' pleading obligations for the market manipulation claims are identical to those for the material misstatements claims except, because there are no alleged misstatements, the PSLRA only governs the pleading of intent to defraud. Thus, Plaintiffs must plead with particularity the manipulative scheme itself, the intent to defraud the investing public, reliance on the integrity of the market (i.e., that they believed it was not manipulated) and resulting damages.

Plaintiffs have succeeded in pleading a market manipulation claim against the Allocating Underwriter Defendants. They have alleged that these Defendants acted with the requisite intent because they required their customers to engage in Tie-in Agreements and to pay Undisclosed Compensation in order to receive an initial allocation of stock. Subsequent purchases, at escalating prices, falsely inflated the price of the shares. This very conduct evinces a strong inference that Defendants intended to defraud the investing public. Plaintiffs also have alleged that these Defendants engaged in deceptive or manipulative conduct because Defendants' conduct was "designed to deceive or defraud investors by controlling or artificially affecting the price of securities."*fn9 Finally, Plaintiffs have alleged the remaining elements of these claims with the required specificity.

Section 20 Claims

Section 20 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 10(b). The pleading of a Section 20 claim is governed solely by Rule 8, because such claims do not necessarily require proof of scienter, nor is fraud an essential element of such claims. Thus a plaintiff must allege only that a defendant controlled a person or entity who violated Section 10(b). At trial, a plaintiff must also show that the defendant was a "culpable participant" in the underlying fraud — i.e., took some action (or inaction) that furthered the underlying fraud. A defendant may then offer proof that the culpable participation was done in good faith. Because Plaintiffs have adequately alleged control, the Section 20 claims survive against those Individual Defendants who controlled Issuers liable under Section 10(b), and are dismissed only against those Individual Defendants who controlled an Issuer as to whom the Section 10(b) claims have been dismissed.

In sum, Plaintiffs have pled a coherent scheme by Underwriters, Issuers, and their officers to defraud the investing public. As such, these lawsuits may proceed.

III. SECURITIES LAW, HOT ISSUES MARKETS, AND TIE-IN AGREEMENTS

A. General Background of the Securities Act and Exchange Act

In the aftermath of the bull market of the 1920s, the 1929 stock market crash, and the subsequent Great Depression, Congress held extensive hearings to investigate the practices underlying securities trading. See generally Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934 (J. S. Ellenberger & Ellen P. Mahar eds. 1973). During these investigations, Congress repeatedly discovered instances of market manipulation and deception, which it concluded had contributed to the market's collapse. For example, Professor Steve Thel has written:

Before [President] Roosevelt was even inaugurated, [Chief Counsel of the Senate Banking and Currency Committee Ferdinand] Pecora revealed fabulous excesses in investment, commercial banking, and the financing of public utilities. Among other things, he showed that in the years before the crash, some respected bankers had controlled the market price of securities in which they held an interest by effecting huge purchases or sales as the situation required. Instances of such manipulative trading were uncovered repeatedly throughout the course of the hearings.

Steve Thel, The Original Conception of Section 10(b) of the Securities Exchange Act, 42 Stan. L. Rev. 385, 412 (1990) (footnotes omitted). Likewise, a 1934 Act Senate Committee report explained, albeit in more muted tones, how the market was manipulated:

Several devices are employed for the purpose of artificially raising or depressing security prices. . . . Among such practices are fictitious "wash" sales; "matched" orders, or orders for the purchase and sale of the same security emanating from a common source for the purpose of recording operations on the tape and thereby creating a false appearance of activity; and other transactions specifically designed to manipulate the price of a security.

S. Rep. No. 73-792, at 7-8 (1934). ("1934 Senate Report").

In order to protect the integrity of the market and combat such practices, Congress enacted the Securities Act of 1933 ("Securities Act")*fn10 and the Securities Exchange Act of 1934 ("Exchange Act").*fn11 In general, the Securities Act regulates the initial offering of securities, see Gustafson v. Alloyd Co., 513 U.S. 561, 571-72 (1995), while the Exchange Act regulates post-distribution purchases and trading, see Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 171 (1994).*fn12

The Securities Act "was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing." Ernst & Ernst, 425 U.S. at 195 (citing H.R. Rep. No. 73-85, at 1-5). The Exchange Act "was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges." Id. (citing 1934 Senate Report at 1-5). "A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry."*fn13 SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186 (1963) (footnote omitted). See also SEC v. Zandford, 122 S.Ct. 1899, 1903 (2002) (same). Every IPO at issue here is governed by the regulatory framework created by these Acts.

B. Hot Issues Markets, Market Manipulation, and Tie-in Agreements

When a company goes public, the initial offering price (the price paid by the first customer) is established by the company and underwriters. Once issued, the stock price is determined by the market. For at least five decades, studies have shown that IPOs generally trade on the open market at a price significantly higher than the offering price, a phenomenon known as underpricing. For example, a stock might have an initial offering price of $18 and rise to a closing market price of $20 on its first day. Such stock is underpriced by $2 (or U.S.C. § 78r (liability for misleading statements in certain periodic reports filed with the SEC); Section 20, 15 approximately 11%).*fn14 "For a long time, the standard underpricing seemed to be between five and twenty percent." Robert Prentice, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals For Its Future, 51 Duke L.J. 1397, 1446 n. 230 (2002) (citation omitted).

From the perspective of the initial purchasers, the underpricing of IPO stock is wonderful because they can make a substantial profit on their investment by selling their stock in the aftermarket. The increased sales activity — and the higher stock price — are also attractive to the issuer, who benefits from the false impression that the company is so highly valued.

The issuer then exploits that impression by using its stock as currency to make acquisitions, or by raising more capital through a higher-priced secondary offering. The underpricing itself is not all good for the issuer — in one sense there was "money left on the table" because the issuer lost out on the difference between the offering price and the first day's closing market price. MDCM Holdings, 216 F. Supp.2d at 254. But the increased aftermarket trading that may attend underpriced issues is likely to make the whole process a winning proposition for the issuer.

When the price of an IPO stock rises quickly in the market, it is often referred to as a "hot issue." In turn, so-called "hot issues markets" are typically characterized by severe underpricing. See, e.g., Jay R. Ritter, The `Hot Issue' Market of 1980, 57 J. Bus. 215 (1984). Over the past four decades, there have been four such markets. The first three occurred from 1959-1962, 1967-1971, and 1979-1983,*fn15 while the most recent hot issues market lasted from 1998-2000 — the time period at the heart of this litigation. Not surprisingly, conduct of the sort alleged in these cases came to the attention of regulators in each of these hot issues markets.

1. Hot Issues Market of 1959-1962

"From 1959 until the market decline of early 1962, the distribution of securities by companies that had not made a previous public offering reached the highest level in history."*fn16 SEC Special Study at 487; see also id. at 514. "The public eagerly sought stocks of companies in certain `glamour' industries, especially the electronics industry, in the expectation that they would quickly rise to a substantial premium — an expectation that was often fulfilled." Id. at 487. "It was not uncommon for underwriters to receive, prior to the effective date, public `indications of interest' for five times the number of shares available." Id. at 515. "Within a few days or even hours after the initial distribution, these so-called `hot issues' would be traded at premiums of as much as 300 percent above the original offering price." Id. at 487. "In many cases, the price of a `hot' issue later fell to a fraction of its original offering price." Id.

In the midst of this "climate of general optimism and speculative interest," id., the SEC "addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold." SEC Legal Bulletin (describing Exchange Act, Release No. 6536). In response to these reports, the SEC issued the following interpretive release:

The attention of the Securities and Exchange Commission has been directed to recently published articles in business magazines and the public press which indicate that certain dealers participating in distributions of new issues have been making allotments to their customers only if such customers agree to make some comparable purchase in the open market after the issue is initially sold. The Commission wishes to call the attention of dealers to the fact that generally speaking any such arrangement involves a violation of the anti-manipulative provisions of the Securities Exchange Act, particularly Rule 10b-6 thereunder, and may involve violation of other provisions of the federal securities laws. Should evidence of such practice by individual firms be developed, the Commission will take appropriate action.

Securities Act, Release No. 4358/Exchange Act, Release No. 6536 (Apr. 24, 1961), available at 1961 WL 61584.*fn17

In 1963, the SEC transmitted to Congress the "Report of Special Study of Securities Markets of the Securities and Exchange Commission." See supra note 15. It "was the most extensive examination of the securities markets since the 1930s" and included "a thorough analysis of new issues" in response to the bull market of the previous three years. SEC Hot Issues Report at 5. "The intensive and extensive examination made by the special study reveals a picture . . . of a general climate of speculation which may rank with excesses of previous eras." SEC Special Study at 553. "More than any single activity or incident, it is this climate of speculative fervor which provides a key to the new-issue phenomenon." Id.

"The Special Study brought into sharp focus, for the first time, the role of the underwriter in the new issues markets." SEC Hot Issues Report at 6. "The underwriter played an important role in the new-issue phenomenon not only by originating and distributing stock in companies going public but also, in many cases, by encouraging the speculative climate." SEC Special Study at 553. "Many of the problems targeted by the Special Study related to underwriting practices, distribution and aftermarket trading." SEC Hot Issues Report at 6. For example, some firms "under pressure from customers and salesmen hungry for new issues, lowered their standards of quality and size of issuers whose securities they would underwrite."*fn18 SEC Special Study at 553-54.

"In the pricing of new issues, underwriters could not help but be influenced by the knowledge that the prices of many issues would subsequently rise in the immediate after-market to prices hardly justified by traditional standards of value." Id. at 554. The Special Study identified a number of problems and abuses that resulted from this knowledge. For example, some underwriters "set low offering prices in the expectation of withholding substantial portions of the issue in accounts of insiders to be sold out to the public." Id. Likewise, "[s]ome underwriters found opportunities with the strong public demand for new issues to obtain very high amounts of compensation from small speculative companies." Id.

"The Special Study also found that certain techniques employed by broker-dealers exacerbated the `hotness' of an issue, often creating immediate and substantial premiums over the initial offering price." SEC Hot Issues Report at 8. Among other manipulative techniques,*fn19 the study found that "solicitation of aftermarket purchases was common and might be actively engaged in by one or more of the major distributors." SEC Special Study at 556. "To add to the aftermarket excitement, some managing underwriters arranged for solicitation of customers at premium prices through nonparticipating firms." Id. "Demand for new issues was further stimulated in some cases by market letters, advisory recommendations, articles in the financial press and other planned publicity, usually optimistic in tone."*fn20 Id.

2. Hot Issues Market of 1967-1971

"In 1967-1971, the new issues markets experienced a resurgence," SEC Hot Issues Report at 11, this time with issues in fast food business and "space age" technology. As former SEC Chairman Arthur Levitt has recalled:

It was in the midst of the so-called "go-go years." I remember walking the halls sensing a feeling among us of unlimited potential and boundless opportunity. Our markets were experiencing an enormous volume surge, growing institutionalization and quite rampant speculation. It was big news I recall that Kentucky Fried Chicken was selling at close to 100 times earnings.

Arthur Levitt, Remarks before the 2000 Annual Meeting of the Securities Industry Association (Nov. 9, 2000).

"In response [to this market], the Commission and the NASD [National Association of Securities Dealers] created a joint task force in mid-1972 to combat the problems caused by hot issues." SEC Hot Issues Report at 11. "Teams of Commission and NASD personnel conducted intensive examinations and investigations of certain broker-dealers." Id. The SEC also "began public, fact-finding hearings on the hot issues experience." Id. (citing SEC File No. 4-148). These investigations uncovered a "considerable number" of violations of the securities laws that resulted in various enforcement actions by the SEC and NASD. Id.

Indeed, the trading abuses of the hot issues market also received scrutiny from the New York State Attorney General who requested that his office study the problems associated with the hot issues market of the late 1960s. See David Clurman, Controlling a Hot Issue Market, 56 Cornell L. Rev. 74 (1970) (discussing study made at the request of Attorney General Louis J. Lefkowitz). The Attorney General's study concluded that "a pattern emerged whereby substantial sums of money went into new and highly speculative ventures." Id. at 82.

The atmosphere became one of pure gambling, and in the process it was not too difficult to rig the game. The big winners were underwriters, insiders of the issuing companies, and those with contacts in these groups. The losers were those investors who purchased at inflated prices and the economy itself.

Id.

"The basic device used to further overheat the market was stimulating demand while simultaneously reducing supply." Id. at 76. "Brokers increased demand," for example, "by frequently emphasizing to their customers the difficulty of obtaining shares." Id. "Salesmen regularly predicted that the after-market prices would be higher than the original or current prices." Id.

"Cruder techniques [to stimulate demand] included brokers informing customers that if they did not make additional purchases in the after-market they would be cut off from further new issues." Id. "In addition, a steady flow of `tips' was fed into the market, and purchasers often stated that this type of information had stimulated their interest in a particular security." Id. at 76-77. The study also "uncovered instances where intra-office brokerage memoranda were inconsistent with offering literature." Id. at 77. In sum, "[c]ompany insiders and investment bankers took full advantage of the opportunities presented to them by the generally heated situation — a situation that was partially of their own creation." Id. at 78.

In response, the SEC "proposed a number of amendments to its rules to curb the excesses of hot issues." SEC Hot Issues Report at 12.*fn21 In particular, the SEC proposed adopting Rule 10b-20 after having received "indications that broker-dealers involved in distributing shares may be imposing requirements involving consideration in addition to the announced price of the shares."*fn22 Certain Short Selling of Securities and Securities Offerings, Exchange Act Release No. 10636, 39 Fed. Reg. 7806 (February 11, 1974). As the SEC explained:

Proposed Rule 10b-20 makes explicit the duty placed on broker-dealers (and others) to refrain from explicitly or implicitly demanding from their customers any payment or consideration in addition to the announced offering price of any securities. The Commission has received indications that in some offerings for which public demand is inadequate the purchase of such offerings['] shares may be tied to certain inducements, such as the opportunity to purchase sought after "hot" issue shares, for which demand exceeds supply. In response to these inducements, a number of persons may have been encouraged to participate in the distribution of shares for which sufficient public demand does not exist by purchasing them solely with a view to their immediate resale and merely to accommodate those marketing the offerings. The demand for offering shares crea[t]ed by the activities of these participants in the distribution process may obfuscate realistic assessments by underwriters who do not induce such participation and by investors and potential investors of the valid demand for such offerings and may artificially affect the offering price for such shares. Further, rewarding these participants with "hot" issue shares may artificially stimulate high public demand for such shares in that the prior commitment made to such participants, which unjustifiably deprives many members of the public of the opportunity to purchase such "hot" issue shares at their original offering price, relegates such persons denied shares in the offerings to making purchases in the after market.

Id. (emphasis added).

Rule 10b-20 was eventually withdrawn in 1988. See Exchange Act Release No. 26182 (Oct. 14, 1988), available at 1988 WL 999999. The SEC explained:

In view of the substantial period of time that has elapsed since Rule 10b-20 was proposed and the fact that `tie-in' arrangements may be reached under existing antifraud and antimanipulation provisions of the federal securities laws, the Commission has determined to withdraw proposed Rule 10b-20.

Id. (citing SEC Hot Issues Report at Section IV.A.3). See also SEC Hot Issues Report at Section V (entitled "Current Regulatory Authority").

3. Hot Issues Market of 1979-1983

From 1979 to 1983, another hot issues market arose. This time the companies going public were from Denver, Salt Lake City and the New York area. See SEC Hot Issues Report at 15-23. "Fad and high-technology business lines were well-represented, including robotic manufacturing, medical products, computers, video materials and entertainment."*fn23 Id. at 22-23. Once again, the SEC and NASD launched a number of investigations into broker-dealers and their underwriting practices in response to reports of abuses in the allocation process. See id. at 15-23.

The SEC provided a comprehensive review of this market when it issued its 1984 Hot Issues Report describing "the abuses identified by the Commission's regulatory and enforcement efforts" and "set[ting] forth the Commission's relevant statutory and rulemaking authority, concluding that this authority is broad enough to cover abuses that have been identified during hot issues markets." Id. at 3-4. The Report found that "selling abuses" were the most common form of misconduct. Id. at 28. "Generally, the abuses found in a hot issues market involve either artificial restrictions on supply or attempts to stimulate demand that facilitate a rapid rise in the price of a security." Id. at 29. The Commission uncovered a wide range of fraudulent activities including schemes founded upon market manipulation and domination, free-riding and withholding of stocks to shorten supply. See id. at 29-30.

"A few cases involve `tie-in' arrangements by which underwriters of hot issues require customers, as a condition of participation in a hot issue offering, either (1) to agree to purchase additional shares of the same issue at a later time and at an increased price, or (2) to participate in another hot issue offering." Id. at 37. "This practice stimulates demand for a hot issue in the aftermarket, thereby facilitating the process by which stock prices rise to a premium." Id. at 37-38. Indeed, the report highlights an example of one underwriter who was alleged to have caused the price of an IPO stock priced at $1 to rise to over $4 within a few hours of its offering. See id. at 38-39 (discussing case 13 attached to the report). The broker-dealer achieved this by (1) requiring customers to place aftermarket purchase orders for the IPO stock at substantial premiums above the offering price and (2) instructing salespersons to advise customers that the company had good financial prospects when it did not.*fn24 See id.

When discussing whether schemes such as tie-in arrangements violate the law, the report is unambiguous: "Every abusive sales and trading practice discussed in this Report clearly violates the federal securities laws as implemented by the Commission pursuant to its rulemaking authority." Id. at 61-62 (emphasis added). "The antifraud provisions of the federal securities laws, a cornerstone of Congress' system of promoting free and open markets for capital formation, are indispensable weapons in combating hot issues abuses. Taken together, these prohibitions offer broad protection to investors." Id. at 62.

4. Hot Issues Market of 1998-2000

Few people may remember the glamour industries of the 1960s, the 1970s "go-go years," or the fact that Denver and Salt Lake City were at the epicenter of the 1980s IPO market. But the Internet and high-tech boom of the 1990s, "irrational exuberance," and Silicon Valley are not far removed from current events. Indeed, in recent years the rise and fall of these companies has been the subject of numerous articles, many books,*fn25 several documentaries (real and fictional),*fn26 and at least one off-Broadway play.*fn27 Two observations concerning this market bear special mention.

The first is that the underpricing of the IPOs of the late 1990s was severe when measured against any other time period. While IPOs have been historically underpriced by five to twenty percent, IPOs in the 1990s frequently surged to 100%-200% of the offering price on the first day of trading. See Jay Ritter, Big Runups of 1975-2000 (August 2001) (listing IPO stock that doubled in price on the first day of trading since 1975) available at http://bear.cba.ufl.edu/ritter/runup750.pdf. "In 1999," for example, "117 IPOs doubled on their first day. This compares with 39 during the previous 24 years combined." Id. In fact, the ten largest first-day increases in IPO stock since 1975 all took place from November 1998 to December 1999.

Indeed, the IPO market of 1998-2000 was more extraordinary than the previous three hot issues markets. The other hot issues markets that had unusual first day increases were often accompanied by a below average number of companies going public. For example, in February of 1980, the average first day increase for IPOs was 119%; in February of 2000, the average first day increase was 116%. These two averages are the first and second highest increases of the last three decades. But what makes the latter far more impressive is that only eight companies went public in February 1980, a number far below the historical average of twenty-nine companies that go public per month.*fn28 In stark contrast, fifty-five companies issued stock in February 2000. Likewise, taking into account the number of months that witnessed extraordinary first day increases, the IPO market of the 1990s substantially surpassed each of the previous hot issues markets. The table below sets forth the top fifteen months in terms of average first day increases since 1960, a majority of which occurred in the most recent hot issues market:

First Day Increase Month/Year Number of IPOs

119.1 Feb. 1980 8

116.2 Feb. 2000 55

114.6 Dec. 1999 40

103.8 Dec. 1967 11

99.5 Jan. 1999 12

97.9 Nov. 1999 54

96 May 1968 28

90.7 Apr. 1977 5

87.5 Mar. 1999 21

86.5 Jan. 2000 15

85 Mar. 2000 53

82.2 Sep. 1998 3

80 May 1978 2

77.1 Oct. 1999 56

76.8 Sep. 1999 40

The second point is that at the end of 2000, the SEC and various newspapers began to report on abuses in the IPO allocations. In August 2000, the SEC's Division of Market Regulation issued a legal bulletin stating that it had "become aware of complaints that, while participating in a distribution of securities, underwriters and broker-dealers have solicited their customers to make additional purchases of the offered security after trading in the security begins." SEC Legal Bulletin. The Bulletin sought to remind "underwriters, broker-dealers, and any other person who is participating in a distribution of securities . . . that they are prohibited from soliciting or requiring their customers to make aftermarket purchases until the distribution is completed." Id. (emphasis added).

Newspapers also reported on their own investigations into the IPO allocation process. For example, on December 6, 2000, the Wall Street Journal published a front-page article discussing how investment banks were requiring their customers to buy shares of stock in the aftermarket as a condition of receiving IPO stock allocations. See Trying to Avoid the Flippers. The article begins:

Hedge-fund trader Robert Meglio was riding high Aug. 15 when shares of Dyax Corp., a biotech company, made their trading debut at $15 and jumped to $20. His fund, Oracle Partners, had been allowed to buy 50,000 shares of the initial public offering. It scored a quick paper profit of $250,000.

But its fat slice of the deal was no accident. To snare such a generous IPO allocation, Mr. Meglio says, he had told salesmen at Dyax's lead underwriter, J.P. Morgan & Co., that his fund would be willing to buy 100,000 more shares after they started trading. "I got a nice allocation, and if I hadn't indicated I would be an after-market buyer, I would have gotten a lot less," Mr. Meglio says.

So goes the new IPO playbook on Wall Street. Underwriters want robust after-market buying so that an IPO will be a success for the newly public company and will make money for ground-floor investors. And big institutional investors are happy to express their plans for such buying in hopes of getting more shares at the IPO price.

Id.

The next day, the Wall Street Journal published another article reporting that federal authorities had begun investigating how securities firms were allocating IPO stock. See Susan Pulliam & Randall Smith, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000, at C1. The article explained:

The Securities and Exchange Commission along with the U.S. attorney's office in Manhattan are conducting the inquiry, which is at an early stage, the people say. A federal grand jury has also been called by the U.S. attorney's office to consider evidence. Both the U.S. attorney's office and the SEC have issued subpoenas to IPO participants, requesting trading records and other documents, these people add.

The authorities are scrutinizing ways in which Wall Street dealers may have sought and obtained larger-than-typical trading commissions in return for giving coveted allocations of IPOs to certain investors. Some of the arrangements could have included specific formulas tied to the investors' profits on the offerings, the people familiar with the probe say.

Id.

The first complaint in this litigation was filed one month later. See Makaron v. VA Linux Sys., Inc., 01 Civ. 242 (filed Jan. 11, 2001).

IV. THE COMPLAINTS

Plaintiffs have filed an Amended Complaint in 308 of the 309 consolidated cases. The Complaints detail the allegations about each Issuer's offering and set forth the various claims against the Underwriters, the Issuer and its officers. In addition, Plaintiffs have filed a document entitled "Master Allegations" that contains the allegations that are shared by all of the Complaints. The individual Complaints incorporate the Master Allegations by reference.

A. Individual Complaints

As a randomly-chosen example of the individual Complaints, I shall describe in some detail the 34-page Consolidated Amended Complaint in In re Cacheflow, Inc. Sec. Litig., 01 Civ. 5143 (filed April 24, 2002) ("Cacheflow Compl.").

1. Factual Allegations and Allegations of Market Manipulation

In 1999, Cacheflow, Inc., was a Sunnyvale, California-based company that produced appliances designed to speed up content delivery over the Internet.*fn29 See Cacheflow Compl. ¶ 17.

At the time the company decided to go public, Brian NeSmith was the company's President and Chief Executive Officer, Michael Malcolm was Chairman of the Board of Directors, and Michael Johnson was Chief Financial Officer, Vice President and Secretary. See id. ¶¶ 18-20. Each of these individuals signed a registration statement and prospectus that was submitted to the SEC (collectively referred to as the "registration statement"). See id.

On November 18, 1999, Cacheflow's registration statement was approved by the SEC. See id. ¶ 5. The next day, an underwriting syndicate distributed 5,000,000 shares of Cacheflow at a price of $24.00 per share. See id. ¶ 30. The underwriting syndicate consisted of the following investment banks:

POSITION UNDERWRITER

LEAD MANAGER Morgan Stanley

CO-MANAGER CSFB Dain Rauscher

SYNDICATE MEMBERS Robertson Stephens (as successor-in-interest to Banc Boston)

BancBoston

Salomon

J.P. Morgan (as successor-in-interest to H&Q)

H&Q

Id. ¶ 14. All of the Underwriters were allocated Cacheflow's initial stock except for J.P. Morgan (H&Q).*fn30 See id. ¶¶ 14-15.

"On the day of the IPO, the price of Cacheflow stock shot up dramatically, trading as high as $139.25 per share, or more than 480% above the IPO price on substantial volume." Id. ¶ 31. Trading on the Nasdaq under the ticker symbol "CFLO", the price of Cacheflow's stock continued to rise in the weeks following the IPO. See id. ¶ 32. Indeed, the stock "hit a high of $182 1/6 per share on December 9, 1999, just prior to the end of the quiet period."*fn31 Id. At some point after the offering, "Plaintiffs Val Kay, Greg Frick, Eric Egelman and Kenneth L. Schmid . . . purchased or otherwise acquired shares of Cacheflow common stock traceable to the IPO." Id. ¶ 12.

Plaintiffs allege that this remarkable price increase in Cacheflow's stock "was not the result of normal market forces." Id. ¶ 31. Rather, "the Allocating Underwriter Defendants created artificial demand for Cacheflow stock by conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of Cacheflow in the aftermarket and, in some instances, to make those purchases at pre-arranged, escalating prices ("Tie-in Agreements")." Id. ¶ 3. "As part and parcel of this scheme . . . certain of the underwriters . . . also improperly utilized their analysts, who, unbeknownst to investors, were compromised by conflicts of interest, [to] artificially inflate or maintain the price of Cacheflow stock by issuing favorable recommendations in analyst reports." Id. ¶ 7.

Under this scheme, Cacheflow's Underwriters profited by "requir[ing] their customers to repay a material portion of profits obtained from selling IPO share allocations in the aftermarket through one or more of the following types of transactions:"

(a) paying inflated brokerage commissions;

(b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or

(c) purchasing equity offerings underwritten by these IPO Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the unlawful scheme alleged herein.

Id. ¶ 4. Plaintiffs collectively refer to these payments as "Undisclosed Compensation." Id.

Plaintiffs also contend that NeSmith, Malcolm and Johnson "knew of or recklessly disregarded the conduct complained of herein through their participation in the `Road Show' process by which underwriters generate interest in public offerings."*fn32 Id. ¶ 8. Moreover, these officers benefitted from the Tie-in Agreements "as a result of their personal holdings of the Issuer's stock." Id.

2. The Registration Statement's Misleading Statements and Omissions

According to the Complaint, Cacheflow's registration statement "failed to disclose, among other things . . . that the Allocating Underwriter Defendants had required Tie-in Agreements in allocating shares in the IPO and would receive Undisclosed Compensation in connection with the IPO." Id. ¶ 6. Plaintiffs further allege that the Defendants made eight specific materially false or misleading statements.

First, Plaintiffs highlight the following paragraph in the registration statement:

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may agree to sell or allot more shares than the 5,000,000 shares of common stock Cacheflow has agreed to sell them. This over-allotment would create a short position in the common stock for their own account. To cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time.

Id. ¶ 37. "[These statements] were materially false and misleading because the Allocating Underwriter Defendants required customers to commit to Tie-in Agreements and created the false appearance of demand for the stock at prices in excess of the IPO price in violation of Regulation M," a regulation promulgated by the SEC under the Exchange Act. Id. ¶ 38. Rule 101(a) of Regulation M states:

Unlawful Activity. In connection with a distribution of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period.

Id. ¶ 35 (quoting 17 C.F.R. § 242.101). Moreover, the SEC Legal Bulletin explains:

Tie-in agreements are a particularly egregious form of solicited transactions prohibited by Regulation M. As far back as 1961, the Commission addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold. The Commission said that such agreements may violate the antimanipulative provisions of the Exchange Act, particularly Rule 10b-6 (which was replaced by Rules 101 and 102 of Regulation M) under the Exchange Act, and may violate other provisions of the federal laws.

Solicitations and tie-in agreements for aftermarket purchases are manipulative because they undermine the integrity of the market as an independent pricing mechanism for the offered security. Solicitations for aftermarket purchases give purchasers in the offering the impression that there is a scarcity of the offered securities. This can stimulate demand and support the pricing of the offering. Moreover, traders in the aftermarket will not know that the aftermarket demand, which may appear to validate the offering price, has been stimulated by the distribution participants. Underwriters have an incentive to artificially influence aftermarket activity because they have underwritten the risk of the offering, and a poor aftermarket performance could result in reputational and subsequent financial loss.*fn33

Id. ¶ 36 (emphasis in original) (quoting the SEC Legal Bulletin). "At no time did the Registration Statement/Prospectus disclose that the Allocating Underwriter Defendants would require their customers to engage in transactions causing the market price of Cacheflow common stock to rise, in transactions that cannot be characterized as stabilizing transactions, over-allotment transactions, syndicate covering transactions or penalty bids." Id. ¶ 38.

Second, Plaintiffs contend that the registration statement was false and misleading because Regulation S-K requires disclosure of payments from customers who received IPO shares.*fn34 See Cacheflow Compl. ¶ 42. Item 508(e) of Regulation S-K provides:

Underwriter's Compensation. Provide a table that sets out the nature of the compensation and the amount of discounts and commissions to be paid to the underwriter for each security and in total. The table must show the separate amounts to be paid by the company and the selling shareholders. In addition, include in the table all other items considered by the National Association of Securities Dealers to be underwriting compensation for purposes of that Association's Rules of Fair Practice.

Id. ¶ 39 (emphasis in original) (quoting 17 C.F.R. § 229.508(e)). The NASD "specifically addresses what constitutes underwriting compensation in NASD Conduct Rule 2710(c)(2)(B) (formerly Article III, Section 44 of the Association's Rules of Fair Practice)[.]" Id. ¶ 40. It states:

For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraphs (3) and (4) below shall be included.

Id. (emphasis omitted). NASD Conduct Rule 2710(c)(2)(C) requires:

If the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover of the prospectus or similar document shall include a cross-reference to the section on underwriting or distribution arrangements.

Id. ¶ 41. "Contrary to applicable law, the Registration Statement/Prospectus did not set forth, by footnote or otherwise, the Undisclosed Compensation." Id. ¶ 42.

Third, the registration statement "misleadingly stated that the underwriting syndicate would receive as compensation an underwriting discount of $1.68 per share, or a total of $8,400,000, based on the spread between the per share proceeds to Cacheflow ($22.32) and the Offering price to the public ($24.00 per share)." Id. ¶ 43. "This disclosure was materially false and misleading as it misrepresented underwriting compensation by failing to include Undisclosed Compensation." Id.

Fourth, the registration statement was materially false and misleading when it stated:

The underwriters initially propose to offer part of the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus [$24.00] and part to various dealers at a price that represents a concession. . . .

Id. ¶ 44. This statement was "materially false and misleading in that in order to receive share allocations from the Allocating Underwriter Defendants in the IPO, customers were required to pay an amount in excess of the IPO price set forth on the cover page in the form of Undisclosed Compensation and/or Tie-in Agreements." Id. ¶ 45.

Fifth, the investment banks that allocated Cacheflow's stock violated NASD Conduct Rule 2330(f), which states that "no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member." Id. ¶ 46. "The Allocating Underwriter Defendants' scheme was dependent upon customers obtaining substantial profits by selling share allocations from the IPO and paying a material portion of such profits to the Allocating Underwriter Defendants. In this regard, the Allocating Underwriter Defendants shared in their customers' profits in violation of NASD Conduct Rule 2330(f)." Id. ¶ 47. "The failure to disclose the Allocating Underwriter Defendants' unlawful profit-sharing arrangement as described herein, rendered the Registration Statement/Prospectus materially false and misleading." Id. ¶ 48.

Sixth, the registration statement was "false and misleading due to its failure to disclose the material fact that the Allocating Underwriter Defendants were charging customers commissions that were unfair, unreasonable, and excessive as consideration for receiving allocations of shares in the IPO." Id. Plaintiffs base this allegation on NASD Conduct Rule 2440, which states in relevant part:

[A member] shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and market therefor.

Id. ¶ 49. Moreover, according to Guideline IM-2440 of the NASD:

It shall be deemed a violation of . . . Rule 2440 for a member to enter into any transaction with a customer in any security at any price not reasonably related to the current market price of the security or to charge a commission which is not reasonable. . . . A mark-up of 5% or even less may be considered unfair or unreasonable under the 5% policy.

Id. ¶ 50.

Seventh, the registration statement "failed to accurately disclose which of the underwriters identified therein actually participated in the distribution of the IPO." Id. ¶ 52. For example, "J.P. Morgan (H&Q) did not receive any of the 100,000 shares listed next to its name." Id. ¶ 54. Thus, the registration statement "was materially false and misleading in that it did not inform the investing public that the shares in the IPO would be distributed only by a few of the underwriters" who were identified in the registration statement. Id. ¶ 53.

Eighth, and finally, on "December 15, 1999, just after the expiration of the `quiet period' with respect to the Cacheflow IPO, Defendants CSFB and Dain Rauscher each initiated analyst coverage of Cacheflow. Dain Rauscher issued a `Strong Buy' recommendation with a 12-month price target of $175 per share. . . . [and] Cacheflow stock closed at $141.50 per share that day." Id. ¶ 56. "The price target set forth in the Dain Rauscher report was materially false and misleading as it was based upon a manipulated price." Id. ¶ 57.

3. Claims

Based on these allegations, Plaintiffs have brought six claims against the Defendants pursuant to the Securities Act and the Exchange Act. First, that each member of the underwriting syndicate, Cacheflow, NeSmith, Malcolm and Johnson violated Section 11 of the Securities Act by including untrue statements and omitting statements of material fact in Cacheflow's registration statement. See Cacheflow Compl. ¶¶ 60-68; see also 15 U.S.C. § 77k. Second, that NeSmith, Malcom and Johnson are liable under Section 15 of the Securities Act, which holds a controlling person liable for a company's Section 11 violation. See Cacheflow Compl. ¶¶ 69-75; see also 15 U.S.C. § 77o. Third, that the Allocating Underwriter Defendants (i.e., all of the underwriters except J.P. Morgan (H&Q)) violated Section 10(b) of the Exchange Act and Rule 10b-5 by manipulating the market with Tie-in Agreements and by requiring customers to pay Undisclosed Compensation. See Cacheflow Compl. ¶¶ 84-92; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Fourth, that all Underwriter Defendants violated Section 10(b) and Rule 10b-5 by making material misrepresentations and omissions for the purpose of securing and concealing the Tie-in Agreements, Undisclosed Compensation, the conflicts of interest between the Underwriter Defendants and the analysts who reported on Cacheflow's stock or some combination thereof. See Cacheflow Compl. ¶¶ 93-103; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Fifth, that Cacheflow, NeSmith, Malcom, and Johnson violated Section 10(b) and Rule 10b-5 by carrying out a scheme to artificially inflate the price of the company's stock by making material misrepresentations and omissions to conceal the Underwriters' behavior. See Cacheflow Compl. ¶¶ 111-20; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Sixth, that NeSmith, Malcom and Johnson are liable under Section 20(a), which holds a controlling person liable for a company's Section 10(b) and Rule 10b-5 violations. See Cacheflow Compl. ¶¶ 121-24; see also 15 U.S.C. § 78t(a).

The following chart summarizes these claims:

Claim Underwriters Issuers Individuals

1. Section 11 Section 11 Section 11

2. Section 15

3. Rule 10b-5 for manipulative practices (only against Allocating Underwriters)

4. Rule 10b-5 for false statements and omissions

5. Rule 10b-5 for Rule 10b-5 for false statements false statements and omissions and omissions

6. Section 20(a)

B. Part I of Master Allegations

There are essentially three parts to the Master Allegations. Part I outlines factual allegations against the Defendants. Part II provides relevant details about twenty-two of the fifty-five Underwriter Defendants. Part III contains a brief description of each Underwriter Defendant and the number of shares received for each IPO. Part I will be the discussed in the greatest detail because it contains the most relevant factual allegations.

1. Tie-in Allegations and Undisclosed Compensation

Part I of the Master Allegations is 114-pages long and its most important paragraphs are 14-17 and 34.*fn35 Paragraphs 14-17 set forth the Plaintiffs' allegations about the alleged Tie-in Agreements and Undisclosed Compensation:

14. The Underwriter Defendants set about to ensure that there would be large gains in aftermarket trading on shares following initial public offerings by improperly creating artificial aftermarket demand. They accomplished this by conditioning share allocations in initial public offerings upon the requirement that customers agree to purchase, in the aftermarket, additional shares of stocks in which they received allocations, and, in some instances, to make those additional purchases at pre-arranged, escalating prices ("Tie-in Agreements").

15. These Tie-in Agreements did not always require that the investors receiving allocations in initial public offerings actually purchase shares in the aftermarket, although often they did. The Tie-in Agreements were designed to ensure ready demand for shares in the event the Underwriter Defendants so desired.

16. By extracting agreements to purchase shares in the aftermarket, the Underwriter Defendants created artificial demand for aftermarket shares, thereby causing the price of the security to artificially escalate as soon as the shares were publicly issued.

17. Not content with record underwriting fees obtained in connection with new offerings, the Underwriter Defendants sought, as part of their manipulative scheme, to further enrich themselves by improperly sharing in the profits earned by their customers in connection with the purchase and sale of IPO securities. The Underwriter Defendants kept track of their customers' actual or imputed profits from the allocation of shares in the IPOs and then demanded that the customers share a material portion of the profits obtained from the sale of those allocated IPO shares through one or more of the following types of transactions: (a) paying inflated brokerage commissions; (b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or (c) purchasing equity offerings underwritten by the Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the Underwriter Defendants' unlawful scheme (Transactions "(a)" through "(c)" above will be, at varying times, collectively referred to hereinafter as "Undisclosed Compensation").

MA ¶¶ 14-17.

"For example," according to paragraph 34, "customers who received allocations of IPO shares in the following listed IPOs fulfilled their commitments to purchase shares in the aftermarket pursuant to Tie-in Agreements, netting the Underwriter Defendants and other underwriters of the referenced offerings substantial additional trading revenue and commissions and substantially and artificially increasing the demand for the issuer's shares[.]" Id. ¶ 34. The statement made in the Master Allegations with respect to Cacheflow's IPO is representative of the allegations repeatedly made in paragraph 34:

One customer, in order to obtain shares of the Cacheflow IPO from Morgan Stanley, was required or induced to and did purchase from Morgan Stanley in the aftermarket, at prices substantially above the IPO price, thousands of additional Cacheflow shares.

Id. ¶ 34, at 16.

While paragraph 34 makes similar allegation with respect to almost every IPO — from Aclara Biosciences to Z-Tel Technologies — and fills over 71 pages of the Master Allegations, see id. ¶ 34 at 8-80, these allegations are not duplicative. The allegations in paragraph 34 differ in three significant ways. First, each allegation varies with respect to the Underwriter from whom that particular unnamed customer bought the IPO stock. For example, the allegations involving Autoweb and Backweb Technologies state:

One customer, in order to obtain shares of the Autoweb IPO from CSFB, was required or induced to and did purchase from CSFB in the aftermarket, at prices substantially above the IPO price, about twice the number of Autoweb shares allocated to that customer in the IPO.

One customer, in order to obtain shares of the Backweb Technologies IPO from Goldman Sachs, was required or induced to and did purchase from Goldman Sachs in the aftermarket, at prices substantially above the IPO price, more than three times the number of Backweb Technologies shares allocated to that customer in the IPO.

Id. ¶ 34 at 13-14 (emphasis added).

Second, the allegations differ as to the amount of stock that the customer was required or induced to buy in the aftermarket. For instance, while one customer was required or induced to purchase "thousands of additional Intersil shares," id. ¶ 34 at 37, another customer was required or induced to purchase "more than three times the number of Liberate shares allocated to that customer in the IPO," id. ¶ 34 at 40.*fn36

Third, in forty-seven of the 309 cases, Plaintiffs allege at least two examples of customers who were required or induced to buy stock in the aftermarket from a particular Underwriter.*fn37 For example, the allegations with respect to PSI Technologies state:

a) One customer, in order to obtain shares of the PSI Technologies IPO from J.P. Morgan (H&Q), was required or induced to and did purchase from J.P. Morgan (H&Q) in the aftermarket, at prices substantially above the IPO price, as many PSI Technologies shares as that [sic] allocated to that customer in the IPO.

b) One customer, in order to obtain shares of the PSI Technolog[ies] IPO from Soundview Technolog[ies] (E*Trade), was required or induced to and did purchase from Soundview Technolog[ies] (E*Trade) in the aftermarket, at prices substantially above the IPO price, four times the number of PSI Technology shares allocated to that customer in the IPO.

c) One customer, in order to obtain shares of the PSI Technolog[ies] IPO from Goldman Sachs, was required or induced to and did purchase from Goldman Sachs in the aftermarket, at prices substantially above the IPO price, thousands of additional PSI Technology shares.

Id. ¶ 34 at 59.

Paragraphs 35-56 further supplement these allegations in three ways. First, these paragraphs provide more details about the types of Undisclosed Compensation that customers paid to the investment banks. Paragraphs 41-43 state:

41. One form of Undisclosed Compensation involved the payment of inflated brokerage commissions. In that regard, investors were instructed or made to understand that allocations of IPO shares would be awarded to customers that paid per share commission rates well in excess of the ordinary and customary commission rates for these accounts, as well as the rules and regulations governing the securities industry.

42. The Underwriter Defendants also sought and received Undisclosed Compensation from customers in the form of commissions paid on trades of highly liquid securities made solely for the purpose of generating commissions. Sometimes these trades were executed in stocks for which the Underwriter Defendants were market makers and which they wanted to actively support. These trades were akin to "churned" sales or "wash" transactions, generated for the main purpose of creating financial benefits for the Underwriter Defendants.

43. The Underwriter Defendants also sought and received Undisclosed Compensation in the form of compensation earned by forcing customers to buy shares of offerings, including undesired add-on offerings, with the understanding that customers would receive IPO allocations only if they purchased such shares.

Id. ¶¶ 41-43.

Second, the paragraphs provide further detail as to how the investment banks enforced their scheme with their customers:

45. With regard to retail accounts, firms (including, for example, Morgan Stanley and Paine Webber) typically utilized a grid (or index) system whereby allocations were made to individual brokers, to then be awarded to clients, based on point totals. The higher the points, the more likely it was for a broker to be awarded an allocation of shares in an initial public offering.

46. Brokers earned points on the grid by allocating shares to clients who were required or induced to buy, and in fact bought, shares of the issuer in the aftermarket, typically at multiples of the initial shares allocated and at prices above the offering price. Brokers also earned points by selling customers shares in add-on offerings. These offerings typically were not favored investments by customers as they offered scant investment returns. However, underwriters earned large fees on add-on offerings and received sizeable commissions on sales of such shares.

47. The Underwriter Defendants' misconduct in connection with [the] initial public offerings was so pervasive and uniform from underwriting firm to underwriting firm, that retail sales personnel relocating to new firms were able to transfer their "grid" scores to new firms.

Id. ¶¶ 45-47.

Third, paragraphs 35-56 refer to various newspaper articles that have reported on the government's investigation into the IPO allocation practices of investment banks during the same time period. For example, the Master Allegations quote a May 11, 2001, New York Times article reporting on the federal grand jury testimony of hedge fund trader Walter Scott Bruan that states:

Mr. Bruan has contended that investment banks manipulated the trading of I.P.O.'s by lining up commitments from investors to buy more shares at specific prices above the offering prices. That practice, known as laddering, would help to ensure that the price of a new stock would rise on its first day of trading, fueling demand from other investors who wanted a piece of a hot stock, Mr. Bruan has said.

Id. ¶ 36 (quoting Patrick McGeehan, Hedge Fund Managers Said to Talk to Grand Jury, N.Y. Times, May 11, 2001, at C1). Likewise, the Master Allegations have similar quotations from other investigative reports on IPO allocation practices. See id. ¶ 37 (quoting from 5/25/01 USA Today article); id. ¶ 40 (quoting from 12/7/00 Wall Street Journal article); id. ¶¶ 49-52 (quoting from Red Herring articles that were published in a seven-part series beginning on 5/2/01); id. ¶ 53 (quoting from 6/29/01 Wall Street Journal article); id. ¶ 55 (quoting from 6/24/00 Wall Street Journal article).

2. Statistical Analysis

Paragraphs 57-65 fall under a heading entitled "Statistical Analysis Of The Coordinated Litigation Confirms the Misconduct Alleged Herein." Id. at 87. These paragraphs compare various data from the IPOs at issue in this coordinated litigation with other data from other IPOs during the same time period or from previous years. Specifically, Plaintiffs allege:

(1) the IPO Litigation Offerings "had the highest average first day market gain [almost 140%] of any initial public offering market of any period measured [i.e., 1980-1999]," id. ¶ 58,

(2) "although average first day gains were also higher for all IPOs during the Class Period [] (just over 60%), the first day aftermarket gains of the IPO Litigation Offerings (almost 140%) were far more dramatic," id. ¶ 59,

(3) "[w]hereas in the Prior Period IPO Market [from Jan. 1980 — June 1998], approximately one out of every ten initial public offerings fell below 10% of the offering price within three years," this happened to "more than 50% of the initial public offerings comprising the IPO Litigation Offerings," id. ¶ 60,

(4) "whereas on average the number of shares traded in the first five days after the IPO was equal to 85% of the shares offered in the Prior Period IPO Market [Oct. 1982-June 1998], the number of shares traded on average in the first five days after the IPO Litigation Offerings was equal to over 350% of the shares issued," id. ¶ 61,

(5) "part of the Underwriter Defendants' motivation for engaging in the misconduct [] was to conduct secondary offerings at a much higher price . . . [and] the percentage of IPOs that were followed by a subsequent equity offering within 6 months increased dramatically for the IPO Litigation Offerings [when compared with IPOs from 1980-June 1998]," id. ¶ 62,

(6) "[i]n the Prior Period IPO Market [January 1980-June 1998], secondary offerings followed initial public offerings on average less than 3.5% of the time . . . [while] the IPO Litigation Offerings were followed by secondary offerings within six months almost five times as often (16%)," and "[a]ll Offerings were followed by secondary offerings within six months of the IPO only slightly more than 8% of the time," id. ¶ 63,

(7) "[t]he IPO Litigation Offerings showed substantial price increases on average around the end of the quiet period, whereas initial public offerings in the Prior Period IPO Market [Jan. 1989-June 1998] showed very little price increase on average," id. ¶ 64,

(8) "[t]he IPO Litigation Offerings also contrasted markedly with All Offerings during the 1998-2000 IPO Market," id. ¶ 65.

Each of these allegations is followed by a four-colored graph illustrating the allegation.

3. Matrix Illustrating Various Relationships Among Underwriters

Paragraphs 66-85 fall under a heading entitled "Matrix." This six-page illustration shows "the relationships between the lead underwriters (`book runners') of the IPO Litigation Offerings and the underwriters who participated in such offerings." Id. ¶ 66. For example, a representative allegation states:

In the 41 IPO Litigation Offerings in which Robertson Stephens was the book-runner (or co-book-runner), the following underwriters participated in the number of IPO Litigation Offerings set forth next to their names: Bear Stearns (7); H&Q (14); SG Cowen (7); Piper Jaffray (12); Prudential (8); SureTrade (7); Weisel (7); First Albany (8); Dain Rauscher (16); CE Unterberg (8); E*Trade (16); and Needham & Co. (10).

Id. ¶ 70. The matrix illustrates the relationship that each of the twenty-one investment banks that served as book-runners or co-book-runners in the IPO Litigation Offerings had with the other investment banks. See id. ¶ 66.

4. Analyst Allegations

Paragraphs 86-108 contain the Plaintiffs' allegations that the Underwriter Defendants used their analysts "to artificially inflate and maintain the aftermarket price of [the IPO] securities." Id. ¶ 86. "[T]he Underwriter Defendants utilized their analysts to recommend such stocks at their first opportunity, typically at the end of the so-called `quiet period,' 25 days following the offering." Id. "Between 1998 and 2000, 97% of analyst initiations at the expiration of the quiet period were by managing underwriters of the initial public offering. Virtually all such coverage was positive." Id. ¶ 108. "In many instances the favorable recommendations were accompanied by unrealistic price targets, frequently reiterated throughout the relevant class periods." Id. ¶ 86. Not only did "analysts employed by the Underwriter Defendants [know] that a negative recommendation would likely lead to fewer investment banking opportunities," id. ¶ 89, but they have been "confronted with enormous pressure to issue favorable recommendations regarding shares underwritten by the various Underwriter Defendants," id. ¶ 107.

The Master Allegations allege three types of perceived conflicts. "[M]any, if not most, of the Underwriter Defendants tied their analysts' compensation to the performance of the investment banking section of the Underwriter Defendants so that the winning of new investment bank business would directly inure to the pecuniary benefit of the analyst." Id. ¶ 88. "Many analysts also suffered from conflicts of interest due to their ownership of stock in companies they were recommending." Id. ¶ 90. Finally, "analysts frequently had equity interests in entities including venture capital funds and partnerships which had investment interests in these issuers." Id. ¶ 104.

5. Motivations of the Underwriters, Issuers and Individual Defendants

The last four paragraphs of Part I, see id. ¶¶ 109-12, allege the motivations that the various Defendants had in carrying out these Tie-in Arrangements. In addition to receiving various forms of Undisclosed Compensation, see id. ¶¶ 41-43, "the Underwriter Defendants were [also] able to parlay the spectacular increase in market capitalization attendant to each offering into additional and highly lucrative investment banking opportunities for themselves," id. ¶ 109. "Examples of these additional opportunities include the underwriting of add-on offerings such as secondary and tertiary equity offerings (for which the Underwriter Defendants typically were paid a fixed percentage of the offering price), the underwriting and sales of debt and convertible offerings and advisory services including financial consulting and advising on mergers and acquisitions." Id. Likewise, during the late 1990s, "the Underwriter Defendants marketed themselves by emphasizing the prospect of substantial market gains, including the first day gains, of IPO Offerings to entice potential clients to retain those underwriters." Id. ¶ 110.

The last paragraph contains the only reference to the alleged motivation of the Issuers and the Individual Defendants to participate in this scheme. See id. ¶ 112. "The Issuers, as new publicly held corporations, benefitted financially from the misconduct as the run up of their respective stock prices afforded them with substantial opportunities to utilize their stock as currency in connection with corporate acquisitions, and to raise even more money through add-on offerings." Id. As far as the Individual Defendants are concerned, "[they] were motivated to and did benefit financially as a result of the sharp appreciation in value of the respective Issuer's stock price." Id.

C. Part II and Part III of the Master Allegations

Although the second and third part of the Master Allegations fill hundreds of pages, they are easily summarized. Part II has twenty-two sections, each of which is tabbed to one particular Underwriter Defendant.*fn38 All of the sections contain (1) background information on that Underwriter, (2) quotations from various newspaper articles reporting on perceived abuses in the IPO allocations by that investment bank, and (3) a list of the IPOs and their offering price that the Underwriter led or co-led, First Day High Price, and the percentage increase that the First Day High represents when compared to the IPO price. In addition, the twenty-one page section on CSFB restates facts revealed from the government's investigation into the IPO allocation practices of that bank as well as its subsequent settlement with the SEC.

Part III is marked with two tabs. After Tab A, Plaintiffs have listed each of the fifty-five investment banks and provided several paragraphs of information about the bank's corporate structure. After Tab B, Plaintiffs have listed the IPOs the Underwriter participated in, the IPO price and the number of shares that investment bank was allocated in that IPO. In addition, Plaintiffs have included estimates as to the amount of additional compensation that customers were required to pay in order to receive the IPO stock. For example, one summary reads:

Banc of America

IPO IPO Price Shares Allocated

Apropos $22.00 2,000

Digital Insight $15.00 2,000

Digitas $24.00 4,000

DrKoop.com $9.00 20,000

High Speed Access $13.00 8,000

Modem Media $16.00 1,000

NetRatings $17.00 2,000

Oni Systems $25.00 2,000

Repeater $9.00 1,000 Technologies

Saba Software $15.00 1,000

Ticketmaster $14.00 9,000 Online-City Search, Inc.

Utstarcom $18.00 2,000

In order to receive the above listed and other IPO allocations of securities from Banc of America, the recipients of such allocations were required or induced to pay in excess of $3.7 million in commissions to Banc of America during 1999 and 2000. These commissions were generated from trades that would not have occurred but for the allocations, and which were created predominately for the purpose of compensating Banc of America for the allocations received. All of these commissions are referred to herein as "Undisclosed Compensation". Id. Sect. III, Tab B, at 1. A similar chart and allegation follows the listing of each Underwriter.

GOVERNING LEGAL PRINCIPLES

V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE

The individual Complaints average more than thirty pages each, comprising a total of nearly 11,355 pages. Defendants have challenged these Complaints as insufficient. The parties have submitted over 500 pages of legal briefing along with thousands of additional pages of attachments, appendixes and letters to support their arguments. Given the seriousness of these allegations, the extent of the briefing, and the fact that there are more than one thousand parties, a thorough discussion of the pleading requirements of the Federal Rules of Civil Procedure and the PSLRA is in order.

A. Rule 8(a)

Under the Federal Rules it is remarkably easy for a plaintiff to plead a claim: Unless the claim falls into one of the two exceptions set forth in Rule 9, a plaintiff must simply provide "(1) a short and plain statement of the grounds upon which the court's jurisdiction depends . . . (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks." Fed.R.Civ.P. 8(a). Almost five decades ago, in Conley v. Gibson, 355 U.S. 41 (1957), the Supreme Court first considered the argument that a plaintiff must also "set forth specific facts to support [the complaint's] general allegations." Id. at 47. The Supreme Court responded unanimously:

The decisive answer to this is that the Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is "a short and plain statement of the claim" that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests. . . . Such simplified "notice pleading" is made possible by the liberal opportunity for discovery and the other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues.

Id. at 47-48. "The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits." Id. at 48.

In Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163 (1993), the Supreme Court rebuked the lower courts for imposing a more demanding rule of pleading on certain types of cases that are sometimes disfavored by the courts (e.g., section 1983 claims against municipalities, prisoner litigation, and civil rights cases). The Court (again unanimous) reaffirmed its previous decision by stating: "In Conley v. Gibson, we said in effect that the Rule meant what it said." Leatherman, 507 U.S. at 168 (citation omitted). Moreover, as if to warn the lower courts not to stray from the Rules, the Court held that heightened pleading "is a result which must be obtained by the process of amending the Federal Rules, and not by judicial interpretation. In the absence of such an amendment, federal courts and litigants must rely on summary judgment and control of discovery to weed out unmeritorious claims sooner rather than later." Id. at 168-69.*fn39

Nonetheless, last term in Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002), the Supreme Court found occasion to again remind the lower courts not to raise the bar for pleading. This time reversing a case that originated from this district, the Court (still unanimous) reiterated that "Rule 8(a)'s simplified pleading standard applies to all civil actions, with limited exceptions." Id. at 513 (emphasis added). "This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims." Id. at 512. "Given the Federal Rules' simplified standard for pleading, `[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Id. at 514 (quoting Hishon v. King & Spalding, 467 U.S. 69, 73 (1984)) (emphasis added). "Rule 8(a) establishes a pleading standard without regard to whether a claim will succeed on the merits." Swierkiewicz, 534 U.S. at 515.

While the meaning of "a short and plain statement of the claim" is clear on its face, Fed.R.Civ.P. 8(a)(2), the drafters removed any conceivable ambiguity by including more than a dozen sample complaints in the Appendix. See Fed.R.Civ.P.App. Forms 3-18. According to Rule 84, "[t]he forms contained in the Appendix of Forms are sufficient under the rules and are intended to indicate the simplicity and brevity of statement which the rules contemplate."*fn40 Fed.R.Civ.P. 84. It is worth emphasizing that not one of these exemplar complaints is more than half a page in length.

"For example, Form 9 sets forth a complaint for negligence in which plaintiff simply states in relevant part: `On June 1, 1936, in a public highway called Boylston Street in Boston, Massachusetts, defendant negligently drove a motor vehicle against plaintiff who was then crossing said highway.'" Swierkiewicz, 534 U.S. at 513 n. 4 (quoting Fed.R.Civ.P. App. Form 9). As the Supreme Court recognized in Swierkiewicz, one clearly written sentence can satisfy Rule 8(a)(2). See id.; see also Walker v. Thompson, 288 F.3d 1005, 1011 n. 2 (7th Cir. 2002).

If the complaint also includes statements "of the grounds upon which the court's jurisdiction depends" and "the relief the pleader seeks," the plaintiff has satisfied Rule 8.*fn41 Fed.R.Civ.P. 8(a)(1),(3).

Rule 8(a) does not require plaintiffs to plead the legal theory, facts or elements underlying their claim. There is nothing in Form 9, for example, to support plaintiff's accusation of negligence. "It does not say, for example, whether the hypothetical defendant was speeding, driving without lights, or driving on the wrong side of the road." Atchinson v. District of Columbia, 73 F.3d 418, 423 (D.C. Cir. 1996). Nor does it outline the four elements of negligence and explain how each is satisfied. "Form 9 thus treats the mere allegation of negligence as sufficient." Id. (emphasis added). Form 9's allegations are wholly conclusory: by simply describing the claim in a short and plain fashion, Form 9 satisfies the Federal Rules. See Fed.R.Civ.P. 84.

"A complaint that complies with the federal rules of civil procedure cannot be dismissed on the ground that it is conclusory or fails to allege facts." Higgs v. Carver, 286 F.3d 437, 439 (7th Cir. 2002). "The courts keep reminding plaintiffs that they don't have to file long complaints, don't have to plead facts, don't have to plead legal theories." Id. (quotation marks and citation omitted). To comply with Rule 8, plaintiffs need not provide anything more than sufficient notice to permit defendant to file an answer.*fn42 In this regard, Form 9 is the definition of short and plain: "It can be read in seconds and answered in minutes." McHenry v. Renne, 84 F.3d 1172, 1177 (9th Cir. 1996).

Indeed, plaintiffs who want to provide something more than a short complaint should be cautious because "[a] party's assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding." Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528 (2d Cir. 1985).*fn43 Plaintiffs may even plead themselves out of court at the outset of their lawsuit by pleading information that defeats their legal claim, thereby "thwarting what might, for all we know, have been a fruitful program of pretrial discovery for the plaintiff." Conn v. GATX Terminals Corp., 18 F.3d 417, 419 (7th Cir. 1994) (citing examples). See also Stone Motor Co. v. General Motors Corp., 293 F.3d 456, 464 (8th Cir. 2002) ("[A] dismissal under Rule 12(b)(6) should be granted only in the unusual case in which a plaintiff includes allegations that show, on the face of the complaint, that there is some insuperable bar to relief.") (quoting Schmedding v. Tnemec Co., 187 F.3d 862, 865 (8th Cir. 1999)).

Given these incentives, it is no surprise that courts "continue to be puzzled why lawyers insist on writing prolix complaints that can only get them into trouble." Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774, 778 (7th Cir. 1994). Plaintiffs would do well to remember that in law, as in life: "He who guards his mouth and his tongue keeps himself from calamity." Proverbs 21:23 (New International Version).

B. Rule 9(b)

"Rule 9(b) does impose a particularity requirement in two specific instances." Leatherman, 507 U.S. at 168. It states in full: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). Of these two exceptions, fraud is far more important — courts and commentators rarely discuss the failure to plead a claim of mistake with particularity (much less dismiss a case for that reason). See Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 682 (7th Cir. 1992).

1. Why Rule 9(b) Requires Particularity

There are two main reasons why fraud claims must be pled with particularity: notice and deterrence.*fn44 With respect to the former, general accusations of fraud are thought to be too amorphous to provide defendants with sufficient notice to permit a response. See Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) ("`The primary purpose of Rule 9(b) is to afford defendant fair notice of the plaintiff's claim and the factual ground upon which it is based.'") (quoting Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990)). "Fraud . . . embrace[s] such a wide variety of potential conduct that a defendant needs a substantial amount of particularized information about plaintiff's claim in order to enable him to understand it and effectively prepare his response."*fn45 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure ("Fed. Prac.") § 1296 ("Pleading the Circumstances of Fraud or Mistake — History and Purpose").

Requiring particularity may also deter plaintiffs from filing frivolous fraud claims. Courts and commentators have offered several explanations for why fraud claims require more deterrence than other claims. One of the most common is that lawsuits based on fraud are more likely to harm a defendant's reputation than a typical lawsuit. "Accusations of fraud," even if proven to be untrue, "can do serious damage to the goodwill of a business firm or a professional person." Bankers Trust Co., 959 F.2d at 683. In addition, fraud claims should be deterred because "assertions of fraud . . . often are involved in attempts to reopen completed transactions or set aside previously issued judicial orders." 5 Fed. Prac. § 1296. Because finality has value, courts will not lightly reexamine completed transactions because one party has claimed fraud. See Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999) (citing Stearns v. Page, 48 U.S. (7 How.) 819, 828-30 (1849)); see also Chamberlain Mach. Works v. United States, 270 U.S. 347, 348-49 (1926).

Another explanation is that fraud claims deserve more deterrence than other lawsuits because plaintiffs frequently file fraud claims for the wrong reasons. See generally 5 Fed. Prac. § 1297. For example, some fraud claims are nothing more than "strike suits" — that is, attempts by plaintiffs to extract settlements from defendants who would rather pay the plaintiff than face the cost of discovery and trial.

Plaintiffs may also sue defendants in order to conduct "fishing expeditions" where a party files a complaint containing general allegations of fraud in hopes that subsequent discovery will uncover enough evidence to substantiate allegations.*fn46 Finally, "fraud is frequently charged irresponsibly by people who have suffered a loss and want to find someone to blame for it." Ackerman, 172 F.3d at 469 (citing Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.) (coining the phrase "fraud by hindsight")).

2. How Particularity Deters Claims of Fraud

Rule 9(b) deters plaintiffs from filing fraud claims in two ways. First, by requiring plaintiffs to state their claim with particularity, the Rule creates a disincentive to the filing of claims for an improper reason. For example, the claim's particularity narrows the potential scope of discovery. Likewise, because pleadings are binding judicial admissions, see supra note 43, plaintiffs cannot easily change their claims based on what they discover during litigation. Thus, requiring plaintiffs to state their claims with particularity has a certain salutary effect.

Second, particularity increases the cost of filing the complaint by forcing a plaintiff to conduct a more substantial investigation of the grounds for her claim before bringing suit. See Ackerman, 172 F.2d at 469. Because "factual contentions [must] have evidentiary support," Fed.R.Civ.P. 11(b)(3), claims that are stated with particularity will necessarily require the plaintiffs to make inquiries that are more extensive than usual. See also Fed.R.Civ.P. 11(b) (stating that attorneys must certify that they have made their pleadings to "the best of [their] knowledge, information, and belief, formed after an inquiry reasonable under the circumstances").

3. Rule 9(b) Must Be Read in Harmony with Rule 8(a)

It is worth emphasizing that Rule 9(b) and Rule 8(a) are children of the same parents: their pleading requirements only differ in degree, not in kind. "[T]his bite of Rule 9(b) was part of the pleading revolution of 1938" in which the drafters rejected arduous fact pleading in favor of providing simple notice. Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). "[I]n applying rule 9(b) we must not lose sight of the fact that it must be reconciled with rule 8 which requires a short and concise statement of claims." Felton v. Walston & Co., 508 F.2d 577, 581 (2d Cir. 1974). Thus, in various ways, courts in this circuit and others have repeatedly emphasized that Rule 9(b) must be read in harmony with the principles established by Rule 8(a). See, e.g., Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990) ("Rule 9(b) . . . must be read together with rule 8(a) which requires only a `short and plain statement' of the claims for relief."); DiVittorio, 822 F.2d at 1247 (same); Credit & Fin. Corp. v. Warner & Swasey Co., 638 F.2d 563, 566 (2d Cir. 1981) (same).*fn47

While a complaint may properly plead a cause of action under Rule 8(a) by stating "defendant negligently drove a motor vehicle against plaintiff," Fed.R.Civ.P. App. Form 9, plaintiff's mere incantation of "fraud" will not satisfy Rule 9(b)'s requirement of particularity. See, e.g., Segal v. Gordon, 467 F.2d 602, 606 (2d Cir. 1972). The additional requirements of Rule 9(b) were well described by Judge Frank Easterbrook when he wrote that "[particularity] means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) (emphasis added).

While Judge Easterbrook seems to suggest that good lawyers (or at least good reporters) should be able to write a claim of fraud in one paragraph, the Appendix to the Rules shows that it can be done in one sentence. Form 13 alleges fraud and satisfies Rule 9(b) by stating:

Defendant C. D. on or about [date given] conveyed all his property, real and personal [or specify and describe] to defendant E. F. for the purpose of defrauding plaintiff and hindering and delaying the collection of the indebtedness evidenced by the note above referred to.

Fed.R.Civ.P. App. Form 13. In less than fifty words, this model complaint answers the five questions posed by Judge Easterbrook:

• who: Defendant C. D.

• what: committed fraudulent conveyance (a type of fraud)

• when: on or about (date given)

• how: by conveying all his property, real and personal to E. F.

• why: for the purpose of hindering and delaying the collection of the indebtedness owed to plaintiff

"Official Form 13 demonstrates that even fraud may be pleaded without long or highly detailed particularity."*fn48 Guidry v. U.S. Tobacco Co., 188 F.3d 619, 632 (5th Cir. 1999).

VI. PLEADING SECURITIES FRAUD

A. Pleading Securities Fraud Before 1995

Courts have long held that complaints pleading securities fraud claims must comply with Rule 9(b) by stating the circumstances constituting fraud with particularity. See Segal, 467 F.2d at 607 (gathering citations). Unlike a pleading that satisfies Rule 8, a securities fraud claim is not properly pled if it merely repeats a statute or regulation verbatim. "A [securities] complaint cannot escape the charge that it is entirely conclusory in nature merely by quoting such words from the statutes as `artifices, schemes, and devices to defraud' and `scheme and conspiracy.'" Id. at 608. "To pass muster under [R]ule 9(b), the complaint must allege the time, place, speaker, and sometimes even the content of the alleged misrepresentation." Ouaknine, 897 F.2d at 79. See also Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993).

To prevail, plaintiffs must ultimately prove by a preponderance of the evidence that the defendant committed the alleged fraud (e.g., the misleading statement or omission) with scienter. When plaintiffs are at the pleading stage, however, scienter — "intent, knowledge, and other condition of mind" — "may be averred generally." Fed.R.Civ.P. 9(b).

Although Rule 9(b) states that scienter may be pleaded generally, for more than a generation the Second Circuit has required that plaintiffs also plead a factual basis that gives rise to a "strong inference" of fraudulent intent. The origins of this pleading requirement are found in Ross v. A.H. Robins Co., Inc., 607 F.2d 545 (2d Cir. 1979), where the court stated:

[A]t this stage of the litigation, we cannot realistically expect plaintiffs to be able to plead defendants' actual knowledge. On the other hand, plaintiffs can be required to supply a factual basis for their conclusory allegations regarding that knowledge. It is reasonable to require that the plaintiffs specifically plead those events which they assert give rise to a strong inference that the defendants had knowledge of the facts contained in paragraph 18 of the complaint or recklessly disregarded their existence. And, of course, plaintiffs must fix the time when these particular events occurred.

Id. at 558 (emphasis added). Over the next sixteen years, the Second Circuit repeatedly reaffirmed its holding that plaintiffs must provide a factual basis for their claims that defendants acted with fraudulent intent.*fn49

In 1987, the Second Circuit developed the doctrine further in Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46 (2d Cir. 1987), by holding that there are two ways for a plaintiff to plead facts supporting a "strong inference" that the defendant acted with scienter. First, the plaintiff could "allege facts showing a motive for committing fraud and a clear opportunity for doing so." Id. at 50. Second, "[w]here motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater." Id. (citations omitted).

B. Pleading Securities Fraud After the PSLRA

Recognizing that courts applied different standards to claims of securities fraud, Congress promulgated a nation-wide standard for pleading securities complaints in 1995 by enacting the PSLRA. The PSLRA imposes at least two pleading requirements on securities actions, referred to as paragraph (b)(1) and paragraph (b)(2). Paragraph (b)(1) applies to securities claims "in which the plaintiff alleges that the defendant" either "made an untrue statement of a material fact" or "omitted to state a material fact." 15 U.S.C. § 78u-4(b)(1). Paragraph (b)(2) applies to claims "in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2).

1. Paragraph (b)(1)

Any claim that falls under paragraph (b)(1)'s purview must "[1] specify each statement alleged to have been misleading, [2] the reason or reasons why the statement is misleading, and [3], if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Plaintiffs' burden with respect to the first two requirements of paragraph (b)(1) is self-evident. In order to plead a claim, a plaintiff cannot generically aver that the defendant made a material misstatement or omission, nor may she merely copy the language of the statute. Rather, plaintiff must specifically plead the statements or omissions that give rise to her cause of action and then explain why they were false or misleading. These pleadings then serve as binding judicial admissions that control the plaintiff's case throughout the course of the proceedings.

The requirements of paragraph (b)(1)'s third element are not as obvious. To begin, the third requirement does not apply to all allegations but rather only "if an allegation regarding the statement or omission is made on information and belief." 15 U.S.C. § 78u-4(b)(1). As the Second Circuit has explained: "Allegations of fraud cannot ordinarily be based `upon information and belief,' except as to `matters peculiarly within the opposing party's knowledge.'" Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir. 1986) (quoting Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), overruled on other grounds by Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1100 n. 9, 1100-06 (1991)). See also Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) ("[A]llegations may be based on information and belief when facts are peculiarly within the opposing party's knowledge."); Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1003 (2d Cir. 1988) (same).

In turn, "whenever plaintiffs allege, on information and belief, that defendants made material misstatements or omissions, the complaint must `state with particularity all facts on which that belief is formed.'" Novak, 216 F.3d at 312 (quoting 15 U.S.C. § 78u-4(b)(1)) (emphasis added). In Novak, however, the Second Circuit found that "notwithstanding the use of the word `all,' paragraph (b)(1) does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based." Id. at 313. The Second Circuit's "reading of the provision focuses on whether the facts alleged are sufficient to support a reasonable belief as to the misleading nature of the statement or omission." Id. at 314 n. 1 (emphasis added). Under Novak, "plaintiffs need only plead with particularity sufficient facts to support those beliefs."*fn50 Id. at 313-14 (emphasis in original).

To summarize, two threshold questions must be answered to determine whether paragraph (b)(1)'s third element applies: First, which allegations regarding the statement or omission are made on information and belief?*fn51 Second, are those the types of allegations that may be alleged on information and belief?

If plaintiff has put forward allegations on information and belief, then whether paragraph (b)(1)'s third element is met raises three additional questions: First, what facts have the plaintiffs put forward to support that belief? Second, have the plaintiffs stated those facts with particularity? Third, are those "sufficient facts to support those beliefs[?]" Novak, 216 F.3d at 313-14.

2. Paragraph (b)(2)

Paragraph (b)(2) requires the plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In Novak, the Second Circuit held that this requirement may be satisfied in one of two ways: the plaintiffs may plead "motive and opportunity to commit fraud" or "strong circumstantial evidence of conscious misbehavior or recklessness." See Novak, 216 F.3d at 310-11.

This is, of course, nothing more than a restatement of the Second Circuit's case law prior to 1995. The Novak court reached this holding after reviewing the text and legislative history, and ultimately concluded that when Congress passed the PSLRA, it settled the disagreement between the circuits in favor of the Second Circuit's pleading standard. See id.*fn52 In promulgating the PSLRA, Congress recognized that the Second Circuit's "pre-PSLRA standard was the most stringent in the nation." Id. at 310.

Given that the PSLRA adopts the Second Circuit's pre-1995 pleading standards,

our prior case law may be helpful in providing guidance as to how the "strong inference" standard may be met. Therefore, in applying this standard, district courts should look to the cases and factors discussed [in the case law] to determine whether plaintiffs have pleaded facts giving rise to the requisite "strong inference." These cases suggest, in brief, that the inference may arise where the complaint sufficiently alleges that the defendants: (1) benefitted in a concrete and personal way from the purported fraud, (2) engaged in deliberately illegal behavior, (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.

Id. at 311 (citations omitted).

VII. PRELIMINARY ISSUES

Before turning to Defendants' arguments as to why each of Plaintiffs' claims should be dismissed, it is necessary to address some preliminary pleading issues. In addition, I will address the Defendants' argument that the pleadings should be dismissed because they are vague and incomprehensible. See, e.g., 1 Und. Mem. at 18-31.

A. Standard of Review

1. The Court Must Take the Pleadings as True and Draw All Inferences in Plaintiffs'

Favor A motion to dismiss under Rule 12 should be granted only if "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Weixel v. Board of Educ. of New York,
287 F.3d 138, 145 (2d Cir. 2002) (quoting Conley, 355 U.S. at 45-46 (alterations omitted)). At the motion to dismiss stage, the issue "`is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test.'" Phelps v. Kapnolas, 308 F.3d 180, 184-85 (2d Cir. 2002) (quoting Chance v. Armstrong, 143 F.3d 698, 701 (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.'" Pierce v. Marano, No. 01 Civ. 3410, 2002 WL 1858772, at *3 (S.D.N.Y. Aug. 13, 2002) (quoting Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 98108, at *2 (S.D.N.Y. Mar. 15, 1994)). When deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). Courts may not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings. See id. at 152-53; see also Fed.R.Civ.P. 10(c).

In addition to Rule 12, the PSLRA provides an alternate basis for dismissal: "the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs [(b)](1) and [(b)](2) are not met." 15 U.S.C. § 78u-4(b)(3)(A). "Although the pleading requirements under the PSLRA are strict, they do not change the standard of review for a motion to dismiss. Even under the PSLRA, the district court, on a motion to dismiss, must draw all reasonable inferences from the particular allegations in the plaintiff's favor, while at the same time requiring the plaintiff to show a strong inference of scienter." Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002) (citations omitted) (citing Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001) (en banc)).

2. Both the Defendants and the Court Must Accept the Complaints as Pled

Throughout their briefs, the Defendants refashion and redraft much of the Complaints, then argue for the dismissal of claims that are not in those Complaints. For example, the Underwriters' third and fifth briefs are respectively entitled "Memorandum in Support of the Underwriter Defendants' Motion to Dismiss Undisclosed Compensation Claims," 3 Und. Mem. (emphasis added), and "Memorandum in Support of the Underwriter Defendants' Motion to Dismiss All Analyst Claims," 5 Und. Mem. (emphasis added).*fn53 These briefs then argue that these "claims" should be dismissed.

A plain reading of the Complaint shows that there are no such claims. For example, the Cacheflow Complaint explicitly alleges six claims and even highlights the claims with headings that are bolded, underlined and capitalized. The third cause of action in the Cacheflow Complaint has the following heading: "THIRD CLAIM (FOR VIOLATIONS OF SECTION 10(b) AND RULE 10b-5 THEREUNDER AGAINST THE ALLOCATING UNDERWRITER DEFENDANTS BASED UPON DECEPTIVE AND MANIPULATIVE PRACTICES IN CONNECTION WITH THE IPO)". Cacheflow Compl. at 23. In similar fashion, each claim brought by the Plaintiffs in Cacheflow relates to alleged statutory violations committed by the Defendants; each claim contains a heading that removes any ambiguity. See supra Part IV.A.3.

While it is perfectly proper to use shorthand phrases to describe these claims, the Defendants have rewritten the Complaints in a way that they believe favors dismissal. It must be remembered, however, that Plaintiffs are the master of their complaint and "neither this Court nor the defendant have the right to redraft the complaint to include new claims."*fn54 MDCM Holdings, 216 F. Supp.2d at 258. Defendants must take the Complaints as they are written.

3. Clarity of Pleadings Is Not a Factor in Dismissal

The Defendants also argue at great length that the Complaints should be dismissed because they are "incomprehensible," "too vague" and "meaningless." 1 Und. Mem. at 18-31. This argument has no merit. The Complaints are written in plain English and are well drafted by competent counsel. No one should have any trouble understanding what has been alleged. See supra Part IV (summarizing the Complaints). Moreover, this failure, if it exists, is not a ground for Rule 12(b)(6) dismissal. If the Defendants were truly perplexed by the Complaints, they should have filed a motion under Rule 12(e), which states:

If a pleading to which a responsive pleading is permitted is so vague or ambiguous that a party cannot reasonably be required to frame a responsive pleading, the party may move for a more definite statement before interposing a responsive pleading. The motion shall point out the defects complained of and the details desired. If the motion is granted and the order of the court is not obeyed within 10 days after notice of the order or within such other time as the court may fix, the court may strike the pleading to which the motion was directed or make such order as it deems just.

Fed.R.Civ.P. 12(e).*fn55 "Perhaps tellingly," the Defendants "made no such motion here," Langadinos, 199 F.3d at 73 n. 6 (discussing Rule 12(e)), nor would such motion have been granted. See also Swierkiewicz, 534 U.S. at 514 (same).

B. The Pleading Standards for Some of the Claims Are Governed by the PSLRA; Others Are Governed by Both the PSLRA and the Federal Rules

Defendants argue in part that the Complaints are not properly pled under Rule 9(b) and the PSLRA. While the parties apparently assumed that both the Rule and the PSLRA applied to these pleadings, recent appellate decisions cast some doubt on this assumption. See In re Navarre Corp. Sec. Litig., 299 F.3d 735, 742 (8th Cir. 2002) ("Contrary to the district court's analysis, the investors technically do not need to meet the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA, as the PSLRA supercedes reliance on 9(b) in securities fraud cases and embodies the standards of 9(b).") (emphasis in original) (citing Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1034 n. 12 (9th Cir. 2002)); City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1255 n. 13 (10th Cir. 2001); Greebel v. FTP Software, Inc., 194 F.3d 185, 193-94 (1st Cir. 1999); see also Advanta, 180 F.3d at 531.

1. The Differences Between the Scope of the PSLRA's Pleading Requirements and Rule 9(b)

While the parties have treated the requirements of the Rule and the PSLRA as interchangeable, a plain reading of the two provisions shows they are in fact quite different. The most significant difference lies in the claims they cover. Rule 9(b) applies to "all averments of fraud," Fed.R.Civ.P. 9(b) (emphasis added) including, of course, all claims of securities fraud.*fn56

In stark contrast, paragraph (b)(1) of the PSLRA only applies to a subset of claims brought under the Exchange Act. In particular, it applies to "any private action arising under this chapter [of the Exchange Act] in which the plaintiff alleges that the defendant"

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading.

15 U.S.C. § 78u-4(b)(1).

Consider, for example, Rule 10b-5, which makes it unlawful:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5(a)-(c) (emphasis added). While claims brought under Rule 10b-5(b) must always satisfy paragraph (b)(1)'s statutory requirement, claims brought under Rule 10b-5(a) or 10b-5(c) need not if they do not rely upon misstatements or omissions (e.g., if they allege market manipulation).

Paragraph (b)(2) applies to "any private action arising under this chapter [of the Exchange Act] in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2). In contrast to paragraph (b)(1), all claims brought under Rule 10b-5 must satisfy paragraph (b)(2) because all such claims require proof that defendant acted with an intentional or reckless state of mind. See, e.g., Novak, 216 F.3d at 308.

2. The Federal Rules Still Apply to Certain Types of Securities Fraud Claims

Given that Rule 9(b) and the PSLRA differ in scope, a pivotal question is whether the Plaintiffs "need to meet the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA." Navarre, 299 F.3d at 742 (emphasis in original). With respect to those requirements specifically imposed by paragraphs (b)(1) and (b)(2) of the PSLRA — pleading facts suggesting scienter and specifying the material misstatements and omissions — plaintiffs only need to satisfy the PSLRA. If Congress intended that paragraph (b) set a pleading standard that is higher or the equivalent of Rule 9(b) for these elements of securities fraud, then the requirements of the Rule are subsumed by the PSLRA. On the other hand, if Congress intended to set a pleading standard that is lower than Rule 9(b), that standard must govern because a statute supercedes a Rule when the two are in conflict. See Jackson v. Stinnett, 102 F.3d 132, 134 (5th Cir. 1996). See also Advanta, 180 F.3d at 531 n. 5 ("the Reform Act supersedes Rule 9(b)").

However, this leaves the question of whether Congress intended that the PSLRA supercede Rule 9(b) with regard to the remaining elements of a securities fraud claim. Consider, for example, Rule 10b-5(a) claims in which a plaintiff alleges that the defendant has "employ[ed] [a] device, scheme, or artifice to defraud." 17 C.F.R. § 240.10b-5(a). The answer is not difficult. Congress intended that the PSLRA supercede the Federal Rules only as to those elements which the PSLRA explicitly mentions (i.e., scienter and material misstatements and omissions). See S. Rep. No. 104-98, at 15. In all other respects, the Rules govern these pleadings.

3. Summary

Given that both the PSLRA and Rule 9(b) apply to claims of securities fraud — although never at the same time to the same element — it is necessary for litigants to be precise when challenging or defending a claim.*fn57 In this litigation, plaintiffs have pled two securities fraud claims: one for market manipulation and another for material misstatements and omission in the registration statement. Each of these claims trigger the PSLRA and Rule 9(b), but in different ways.

In this regard, the following standards will apply:

1. Market manipulation under Rule 10b-5(a) or Rule 10b-5(c): Plaintiffs must satisfy Rule 9(b) by stating "the circumstances constituting fraud . . . with particularity." Fed. R. Civ. P. 9(b). Because plaintiffs must ultimately prove scienter to prevail, paragraph (b)(2) of the PSLRA also applies to this claim. Thus, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

2. Material omissions and misstatements under Rule 10b-5(b): Plaintiffs must satisfy both paragraph (b)(1) and (b)(2) of the PSLRA. It is unnecessary, however, for courts to analyze the "circumstances constituting fraud" under Rule 9(b).*fn58

In both cases, Rule 9(b) governs the pleading of the remaining elements of the claims: loss causation, transaction causation, reliance and damages.

APPLICATION OF LEGAL PRINCIPLES

With these governing legal principles firmly in mind, I will now, finally, address Defendants' motions. In order to prevail, Defendants must demonstrate that Plaintiffs have failed to meet their pleading burdens or have failed to state their claims as a matter of law.

VIII. SECTION 11 CLAIMS

A. The Section 11 Claims Have Been Properly Pled

Plaintiffs' first claims allege violations of Section 11 by the Underwriters, Issuers and Individual Officers.*fn59 See Part IV.A (summarizing Cacheflow Compl. ¶¶ 60-68). Section 11(a) states in pertinent part:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may . . . sue —

(1) every person who signed the registration statement;

(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;

(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;

(5) every underwriter with respect to such security.

15 U.S.C. § 77k(a) (emphasis added).

As the Supreme Court has explained:

Section 11 of the 1933 Act allows purchasers of a registered security to sue certain enumerated parties in a registered offering when false or misleading information is included in a registration statement. The section was designed to assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering.

Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983) (footnotes omitted). Under Section 11, a plaintiff need not prove that the defendants acted with scienter; "he need only show a material misstatement or omission to establish his prima facie case." Id. at 382 (emphasis added). "Although limited in scope, § 11 places a relatively minimal burden on a plaintiff." Id.

Defendants identify three pleading deficiencies in Plaintiffs' Section 11 claims. First, the Underwriters argue that Rule 9(b)'s heightened pleading standards apply to the Section 11 claims because they "sound in fraud" and that Plaintiffs have not satisfied this burden. 1 Und. Mem. at 15.

Second, the Underwriters assert that those Plaintiffs who bought their shares after the initial twelve months' earning statements were issued should be dismissed for failure to allege reliance.

See 6 Und. Mem. at 2-3. Third, the Issuers and Individual Defendants argue that the Plaintiffs fail to allege that these Defendants knew about the information that was omitted from the registration statement. See Iss. Mem. at 50-55. For the reasons discussed below, these arguments have no merit.

1. The PSLRA's Pleading Standards Do Not Apply to Claims Brought Under the Securities Act

Whether the heightened pleading requirements of the PSLRA apply to Section 11 turns on the interpretation of the phrase "any private action arising under this chapter." 15 U.S.C. § 78u-4(b)(1),(2) (emphasis added). When taken out of context, "under this chapter" is ambiguous because 15 U.S.C. § 78u-4(b) is found under Chapter 2B of Title 15 of the United States Code and entitled "Securities Exchanges." That is, all Exchange Act claims fall under Chapter 2B of Title 15. In contrast, Chapter 2A of Title 15 is entitled "Securities and Trust Indentures" and contains all of the Securities Act claims.

The question, then, is whether the phrase "under this chapter" refers to Chapter 2B (and thus paragraph (b) only applies to Exchange Act claims) or whether it refers to Chapter 2 (and thus paragraph (b) also applies to Securities Act claims).

However, if the statute's full text and structure are considered, see United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am. Inc., 508 U.S. 439, 454-55 (1993), then there is no ambiguity: Congress only intended paragraph (b) of 15 U.S.C. § 78u-4 to apply to Exchange Act claims.

First, paragraph (b) is entitled: "Requirements for securities fraud actions." 15 U.S.C. § 78u-4(b). Securities fraud claims can be brought only under the Exchange Act (and regulations promulgated thereunder). See supra notes 13 and 56.

The title of paragraph (b) is therefore a strong indicator that Congress only intended it to apply to Exchange Act claims. See INS v. National Ctr. for Immigrants' Rights, Inc., 502 U.S. 183, 189 (1991) ("[T]he title of a statute or section can aid in resolving an ambiguity in the legislation's text."); United States v. Fisher, 6 U.S. (2 Cranch) 358, 386 (1805) (Marshall, C.J.) ("Where the mind labours to discover the design of the legislature, it seizes every thing from which aid can be derived; and in such case the title claims a degree of notice, and will have its due share of consideration.").

Second, and more important, in enacting the PSLRA Congress repeatedly treated the Securities Act and the Exchange Act as separate chapters. See 15 U.S.C. § 77z-1(a)(2)-(3), 78u-4(a)(2)-(3) (identical provisions concerning plaintiff certifications, appointment of lead plaintiffs, selection of lead counsel, restrictions on plaintiffs); id. §§ 77z-1(c), 78u-4(c) (identical provisions concerning sanctions for abusive litigation); id. §§ 77z-1(d), 78u-4(d) (identical provision concerning defendant's right to written jury interrogatories).

If this Court were to interpret "under this chapter" as used throughout 15 U.S.C. § 78u-4 to include the Securities Act, each of these identical provisions in the Securities Act would be entirely superfluous.*fn60 United States v. Nordic Vill., Inc., 503 U.S. 30, 36 (1992) ("a statute must, if possible, be construed in such fashion that every word has some operative effect."). See also Market Co. v. Hoffman, 101 U.S. 112, 115-16 (1879).

In sum, because the phrase "under this chapter" as used throughout 15 U.S.C. § 78u-4 only refers to the Exchange Act, the PSLRA pleading requirements have no application to claims that arise under Section 11 or other provisions of the Securities Act (e.g., Section 15).

2. Rule 8(a) Applies to Section 11

Rather than contend that Plaintiffs' Section 11 claims must satisfy the PSLRA, Defendants seek to impose a heightened pleading standard through the Federal Rules. "Because the Section 11 claims asserted here `sound in fraud,'" Defendants contend, "they must be pled in accordance with the heightened pleading standards imposed by Federal Rule of Civil Procedure Rule 9(b)." 1 Und. Mem. at 15 (citing Ellison v. American Image Motor Co., 36 F. Supp.2d 628, 639 (S.D.N.Y. 1999); Schoenhaut v. American Sensors, Inc., 986 F. Supp. 785, 795 n. 13 (S.D.N.Y. 1997); In re Chaus Sec. Litig., No. 88 Civ. 8641, 1990 WL 188921, at *10 (S.D.N.Y. Nov. 20, 1990)).

While some courts have accepted Defendants' argument, most have not because nothing in Section 11 requires a plaintiff to prove the defendant committed fraud.*fn61 Rule 9(b) requires a plaintiff to plead "the circumstances constituting fraud . . . with particularity." Fed.R.Civ.P. 9(b) (emphasis added). Because there is no need to prove fraud in a Section 11 claim, there is no need to satisfy Rule 9(b). Because a plaintiff cannot be required to plead something it need not prove, I join the majority of courts in this district that have concluded that Rule 9(b) does not apply to Section 11 claims.

Defendants argue that several circuit courts have recognized the sound in fraud doctrine.*fn62 But this argument is somewhat exaggerated. See 11/1/02 Tr. at 205 (statement of Mark Holland that "the Ninth, the Fifth, the Third, and the Seventh" Circuits have adopted the sound in fraud doctrine, while "the Eighth Circuit goes the other way").

While the Seventh Circuit discussed the application of Rule 9(b) to Section 16(a) and Section 20 claims in Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990), the district courts in that Circuit have refused to apply Sears to the ground that the circuit's reference to Rule 9(b) was pure dictum.*fn63 The clear holding in Sears is that the securities at issue in the case were "exempt from the provisions of the Securities Act." Sears, 912 F.2d at 892. Having disposed of the Securities Act claims on this basis, there was plainly no need to hold that Rule 9(b) governs the Section 11 claims or that the plaintiffs failed to meet that requirement.

Meanwhile, in recent years the Fifth and Third Circuits have taken steps to substantially undercut the application of the sound in fraud doctrine. In the Fifth Circuit, plaintiffs who explicitly disavow any allegation of fraud in connection with their Section 11 claim only need to satisfy Rule 8(a).*fn64 Likewise, the Third Circuit has signaled its intention to follow the Fifth Circuit by allowing plaintiffs to explicitly disavow fraud in pleading Section 11 claims.*fn65

At the time that the parties briefed the instant motions, only the Ninth Circuit had taken an unequivocal stance on the sound in fraud doctrine by stating that Rule 9(b) should apply even if a plaintiff explicitly disavows fraud in connection with its Section 11 claim. See In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 n. 2 (9th Cir. 1996). The Ninth Circuit has now signaled its desire to move away from rigid application of the sound in fraud doctrine. In Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, No. 01-55834, 2003 WL 203124 (9th Cir. Jan. 31, 2003), the court explained that in a case where fraud is not an essential

element of the claim, and where allegations of both fraudulent and non-fraudulent conduct are made in the complaint . . . particular averments of fraud [that] are insufficiently pled under Rule 9(b) . . . should be disregard[ed] . . . or strip[ped] [] from the claim. The court should then examine the allegations that remain to determine whether they state a claim.

Id. at *5-6 (emphasis added). Thus, Rule 9(b) no longer applies to all allegations in a Section 11 claim; it applies only to the actual "averments of fraud." Id. at *5.

The Ninth Circuit is the only circuit court that has provided any rationale for its decision to accept the sound in fraud doctrine: "`Rule 9(b) serves to . . . protect professionals from the harm that comes from being subject to fraud charges.' Fraud allegations may damage a defendant's reputation regardless of the cause of action in which they appear, and they are therefore properly subject to Rule 9(b) in every case." Vess, 2003 WL 203124, at *5 (quoting Stac Elec., 89 F.3d at 1405) (ellipsis in original) (citations omitted). But even if these policy considerations apply with the same force to a claim that does not require proof of scienter, the Supreme Court has made it clear that such considerations are never a valid reason to stray from the language of the applicable statute or Rule. "Whatever merits these and other policy arguments may have, it is not the province of [the courts] to rewrite the statute [or Rules] to accommodate them." Artuz v. Bennett, 531 U.S. 4, 10 (2000). See also Badaracco v. Commissioner, 464 U.S. 386, 398 (1984) ("Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement.").

Indeed, in the last decade the Supreme Court has twice admonished the lower courts for augmenting federal pleading requirements: "A requirement of greater specificity for particular claims is a result that `must be obtained by the process of amending the Federal Rules, and not by judicial interpretation.'" Swierkiewicz, 534 U.S. at 515 (quoting Leatherman, 507 U.S. at 168) (emphasis added). In fact, in Swierkiewicz, the Defendant tried to persuade the Court on policy grounds by asserting that "allowing lawsuits based on conclusory allegations of discrimination to go forward will burden the courts and encourage disgruntled employees to bring unsubstantiated suits." Id. at 514. The Court responded: "Whatever the practical merits of this argument, the Federal Rules do not contain a heightened pleading standard for employment discrimination suits." Id. at 514-15.*fn66

Plaintiffs rely on those cases that have allowed litigants to explicitly disclaim any allegations of fraud in connection with their Section 11 claims, as Plaintiffs have, in order to avoid Rule 9(b)'s heightened pleading standard. See 3 Pl. Mem. at 2 n. 4; see also Lone Star Ladies, 238 F.3d at 369; Westinghouse, 90 F.3d at 717. But it is obvious from the Complaints that Plaintiffs' disclaimer is superficial.*fn67 See, e.g., Cacheflow Compl. ¶ 60 ("Plaintiffs repeat and reallege the allegations set forth above as if set forth fully herein, except to the extent that any such allegation may be deemed to sound in fraud."). Ultimately, if Plaintiffs are to prevail on their Section 11 claims, they will necessarily have to prove factual allegations that also give rise to their claims of securities fraud under Rule 10b-5.*fn68 Thus, if Plaintiffs recover damages under Section 11, they will have proved that the Allocating Underwriters manipulated the market with Tie-in Agreements, a violation of Rule 10b-5(a), as well as intentionally made misstatements and omissions in the registration statements, a violation of Rule 10b-5(b). In this sense, the Section 11 claims are "grounded" in their fraud claims in a way that cannot be simply disavowed by the Plaintiffs.

This does not mean, however, that a heightened pleading standard applies to Plaintiffs' Section 11 claims. Whether Rule 8(a) or 9(b) is triggered turns on the type of claim alleged (i.e., the cause of action) rather than the factual allegations on which that claim is based.*fn69 That courts must look at the type of claim being alleged to determine which Rule applies is obvious from the plain language of Rule 8, which states that a "pleading which sets forth a claim for relief, whether an original claim, counterclaim, cross-claim, or third-party claim, shall contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8 (emphasis added).*fn70 Likewise, Rule 9(b) only applies to claims that fall under the category of fraud or mistake. Because a Section 11 claim is not a fraud claim, Rule 8(a) applies. That the same factual allegations also give rise to a Rule 10b-5 claim is irrelevant to this analysis.

That being so, just as the half-page model complaints in the Appendix to the Federal Rules of Civil Procedure satisfy the pleading requirements of the Federal Rules, see Fed.R. Civ. P. 84, Plaintiffs' allegations here are sufficient to state a Section 11 claim against each of the Defendants. See, e.g., Cacheflow Compl. ¶¶ 1, 5, 6, 9, 61.

3. Plaintiffs Need Not Plead Reliance in Order to State Certain of Their Section 11 Claims

Section 11(a) requires that if a plaintiff acquires the security

after the issuer has made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such omission, but such reliance may be established without proof of the reading of the registration statement by such person.

15 U.S.C. § 77k(a) (emphasis added). Defendants argue that in approximately a dozen of these coordinated cases, "plaintiffs . . . purchased their shares after the issuers made available an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement." 6 Und. Mem. at 3. "None of those plaintiffs allege that they relied upon the registration statement they claim was misleading." Id. "As a result," Underwriters argue, "those claims should be dismissed." Id.

This argument has no merit because Rule 8 does not require plaintiffs to plead the elements of a claim. See supra Part V.A. Just as plaintiffs do not need to allege causation in order to plead a negligence claim (even though a plaintiff must ultimately prove causation to prevail), see Fed.R.Civ.P. App. Form 9, plaintiffs do not need to allege reliance on a registration statement to plead a Section 11 claim. See, e.g., In re MobileMedia Sec. Litig., 28 F. Supp.2d 901, 923 (D.N.J. 1998) ("A plaintiff need not plead fraud, reliance, motive, intent, knowledge or scienter under Section 11."). Indeed, given that the Underwriter Defendants do not claim they lack notice of the Section 11 claim, or that there are no set of facts under which plaintiffs could prevail, their argument must be rejected.

4. Plaintiffs Need Not Plead that the Issuers and Individual Defendants Had Knowledge in Order to State Section 11 Claims Against Those Defendants

The Issuers and Individual Defendants argue that "Section 11 liability does not attach in instances in which the allegedly omitted information is not known to [them]." Iss. Mem. at 51. As a result, they argue that the Section 11 claims should be dismissed because Plaintiffs have failed to allege that these Defendants knew about the omitted material. The Plaintiffs disagree, arguing that "[c]ourts have held, time and time again, that issuers are liable under Section 11 irrespective of their knowledge (or lack thereof)." Pl. Mem. (Iss.) at 11.

Section 11 "was designed to assure compliance with the disclosure provisions of the [Securities] Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering." Herman & MacLean, 459 U.S. at 381-82 (footnotes omitted). The Supreme Court has held that, "[l]iability against the issuer of a security is virtually absolute" while "[o]ther defendants bear the burden of demonstrating due diligence." Id. at 382 (emphasis added). See also AnnTaylor Stores, 807 F. Supp. at 998 ("An issuer has absolute liability for any misrepresentations or omissions; the underwriters and signatories have an affirmative due diligence defense.") (emphasis added).

Because intent to defraud is not an element in a Section 11 claim, "only a material misstatement or omission need be shown to establish a prima facie case, and scienter need not be alleged." Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1310 (S.D.N.Y. 1996). See also In re Twinlab Corp. Sec. Litig., 103 F. Supp.2d 193, 201 (E.D.N.Y. 2000) ("Section 11 `places a relatively minimal burden on a plaintiff,' requiring simply that the plaintiff allege that he purchased the security and that the registration statement contains false or misleading statements concerning a material fact.") (quoting Herman & MacLean, 459 U.S. at 381-82). Because there is no scienter requirement in Section 11, Plaintiffs need not plead that the Defendants had knowledge of the alleged omission. See In re Turkcell Iletisim Hismetler, A.S. Sec. Litig., 202 F. Supp.2d 8, 12 (S.D.N.Y. 2001); see also Degulis v. LXR Biotechnology, Inc., No. 95 Civ. 4204, 1997 WL 20832, at *3 (S.D.N.Y. Jan. 21, 1997) ("[T]o make out a prima facie case at the pleadings stage, Plaintiffs need only allege a material misstatement or omission. Neither knowledge nor reason to know is an element in a plaintiff's prima facie case.").

Defendants cite In re Adams Golf, Inc. Sec. Litig., 176 F. Supp.2d 216 (D.Del. 2001), and In re Ultimate Corp. Sec. Litig., No. 86 Civ. 5944, 1989 WL 86961 (S.D.N.Y. June 30, 1989) (mem.), in support of their argument that Plaintiffs must plead that the Issuers and Individual Defendants had knowledge of the alleged omissions at the time of the IPO. See Iss. Mem. at 50-53. Defendants' reliance on these cases is misplaced. Ultimate decided a motion for summary judgment and thus provides little guidance at the pleading stage. Adams Golf is easily distinguished. The court granted a motion to dismiss in that case because it concluded that neither of the alleged omissions was actionable as a matter of law: one omission was simply not material, see Adams Golf, 176 F. Supp.2d at 234, and the other was a forward looking statement (i.e., something which could not have been known at the time of the omission), id. (citing Zucker v. Quasha, 891 F. Supp. 1010, 1014 (D.N.J. 1995)).*fn71 Here, all of the alleged misrepresentations are actionable. See infra Part X.B.

While some Defendants may raise an affirmative defense that the alleged omission concerned information of which it was unaware, and which it could not have discovered by the exercise of reasonable care, see Herman & MacLean, 459 U.S. at 382; AnnTaylor Stores, 807 F. Supp. at 998, Plaintiffs need not plead the converse — namely, that Defendants had the requisite knowledge. Accordingly, Plaintiffs have sufficiently pled their Section 11 claims.

B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief May Be Granted

1. Plaintiffs Have Standing

Section 11 creates a right of action for "any person" acquiring a security offered pursuant to a misleading registration statement. 15 U.S.C. § 77k(a). Nonetheless, Underwriters argue that only individuals who purchase in the initial offering (as opposed to the aftermarket) may assert a claim. See 6 Und. Mem. at 8; 6 Und. Reply at 4-8.*fn72

The Court of Appeals has now definitively held otherwise: "aftermarket purchasers who can trace their shares to an allegedly misleading registration statement have standing to sue under § 11 of the 1933 Act." DeMaria v. Andersen, No. 01-7505, 2003 WL 174543, at *7 (2d Cir. Jan. 28, 2003). Accord Lee v. Ernst & Young, LLP, 294 F.3d 969, 976-78 (8th Cir. 2002); Joseph v. Wiles, 223 F.3d 1155, 1158 (10th Cir. 2000); Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1079-82 (9th Cir. 1999). See also Milman, 192 F.R.D. at 107 ("a secondary market purchaser who can trace her securities to a registered offering may bring suit under [section] 11"). Because Plaintiffs allege that their shares are traceable to the allegedly misleading registration statements, see, e.g., Cacheflow Compl. ¶¶ 12, 61, they unquestionably have standing.

2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent with Their Claims

"Although reliance ordinarily need not be pled to state a Section 11 claim, under Section 11(a) a plaintiff has no claim if `it is proved that at the time of such acquisition he knew of such untruth or omission.'" 2 Und. Mem. at 9 (quoting McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044, 1047 (2d Cir. 1995)) (emphasis added). See also 15 U.S.C. § 77k(a) (providing that when a registration statement has a material misstatement or omission "any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may . . . sue [the following groups]" (emphasis added)). "Here," the Underwriters argue, "the pleadings allege on their face `common knowledge' of the alleged misrepresentation." 2 Und. Mem. at 9. "Because a court may properly dismiss a claim on the pleadings when an affirmative defense appears on its face, the Section 11 claims should be dismissed." Id. (quotation marks and citation omitted).

While the Underwriters are correct that Plaintiffs may plead themselves out of court by pleading information that defeats their legal claim because a complaint is a binding judicial admission, see supra note 43 and accompanying text, they are incorrect in their assertion that Plaintiffs have done so here. A fair reading of the Master Allegations shows that Plaintiffs have merely pled the alleged scheme was "common knowledge" among the customers who received the initial distribution of stock from the Underwriters (e.g., those who were required to enter into Tie-in Agreements). In contrast, the Plaintiffs in these cases are investors who bought the IPO stock in the aftermarket, not customers who were allocated the initial stock.*fn73 See, e.g., Cacheflow Compl. ¶ 12 (listing Plaintiffs Val Kay, Greg Frick, Eric Egelman, and Kenneth L. Schmid who purchased or otherwise acquired shares of Cacheflow common stock). Indeed, "[t]he vast majority of [the] plaintiffs in fact are retail purchasers in the aftermarket," although some institutional investors who bought stock in the aftermarket have also brought suit. See 11/1/02 Tr. at 32.

The pertinent allegations to which the Underwriters refer in making their "common knowledge" argument are paragraphs thirty through thirty-three of the Master Allegation. See 2 Und. Mem. at 2 (quoting parts of MA ¶¶ 30-33). Those paragraphs state in full:

30. Institutional and retail investors, who have received allocations in initial public offerings from various firms, have noted that it was common knowledge that the clients who were forced to pay Undisclosed Compensation to the underwriters, in the form of commissions or otherwise, and who agreed to purchase in the aftermarket received allocations in the IPO.

31. This industry-wide understanding was sometimes expressed by the Underwriter Defendants and other times implied, but nevertheless invariably communicated between those with the power to make allocations of shares in initial public offerings (the underwriters). . . .

32. For example, "Michael Sola, portfolio manager for T. Rowe Price's Developing Technology Fund, explained to USA Today [May 25, 2001] how the game was played. He said that `people know that the higher they say they are willing to buy the stock (in the after market), the bigger the allocation [of IPO shares] they are going to get.'" [Testimony of David W. Tice, David W. Tice & Associates, Inc., before the House Committee on Financial Services, Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, June 14, 2001].

33. Even institutional investors generally considered to be medium or large in terms of amount of assets under management, were told by Underwriter Defendants, in words or substance, that in order to receive IPO allocations, they had to commit to buying additional shares in the aftermarket.

MA ¶¶ 30-33 (emphasis added). When read in context, there is no ambiguity as to who had "common knowledge" of the alleged scheme: the Underwriters and their customers. See id. This allegation is entirely consistent with the Plaintiffs' allegations that in 309 IPOs, Underwriters repeatedly required their customers who received IPO stock (e.g., T. Rowe Price's Developing Technology Fund, medium, and large institutional investors) to enter into Tie-in Agreements and pay Undisclosed Compensation. At the same time, there is no concession that investors in the aftermarket — i.e., the Plaintiffs in these cases — knew about this scheme.

In arguing that the Plaintiffs have pled themselves out of court, the Underwriters point to the allegation that institutional and retail investors knew about the scheme, and thus all retail investors must have known about the scheme. See 11/1/02 Tr. at 31 (David W. Ichel stating: "It says also retail investors."). However, this interpretation reads the words "retail investor" out of context. The sentence to which the Underwriters refer states: "Institutional and retail investors, who have received allocations in initial public offerings from various firms. . . ." MA ¶ 30 (emphasis added). While it is true that Plaintiffs have pled that at least some retail investors knew about the scheme, this group is plainly limited to those investors who received stock from the Underwriters in the IPO.*fn74

The Underwriters' argument would only have merit if the Complaints had alleged that the scheme was common knowledge among all investors. But not only is there no such allegation, such an allegation would not be reasonable given that investors who buy stock in the initial allocation generally have more knowledge of the IPO process than investors who purchase stock in the aftermarket. Indeed, the SEC has long defended the importance of securities law on the ground that investors in the aftermarket have a much lower level of sophistication and knowledge about the IPO process than initial purchasers. See, e.g., SEC Special Study at 556 (arguing that disclosure provisions of the Securities Act are particularly important because "persons who bought in the after-market often [are] less sophisticated [than customers who received original allotments] and more susceptible to the allure of publicity and rumor about `hot issues.'"); SEC Hot Issues Report at 9 (same).

Nor does the allegation that the scheme was "common knowledge" among those required to participate in the scheme mean that every client knew about it.*fn75 The fact that some of the Plaintiffs are institutional investors does not necessarily mean that "at the time of such acquisition [of the securities that they] knew of [the alleged] untruth or omission [in the registration statement]." 15 U.S.C. § 77k(a). Perhaps they were one of the few institutional investors who did not know. Of course, Defendants may conduct discovery to determine the Plaintiffs' actual knowledge and seek to prove that they were fully aware of the alleged scheme. Likewise, they may use the allegation that it was "common knowledge" to try to "reduce[] the credibility of the witness" who claims she was ignorant. Tho Dinh Tran, 281 F.3d at 32. But these are ultimately issues for the trier of fact to resolve. Thus, Plaintiffs have not pled themselves out of court with respect to their Section 11 claims.

3. Those Plaintiffs Who Sold Securities Above the Offering Prices Have No Damages and Therefore No Claim Upon Which Relief Can Be Granted

Defendants are correct, however, in arguing that all Section 11 claims brought by Plaintiffs who sold securities at prices above the offering price must be dismissed because these Plaintiffs have no damages. Section 11(e), entitled "Measure of Damages," provides in pertinent part that damages under Section 11 are:

[T]he difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and . . . the price at which such security shall have been disposed of in the market before suit. . . .

15 U.S.C. § 77k(e) (emphasis added).

If a plaintiff has no conceivable damages under Section 11, she cannot state a claim upon which relief can be granted and her Section 11 claims must be dismissed. See Fed.R.Civ.P. 12(b)(6). See also In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1203-05 (9th Cir. 2002) (affirming dismissal under Rule 12(b)(6) because plaintiff's own pleadings revealed that he made a profit on the sale of his securities). Cf. Adair v. Kaye Kotts Assocs., No. 97 Civ. 3375, 1998 WL 142353, at *8 (S.D.N.Y. Mar. 27, 1998) ("For plaintiffs' Section 11 claim to be dismissed under Section 11(e) at this stage in the proceedings, defendants must conclusively establish that plaintiffs' damages are de minimus.") (citation omitted).*fn76

Defendants argue that Section 11(e) specifies that the measure of damages is the lesser of a security's purchase price and its offering price, minus its sale price, i.e., an investor who bought above the offering price must nonetheless use the offering price as the starting point for damages calculations. If that same investor then sold the security at a price above the offering price — even if the sale was for a loss — that difference would be a negative number. Thus, if a security was issued at $100, bought at $200, and sold at $150, the damages would be (-$50): $100 (the lesser of the offering price and the purchase price) minus $150 (the sale price). Negative damages are, of course, no damages at all.

Plaintiffs urge a different interpretation of Section 11(e): the parenthetical phrase "not exceeding the price at which the security was offered to the public" applies not to the "amount paid for the security," but rather to the "difference." According to Plaintiffs, the damages are $50: the $200 purchase price minus the $150 sale price.

The proper interpretation of Section 11(e) appears to be a question of first impression in this Circuit, and perhaps the entire country.*fn77 The courts that have previously "resolved" this question seem to have done so inadvertently, and uniformly without discussion.

As the Supreme Court has recently noted, "in all statutory construction cases, we begin with the language of the statute." Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 (2002). "The first step `is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case,'" Id. (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997)), and if it does, "there is no reason to resort to legislative history." United States v. Gonzales, 520 U.S. 1, 6 (1997) (citing Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992)).

The language of Section 11(e) is plain and unambiguous. The parenthetical requirement "not exceeding the price at which the security was offered to the public" is placed after the first term in the equation, thereby requiring that it modify the first term, i.e., "the amount paid." Had Congress intended for the parenthetical limitation to apply to the difference, it could have said so.*fn78 For example, Congress could have pegged the measure of damages at "the difference (not exceeding the price at which the security was offered to the public) between the amount paid for the security" and its sale price.

Moreover, Plaintiffs' reading of Section 11(e) would make Section 11(g) entirely redundant. Section 11(g) provides that, "In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public." 15 U.S.C. § 77k(g). The term "amount recoverable" found in Section 11(g) is nothing more than a cap on damages. Section 11(e), which governs the calculation of damages, uses the term "difference" to define the amount recoverable, thus the terms are synonymous. Under the reading espoused by Plaintiffs, therefore, Sections 11(e) and 11(g) are redundant; requiring that the "difference" does not exceed the offering price in Section 11(e) would be exactly the same as capping the "amount recoverable" at the offering price in Section 11(g). But canons of construction demand that the parenthetical limitation in Section 11(e) imposes an additional restriction. See Nordic Vill., 503 U.S. at 36; United States v. Menasche, 348 U.S. 528, 538-39 (1955); Montclair v. Ramsdell, 107 U.S. 147, 152 (1883); Market Co., 101 U.S. at 115; Muniz v. United States, 236 F.3d 122, 127 (2d Cir. 2001). The only plausible interpretation is to read the parenthetical limitation onto the "amount paid," which limits the class of possible plaintiffs under Section 11.

Because the statute is written in clear and unambiguous language, "judicial inquiry is complete." Marvel Characters, Inc. v. Simon, 310 F.3d 280, 290 (2d Cir. 2002) (quoting Connecticut Nat'l Bank, 503 U.S. at 254). See also Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999) ("where the statutory language provides a clear answer, [our analysis] ends there"). However, because no court has previously passed on this issue, it is worth briefly noting that the legislative history of Section 11 also supports this conclusion.

At the time the Securities Act was passed in 1933, Section 11(e) read:

The suit authorized under subsection (a) may be either (1) to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or (2) for damages if the person suing no longer owns the security.

48 Stat. 74, 83 (1933). Under the initial embodiment of Section 11, therefore, the measure of damages was the "purchase price, or . . . damages not exceeding such price. . . ." H.R. Rep. No. 73-85, at 9. See also S. Rep. No. 73-47, at 5 (1933). This original formulation was based on the remedy of rescission. See Federal Securities Act: Hearings before the House Interstate and Foreign Commerce Committee, 73d Cong. 145-46 (1933) (testimony of Ollie M. Butler, Foreign Service Division, Department of Commerce); id. at 222 (statement of Hon. Huston Thompson); Securities Act: Hearings before the Senate Banking and Currency Committee, 73d Cong. 87-88, 149-54, 230 (1933). Section 11 as a whole was intended to complement the common law remedies available to securities purchasers, while at the same time eliminating some of the roadblocks to recovery (e.g., the requirements of privity, and the elements of reliance, causation, and scienter). Section 11(e), therefore, was meant to provide the same remedies available under common law, i.e., rescission or damages.

Nonetheless, Section 11(e) came under immediate criticism. In an influential piece worth quoting at length, then-Professor William O. Douglas wrote of the original Section 11(e):

When the Act provides for damages, it [] introduces distinct innovations. . . . It is provided that "In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public." If the purchaser still owns the security he may on tendering it back to any of the parties under Section 11 recover what he paid for it, provided he paid less than the public offer price. In case he paid more than the public offer price he would be entitled to receive only an amount equal to that price. If he bought at $125, the public offering price being $100, and the price dropped to $50 he might elect to rescind and recover $100. But if he sold at $50 he might recover damages of $75. Now it has been asserted that in such a case the damages recoverable would be $50 — the difference between the public offering price and the price at which plaintiff sold. In other words it is claimed that the subsection quoted means what would have been meant if it had provided "In no case shall the amount recoverable as damages under this section exceed the amount by which the price at which the security was offered to the public is in excess of the price at which plaintiff sold the security." Section 11(g), however, does not use such a measure. If courts thus restrict the measure of damages, they may or may not be conforming to the intent of Congress. But they certainly would be reading into the Act words that are not there.

William O. Douglas & George E. Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 174-75 (1933) (footnotes omitted). See generally Harry Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933).

As a result of this criticism, Section 11(e) was amended by Section 206(d) of the Exchange Act, which implemented the current Section 11(e) by inserting just the language (slightly edited) that Douglas suggested.

As one scholar observed at the time,

Damages are still prima facie the difference between the amount realized on the value of the security and the amount at which the security was offered to the public. One clarification here adopts the Commissioner's view that if a security is offered at $100, purchased by the plaintiff at $200 and sold by him at $50, his damages are $50 [offering price minus sale price] and not $100 [the recissionary measure of damages] as might have been contended under the original Act.

John Hanna, The Securities Exchange Act of 1934, 23 Cal. L. Rev. 1, 8 (1934). See also 78 Cong. Rec. 8716 (1934) (Statement
of FTC Commissioner James M. Landis).*fn79 Assuming the amendments were responsive to the "Commissioner's view," then Congress' intent was plainly to set the measure of damages as the lesser of the purchase price and offering price, minus the sale price of a security.

Therefore, based on the plain language of Section 11 and its legislative history, a plaintiff who sells a security above its offering price has no cognizable damages under Section 11 of the Securities Act, notwithstanding the fact that such plaintiff may have actually suffered a loss.*fn80 Accordingly, the Section 11 claims of such Plaintiffs must be dismissed.*fn81

IX. SECTION 15 CLAIMS

Section 15 states:

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under [Section 11] . . . shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

15 U.S.C. § 77o. Plaintiffs' Section 15 claims accuse Individual Defendants of controlling Issuer Defendants and thereby sharing liability for those Issuers' violations of Section 11. Defendants argue that Plaintiffs have not adequately pled these claims. See Iss. Mem. at 60-65.

In order to establish a prima facie Section 15 claim, a plaintiff need only establish (1) control, and (2) an underlying violation of Section 11 (or Section 12(a)(2)).*fn82 See In re Independent Energy Holdings PLC Sec. Litig., 154 F. Supp.2d 741, 770 (S.D.N.Y. 2001). Rule 9(b) does not apply to the pleading of a Section 15 claim because fraud is not an element of that claim.*fn83 And the PSLRA does not apply, as Section 15 does not require proof of scienter,*fn84 and because Section 15 arises under the Exchange Act. Therefore, Section 15 claims need only be pleaded under Rule 8; a defendant is only entitled to notice that she allegedly controlled an entity that violated Section 11.

Control is "`the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'" SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996) (quoting 17 C.F.R. § 240.12b-2). A plaintiff is required to prove actual control, not merely control person status. See Cromer Fin. Ltd. v. Berger, 137 F. Supp.2d 452, 484 (S.D.N.Y. 2001). Naked allegations of control, however, will typically suffice to put a defendant on notice of the claims against her.*fn85

Here, Plaintiffs allege "[e]ach of the Individual Defendants was a control person of the Issuer with respect to the IPO [and] . . . [a]s a result, the Individual Defendants are liable under Section 15 of the Securities Act for the Issuer's primary violation of Section 11 of the Securities Act." Cacheflow Compl. ¶¶ 72, 74. These paragraphs, in combination with the allegations supporting the Section 11 claims, provide notice to the Individual Defendants of the claims brought against them. Thus, the Section 15 claims are adequately pled.*fn86

X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND INDIVIDUAL DEFENDANTS

Plaintiffs have brought two distinct claims under Rule 10b-5, a regulation that makes it unlawful

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

Plaintiffs' first set of claims allege that all Defendants made material misstatements and omissions in the registration statements, either with an intentional or reckless state of mind, in violation of Rule 10b-5(b). See, e.g., Cacheflow Compl. ¶¶ 95, 99, 100, 101. Because material omissions and misstatements are an essential part of these claims, see 17 C.F.R. § 240.10b-5(b), they must satisfy the requirements of paragraph (b)(1). Similarly, because Plaintiffs must ultimately prove that the Defendants acted with scienter, these claims must also satisfy paragraph (b)(2). Rule 9(b) governs the remaining elements of these claims.

A. The Rule 10b-5 Claims for Material Misstatements Have Been Properly Pled

1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of the PSLRA — Particularity

Paragraph (b)(1) requires that for any claim asserting material misstatements or omissions, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).

a. Paragraph (b)(1)'s First Two Requirements Have Been Satisfied

Plaintiffs have explicitly pled that seven specific material misstatements and omissions contained in the registration statement are false or misleading.*fn87 See supra Part IV.A.2. Moreover, for each misstatement or omission, Plaintiffs have stated the reasons why they believe these statements and omissions are misleading. See id. These eight statements and omissions and the alleged reasons they were false and misleading are briefly summarized as follows:

First, the registration statement failed to disclose that Allocating Underwriters had entered into Tie-in Agreement with their customers, in violation of Regulation M, 17 C.F.R. § 242.101.

Second, the registration statement did not include the Undisclosed Compensation as required by Regulation S-K, 17 C.F.R. § 229.508(e).

Third, the registration statement misleadingly stated that the underwriting syndicate would receive as compensation an underwriting discount of $1.68 per share, or a total of $8,400,000, based on the spread between the per share proceeds (e.g., $22.32) and the Offering price to the public (e.g., $24.00 per share) but failed to include the Undisclosed Compensation.

Fourth, the registration statement misleadingly stated that the Allocating Underwriters would offer the IPO shares to the public at a price set forth on the cover page because customers had to pay an amount in excess of that listed price through Tie-in Agreements and Undisclosed Compensation.

Fifth, the registration statement failed to disclose that the Allocating Underwriters were violating NASD Conduct Rule 2330(f), which prohibits underwriters from sharing in the profits or losses in any account of a customer. Sixth, the registration statement failed to disclose that the Allocating Underwriters were charging customers commissions that were unfair, unreasonable, and excessive in order to receive allocations of IPO shares, a violation of NASD Conduct Rule 2440.

Seventh, the registration statement did not accurately state which of the underwriters would actually participate in the distribution of the IPO (e.g., J.P. Morgan did not receive any of the 100,000 shares listed next to its name in the Cacheflow IPO).

Eighth, analyst reports issued just after the expiration of the "quiet period" with a "Strong Buy" recommendation and a 12-month price target (e.g., $175 per share in Cacheflow) was materially false and misleading as it was based upon a manipulated price.

Plaintiffs have satisfied the first two requirements of paragraph (b)(1). They have not generally averred that the registration statements were misleading. Nor are the proffered reasons speculative or vague. Rather, Plaintiffs have pointed to specific provisions of the statement and then provided reasonable explanations as to why they believe specific statements or omissions were false or misleading.

Although these requirements are easy to satisfy, it is worth remembering that Plaintiffs are bound by these pleadings throughout the course of the proceedings. Because Plaintiffs have specified the misstatements and omissions that they claim were misleading, the Court is able to evaluate whether they are material as a matter of law. See infra Part X.B.1.

In short, while nothing more is needed to satisfy these two requirements of paragraph (b)(1) on a motion to dismiss, the PSLRA has clearly served its purpose by putting the Defendants on notice of the specific misstatements and omissions that are at issue.

b. Paragraph (b)(1)'s Last Requirement Has Been Satisfied

On November 25, 2002, I directed Plaintiffs to identify which of their allegations were based on information and belief, and to identify for those allegations, the "facts on which that belief [was] formed." Order, In re Initial Public Offering Sec. Litig., 21 M.C. 92 (S.D.N.Y. Nov. 25, 2002) ("11/25/02 Order").*fn88 See also Lirette, 999 F. Supp. at 165 (requiring similar submission in order to establish basis for information and belief).

In response to the 11/25/02 Order, Plaintiffs submitted a chart — almost one thousand pages in length — identifying which paragraphs of the 309 Complaints and the Master Allegations were based on information and belief, and the basis for those beliefs. Plaintiffs identified eleven categories of sources: (1) confidential sources; (2) registration statements and/or prospectuses; (3) SEC filings; (4) press releases; (5) media resources, including newspapers, magazines, Internet sources, and books; (6) analyst reports; (7) letters to Plaintiffs' counsel from Underwriter Defendants' counsel; (8) academic literature; (9) congressional testimony; (10) the Order Pursuant to New York General Business Law § 354 in In re An Inquiry by Eliot Spitzer, Attorney General of the State of New York, No. 02401522 (Sup.Ct.N.Y. Co. Apr. 8, 2002); and (11) the Consent Decree in SEC v. Credit Suisse First Boston Corp., No. 1:02 CV 00090 (D.D.C. Jan.29, 2002).*fn89

This submission was "deemed to be part of the complaints," see 11/25/02 Order, and therefore supplemented the pleadings,*fn90 which already averred that:

Plaintiffs, by their undersigned attorneys, individually and on behalf of the Class described below, upon information and belief, based upon, inter alia, the investigation of counsel, which includes a review of public announcements made by Defendants, interviews with individuals with knowledge of the acts and practices described herein, Securities and Exchange Commission ("SEC") filings made by Defendants, press releases, and media reports, except as to Paragraph 12 applicable to the named Plaintiffs which is alleged upon personal knowledge, bring this Consolidated Amended Complaint (the "Complaint") against the Defendants named herein, and allege as follows:

Cacheflow Compl. at 1 (emphasis added).*fn91

For each of the Complaints, Plaintiffs identified approximately fifty paragraphs based on information and belief. It is important to note, however, that paragraph (b)(1) does not apply to each of the paragraphs identified by Plaintiffs. Rather, paragraph (b)(1) applies only to allegations regarding statements (here in the registration statements/prospectuses) alleged to be misleading. Many of the paragraphs identified by Plaintiffs plead matters of fact, see, e.g., Cacheflow Compl. ¶ 31 ("On the day of the IPO, the price of Cacheflow stock shot up dramatically, trading as high as $139.25 per share, or more than 480% above the IPO price on substantial volume.").*fn92 Other paragraphs plead conclusory allegations of motive but plead no facts — on information and belief or otherwise. See, e.g., Cacheflow Compl. ¶ 110(b) ("The Issuer [and Individual] Defendants were motivated by the fact that the artificially inflated price of the Issuer's shares in the aftermarket would enable Individual Defendants to sell personal holdings in the Issuer's securities at artificially inflated prices in the aftermarket or otherwise."). These statements and allegations are not at issue here.

What remains are a handful of paragraphs in the Complaints that allege, on information and belief, that Defendants made various material misstatements. See, e.g., id. ¶¶ 38, 43, 45, 48, 51-54. In addition, several allegations describing the unlawful scheme are critical to Plaintiffs' material misstatement allegations because, inter alia, Plaintiffs plead that Defendants made material misstatements simply by failing to disclose various aspects of the scheme. See, e.g., id. ¶¶ 34, 47, 55-57.*fn93 In sum, Plaintiffs' allegations of material misstatements are that Defendants failed to disclose their illegal conduct in their registration statements and prospectuses. See, e.g., id. ¶ 48 ("The failure to disclose the Allocating Underwriter Defendants' unlawful profit-sharing arrangement as described herein, rendered the Registration Statement/Prospectus materially false and misleading."). Plaintiffs further allege that Defendants' motive in failing to disclose the scheme was to conceal and perpetuate the scheme. See, e.g., id. ¶ 99 ("The material misrepresentations and/or omissions were made knowingly or recklessly and for the purpose and effect of, inter alia: (a) securing and concealing the Tie-in Agreements; (b) securing and concealing the Undisclosed Compensation; and/or (c) concealing that certain of the Underwriter Defendants and their analysts who reported on the Issuer's stock had material conflicts of interest."). Thus, if Plaintiffs have identified a sufficient basis to support the formation of their belief that Defendants engaged in the manipulative conduct — and that Defendants failed to disclose that conduct — they have satisfied paragraph (b)(1)'s third requirement. See Novak, 216 F.3d at 313-14.

The requirements of the PSLRA must be read consistently with its purpose. See Barrett v. Van Pelt, 268 U.S. 85, 90-91 (1925). Congress enacted the information and belief pleading requirement because "[n]aming a party in a civil suit for fraud is a serious matter. Unwarranted fraud claims can lead to serious injury to reputation for which our legal system effectively offers no redress." H.R. Conf. Rep. 104-369, at 41. The purpose of the information and belief requirement — indeed, the purpose of all of the PSLRA's heightened pleading requirements — was to weed out meritless lawsuits at the pleading stage.*fn94

On this point the rule of the Second Circuit is clear: "paragraph (b)(1) does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based. Rather, plaintiffs need only plead with particularity sufficient facts to support those beliefs." Novak, 216 F.3d at 313-14 (emphasis in original). What facts and what level of particularity are sufficient to support a plaintiff's beliefs will vary from case to case. Under paragraph (b)(1), sufficiency and particularity are intricately related; the greater the basis for a belief, i.e., the more obviously sufficient plaintiffs' sources are, the less particularity is required in identifying them. Where an allegation stems from only one or two sources, however, it is imortant that they be identified with absolute particularity. The critical threshold is that the allegations must be made in a way that satisfies the court that plaintiff's charge of fraud is not "unwarranted."

For example, where a fraud allegation is founded on the uncorroborated allegations of one anonymous whistle-blower, it is necessary to uniquely identify that source, either by naming her or by describing her with such particularity as to satisfy the court that her information is credible. See id. at 314 (where allegations are based solely on information from confidential sources, "there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged."). Where, as here, there are many confidential sources who all say the same thing — that they were required to enter into Tie-in Agreements — and those sources are corroborated by a vast number*fn95 of media reports*fn96 (including admissions by insiders), as well as intensive investigations by both state and federal agencies, the cumulative effect of the evidence is important. In such a case, the sheer volume of the corroboration obviates the need for absolute particularity.

Here, generic references to news articles, academic literature, and press releases are sufficiently particular to support the formation of Plaintiffs' beliefs because the substance of those beliefs — that the Defendants were perpetrating a massive fraud on the securities market in connection with most every IPO — was the stuff of daily headlines.*fn97 The alleged fraud had so permeated the news media that there can be no doubt that Plaintiffs have a sufficient basis for their information and belief, and that is all that the statute requires. The same can be said for any of the categories of sources proffered by Plaintiffs. Because there is no real doubt in these cases that Plaintiffs have ample grounds on which to base their allegations, there is no danger that the allegations here are "unwarranted" — even if they ultimately turn out to be untrue.

To ask Plaintiffs to show more than they have would be pointless, and to ask the Court to cross-reference every paragraph of every complaint against particular media reports, articles, letters, and other sources would be a waste of this Court's limited resources. Accordingly, Plaintiffs have satisfied the third requirement of paragraph (b)(1).

2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter

Paragraph (b)(2) provides, "In any private action . . . in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). In most of the Complaints, Plaintiffs have brought Rule 10b-5(b) claims for material misstatements and omissions against all Defendants: Allocating Underwriters, Non-Allocating Underwriters, Individual Officers, and Issuers. Plaintiffs allege that each of these Defendants made the seven misstatements and omissions when signing the registration statement. Plaintiffs have satisfied the requirements of paragraph (b)(2) with respect to these alleged misstatements and omissions for each Defendant.*fn98

a. Allocating Underwriters

Plaintiffs have alleged that the Allocating Underwriters engaged in a scheme that could have only happened intentionally, and which they knew must be disclosed to the investing public: "the Allocating Underwriter Defendants created artificial demand for Cacheflow stock by conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of Cacheflow in the aftermarket and, in some instances, to make those purchases at pre-arranged, escalating prices (`Tie-in Agreements')." Cacheflow Compl. ¶ 3. Under this scheme, the Allocating Underwriters profited by "requir[ing] their customers to repay a material portion of profits obtained from selling IPO share allocations in the aftermarket through one or more of the following types of transactions:

(a) paying inflated brokerage commissions;

(b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or

(c) purchasing equity offerings underwritten by the Allocating Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the unlawful scheme alleged herein.

Id. ¶ 4.
*fn99 Finally, as part of this overall scheme, not every Underwriter who was listed on the registration statement distributed the company's shares, see id. ¶¶ 53-54, because by concentrating the Underwriters who would allocate shares, it was "easier for a select group of underwriters in various offerings to engage in the manipulative practices." MA ¶ 54.

These allegations of the Allocating Underwriters' conduct give rise to a strong inference that they made each of the seven material misstatements and omissions with the required state of mind. The alleged conduct was so obviously manipulative (and material, see infra Part X.B.1) that it could not have been done inadvertently. That Allocating Underwriters then signed registration statements that plainly failed to disclose the scheme — in the face of an obvious duty to disclose, see infra Part X.B.2 — gives rise to a strong inference that the misstatements were made intentionally for the purpose of defrauding the investing public.

Indeed, even if parts of the alleged scheme consisted of permissible stabilization practices (which is highly unlikely, see infra Part XI.B.1), the failure to disclose that conduct still would have evinced an intent to defraud. It is well-established that the SEC allows Underwriters to engage in certain acts of "stabilization." See 15 U.S.C. § 78(i)(a)(6) (granting the SEC the authority to promulgate rules that allow "pegging, fixing or stabilizing the price of [a] security"); 17 C.F.R. § 242.104 (establishing guidelines for acts of stabilization); see also Friedman v. Salomon/Smith Barney, Inc., No. 98 Civ. 5990, 2000 WL 1804719, at *3 (S.D.N.Y. Dec. 8, 2000) ("Friedman I") (describing the history and law of stabilization), aff'd, 313 F.3d 796 (2d Cir. 2002) ("Friedman II").

For instance, if the public offering price for a security is $10.00 per share, and the market price before the completion of the distribution falls to $9.00 per share, the manager may enter a stabilizing bid of $10.00 per share to prevent persons interested in the security from purchasing securities in the open market at a price below the public offering price.

Samuel N. Allen, A Lawyer's Guide to the Operation of Underwriting Syndicates, 26 New Eng. L. Rev. 319, 349 (1991). While such acts manipulate the market by artificially inflating the price,*fn100 they are nonetheless lawful and do not violate either Rule 10b-5(a) or (c).

However, if an underwriter fails to disclose its stabilization practices, it is liable for making material misstatements and omissions in violation of Rule 10b-5(b), see 17 C.F.R. § 240.10b-5(b), because any act of manipulation — even a legal one — is material and must be disclosed. See Miller v. Steinbach, 268 F. Supp. 255, 274 (S.D.N.Y. 1967); see also infra Part X.B.2.

The rule — of logic as much as of law — is that whenever a defendant engages in clearly manipulative practices, and then conceals those practices by making misstatements, the concealment is presumptively done with the intent to defraud.

b. Non-Allocating

Underwriters Because Plaintiffs cannot accuse the Non-Allocating Underwriters of requiring their customers to enter into any Tie-in Agreements and pay Undisclosed Compensation, the allegations that were sufficient to show a strong inference of scienter with respect to the Allocating Underwriters do not suffice with respect to the Non-Allocating Underwriters. For example, in the Cacheflow complaint, Plaintiffs allege that J.P. Morgan (H&Q) did not allocate any stock, see Cacheflow Compl. ¶¶ 14-16. J.P. Morgan, as a Non-Allocating Underwriter, argues that it neither knew of nor recklessly disregarded the conduct of the Allocating Underwriters who were engaged in the allegedly illegal scheme, and as a result, did not knowingly or recklessly make the first six misstatements and omissions, which related to the Tie-in Agreements and Undisclosed Compensation.*fn101

Nonetheless, for at least two reasons, Plaintiffs have made other allegations that are sufficient to give rise to a strong inference that the Non-Allocating Underwriters signed the registration statement with the requisite state of mind. First, it is significant that these Underwriters were listed on the registration statements as underwriters of the IPO, but then allegedly received no allocation. This circumstance is so unusual that it supports a strong inference that the Non-Allocating Underwriters either knew about, or acted with reckless disregard towards, the entire scheme of the Allocating Underwriters when signing the registration statement.

Second, these Complaints cannot and need not be read in isolation. There are 309 Complaints against the fifty-five Underwriters in which Plaintiffs describe in painstaking detail the relationships between the various investment banks. See MA ¶¶ 66-85. Even if an Underwriter took no role in one allocation, it took an active role in others — and in those IPOs it is accused of committing illegal acts. For example, during the class period J.P. Morgan was either a Lead or Co-Lead Underwriter in twelve other IPOs in which it is alleged to have required Tie-In Agreements of its customers and taken Undisclosed Compensation.*fn102 The allegations that J.P. Morgan engaged in the same scheme in these IPOs raise a strong inference that in the Cacheflow IPO J.P. Morgan knew that the misstatements and omissions in the registration statements were misleading; or, at least, acted with reckless disregard towards their truth.

Similarly, in the Master Allegations, Plaintiffs allege that at least one customer was required or induced by J.P. Morgan to buy stock in the aftermarket at prices substantially above the IPO price in six IPOs.*fn103 These allegations also raise a strong inference that in the Cacheflow IPO J.P. Morgan knew that the misstatements and omissions in the registration statements were false or misleading because the Allocating Underwriters would and did require Tie-in Agreements and Undisclosed Compensation.*fn104 Paragraph (b)(2) has thus been satisfied.

c. Individual Defendants

On November 13, 2002, I directed Plaintiffs to submit charts summarizing their allegations of scienter as to the Individual Defendants and Issuers in each of the 309 complaints. See Order, In re Initial Public Offering Sec. Litig., No. 21 M.C. 92 (S.D.N.Y. Nov. 13, 2002) ("11/13/02 Order"). As to the Individual Defendants, Plaintiffs were directed to identify (1) their title, (2) whether they signed the relevant registration statement, (3) the source of their knowledge of the alleged misrepresentations or omissions, (4) the number of shares of the relevant Issuer that they owned, (5) the number of shares sold, (6) the dates(s) of sale, and (7) the proceeds from the sale. In response, Plaintiffs submitted a chart on November 26, 2002.*fn105 As an example, Plaintiffs submitted the following chart in connection with the Ask Jeeves Inc.*fn106 offering:

Individual Title Signed? Source of Shares Shares Sold Date(s) Proceeds Defendant Knowledge Owned Sold

Robert W. President, Yes -Road Show 189,424 Approximately 8/16/2000- Approximately Wrubel CEO and -Close 100,000 shares 2/23/2001 $1,320,000 Board interaction (Including (Including with 10,000 in $720,000 in Underwriter Secondary Secondary Defendants Offering) Offering) prior to IPO

¶¶ 137, 138, 139, 140

Individual Defendant stock sales

¶ 22 ¶ 22 ¶ 142(b) ¶ 142(a) ¶ 142(b) ¶ 142(b) ¶ 142(b)

Plaintiffs' allegations against the Individual Defendants who signed the registration statement
*fn107 are not nearly as strong as those against the Underwriters. This is not surprising given that the Complaints most fully describe the conduct and motivations of the Underwriters. Compare MA ¶¶ 1-111 (describing, over 113 pages, the conduct and motivations of the Underwriters), with MA ¶ 112 (describing the conduct and motivations of Individual Defendants). For example, while Plaintiffs have pled hundreds of examples of Underwriters who were involved in Tie-in Agreements, see id. ¶ 34, they have not alleged a single instance of an Individual Defendant who actually knew about the alleged scheme. In short, Plaintiffs have not alleged facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness by the Individual Defendants with respect to the registration statements.*fn108 See Novak, 216 F.3d at 307-08.

Nonetheless, Plaintiffs' Rule 10b-5(b) claims against the Individual Defendants may still satisfy paragraph (b)(2) of the PSLRA by alleging that the Individual Defendants had the "motive and opportunity" to make the alleged misstatements and omissions. See supra Part VI.B.2. In the Cacheflow Complaint, for instance, Plaintiffs allege:

(a) The Individual Defendants beneficially owned substantial amounts of the Issuer's common stock. For example, as of the IPO, Defendant NeSmith owned 2,000,000 shares, and Defendant Malcolm owned 5,163,785 shares. These holdings, which were purchased or otherwise acquired at prices below the IPO price, substantially increased in value as a result of the misconduct alleged herein.

(b) The Issuer Defendants were motivated by the fact that the artificially inflated price of the Issuer's shares in the aftermarket would enable Individual Defendants to sell personal holdings in the Issuer's securities at artificially inflated prices in the aftermarket or otherwise. In this regard, after Cacheflow's IPO, Defendants NeSmith, Malcolm and Johnson filed SEC Form 144's indicating the sale or intention to sell thousands of shares at a substantial premium over the IPO price as follows: [listing stock sales of NeSmith, Malcolm and Johnson]

Cacheflow Compl. ¶ 110(a)-(b). The Complaint estimates that NeSmith made the following amounts of money by selling Cacheflow stock during the class period: $1,308,840 (30,000 shares on December 1, 2000), $3,021,000 (65,000 shares between November 27-30, 2000), $8,480,000 (90,000 shares between August 21-22, 2000), and $4,799,000 (90,000 shares on June 16, 2000). See id. ¶ 110(b). Malcom and Johnson made similar amounts of money by selling their stock. See id.

The Individual Defendants, for purposes of this motion, do not challenge that they had the opportunity to know about the entire scheme and thereby make the alleged misstatements and omissions. Indeed, the Individual Defendants who signed the registration statements were intimately involved in the IPO process with the Underwriters (e.g., marketing the company and attending road shows).*fn109 See, e.g., Cacheflow Compl. ¶¶ 8, 108. See also Shields, 25 F.3d at 1130 (holding that opportunity requires pleading that the defendants had "the means and likely prospect of achieving concrete benefits by the means alleged."). Because there was an opportunity for the Individual Defendants to discover the alleged scheme and commit the material misstatements and omissions, the only significant question is whether the Individual Defendants also had the motive.

The Second Circuit has explained that motive is properly alleged by stating "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." Ganino v. Citizens Util. Co, 228 F.3d 154, 170 (2d Cir. 2000) (quoting Shields, 25 F.3d at 1130). Here, the ability to inflate the value of Cacheflow stock and make large personal financial gains constitutes the type of "concrete benefits" that could motivate any of the Individual Defendants to purposefully make the alleged material misstatements and omissions or, at the very least, act with reckless disregard of their truth.

As the Novak court held, the motive prong is "generally met when corporate insiders [are] alleged to have misrepresented to the public material facts about the corporation's performance or prospects in order to keep the stock price artificially high while they sold their own shares at a profit." 216 F.3d at 308.*fn110 The Individual Defendants in these cases are "corporate insiders" who allegedly signed a registration statement in order to keep "the stock price artificially high while they sold their own shares at a profit." Id. Where corporate insiders engaged in "`unusual insider trading activity,'" Stevelman, 174 F.3d at 85 (quoting In re Apple Computer Sec. litig., 886 F.2d 1109, 1117 (9th Cir. 1989)*fn111 i.e., sold hundreds of thousands of dollars worth of inflated stock, the motive prong is plainly satisfied.*fn112 See Cacheflow Compl. ¶ 110(b).

i. The Motive Allegations Are Sufficient as to Sixty-Four Defendants

Plaintiffs' chart lists a total of 243 Individual Defendants.*fn113 Ninety-two of these Defendants — all of them officers or board members alleged to have signed the registration statements — sold shares in their companies following the IPO. For sixty-four of these (ninety-two) Defendants, the allegations are sufficient, at the pleading stage, to create an inference of scienter.

The allegations are sufficient for different reasons. For example, for fifty-one of these (sixty-four) Defendants, Plaintiffs have identified the number of shares owned, the number of shares sold, the date of the sale, and the proceeds from the sale. So long as these trades were "unusual" (discussed infra Part X.A.2.c.ii) and took place reasonably soon after the IPO, the motive prong is plainly satisfied for pleading purposes.

On the other hand, for thirteen of these (sixty-four) Defendants, Plaintiffs have merely pled the amount of the proceeds without identifying the number of shares owned or sold. Nonetheless, because of the magnitude of the proceeds — ranging from $220,000 to $40,000,000 — it is fair to infer that the sales were "unusual," and therefore satisfy the motive prong at this stage. But if discovery should reveal, for example, that a sale of $220,000 in proceeds is an insignificant percentage of a Defendant's holdings in the Issuer, such a Defendant is overwhelmingly likely to be dismissed at the summary judgment stage.*fn114

ii. The Motive Allegations Are Insufficient as to 161 Defendants

Plaintiffs' Rule 10b-5 claims must be dismissed against 161 Individual Defendants either because (i) Plaintiffs have made no allegations of motive (133 Defendants); (ii) Plaintiffs' allegations of motive are not sufficiently particular (twelve Defendants); or (iii) Plaintiffs' allegations of motive are insufficient as a matter of law (sixteen Defendants).

Plaintiffs have made no motive allegations with respect to 133 Individual Defendants. Fifty of these (133) Defendants owned no shares in the company and, of course, sold no shares. For those fifty Defendants, there was no allegation sufficient to show that the Defendant satisfied the motive prong of the "motive and opportunity" test. Accordingly, the Rule 10b-5 claims against these fifty Defendants must be dismissed. The other eighty-three of these (133) Defendants are alleged to have owned shares in the company — often substantial shares — but there is no allegation that they sold any of those shares during the relevant period. As a result, the Complaints against these eighty-three Individual Defendants again fail the motive prong. Mere ownership in the absence of profit-taking does not establish a motive that would support a "strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Thus, the Rule 10b-5 claims are dismissed with respect to these 133 Defendants.*fn115

Plaintiffs' Rule 10b-5 claims must be dismissed against an additional twelve Defendants because paragraph (b)(2) requires the plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. (emphasis added). For these twelve Defendants, the Complaints plead generally that they sold (or intended to sell) some of their stock, but the allegations lack any particulars, i.e., there is no information as to how many shares were sold, the percentage of that Defendant's holdings that were sold, the dates of the sales, or the proceeds from those sales. These allegations are not sufficiently particular to make a meaningful determination as to motive. Because of this, Plaintiffs have failed to allege that these Defendants acted with the required state of mind. Accordingly, the Rule 10b-5 claims for material misstatements against these twelve Defendants must also be dismissed.*fn116

Finally, Plaintiffs' Rule 10b-5 claims must be dismissed, as a matter of law, against sixteen Individual Defendants. Although Plaintiffs have identified sales with sufficient particularity as to these sixteen Defendants, the trades themselves are insufficient to permit an inference of motive because they do not evince unusual insider trading activity.*fn117 The Court of Appeals has stressed that "none of [its] cases establishe[s] a per se rule that the sale by one officer of corporate stock for a relatively small sum can never amount to unusual trading. Rather, each case [must be] decided on its own facts." In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 75 (2d Cir. 2001). In the cases at bar, Individual Defendants are alleged to have sold between 0.65 percent*fn118 and approximately 751 percent*fn119 of their holdings. In these cases, insider sales that represent less than ten percent of that insiders' total holdings are insufficiently "unusual" to permit an inference of scienter. See, e.g., In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D. 133, 140 (S.D.N.Y. 1999) (sales ranging from eleven percent to 100 percent sufficiently unusual); In re Guilford Mills, Inc., Sec. Litig., No. 98 Civ. 7739, 1999 WL 33248953, at *4 (S.D.N.Y. July 21, 1999) (sale of slightly less than ten percent of holdings sufficiently unusual). The Rule 10b-5 claims against those sixteen Defendants who sold less than ten percent of their holdings are therefore dismissed.*fn120

d. Issuers

The 11/13/02 Order also directed Plaintiffs to submit charts detailing their scienter allegations against the Issuer Defendants. Plaintiffs were directed to identify for each Issuer (1) the source of the Defendant's knowledge of the alleged misrepresentations and omissions, and (2) any stock-based acquisitions made by the Issuer after the IPO or any other acts by the Issuer that relied upon the allegedly artificially inflated value of the company. See 11/13/02 Order. In response, Plaintiffs again submitted charts on November 26, 2002.*fn121 The following chart with respect to the Cacheflow offering is an example of Plaintiffs' submissions:

Issuer Source of Knowledge for 10(b)-5 Claims Acquisitions/other acts which relied on inflated value of the company

Cacheflow, Inc. -Road Show Acquisitions: 06/05/00 SpringBank Networks in a stock deal -Close interaction with Underwriter valued at $180 million; Defendants prior to IPO

¶¶ 105, 106, 107, 108 12/08/00 Entera in a stock deal valued at $440 Individual Defendant stock sales million

¶ 110(b) ¶ 110(c)

For the same reasons discussed above with respect to the Individual Defendants, Plaintiffs have failed to plead strong circumstantial evidence that the Issuers engaged in conscious misbehavior or acted recklessly, sufficient to support a strong inference that they knowingly or recklessly made the specified misstatements and omissions in the registration statements.*fn122 Nonetheless, Plaintiffs' Rule 10b-5(b) claims against the Issuers may still satisfy paragraph (b)(2) of the PSLRA by alleging that the Issuer had the "motive and opportunity" to make the alleged misstatements and omissions.

There is again no dispute as to opportunity. The Issuers, acting through their corporate officers, were intimately involved in the IPO process with the Underwriters (e.g., setting the initial price of the IPO stock). See, e.g., Cacheflow Compl. ¶ 107 ("Once the Issuer Defendants had determined to retain the Underwriter Defendants with respect to the Issuer's IPO, the Issuer Defendants worked closely with the Underwriter Defendants in preparing the Registration Statement/Prospectus, as well as generating interest in the IPO by speaking with various, but selected, groups of investors."); see also Shields, 25 F.3d at 1130 (holding that pleading opportunity requires that the defendants had "the means and likely prospect of achieving concrete benefits by the means alleged.").*fn123 Because there was an opportunity for the Issuers to discover the alleged scheme and commit the material misstatements and omissions in the registration statement, the only significant question is whether they also had the motive.

To satisfy the motive prong, Plaintiffs again point towards "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." Ganino, 228 F.3d at 170 (quoting Shields, 25 F.3d at 1130). Specifically, the Plaintiffs allege:

The Issuers, as new publicly held corporations, benefitted financially from the misconduct [of the Underwriters] as the run up of their respective stock prices afforded them with substantial opportunities to utilize their stock as currency in connection with corporate acquisitions, and to raise even more money through add-on offerings.

MA ¶ 112. Likewise, the Complaint in Cacheflow alleges:

The Issuer Defendants were further motivated by the fact that the Issuer's artificially inflated stock price could be utilized as currency in negotiating and/or consummating stock-based acquisitions after the IPO. In this regard, the Issuer Defendants [sic] made at least two acquisitions. On June 5, 2000, Cacheflow acquired SpringBank Networks, Inc. in a stock deal valued at a total of $180 million. In addition, on December 18, 2000, Cacheflow acquired Entera, Inc. in a stock deal valued at a total of $440 million.

Cacheflow Compl. ¶ 110(c).

These benefits are sufficiently concrete and personal so as to provide a motive for Cacheflow to purposefully or recklessly make the specified material misstatements and omissions in the registration statement that artificially inflated the value of the company. See, e.g., In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp.2d 314, 328 (S.D.N.Y. 2001) (allegation that defendants "sought to maintain the artificially high stock price so that the [company] might use that stock as currency for acquisitions . . . is a sufficiently concrete motive to support a strong inference of scienter.").

While the Issuers undoubtedly benefitted from the artificially inflated value of their companies, an argument also could be made that money that was rightfully theirs ended up in the pockets of the Underwriters and the select investors who received the initial allocations.*fn124 Whether the benefits obtained through the alleged fraud outweighed the possible loss resulting from the initial underpricing is a question of fact that must be left for another day. The role of the Court on a motion to dismiss is not to weigh evidence but merely to determine whether a claim has been pled. The only question remaining here is whether, drawing all reasonable inferences in favor of the Plaintiffs, they have pled allegations that provide a motive for the Issuers to participate in the alleged misrepresentations and omissions.

i. The Motive Allegations Are Sufficient as to 185 Issuers

Plaintiffs have pled facts sufficient to create an inference of motive, and thus scienter, with respect to 185 Issuers by alleging either (i) stock-based acquisitions (156 Issuers), or (ii) add-on offerings (twenty-nine Issuers).

The Plaintiffs have alleged with particularity — by specifying the information requested in the 11/13/02 Order — that 156 Issuers (including Cacheflow) used the alleged inflated value of their shares to make one or more stock-based acquisitions. This category also includes one Issuer that entered into a stock-based merger with another company (El Sitio, Inc.), and one case where a stock-based acquisition was announced but not necessarily consummated (Evolve Software, Inc.). These allegations are sufficient to show motive.

The motive allegations are also sufficient in twenty-nine cases which, though lacking particularized allegations about any acquisition (either by failing to allege an acquisition at all, or by only alleging one generally), contain allegations of add-on offerings. See Twinlab,

103 F. Supp.2d at 206 (holding that allegations that issuer "inflate[d] the stock price to maximize revenue from the secondary offering" was a "sufficient allegation of motive"); Duncan v. Pencer, No. 94 Civ. 0321, 1996 WL 19043, at *14 (S.D.N.Y. Jan. 18, 1996) (holding that issuer's public offering to raise capital stated a "motive theory [] sufficient to withstand a motion to dismiss."). Plaintiffs have alleged that these Issuers used the inflated value of their shares to support a secondary or tertiary offering to raise additional funds.*fn125

ii. The Motive Allegations Are Insufficient as to 116 Issuers*fn126

Plaintiffs' Rule 10b-5 claims are dismissed against 116 Defendants either because (i) Plaintiffs have made no allegations of motive, i.e., no acquisitions or add-on offerings (ninety-three Issuers); (ii) Plaintiffs' allegations of motive are not sufficiently particular (twenty-one Issuers); or (iii) Plaintiffs' allegations of motive are insufficient as a matter of law (two Issuers).

Plaintiffs have made no allegation of motive whatsoever with respect to ninety-three of the Issuers. In the Issuer chart, one column was titled "Acquisition/other acts which relied on inflated value of the company." This column was left entirely blank in these ninety-three cases.*fn127 Because there is no pleading of motivation sufficient to satisfy paragraph (b)(2)'s requirement that the defendant acted with the requisite state of mind, the Rule 10b-5 material misstatement claims against these Issuers must be dismissed.*fn128

Next, Plaintiffs have failed to meet the particularity requirement of paragraph (b)(2) with respect to an additional twenty-one Issuers. In these cases, Plaintiffs have pled that each Issuer made at least one acquisition — or in one case (Tickets.com), sought to make an acquisition — but the pleadings fail to provide any information regarding the number of shares transacted or monetary values of the acquisitions. These allegations fail the particularity requirement of paragraph (b)(2) and therefore must be dismissed.*fn129

Finally, with respect to two Issuers, Plaintiffs allege a single acquisition each — one with a monetary value, one without — that occurred in March 2002, far removed in time from the IPO. These two acquisitions are insufficient as a matter of law because they occurred after the close of the Class Period, when it is admitted that the allegedly fraudulent scheme was publicized. I am therefore unable to draw the inference that these Issuers capitalized on an artificially inflated stock price.*fn130 See High View Fund, L.P. v. Hall, 27 F. Supp.2d 420, 427-28 (S.D.N.Y. 1998) (where defendants did not take advantage of alleged scheme to defraud until one year later, "[t]hese allegations of misconduct are simply too far removed from plaintiffs' solicitation of investments through the Offering Memorandum to create the requisite inference of scienter. A contrary result would eviscerate the protections afforded by Rule 9(b).").

e. Summary

Plaintiffs have satisfied paragraph (b)(2) with respect to certain members of each class of Defendant by showing "strong circumstantial evidence" or "motive and opportunity." In each case, the following facts give rise to a strong inference of scienter:

For Allocating Underwriters, the fact that they required their customers to enter into Tie-in Agreements and received Undisclosed Compensation.

For Non-Allocating Underwriters, the fact that they received no allocation and failed to disclose it, while acting as Allocating Underwriters in other IPOs and requiring Tie-in Agreements in those IPOs.

For Issuers, the fact that they made acquisitions, mergers, or add-on offerings based on the inflated value of their stock.

For Individual Defendants, the fact that they sold a large amount of stock within a short period of time after the IPO.

3. The Material Misstatement Claims Adequately Plead the Remaining Elements of a Rule 10b-5 Claim: Transaction Causation, Loss Causation, Reliance and Damages

The remaining elements of a Rule 10b-5 claim are not required to be pleaded under the PSLRA. Nonetheless, in the Second Circuit, plaintiffs have long been required to apply Rule 9(b) to the pleading of all elements of a Rule 10b-5 claim. See Schlick, 507 F.2d at 379-80. Most recently, the Second Circuit reiterated that to plead a Rule 10b-5 claim based on material misstatements or omissions, "[a] plaintiff must allege" the following elements:

"`that [1] in connection with the purchase or sale of securities, the defendant, [2] acting with scienter, [3] made a false material misrepresentation or omitted to disclose material information and that [4] plaintiff's reliance on defendant's conduct [5] caused [plaintiff] injury.'" In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 264 (2d Cir. 1993) (alteration in original) (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir. 1985)).

Caiola, 295 F.3d at 321 (emphasis and numbering added).*fn131 Furthermore, "causation under federal securities laws is two-pronged: a plaintiff must allege both transaction causation, i.e., that but for the fraudulent statement or omission, the plaintiff would not have entered into the transaction; and loss causation, i.e., that the subject of the fraudulent statement or omission was the cause of the actual loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001) (emphasis added) (citing Manufacturers Hanover Trust Co. v. Drysdale Secs. Corp., 801 F.2d 13, 20 (2d Cir. 1986)).

In 1995, Congress codified the loss causation requirement in the PSLRA:

In any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages.

15 U.S.C. § 78u-4(b)(4) (emphasis added). Congress did not, however, require loss causation to be pled.*fn132 But approximately a year ago, the Court of Appeals reiterated, in Suez Equity, that a securities fraud plaintiff must plead loss causation, along with the other elements of Rule 10b-5. The court noted that the concepts of loss causation and transaction causation were "somewhat elusive," but reminded the lower courts that causation in the securities law context is "two-pronged." Suez Equity, 250 F.3d at 95-96.*fn133 The court adopted the following rule:

[P]laintiffs may allege transaction and loss causation by averring both that they would not have entered the transaction but for the misrepresentations and that the defendants' misrepresentations induced a disparity between the transaction price and the true "investment quality" of the securities at the time of transaction.*fn134

250 F.3d at 97-98 (emphasis in original).*fn135 Such allegations suffice to allege not only loss and transaction causation, but also the elements of reliance, see Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 186 (2d Cir. 2001) ("transaction causation is generally understood as reliance"), and damages (because loss causation presupposes damages).

In short, the rule of Suez Equity sets out the pleading requirements for all elements of a Rule 10b-5 claim that are governed by Rule 9(b) rather than by the PSLRA. Under Suez Equity, the hallmark of an adequately pled Rule 10b-5 claim is not necessarily a particularized allegation of direct causation, but rather the allegation of a coherent scheme to defraud that accounts generally for both the plaintiff's initial investment and, without any definitive supervening cause,*fn136 the loss on that investment.*fn137 See generally In re Blech Sec. Litig., 961 F. Supp. 569, 586 (S.D.N.Y. 1997) ("Blech II"); Aquino v. Trupin, 833 F. Supp. 336, 342 (S.D.N.Y. 1993) ("it is not necessary to plead causation in any great detail"); In re Accelr8 Tech. Corp. Sec. Litig., 147 F. Supp.2d 1049, 1057 (D.Colo. 2001) ("it is not Plaintiffs' burden to prove loss causation in their pleadings"). Where a complaint, read liberally, alleges such a scheme and otherwise comports with Rule 9(b) and the PSLRA, it is adequately pled.

These cases allege "an industry-wide scam . . . whereby people were put into IPOs, the stock was hyped, the insiders got out, and the little people who bought [the stock] on their broker's recommendations were left holding the bag. That's the guts of what these cases are coming down to." 9/26/01 Tr. at 17 (Statement of Jeffrey Barist, counsel to Deutsche Banc Alex.Brown). See also supra Part IV. The question, then, is whether the pleading of such a scheme adequately alleges

both that [Plaintiffs] would not have entered the transaction but for the misrepresentations and that the defendants' misrepresentations induced a disparity between the transaction price and the true "investment quality" of the securities at the time of transaction.

Suez Equity, 250 F.3d at 97-98 (emphasis in original).

a. Transaction Causation

The first prong of the Suez Equity test — transaction causation, or reliance*fn138 — is satisfied if a plaintiff alleges that defendants have "disseminat[ed] false information into the market on which a reasonable investor would rely." In re Ames Dept. Stores Inc. Stock Litig., 991 F.2d 953, 967 (2d Cir. 1993). See also Hade v. Capozzi, No. 91 Civ. 5897, 1996 WL 426394, at *1 (S.D.N.Y. July 30, 1996) (citing Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992) and Schlick, 507 F.2d at 380-81).

Plaintiffs here rely solely on the so-called "fraud on the market" theory of reliance.

The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.

Basic Inc. v. Levinson, 485 U.S. 224, 241-42 (1988) (alterations in original) (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir. 1986)). Where such an "efficient market" exists, all public information is assumed to be rapidly assimilated and therefore is assumed to affect prices. Almost by definition, any misstatement or omission that affects the price of a security — especially one that incorrectly represents its value — is important to the reasonable investor. See infra Part X.B.1. Under the fraud on the market theory, an individual investor need not be aware of and rely explicitly on those alleged misstatements; it is sufficient that she bases her transactions on the market trends or securities prices that are altered by the fraud. In these cases, Plaintiffs specifically rely on the fraud on the market "presumption." See Cacheflow Compl. ¶ 76.

Defendants contend that the fraud on the market doctrine is inapplicable. See 2 Und. Mem. at 6-8. Defendants' primary contention is that the fraud on the market theory cannot apply to IPOs because, "at the outset and for a significant period following an IPO, the market for those securities lacks the ingredients that make a market efficient." 2 Und. Mem. at 6.*fn139 Defendants cite cases holding or suggesting that the fraud on the market doctrine is inapplicable in IPO cases as a matter of law.*fn140

The instant cases are different than this line of cases in at least two important respects. First, the cases at bar concern purchases in the aftermarket. Although much of the allegedly fraudulent conduct happened at the time of the IPO, that fraud is alleged to have altered the price of the securities in the aftermarket, not on the IPO. Prices in the aftermarket are set by the market, thus the fraud on the market theory may apply. Second, to the extent that the immediate aftermarket of an IPO might be inefficient, the line of cases beginning with Freeman in 1990 all pre-date the most recent hot issues market.*fn141 Certain technological advances — especially the rise of the Internet — ensure that information permeates the market faster than ever before.*fn142 The increased ability of the market to quickly assimilate information from a wider array of sources tips the balance more heavily in favor of applying the efficient market hypothesis in these cases.*fn143

Moreover, whether the fraud on the market theory applies is not a pure question of law. Rather, that determination turns on whether the relevant market has the traits of an "efficient market" as described in Basic. Thus, the question of whether securities were traded in an efficient market should not be decided on a motion to dismiss. See RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F. Supp.2d 389, 404 (S.D.N.Y. 2002) (deciding applicability of fraud on the market doctrine at summary judgment); Ellison, 36 F. Supp.2d at 643-44 ("At this [motion to dismiss] stage in the litigation, before discovery has even commenced, I am not prepared to hold as a matter of law that the allegations [that the fraud on the market doctrine applies] fail."); In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 490 (S.D.N.Y. 1989) ("Whether in fact Laser Arms traded in an efficient market is a question of fact. Therefore, resolution of that issue must await presentation of further proof at trial.").*fn144

Accordingly, because Plaintiffs have sufficiently pled the applicability of the fraud on the market presumption, they have adequately pled the element of transaction causation.

b. Loss Causation and Damages

Plaintiffs have also adequately pled loss causation and damages under the second prong of the Suez Equity test — that the alleged misrepresentations artificially inflated the market price of the relevant securities.*fn145 Defendants' arguments notwithstanding, Plaintiffs have pled, with significant particularity, an extensive and coherent scheme of loss causation. Indeed, the entire aim of the alleged misrepresentations was to "secur[e] and conceal[]" the Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, Cacheflow Compl. ¶ 99, which in turn had the effect of "artificially inflat[ing] and maintain[ing] the market price of and demand for the Issuer's common stock." Id. ¶ 96. As Defendants concede, Plaintiffs "charge an `industry wide' scheme to inflate prices in the aftermarket for all `IPO Litigation Offerings' over a period of years. . . ." 2 Und. Mem. at 1 (quoting MA ¶ 3).

Plaintiffs have alleged, inter alia, a scheme to create "artificial demand," Cacheflow Compl. ¶ 3, by requiring investors seeking an allocation of a particular IPO to enter into Tie-in Agreements and purchase stock in the aftermarket, the mechanics of which are set forth in great detail. See, e.g., MA ¶¶ 36-54. The alleged result was to create "the false appearance of demand for the stock at prices in excess of the IPO price." Cacheflow Compl. ¶ 38. In addition, certain Underwriter Defendants are alleged to have used their analysts to issue fraudulent "Buy," "Strong Buy," or "Outperform" recommendations, id. ¶ 56, the result of which was to "manipulate the aftermarket stock price," id. ¶ 55. In all, the alleged scheme "had the effect of inflating the price of the Issuer's common stock above the price that would have otherwise prevailed in a fair and open market." Id. ¶ 59.

Defendants' repeated insistence that Plaintiffs' scheme of loss causation is somehow "incoherent," misses the mark. See 2 Und. Mem. at 9-17,. Relying on a particular reading of the Complaints, Defendants argue that relief may not be available to every Plaintiff under every allegation (e.g., Plaintiffs that purchased before the conflicted analyst reports were released cannot plead loss causation in relation to the analyst conflicts). While this may be one legitimate reading of the allegations, it is neither the best reading because it does not take the Complaints as pled, see supra Part VII.A.2, nor the one that must be applied on a motion to dismiss. Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in their favor, Plaintiffs have alleged one coherent scheme to defraud — characterized by Tie-in Agreements and analyst conflicts, motivated by Undisclosed Compensation, and secured and concealed by lies and omissions — the entire purpose of which was to artificially drive up the price of the relevant securities. This is precisely the sort of scheme contemplated in Suez Equity as satisfying the loss causation requirement. Accordingly, Plaintiffs have adequately pled damages and loss causation.

B. Plaintiffs Have Stated Rule 10b-5 Claims for Material Misstatements and Omissions Upon Which Relief May Be Granted

Defendants next argue that the alleged misstatements or omissions fail to state a claim upon which relief may be granted because Defendants had no duty to disclose the facts about which they allegedly lied. This argument raises two related questions: (1) whether the alleged misrepresentations were material, and, if so, (2) whether Defendants had a duty to disclose that which they allegedly did not.

1. The Misstatements and Omissions Are Material

For a misstatement or omission to be material,

there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

TSC Indus., Inc. v. Northway, Inc.,
426 U.S. 438, 449 (1976) (footnote omitted). The Supreme Court has "expressly adopt[ed]" this standard of materiality for claims arising under Section 10(b) and Rule 10b-5. Basic, 485 U.S. at 232. As the Court explained, "[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor." TSC Indus., 426 U.S. at 445. "[M]ateriality depends on the significance the reasonable investor would place on the withheld or misrepresented information." Basic, 485 U.S. at 240.*fn146

The question of materiality is rarely amenable to disposition as a matter of law. Rather, it is considered a "mixed question of law and fact." TSC Indus., 426 U.S. at 450. Materiality may be resolved as a matter of law "[o]nly if the established omissions are `so obviously important to an investor, that reasonable minds cannot differ,'" id. (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970)), or, "if the information is trivial . . . or is `so basic that any investor could be expected to know it,'" Ganino, 228 F.3d at 161-62 (quoting Levitin v. PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir. 1998)). Thus,

when presented with a Rule 12(b)(6) motion, "a complaint may not properly be dismissed . . . on the grounds that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance."

Ganino, 228 F.3d at 162 (quoting Goldman, 754 F.2d at 1067). See also Halperin v. eBanker USA.COM, Inc., 295 F.3d 352, 357 (2d Cir. 2002). Moreover, when evaluating misstatements in a registration statement or prospectus,

we read it as a whole. Our inquiry does not focus on whether particular statements, taken separately, were literally true, but whether defendants' representations, taken together and in context, would have misled a reasonable investor about the nature of the securities. As we have explained, a prospectus will violate federal securities laws if it does not disclose material objective factual matters, or buries those matters beneath other information, or treats them cavalierly.

DeMaria, 2003 WL 174543, at *9 (quotation marks and citations omitted).

Under this stringent test, Plaintiffs plainly plead materiality. The eight alleged omissions and misstatements, set forth at Part X.A.1.a, need not be analyzed in isolation. Rather, the relevant inquiry is whether all of the misrepresentations, in the context of the registration statement, deceived the reasonable investor about the "nature of the securit[y]." DeMaria, 2003 WL 174543, at *9 (quoting McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576, 579 (2d Cir. 1990). The alleged misstatements — which together conceal and effectuate a massive scheme to inflate stock prices and then share the profits among the Issuer, its officers, and the Underwriter — plainly are neither trivial nor obviously unimportant.*fn147 See Metzner v. D.H. Blair & Co., 689 F. Supp. 262, 264 (S.D.N.Y. 1988) ("[M]arket manipulation is a fact reasonable investors might have considered important in the making of their decisions.") (quotation marks, citations and alterations omitted); see also Chasins, 438 F.2d at 1171 ("[A] material fact is one `. . . which in reasonable and objective contemplation might affect the value of the corporation's stock or securities. . . .'") (quoting Kohler v. Kohler Co., 319 F.2d 634, 642 (7th Cir. 1963)).

2. All Defendants Had a Duty to Disclose*fn148

In addition to being material, "a statement must also be misleading." Basic, 485 U.S. at 239 n. 17. See also 17 C.F.R. § 240.10b-5(b). Both untrue statements and omissions are evaluated "in the light of the circumstances under which they were made." 17 C.F.R. § 240.10b-5(b).

An "untrue statement," i.e., a misstatement that comprises a half-truth or a whole lie (as opposed to an omission), is always misleading because a speaker, having begun to speak, is obliged to do so completely and truthfully. See Caiola, 295 F.3d at 329-31. Thus, to the extent that Defendants are accused of misstatements, see 11/1/02 Tr. at 72-86,*fn149 they unquestionably had a duty to disclose.

"Silence [i.e., an omission], absent a duty to disclose, is not misleading under Rule 10b-5." Basic, 485 U.S. at 239 n. 17.

[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts. . . . [W]e have not only emphasized the importance of ascertaining a duty to disclose when omissions are at issue but have also drawn a distinction between the concepts of a duty to disclose and materiality.

Time Warner, 9 F.3d at 267 (citations omitted). See also First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977) ("A misstatement or omission encompasses patently false statements. Silence, or omission to state a fact, is proscribed only in certain situations: first, where the defendant has a duty to speak, secondly, where the defendant has revealed some relevant, material information even though he had no duty (i.e., a defendant may not deal in half-truths).").

Thus, "[t]he initial inquiry in each case is what duty of disclosure the law should impose upon the person being sued." Chris-Craft Indus. Inc. v. Piper Aircraft Corp., 480 F.2d 341, 363 (2d Cir. 1973). A duty to speak honestly may arise in a number of ways.*fn150 "Under the securities laws, the duty to disclose is statutory, or has been derived from statutory obligations." See H.L. Federman & Co. v. Greenberg, 405 F. Supp. 1332, 1336 (S.D.N.Y. 1975).

Here, Plaintiffs charge Defendants with making material misstatements and omissions to conceal and effectuate the scheme to defraud. The sufficiency of those claims turns on whether Defendants had a duty to disclose the underlying scheme. Defendants deny that they had any such duty, relying on a dense thicket of regulations.*fn151

Despite Defendants' invitation, it is not necessary to analyze the application of these rules and regulations at this stage. Where a defendant has engaged in conduct that amounts to "market manipulation" under Rule 10b-5(a) or (c), that misconduct creates an independent duty to disclose.*fn152 Failure to do so thus gives rise to a violation of Rule 10b-5(b). This is so because participants in the securities markets are entitled to presume that all of the actors are behaving legally; silence that conceals illegal activity is therefore intrinsically misleading and (presuming the illegality is also material) is always violative of Rule 10b-5(b).

This result follows logically from the very purpose of the Exchange Act.

In making this determination [of whether there is a duty to disclose] we should bear in mind that a major congressional policy behind the securities laws in general, and the antifraud provisions in particular, is the protection of investors who rely on the completeness and accuracy of information made available to them. Those with greater access to information, or having a special relationship to investors making use of the information, often may have an affirmative duty of disclosure. When making a representation, they are required to ascertain what is material as of the time of the transaction and to disclose fully those material facts about which the [investor] is presumably uninformed and which would, in reasonable anticipation, affect his judgment. A failure to perform these duties with "due diligence" in issuing registration materials provides a basis for suit under § 11 of the 1933 Act. . . . A knowing or reckless failure to discharge these obligations constitutes sufficiently culpable conduct to justify a judgment under Rule 10b-5 or § 14(e) for damages or other appropriate relief against the wrongdoer.

Chris-Craft, 480 F.2d at 363 (citations and internal quotation marks omitted) (second alteration in original). The "fundamental purpose" of the securities laws is "to substitute a philosophy of full disclosure for the philosophy of caveat emptor," Capital Gains Research Bureau, 375 U.S. at 186, and in order to "effectuate its remedial purpose," the securities laws must be applied "not technically and restrictively, but flexibly." Id. at 195. Where insiders conspire to frustrate the efficient function of securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered it up with lies and omissions. This conduct gives rise to liability under every section of Rule 10b-5.

Moreover, the duty to disclose falls on all parties aware of the manipulation, or who take advantage of it. Here, for example, it is unimportant that only Allocating Underwriters are directly liable for the market manipulation. It is enough that all Defendants — Underwriters, Issuers, and Individuals alike — are alleged to have known of or recklessly disregarded the manipulation, and to have used that knowledge to their advantage. See supra Part X.A.2. "Failure to disclose that market prices are being artificially depressed operates as a deceit on the market place and is an omission of a material fact." United States v. Regan, 937 F.2d 823, 829 (2d Cir. 1991) (quoting United States v. Charney, 537 F.2d 341, 351 (9th Cir. 1976)). This is equally true, of course, for the failure to disclose that market prices are being artificially inflated.

Plaintiffs have sufficiently alleged a claim of prohibited market manipulation. See infra Part XI. "This being so, [Defendants] possessed the affirmative duty . . . to disclose this fact" to Plaintiffs.*fn153 Affiliated Ute Citizens v. United States, 406 U.S. 128, 153 (1972). And because, in addition to that duty, the content of the alleged misrepresentation was material, see supra Part X.B.1, Plaintiffs have stated a Rule 10b-5(b) claim for material misstatements upon which relief may be granted. See, e.g., Alter v. DBKLM, Inc., 840 F. Supp. 799, 807-08 (D.Colo. 1993) (holding that allegations of manipulation of bond market that induced plaintiffs to make trades "suffice to create a duty and state a claim") (citing Texas Gulf Sulphur, 401 F.2d at 857-60).

But Defendants had a duty to disclose even under the regulatory scheme on which they rely. SEC Regulation S-K explains that with respect to "Underwriter's Compensation," a registration statement must disclose, among other things, "all other items considered by the National Association of Securities Dealers to be underwriting compensation. . . ." 17 C.F.R. § 229.508(e).*fn154

The NASD is explicit when it comes to what it considers to be underwriting compensation:

For purposes of determining the amount of underwriting compensation, all items of value received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering . . . shall be included.

NASD Rule 2710(c)(2) (emphasis added). The analysis ends there. According to long-held canons of construction, regulations must be read according to their plain meaning. See Barnhart, 534 U.S. at 450; see also Gibbs v. PFS Invs., Inc., 209 F. Supp.2d 620, 626 (E.D.Va. 2002) (giving terms in NASD rules their plain meaning). All means all; any means any. There is no suggestion elsewhere in the NASD Rules that these words are somehow terms of art that should be given any meaning but the usual ones.*fn155 Similarly, there can be no question that the alleged Undisclosed Compensation was an "item of value," see NASD Rule 2710(c)(3) (defining that term broadly), which was given "in connection with or related to the distribution," see id. 2710(c)(4) (defining that term broadly). Investors are alleged to have been required to pay compensation — in the form of money or commissions — to Underwriters in order to receive an allocation in the distribution of the public offering. Only an "Alice in Wonderland" — like reading of the regulations would permit the result Defendants urge.*fn156

Thus, under any analysis, Defendants had a duty to disclose.*fn157 That duty, coupled with the materiality of the concealed information, gives rise to a claim under Rule 10b-5(b) upon which relief can be granted.

For the reasons stated above, Defendants' motions to dismiss the Rule 10b-5 claims are denied except in those instances where Plaintiffs have not sufficiently alleged scienter.

XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST THE ALLOCATING UNDERWRITERS

Plaintiffs' second set of Rule 10b-5 claims allege that "[t]he Allocating Underwriter Defendants employed devices, schemes and artifices to defraud and/or engaged in acts, practices and a course of business which operated as a fraud and deceit upon the Plaintiffs," Cacheflow Compl. ¶ 87, which mimics the provisions of Rule 10b-5(a) and (c).*fn158

Defendants challenge the market manipulation claim on the grounds that Plaintiffs have failed the pleading requirements of Rule 9(b) and the PSLRA, and have failed to state a claim under Rule 12(b)(6).

A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter

In order to comply with the pleading requirements of the PSLRA, it is only necessary to discuss paragraph (b)(2), which requires that plaintiffs "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).*fn159 Because the briefing displays confusion about this requirement, an important clarification is warranted. Plaintiffs do not need to plead the defendant's actual knowledge of the market manipulation scheme with particularity. Courts in this circuit have long recognized that "at this stage of the litigation, we cannot realistically expect plaintiffs to be able to plead defendants' actual knowledge." Ross, 607 F.2d at 558.*fn160 Paragraph (b)(2) does require, however, that plaintiffs plead facts that give rise to a "strong inference" that the defendant acted with the required state of mind, and it is those facts that must be stated with particularity. See 15 U.S.C. § 78u-4(b)(2).

With respect to the market manipulation claim against the Allocating Underwriters, Plaintiffs have satisfied paragraph (b)(2) for a simple reason: They have alleged that the Allocating Underwriters "engaged in [the] deliberately illegal behavior" of requiring customers to enter into Tie-in Agreements in order to obtain IPO stock. Novak, 216 F.3d at 311.*fn161 As the Plaintiffs correctly argue, "[t]he Underwriter Defendants do not even attempt to suggest that the misconduct alleged here was anything but intentional." 1 Pl. Mem. at 48. Nor could they — Tie-in Agreements do not happen accidently, negligently, or even recklessly. Tie-in Agreements only happen if the Allocating Underwriters intentionally require them.

Thus, under the PSLRA, Novak and case law long-established in this circuit, Plaintiffs' allegations that the Allocating Underwriters required their customers to enter into Tie-in Agreements — an allegation that must be accepted as true on a motion to dismiss — gives "rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

B. The Market Manipulation Claims Adequately State Claims Upon Which Relief May Be Granted

The elements of a Rule 10b-5 market manipulation claim are well-settled in this circuit.

[S]ection 10(b) and Rule 10b-5 impose primary liability upon those persons or entities who employ manipulative and deceptive practices while engaged in a scheme to defraud. To state a claim for market manipulation, Plaintiffs must allege that (1) they were injured; (2) in connection with the purchase or sale of securities; (3) by relying on a market for securities; (4) controlled or artificially affected by defendant's deceptive or manipulative conduct; and (5) the defendants engaged in the manipulative conduct with scienter.

Blech II, 961 F. Supp. at 582 (citing Ernst & Ernst, 425 U.S. at 199). Accord In re Sterling Foster & Co., Inc. Sec. Litig., 222 F. Supp.2d 289, 303-04 (E.D.N.Y. 2002). Because the PSLRA sets no special pleading requirements for market manipulation claims, the "deceptive or manipulative conduct" in a market manipulation claim need only be pled under Rule 9(b). See supra Part VII.B.2. Moreover, the "deceptive or manipulative conduct" in a market manipulation claim, while still requiring particularity, may be pled with less specificity than that required in claims alleging material misstatements or omissions.

Unlike most fraud — most notably misrepresentation claims, where Rule 9(b) has been most heavily commented upon — where at least some aspects of the time, place, and other details of a defendant's activity are within the knowledge of the plaintiff as a matter of course — market manipulation claims present circumstances in which the mechanism of the scheme is likely to be unknown to the plaintiffs. . . . [W]here the principal allegations of wrongdoing involve market manipulation rather than false statements, the Complaint sets forth a sufficient level of detail by alleging the nature, purpose, and effect of the fraudulent conduct and the roles of the defendants. Although [the Complaint here] does so in broad strokes, at this stage no more can be required to give Defendants fair notice of Plaintiffs' claims and thereby to satisfy Rule 9(b).

In re Blech Sec. Litig., 928 F. Supp. 1279, 1290-91 (S.D.N.Y. 1996) ("Blech I") (emphasis added).*fn162 See also Baxter v. A.R. Baron, No. 94 Civ. 3913, 1996 WL 586338, at *8 (S.D.N.Y. Oct. 11, 1996) ("The degree of particularity required for pleading a market manipulation scheme is not as demanding as it is when Rule 9(b) is applied in other instances of fraud because the facts relating to a manipulation scheme are often known only by the defendants.").*fn163

The question, then, is whether Plaintiffs have adequately pled that the Allocating Underwriters engaged in "deceptive or manipulative conduct." Although Underwriters are certainly correct in pointing out that "to state a claim for market manipulation, a plaintiff must do more than merely allege the existence of a manipulative scheme," Scone, 1998 WL 205338, at *5, I have already held in the material misstatement context that Plaintiffs have alleged transaction and loss causation, which also include the elements of damages and reliance. See supra Part X.A.3. Because the material misstatements were made for the primary purpose of concealing and affecting the manipulative scheme alleged herein, that analysis applies with equal force in the market manipulation context.

1. Plaintiffs Adequately Plead "Deceptive or Manipulative Conduct"

Nonetheless, not all conduct that harms investors can be called "manipulative." The word "manipulative" is "virtually a term of art when used in connection with securities markets. It connotes intentional or wilful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst, 425 U.S. at 199.

[Manipulation] refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity. . . . Section 10(b)'s general prohibition of practices deemed by the SEC to be "manipulative" — in this technical sense of artificially affecting market activity in order to mislead investors — is fully consistent with the fundamental purpose of the 1934 Act. . . .

Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977). That fundamental purpose is "`[t]o insure to the multitude of investors the maintenance of fair and honest markets,'" Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir. 1969) (quoting H.R. Rep. No. 73-1383, at 11 (1934)). This goal is achieved by "prevent[ing] practices that impair the function of stock markets in enabling people to buy and sell securities at prices that reflect undistorted (though not necessarily accurate) estimates of the underlying economic value of the securities traded." Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857, 861 (7th Cir. 1995) (Posner, C.J.).

"Market manipulation" is that conduct which runs afoul of the "fundamental objectives of the securities laws." Id. at 865. See also Blech II, 961 F. Supp. at 580. Indeed, the Supreme Court has explained:

The[] proscriptions [of the securities laws], by statute and rule, are broad and . . . are obviously meant to be inclusive. The Court has said that the 1934 Act and its companion legislative enactments embrace a "fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186 (1963). In the case just cited the Court noted that Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed "not technically and restrictively, but flexibly to effectuate its remedial purposes." Id. at 195.

Affiliated Ute, 406 U.S. at 151 (footnote omitted). See also Zandford, 122 S.Ct. at 1903; Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971). In the end, "[t]he gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators." Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir. 1999).

Underwriters insist that their conduct does not constitute market manipulation under any of these descriptions; they argue that Plaintiffs' Tie-in Allegations attempt to criminalize*fn164 legitimate book building*fn165 activity by characterizing the gathering of "indications of interest" as market manipulation. Indications of interest are necessary, Underwriters insist, in order to engage effectively in legitimate price stabilization practices,*fn166 including prohibiting investors from "flipping"*fn167 their IPO allocations. See 4 Und. Mem. at 5-6. Thus underwriters may permissibly contact potential IPO investors and inquire into their intentions in the aftermarket, including whether they plan to buy, hold, or sell the newly-issued security. Underwriters argue, essentially, that their conduct — which was merely a necessary predicate to permitted stabilization practices — was consistent with the purpose of the securities laws.*fn168

This argument radically mischaracterizes the Complaints.*fn169 As pled, the Complaints make no mention of stabilization practices, charging Allocating Underwriters with requiring investors to make aftermarket purchases in order to receive IPO allocations. See, e.g., MA ¶ 34. These Complaints cannot be dismissed unless Plaintiffs have affirmatively pleaded themselves out of court by alleging legitimate stabilization practices in clear and unambiguous language. See supra Part V.A. There are no such allegations. See Cacheflow Compl. ¶ 38 ("Defendants . . . required[d] their customers seeking to purchase IPO shares to engage in transactions causing the market price of Cacheflow common stock to rise, in transactions that cannot be characterized as stabilizing transactions. . . .") (emphasis added).

While "price stabilization in contravention of SEC regulations is unlawful . . . the [Exchange Act] allows price stabilization practices that the SEC does not prohibit." Friedman II, 313 F.3d at 803. If the Underwriters were permitted to require investors to enter into Tie-in Agreements, then Plaintiffs cannot state a claim upon which relief can be granted and the Complaints must be dismissed. See Fed.R.Civ.P. 12(b)(6). Thus, the critical questions for purposes of this motion are (1) whether tie-ins are a form of stabilization, as opposed to market manipulation, and (2) whether SEC regulations or the Exchange Act prohibit Tie-in Agreements as alleged. Because SEC regulations plainly prohibit the conduct as alleged there is no need to address the first question.

"Stabilization is that process whereby the market price of a security is pegged or fixed for the limited purpose of preventing or retarding a decline in contemplation of or during a public offering of securities." Exchange Act Release No. 34-4163, available at 1948 WL 28675 (Sept. 16, 1948). Rule 104 of SEC Regulation M provides that "[s]tabilizing is prohibited except for the purpose of preventing or retarding a decline in the market price of a security." 17 C.F.R. § 242.104(b).*fn170

Stabilization practices therefore stand in marked contrast to the manipulative conduct described above, which is aimed primarily at inflating or otherwise artificially moving the price of securities. Thus whether the Complaints allege stabilization or manipulation turns largely on the "nature, purpose, and effect" of the conduct alleged." Blech I, 928 F. Supp. at 1291.

Throughout the Complaints and in the Master Allegations, Plaintiffs allege a sweeping scheme whose nature, purpose, and effect was to artificially inflate the price of newly-issued securities.*fn171 Not only do Plaintiffs allege that the scheme charged "had the effect of inflating the price of the Issuer's common stock above the price that would have otherwise prevailed in a fair and open market," Cacheflow Compl. ¶ 59, they allege that Defendants "carried out a plan, scheme and course of conduct which was intended to . . . artificially inflate and maintain the market price and trading volume of the Issuer's common stock; and [] induce Plaintiffs . . . to purchase or otherwise acquire the Issuer's common stock at artificially inflated prices." Id. ¶ 86 (emphasis added) (allegation as to Allocating Underwriter Defendants); id. ¶ 96 (identical allegation as to all Underwriter Defendants); id. ¶ 114 (identical allegation as to all Issuer and Individual Defendants). See also id. ¶ 110(b)-(c). In sum, Plaintiffs allege that Defendants "knowingly or recklessly participated in conduct that artificially inflated the price of the issuer's shares." MA ¶ 3.*fn172

Because Plaintiffs have sufficiently alleged a scheme, the "nature, purpose, and effect" of which was to artificially raise stock prices above their true value, as opposed to "preventing or retarding a decline in the market price of a security," 17 C.F.R. § 242.104(b), they have adequately pled a market manipulation scheme upon which relief may be granted.*fn173

2. College Bound II Is Not the Law

Notwithstanding the clear statements of the Supreme Court, the Second Circuit and a number of courts in this district, counsel for Underwriters, when asked to identify the "irreducible minimum of the elements that must be pled . . . in a market manipulation claim," 11/1/02 Tr. at 88, identified an entirely different list:

There needs to be domination and control, and there needs to be disguised or fictitious transactions. There needs to be economic reasonableness. There is a sole intent requirement.

Id. (Statement of David W. Ichel, counsel to J.P. Morgan Chase & Co., Hambrecht & Quist, LLC, Chase Securities, Inc., J.P. Morgan Securities, Inc., and Robert Fleming, Inc.). The Underwriters insist that the pleading requirements for Rule 10b-5 market manipulation claims were laid out by the Court of Appeals in United States v. Mulheren, 938 F.2d 364 (2d Cir. 1991), as interpreted by Chief Judge Mukasey in College Bound II:

the elements of an open-market manipulation claim outlined in Mulheren [are]: 1) "profit or personal gain to the alleged manipulator"; 2) deceptive intent; 3) market domination; and 4) economic reasonableness of the alleged transaction.

1995 WL 450486, at *6 (quoting Mulheren, 938 F.2d at 370).*fn174 Throughout their (fourth) brief and at oral argument, Underwriters relied almost exclusively on Mulheren and College Bound II. Therefore, several observations about Mulheren and College Bound II are in order.*fn175

First, College Bound II and Mulheren are expressly limited to cases of so-called "open-market manipulation." College Bound II, 1995 WL 450486, at *6.*fn176 In fact, there is no such thing. A review of federal securities law and academic literature yields no authority — other than College Bound II and Nanopierce (itself displaying skepticism, see 2002 WL 31819207, at *6-7 & n. 11) — that recognizes a distinction between open-market manipulation and any other market manipulation. What the cases just cited call "open-market manipulation" are merely those cases involving conduct that stands near the line between illegal and legal activity because their resolution turns less on conduct and more on the intent of the defendants. See Markowski v. SEC, 274 F.3d 525, 528 (D.C. Cir. 2001), cert. denied, 123 S.Ct. 96 (2003).*fn177

Second, even if there were such a thing as open-market manipulation, the "elements" outlined in College Bound II have no basis in law. Mulheren — itself a criminal case, decided as a direct appeal from a jury verdict rather than on a motion to dismiss — never required that a defendant act with the "sole intent" to defraud, but instead "assume[d], without deciding . . . that an investor may lawfully be convicted under Rule 10b-5 where the purpose of his transaction is solely to affect the price of a security." Mulheren, 938 F.2d at 368. The court therefore left open the question of whether a defendant who acts with, for example, the "primary" intent of affecting a stock price could be criminally liable for securities fraud. See id. Mulheren also refers to "profit or personal gain" as merely "[o]ne of the hallmarks of manipulation." Id. at 370. As for market domination, the court only "agree[d], as a general proposition, that market domination is a factor that supports a manipulation charge." Id. at 371 (emphasis added). And all of these "factors" — personal gain, market domination, economic reasonableness — were simply intended as examples of conduct from which "manipulative intent can be inferred." Id. at 371. Mulheren is not an opinion purporting to announce the elements for some new cause of action, but one of many Second Circuit opinions about scienter in market manipulation cases. Read properly, Mulheren adds little to the well-settled tests of scienter in this circuit: "motive and opportunity" and "strong circumstantial evidence." Novak, 216 F.3d at 309, 311. See generally supra Part VI.B.2.

Tellingly, Mulheren was decided over eleven years ago and College Bound II over seven years ago, yet those cases have been cited precisely once — in this or any other court — as establishing the elements of an open-market manipulation claim. See Nanopierce, 2002 WL 31819207, at *6 n. 10. And that case, far from holding that "courts enforce special [strict] pleading requirements when evaluating the adequacy of allegations in the market manipulation context," 4 Und. Mem. at 2, joined the many courts, cited earlier, holding that a market manipulation claim need only identify the "nature, purpose, and effect" of the allegedly fraudulent scheme. With all due respect, College Bound II, to the extent it purports to interpret and apply Mulheren, is simply not the controlling law of this circuit.

For all of the reasons set forth above, Plaintiffs have adequately pled a market manipulation claim against Allocating Underwriters on which relief may be granted. Defendants' motion to dismiss these claims are therefore denied.

XII. SECTION 20 CLAIMS

Plaintiffs' final set of claims assert that all of the Individual Defendants are liable under Section 20 of the Exchange Act. Section 20(a) states, in pertinent part:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a) (emphasis added). Every Individual Defendant accused of secondary liability under Section 20 is also accused of primary liability under Rule 10b-5. The Section 20 claims accuse the Individual Defendants of controlling the Issuers at the time the Issuers allegedly violated Rule 10b-5. See, e.g., Cacheflow Compl. ¶ 122 ("The Individual Defendants acted as controlling persons of the Issuer within the meaning of Section 20(a) of the Exchange Act as alleged herein and culpably participated in the wrongdoing."). Thus, Plaintiffs seek to hold Individual Defendants liable both for their own alleged misconduct, and for the alleged misconduct of the companies they controlled.*fn178

As with control person liability under Section 15 of the Securities Act, see supra Part IX, the two threshold questions are: (1) Does Rule 8 or Rule 9(b) apply to the pleading of a Section 20 claim, i.e., is Section 20 a fraud claim?; and (2) does the PSLRA apply to the pleading of a Section 20 claim, i.e., does Section 20 require proof (and thus, under paragraph (b)(2), pleading) of scienter? In order to answer these questions, it is necessary to explore the elements of a Section 20(a) claim.

The Supreme Court has never delineated the elements of a Section 20(a) claim. While the various courts of appeals agree that "control" and an underlying violation of the securities laws by the controlled entity are required elements, there is deep disagreement over whether Section 20(a) also has a scienter element. Six courts of appeals have clearly held that there is no scienter requirement; two have clearly held that there is.*fn179

The Second Circuit has yet to definitively answer this question. However, the Second Circuit has held that in order to prove a Section 20 claim, "a plaintiff must show (1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) `that the controlling person was in some meaningful sense a culpable participant' in the primary violation." Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998) (quoting First Jersey, 101 F.3d at 1472). Defendants argue that Plaintiffs have failed to adequately plead the elements of control and culpable participation (and, of course, that there was no underlying violation of the Exchange Act). See Iss. Mem. at 60-65.

"Control" in Section 20 has the same meaning as in Section 15, and has been adequately alleged. See supra Part IX. See also 17 C.F.R. § 240.12b-2 (defining control as "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."). The Rule 10b-5 claims against Issuers, who are identified in the Section 20 claims as the primary violators, have been adequately pled. See supra Part X and Part B of Appendix 5 to this Opinion. Thus the critical question is what is meant by "culpable participation" — a term that does not appear anywhere in Section 20(a).

Because some courts have assumed that "culpable participation" requires proof of a certain state of mind,*fn180 they have held that plaintiffs must plead scienter under paragraph (b)(2) of the PSLRA. See, e.g., In re CINAR Corp. Sec. Litig., 186 F. Supp.2d 279, 310 (E.D.N.Y. 2002); Independent Energy, 154 F. Supp.2d at 770. This assumption has been made despite the fact that the Second Circuit has never defined "culpable participation" or equated that term with scienter.*fn181

Given the reliance of courts on this assumption, it is interesting to trace the development of Section 20(a) jurisprudence in the Second Circuit. As early as 1973, the court wrote:

The intent of Congress in adding [Section 20], passed at the same time as the amendment to Section 15 of the 1933 Act, was obviously to impose liability only on those directors who fall within its definition of control and who are in some meaningful sense culpable participants in the fraud perpetrated by controlled persons.

Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en banc) (emphasis added). See also Gordon v. Burr, 506 F.2d 1080, 1086 (2d Cir. 1974).

In 1980, however, the Second Circuit suggested that there was no scienter (as opposed to culpable participation) element to Section 20(a) when it held that allegations of control, coupled with an underlying violation, are sufficient to state a claim. See Marbury Mgmt., 629 F.2d at 716. According to the Marbury Management court, good faith could only be asserted as an affirmative defense. Id.

Nonetheless, after 1980, district courts were divided on whether Section 20(a) contained an element of scienter depending on whether they "followed" Lanza and Gordon, or Marbury Management.*fn182 Compare, e.g., Robbins v. Moore Med. Corp., 788 F. Supp. 179, 188 (S.D.N.Y. 1992) (holding that plaintiff must plead control and scienter), with In re Citisource, Inc. Sec. Litig., 694 F. Supp. 1069, 1076 (S.D.N.Y. 1988) (holding that plaintiff must merely plead control). See generally In re Health Mgmt., Inc. Sec. Litig., 970 F. Supp. 192, 205-06 (E.D.N.Y. 1997) (discussing split in the district courts).

In 1996, the Court of Appeals attempted to reconcile its prior precedent by holding that,

In order to establish a prima facie case of controlling-person liability, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.

First Jersey, 101 F.3d at 1472 (emphasis added) (citations and quotation marks omitted). According to the First Jersey court, once the prima facie case has been established, the burden shifts to defendants to demonstrate good faith. Id at 1473. Again, the term "culpable participation" was never defined.

Although many district courts understood First Jersey to conclusively require plaintiffs to plead scienter, see, e.g., Mishkin, 1998 WL 651065, at *22-24, the Court of Appeals has revisited Section 20(a) three times since 1996, see Boguslavsky, 159 F.3d at 720; Ganino, 228 F.3d at 170; Suez Equity, 250 F.3d at 101, but never addressed the meaning of "culpable participation." Interestingly, whenever the Second Circuit has applied its own test, it has essentially rendered the "culpable participation" requirement meaningless.

In First Jersey, the court explained:

As discussed . . . above, the district court properly found that First Jersey violated the 1934 Act; and for the reasons discussed . . . above, there can be no question that Brennan was a controlling person with respect to First Jersey. Hence, in order to escape controlling person liability, Brennan had the burden of showing that he did not induce the Firm's violations and that he maintained and enforced a reasonable and proper system of supervision and internal control over the pertinent personnel.

101 F.3d at 1473 (emphasis added). Most recently in Suez Equity, on appeal from a motion to dismiss, the court reasoned:

The complaint alleges that DeRoziere was an officer of the Bank and that he had primary responsibility for the dealings of that Bank and the other corporate defendants with SAM Group. While somewhat broad, this allegation is sufficient to plead controlling-person liability for the Bank derived from DeRoziere, the purported primary violater.

250 F.3d at 101 (emphasis added). In both First Jersey and Suez Equity, allegations of control coupled with an underlying violation sufficed to plead a Section 20(a) claim. Neither case — both post-PSLRA — even hinted that scienter must be pled in a Section 20(a) claim in accordance with paragraph (b)(2), and Suez Equity explicitly recognized that plaintiff's allegations, while adequate to state a claim under Section 20(a), were "somewhat broad," i.e., not particular. Thus, although the meaning of "culpable participation" is unclear, there is strong reason to believe that it is not the same as scienter.
*fn183

The holding that Section 20(a) has no scienter element is also commanded by the congressional intent underlying Section 20(a), namely the desire to hold "a person who controls a person subject to the act or a rule or regulation thereunder . . . liable to the same extent as the person controlled unless the controlling person acted in good faith and did not induce the act in question." S. Rep. No. 73-792, at 22 (emphasis added); H.R. Conf. Rep. No. 73-1383, at 26 (1934) (same). As Justice Douglas explained, dissenting from a denial of certiorari,

Section 20(a) provides that anyone who "controls" a person liable under the 1934 Act is equally liable, subject only to the defense of "good faith." The section is remedial and is to be construed liberally. It has been interpreted as requiring only some indirect means of discipline or influence short of actual direction to hold a "controlling person" liable. . . . The purpose of the Act is to expand, not restrict, the public's remedies.

Sennott v. Rodman & Renshaw, 424 U.S. 926, 929 (1973) (emphasis added). Finding a scienter requirement where none exists in the plain text would therefore undercut the remedial purpose of the statute.

As the Supreme Court explained in Ernst & Ernst,

In each instance that Congress created express civil liability in favor of purchasers or sellers of securities it clearly specified whether recovery was to be premised on knowing or intentional conduct, negligence, or entirely innocent mistake.

425 U.S. at 207 (citations omitted). For example, while Section 11 provides for absolute liability on the part of issuers, those who assist the issuers (i.e., experts) may raise the affirmative defense that their conduct was not negligent.

Within the limits specified by § 11(e), the issuer of the securities is held absolutely liable for any damages resulting from such misstatement or omission [in the registration statement]. But experts such as accountants who have prepared portions of the registration statement are accorded a "due diligence" defense. In effect, this is a negligence standard. An expert may avoid civil liability with respect to the portions of the registration statement for which he was responsible by showing that "after reasonable investigation" he had "reasonable ground[s] to believe" that the statements for which he was responsible were true and there was no omission of a material fact.

Id. at 208 (emphasis added) (alterations in original, citations omitted). Similarly, "§ 20, which imposes liability upon controlling persons for violations of the Act by those they control, exculpates a defendant who acted in good faith and did not induce the act constituting the violation." Id. at 209 n. 28 (emphasis added; quotation marks, alterations, and citations omitted). Under both sections, the burden is on defendants (other than issuers under Section 11) to "exculpate" themselves by proving either good faith or due diligence.*fn184 Plaintiffs, therefore, need not affirmatively plead negligence.

In sum, scienter is not an essential element of a Section 20(a) claim such that a "plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2).*fn185 Rather, a plaintiff need only prove scienter if a defendant presents the affirmative defense that it acted in good faith. Section 20(a) must therefore be pleaded only in accordance with Rule 8(a). Neither the PSLRA (because scienter is not an essential element), nor Rule 9(b) (because fraud is not an essential element),*fn186 apply to a Section 20(a) claim.*fn187

Therefore, because Plaintiffs have adequately alleged control, see supra Part IX, the Individual Defendants' motion to dismiss the Section 20(a) claims is denied except as to those Individual Defendants alleged to have controlled Issuer Defendants previously dismissed under Rule 10b-5, see supra Part X.A.2.d.ii.*fn188

CONCLUDING MATERIAL

XIII. LEAVE TO REPLEAD

When a cause of action is dismissed because of pleading deficiencies, the usual remedy is to permit plaintiff to replead its case. See Fed.R.Civ.P. 15(a) ("leave [to replead] shall be freely given when justice so requires."); see also Foman v. Davis, 371 U.S. 178, 183 (1962). This policy is especially appropriate in the context of claims dismissed under Rule 9(b) because the law favors resolving disputes on their merits. See Acito, 47 F.3d at 54-55; Luce, 802 F.2d at 56-57.

Nonetheless, not every securities fraud claim that is dismissed lends itself to repleading. There are two instances in particular where granting leave to replead may be inappropriate. First, where a claim is dismissed as a matter of law because it fails to state a claim, repleading would be "futile." Lucente v. International Bus. Mach. Corp., 310 F.3d 243, 258 (2d Cir. 2002) ("An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed.R. Civ. P. 12(b)(6)") (citing Dougherty v. North Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir. 2002)). See also Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990). Second, where leave to amend or replead has been repeatedly granted, it may be appropriate to deny leave. Although the Rules eschew "technical forms of pleading," Fed.R.Civ.P. 8(e)(i), where pleading deficiencies have been identified a number of times and not cured, there comes a point where enough is enough. See, e.g., Dooner v. Keefe, Bruyette & Woods, Inc., No. 00 Civ. 572, 2003 WL 135706, at *4 (S.D.N.Y. Jan. 17, 2003) ("this is the plaintiff's third complaint . . . [t]hree bites at the apple is enough"); see also In re Am. Express Co. Shareholders Litig., 39 F.3d 395 (2d Cir. 1994); Fisher v. Offerman & Co., Inc., No. 95 Civ. 2566, 1996 WL 563141, at *9 (S.D.N.Y. Oct. 2, 1996); In re Hyperion Sec. Litig., No. 93 Civ. 7179, 1995 WL 422480, at *8 (S.D.N.Y. July 14, 1995), aff'd sub nom., Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir. 1996).

A number of Plaintiffs' claims here have been dismissed because they fail to state a claim as a matter of law. See supra Parts VIII.B.3 (dismissing Section 11 claims where Plaintiffs sold above the offering price); IX (dismissing certain Section 15 claims); X.A.2.d.ii (dismissing Rule 10b-5 claims against Issuers who only made acquisitions after a certain date); X.A.2.c.ii (dismissing Rule 10b-5 claims against Individual Defendants who sold a small percentage of their stock, or who did not sign registration statement). It would be futile for Plaintiffs to replead these claims. Accordingly, leave is denied.

Moreover, many of the claims dismissed by today's Order should not be repled, even though they have been dismissed under Rule 9(b), because Plaintiffs have had numerous opportunities to amend their pleadings. Over a year ago, in accordance with this Court's rules, Defendants first notified Plaintiffs of perceived deficiencies in the Complaints. See 1/22/02 Letter from Gandolfo V. DiBlasi, Underwriters' Liaison Counsel, to Plaintiffs; 1/29/02 Letter from Nina (Nicki) Locker & Laurie B. Smilan, writing on behalf of Issuer and Individual Defendants, to Plaintiffs. When those letters were exchanged, Plaintiffs had not yet filed their Consolidated Amended Class Action Complaints; together, those letters identified most, if not all, of the arguments ultimately raised by Defendants in the instant motions. In April 2002, Plaintiffs filed their Amended Complaints, presumably taking into consideration the objections leveled by Defendants three months earlier.

Nonetheless, in an attempt to limit the scope of these motions to dismiss to issues that could not be cured by simple repleading, I again directed Defendants to identify perceived pleading deficiencies in the Amended Complaints. As I explained at the time:

You've seen many motions granted with leave to amend. . . . Well, that's not something I wanted to see here. I was very hopeful that the earlier [January] letter exchange, that long number of meetings you had, would close obvious issues and would leave only truly contested legal issues, so to speak, where they just don't agree with your theory, but not something you can fix.

5/23/02 Tr. at 33-34. Thus, Defendants were asked to provide Plaintiffs with a "table of contents" of their contemplated motions to dismiss. Id. at 34. Defendants did just that approximately one week later. See 5/31/02 Letter from Gandolfo V. DiBlasi to Plaintiffs; 6/4/02 Letter from Jack C. Auspitz, Issuer and Individual Defendants' Liaison Counsel, to Plaintiffs. These two letters identified a number of shortcomings. As a result, Plaintiffs were again permitted to amend their Complaints in December 2002, two months after the instant motions were fully submitted and argued. See In re Initial Public Offering Sec. Litig., No. 21 M.C. 92, 2002 WL 31894620 (S.D.N.Y. Dec. 27, 2002). Plaintiffs were fully aware of the grounds raised in the motions to dismiss when they filed their most recent amendments.*fn189

Although pleading is not a "game of skill in which one misstep by counsel may be decisive to the outcome," Conley, 355 U.S. at 48, where there have been several missteps, even after one's adversary has played her hand, the game is up. In a number of instances, Plaintiffs have failed to plead essential material despite repeated opportunities to do so; there is no good reason to provide yet another opportunity. See supra Part X.A.2.d.ii. (dismissing Rule 10b-5 claims against Issuers for whom Plaintiffs made no allegation of scienter); Part X.A.2.c.ii. (dismissing Rule 10b-5 claims against Individual Defendants for whom Plaintiffs made no allegations of scienter); Part XII (dismissing certain Section 20 claims).*fn190

Plaintiffs may replead, however, claims that have been dismissed for lack of the required particularity. Specifically, Plaintiffs may only replead the following claims:

1. Rule 10b-5 claims against the twelve Individuals listed in Part D of Appendix 4 to this Opinion; and

2. Rule 10b-5 claims against the twenty-one Issuers listed in Part D of Appendix 5 to this Opinion.

If Plaintiffs are able to successfully replead the Rule 10b-5 claims, they may be able to revive certain of the Section 20 claims. Leave to replead all other claims is denied.

XIV. CONCLUSION

Because Plaintiffs have alleged that Defendants failed to adhere to a "philosophy of full disclosure" and engaged in a scheme to manipulate the securities markets, the motions to dismiss are, for the most part, denied. The Underwriter Defendants' motions to dismiss are granted in part and denied in part and the Issuers and Individual Defendants' motions to dismiss are granted in part and denied in part. As a result, discovery may now proceed. See 15 U.S.C. § 78u-4(3)(B). A conference is scheduled for March 5 at 11 a.m.

SO ORDERED:

Appendix 1:

Captions CASES CONSOLIDATED AS IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION, 21 M.C. 92

In re 724 Solutions, Inc. IPO Sec. Litig., 01 Civ. 5333

In re Accelerated Networks, Inc. IPO Sec. Litig., 01 Civ. 5644

In re Aclara Biosciences, Inc. IPO Sec. Litig., 01 Civ. 10050

In re Aether Systems, Inc. IPO Sec. Litig., 01 Civ. 5570

In re Agency.com, Ltd. IPO Sec. Litig., 01 Civ. 5902

In re Agile Software Corp. IPO Sec. Litig., 01 Civ. 9413

In re Agilent Technologies, Inc. IPO Sec. Litig., 01 Civ. 10639

In re AirGate PCS Inc. IPO Sec. Litig., 01 Civ. 9801

In re Airnet Communications Corp. IPO Sec. Litig., 01 Civ. 10161

In re Airspan Networks, Inc. IPO Sec. Litig., 01 Civ. 6747

In re Akamai Technologies, Inc. IPO Sec. Litig., 01 Civ. 6000

In re Alamosa PCS Holdings IPO Sec. Litig., 01 Civ. 11235

In re Alloy Online, Inc. IPO Sec. Litig., 01 Civ. 9742

In re Antigenics, Inc. IPO Sec. Litig., 01 Civ. 9741

In re Apropos Technology, Inc. IPO Sec. Litig., 01 Civ. 9982

In re Ariba, Inc. IPO Sec. Litig., 01 Civ. 2359

In re Ashford.com, Inc. IPO Sec. Litig., 01 Civ. 6275

In re AsiaInfo Holdings, Inc. IPO Sec. Litig., 01 Civ. 10901

In re Ask Jeeves, Inc. IPO Sec. Litig., 01 Civ. 9422

In re Aspect Medical Systems, Inc. IPO Sec. Litig., 01 Civ. 7090

In re Audible, Inc. IPO Sec. Litig., 01 Civ. 5258

In re Autobytel.com, Inc. IPO Sec. Litig., 01 Civ. 6825

In re AutoWeb.com, Inc. IPO Sec. Litig., 01 Civ. 3360

In re Avanex Corp. IPO Sec. Litig., 01 Civ. 6890

In re AvantGo, Inc. IPO Sec. Litig., 01 Civ. 9618

In re Avenue A, Inc. IPO Sec. Litig., 01 Civ. 5446

In re Avici Systems, Inc. IPO Sec. Litig., 01 Civ. 3363

In re B2B Internet HOLDRS IPO Sec. Litig. 01 Civ. 2858

In re Backweb Technologies Ltd. IPO Sec. Litig., 01 Civ. 10000

In re Be Free, Inc. IPO Sec. Litig., 01 Civ. 10827

In re Blue Martini Software, Inc. IPO Sec. Litig., 01 Civ. 6241

In re Bookham Technology PLC IPO Sec. Litig., 01 Civ. 9883

In re Bottomline Technologies, Inc. IPO Sec. Litig., 01 Civ. 6824

In re Braun Consulting, Inc. IPO Sec. Litig., 01 Civ. 10629 In re Breakaway Solutions, Inc. IPO Sec. Litig., 01 Civ. 6397

In re Brocade Communications Systems, Inc. IPO Sec. Litig., 01 Civ. 6613

In re BSquare Corp. IPO Sec. Litig., 01 Civ. 6216

In re Buy.com, Inc. IPO Sec. Litig., 01 Civ. 6323

In re Cacheflow, Inc. IPO Sec. Litig., 01 Civ. 5143

In re Caldera Systems, Inc. IPO Sec. Litig., 01 Civ. 6271

In re Calico Commerce, Inc. IPO Sec. Litig., 01 Civ. 2601

In re Caliper Technologies Corp. IPO Sec. Litig., 01 Civ. 5072

In re Capstone Turbine Corp. IPO Sec. Litig., 01 Civ. 11220

In re Carrier1 International SA IPO Sec. Litig., 01 Civ. 10940

In re Centra Software, Inc. IPO Sec. Litig., 01 Civ. 10988

In re Chartered Semiconductor Manufacturing, Ltd. IPO Sec. Litig., 01 Civ. 10839

In re Chinadotcom Corp. IPO Sec. Litig., 01 Civ. 5937

In re Choice One Communications, Inc. IPO Sec. Litig., 01 Civ. 10576

In re Chordiant Software, Inc. IPO Sec. Litig., 01 Civ. 6222 In re Clarent Corp. IPO Sec. Litig., 01 Civ. 6322

In re Click Commerce, Inc. IPO Sec. Litig., 01 Civ. 11234

In re Cobalt Networks IPO Sec. Litig., 01 Civ. 10971

In re Commerce One, Inc. IPO Sec. Litig., 01 Civ. 5575

In re CommTouch Software, Inc. IPO Sec. Litig., 01 Civ. 7044

In re Concur Technologies, Inc. IPO Sec. Litig., 01 Civ. 6828

In re Copper Mountain Networks, Inc. IPO Sec. Litig., 01 Civ. 10943

In re Corio, Inc. IPO Sec. Litig., 01 Civ. 10686

In re Corvis Corp. IPO Sec. Litig., 01 Civ. 3857

In re CoSine Communications, Inc. IPO Sec. Litig., 01 Civ.10105

In re Covad Communications Group, Inc. IPO Sec. Litig., 01 Civ. 5834

In re Critical Path, Inc. IPO Sec. Litig., 01 Civ. 6542

In re CyberSource Corp. IPO Sec. Litig., 01 Civ. 7000

In re Daleen Technologies, Inc. IPO Sec. Litig., 01 Civ. 10944

In re Data Return Corp. IPO Sec. Litig., 01 Civ. 10107

In re deCode Genetics, Inc. IPO Sec. Litig., 01 Civ. 11219

In re Delano Technology Corp. IPO Sec. Litig., 01 Civ. 7180

In re Deltathree.com, Inc. IPO Sec. Litig., 01 Civ. 5425

In re Dice, Inc. (Earthweb) IPO Sec. Litig., 01 Civ. 9747

In re Digimarc Corp. IPO Sec. Litig., 01 Civ. 3792

In re Digital Impact, Inc. IPO Sec. Litig., 01 Civ. 4942

In re Digital Insight Corp. IPO Sec. Litig., 01 Civ. 11231

In re Digital Island, Inc. IPO Sec. Litig., 01 Civ. 6887

In re Digital River, Inc. IPO Sec. Litig., 01 Civ. 7355

In re DigitalThink, Inc. IPO Sec. Litig., 01 Civ. 9619

In re Digitas, Inc. IPO Sec. Litig., 01 Civ. 5948 Vicki M. Muller, et al. v. Diversa Corp., et al., 02 Civ. 9699

In re DoubleClick, Inc. IPO Sec. Litig., 01 Civ. 3980

In re DrKoop.com, Inc. IPO Sec. Litig., 01 Civ. 6242

In re Drugstore.com, Inc. IPO Sec. Litig., 01 Civ. 5838

In re E-LOAN, Inc. IPO Sec. Litig., 01 Civ. 7467

In re E.piphany, Inc. IPO Sec. Litig., 01 Civ. 6158

In re eBenx, Inc. IPO Sec. Litig., 01 Civ. 9411

In re EGain Communications Corp. IPO Sec. Litig., 01 Civ. 9414

In re El Sitio, Inc. IPO Sec. Litig., 01 Civ. 5089

In re Eloquent, Inc. IPO Sec. Litig., 01 Civ. 6775

In re Engage Technologies, Inc. IPO Sec. Litig., 01 Civ. 8404

In re Equinix, Inc. IPO Sec. Litig., 01 Civ. 7002

In re eToys, Inc. IPO Sec. Litig., 01 Civ. 5911

In re Evolve Software, Inc. IPO Sec. Litig., 01 Civ. 9800

In re Exchange Applications, Inc. IPO Sec. Litig., 01 Civ. 9516

In re Exfo Electro Optical Engineering, Inc. IPO Sec. Litig., 01 Civ. 10684

In re Expedia, Inc. IPO Sec. Litig., 01 Civ. 4973

In re Extensity, Inc. IPO Sec. Litig., 01 Civ. 11246

In re Extreme Networks, Inc. IPO Sec. Litig., 01 Civ. 6143

In re F5 Networks, Inc. IPO Sec. Litig., 01 Civ. 7055

In re Fairmarket, Inc. IPO Sec. Litig., 01 Civ. 6948

In re Fatbrain.com, Inc. IPO Sec. Litig., 01 Civ. 10164

In re Finisar Corp. IPO Sec. Litig., 01 Civ. 10813

In re FirePond, Inc. IPO Sec. Litig., 01 Civ. 7048

In re FlashNet Communications, Inc. IPO Sec. Litig., 01 Civ. 10738

In re Focal Communications Corp. IPO Sec. Litig., 01 Civ. 10111

In re Foundry Networks, Inc. IPO Sec. Litig., 01 Civ. 10640

In re FreeMarkets, Inc. IPO Sec. Litig., 01 Civ. 7039

In re Gadzoox Networks, Inc. IPO Sec. Litig., 01 Civ. 5039

In re Gigamedia Ltd. IPO Sec. Litig., 01 Civ. 10884

In re Global Crossing, Ltd. IPO Sec. Litig., 01 Civ. 7023

In re GlobeSpan, Inc. IPO Sec. Litig., 01 Civ. 10741

In re GoTo.com, Inc. IPO Sec. Litig., 01 Civ. 6339

In re GRIC Communications, Inc. IPO Sec. Litig., 01 Civ. 6771

In re GT Group Telecom, Inc. IPO Sec. Litig., 01 Civ. 9748 In re Handspring, Inc. IPO Sec. Litig., 01 Civ. 7033

In re High Speed Access Corp. IPO Sec. Litig., 01 Civ. 9743

In re Hoover's, Inc. IPO Sec. Litig., 01 Civ. 10122

In re iBasis, Inc. IPO Sec. Litig., 01 Civ. 6272

In re iBeam Broadcasting Corp. IPO Sec. Litig., 01 Civ. 6842

In re iManage, Inc. IPO Sec. Litig., 01 Civ. 6277

In re Immersion Corp. IPO Sec. Litig., 01 Civ. 9975

In re IMPSAT Fiber Networks, Inc. IPO Sec. Litig., 01 Civ. 9710

In re Informatica Corp. IPO Sec. Litig., 01 Civ. 9922

In re InforMax, Inc. IPO Sec. Litig., 01 Civ. 10834

In re Inforte Corp. IPO Sec. Litig., 01 Civ. 10836

In re Inrange Technologies Corp. IPO Sec. Litig., 01 Civ. 10800

In re InsWeb Corp. IPO Sec. Litig., 01 Civ. 10969

In re Integrated Information Systems, Inc. IPO Sec. Litig., 01 Civ. 6120

In re Integrated Telecom Express, Inc. IPO Sec. Litig., 01 Civ. 10108

In re InterNAP Network Services Corp. IPO Sec. Litig., 01 Civ. 6084

In re Internet Capital Group, Inc. IPO Sec. Litig., 01 Civ. 3975

In re Internet Infrastructure HOLDRS IPO Sec. Litig., 01 Civ. 7654

In re Internet Initiative Japan IPO Sec. Litig., 01 Civ. 10974

In re Intersil Holding Corp. IPO Sec. Litig., 01 Civ. 5144

In re InterTrust Technologies Corp. IPO Sec. Litig., 01 Civ. 4187

In re Interwave International Ltd. IPO Sec. Litig., 01 Civ. 10598

In re Interwoven, Inc. IPO Sec. Litig., 01 Civ. 9917

In re Intraware, Inc. IPO Sec. Litig., 01 Civ. 9349

In re iPrint Technologies, Inc. (F/k/a Iprint.com) IPO Sec. Litig., 01 Civ. 5365

In re iTXC Corp. IPO Sec. Litig., 01 Civ. 6892

In re iVillage, Inc. IPO Sec. Litig., 01 Civ. 4974

In re iXL Enterprises, Inc. IPO Sec. Litig., 01 Civ. 9417

In re Jazztel P.L.C. IPO Sec. Litig., 01 Civ. 10983

In re JNI Corp. IPO Sec. Litig., 01 Civ. 10740

In re Juniper Networks, Inc. IPO Sec. Litig., 01 Civ. 10899

In re Kana Software, Inc. IPO Sec. Litig., 01 Civ. 6822

In re Keynote Systems, Inc. IPO Sec. Litig., 01 Civ. 7666

In re Korea Thrunet Co., Ltd. IPO Sec. Litig., 01 Civ. 9442

In re Lante Corporation, Inc. IPO Sec. Litig., 01 Civ. 7046

In re Latitude Communications, Inc. IPO Sec. Litig., 01 Civ. 10121

In re Lexent, Inc. IPO Sec. Litig., 01 Civ. 9440

In re Liberate Technologies, Inc. IPO Sec. Litig., 01 Civ. 4147

In re Lionbridge Technologies, Inc. IPO Sec. Litig., 01 Civ. 6770

In re Liquid Audio, Inc. IPO Sec. Litig., 01 Civ. 6661

In re Looksmart, Ltd. IPO Sec. Litig., 01 Civ. 7030

In re Loudeye Technologies, Inc. IPO Sec. Litig., 01 Civ. 6872

In re Manufacturers Services Ltd. IPO Sec. Litig., 01 Civ. 11000

In re Marimba, Inc. IPO Sec. Litig., 01 Civ. 3483

In re MarketWatch.com, Inc. IPO Sec. Litig., 01 Civ. 3225

In re Martha Stewart Living Omnimedia IPO Sec. Litig., 01 Civ. 10900

In re Marvell Technologies IPO Sec. Litig., 01 Civ. 7053

In re MatrixOne, Inc. IPO Sec. Litig., 01 Civ. 6757

In re Maxygen, Inc. IPO Sec. Litig., 01 Civ. 10990

In re McAfee.com Corp. IPO Sec. Litig., 01 Civ. 7034

In re McData Corp. IPO Sec. Litig., 01 Civ. 6627

In re MCK Communications, Inc. IPO Sec. Litig., 01 Civ. 11230

In re Mediaplex, Inc. IPO Sec. Litig., 01 Civ. 6301

In re MedicaLogic, Inc. IPO Sec. Litig., 01 Civ. 7726

In re MetaSolv Software, Inc. IPO Sec. Litig., 01 Civ. 9651

In re Metawave Communications Corp. IPO Sec. Litig., 01 Civ. 9799

In re Microtune, Inc. IPO Sec. Litig., 01 Civ. 6823

In re Modem Media, Inc. IPO Sec. Litig., 01 Civ. 7201

In re MP3.com, Inc. IPO Sec. Litig., 01 Civ. 4183

In re Multex.com, Inc. IPO Sec. Litig., 01 Civ. 3910

In re NaviSite, Inc. IPO Sec. Litig., 01 Civ. 5374

In re Neoforma.com, Inc. IPO Sec. Litig., 01 Civ. 6689

In re Net Perceptions, Inc. IPO Sec. Litig., 01 Civ. 9675

In re Net2000 Communications, Inc. IPO Sec. Litig., 01 Civ. 5227

In re Net2Phone, Inc. IPO Sec. Litig., 01 Civ. 7028

In re Netcentives, Inc. IPO Sec. Litig., 01 Civ. 5332

In re NetRatings, Inc. IPO Sec. Litig., 01 Civ. 9798

In re Netro Corp. IPO Sec. Litig., 01 Civ. 7035

In re NETsilicon, Inc. IPO Sec. Litig., 01 Civ. 7281

In re NetSolve, Inc. IPO Sec. Litig., 01 Civ. 11239

In re Network Engines, Inc. IPO Sec. Litig., 01 Civ. 10894

In re Netzero, Inc. IPO Sec. Litig., 01 Civ. 3358

In re New Focus, Inc. IPO Sec. Litig., 01 Civ. 5822

In re Next Level Communications, Inc. IPO Sec. Litig., 01 Civ. 6004

In re NextCard, Inc. IPO Sec. Litig., 01 Civ. 10823

In re Nextel Partners, Inc. IPO Sec. Litig., 01 Civ. 10945

In re Network Plus Corp. IPO Sec. Litig., 01 Civ. 6089

In re Niku Corp. IPO Sec. Litig., 01 Civ. 7280

In re NorthPoint Communications Group, Inc. IPO Sec. Litig., 01 Civ. 9561

In re Nuance Communications Inc. IPO Sec. Litig., 01 Civ. 7344

In re Numerical Technologies, Inc. IPO Sec. Litig., 01 Civ. 9513

In re OmniSky, Corp. IPO Sec. Litig., 01 Civ. 6660

In re OmniVision Technologies, Inc. IPO Sec. Litig., 01 Civ. 10775

In re On Semiconductor Corp. IPO Sec. Litig., 01 Civ. 6114

In re ONI Systems Corp. IPO Sec. Litig., 01 Civ. 7842

In re Onvia.com, Inc. IPO Sec. Litig., 01 Civ. 5354

In re Onyx Software Corp. IPO Sec. Litig., 01 Civ. 9560

In re OpenTV Corp. IPO Sec. Litig., 01 Civ. 7032

In re Openwave Systems, Inc. IPO Sec. Litig., 01 Civ. 9744

In re Oplink Communications, Inc. IPO Sec. Litig., 01 Civ. 9904

In re Optio Software, Inc. IPO Sec. Litig., 01 Civ. 10051

In re OraPharma, Inc. IPO Sec. Litig., 01 Civ. 9918

In re Oratec Interventions, Inc. IPO Sec. Litig., 01 Civ. 10799

In re Orchid Biosciences, Inc. IPO Sec. Litig., 01 Civ. 10575

In re Organic, Inc. IPO Sec. Litig., 01 Civ. 4778

In re OTG Software, Inc. IPO Sec. Litig., 01 Civ. 6873

In re Pac-West Telecomm, Inc. IPO Sec. Litig., 01 Civ. 11217

In re Pacific Internet Ltd. IPO Sec. Litig., 01 Civ. 11202

In re Packateer, Inc. IPO Sec. Litig., 01 Civ. 10185

In re Palm, Inc. IPO Sec. Litig., 01 Civ. 5613

In re Paradyne Networks, Inc. IPO Sec. Litig., 01 Civ. 10797

In re pcOrder, Inc. IPO Sec. Litig., 01 Civ. 10828

In re Perot Systems Corp. IPO Sec. Litig., 01 Civ. 6820

In re PlanetRx.com, Inc. IPO Sec. Litig., 01 Civ. 2621

In re Portal Software, Inc. IPO Sec. Litig., 01 Civ. 6160

In re Predictive Systems, Inc. IPO Sec. Litig., 01 Civ. 10059

In re Preview Systems, Inc. IPO Sec. Litig., 01 Civ. 7279

In re Priceline.com, Inc. IPO Sec. Litig., 01 Civ. 2261

In re Primus Knowledge Solutions, Inc. IPO Sec. Litig., 01 Civ. 11201

In re Prodigy Communications, Inc. IPO Sec. Litig., 01 Civ. 9504

In re Proton Energy Systems, Inc. IPO Sec. Litig., 01 Civ. 6082

In re PSI Technologies Holdings, Inc. IPO Sec. Litig., 01 Civ. 8401

In re PurchasePro.com, Inc. IPO Sec. Litig., 01 Civ. 10867

In re Quest Software, Inc. IPO Sec. Litig., 01 Civ. 10745

In re Quicklogic Corp. IPO Sec. Litig., 01 Civ. 9503

In re Radio One, Inc. IPO Sec. Litig., 01 Civ. 10160

In re Radio Unica Communications Corp. IPO Sec. Litig., 01 Civ. 9978

In re Radware Ltd. IPO Sec. Litig., 01 Civ. 10898

In re Ravisent Technologies, Inc. IPO Sec. Litig., 01 Civ. 10683

In re Razorfish, Inc. IPO Sec. Litig., 01 Civ. 5427

In re Red Hat, Inc. IPO Sec. Litig., 01 Civ. 2712

In re Redback Networks, Inc. IPO Sec. Litig., 01 Civ. 6090

In re Regent Communications, Inc. IPO Sec. Litig., 01 Civ. 10942

In re Register.com, Inc. IPO Sec. Litig., 01 Civ. 10120

In re Repeater Technologies, Inc. IPO Sec. Litig., 01 Civ. 10140

In re Resonate, Inc. IPO Sec. Litig., 01 Civ. 11245

In re Retek, Inc. IPO Sec. Litig., 01 Civ. 5225

In re Rhythms NetConnections, Inc. IPO Sec. Litig., 01 Civ. 6128

In re RoweCom, Inc. IPO Sec. Litig., 01 Civ. 6950

In re Saba Software, Inc. IPO Sec. Litig., 01 Civ. 10754

In re Satyam Infoway, Ltd. IPO Sec. Litig., 01 Civ. 9746

In re SciQuest.com, Inc. IPO Sec. Litig., 01 Civ. 7415

In re Selectica, Inc. IPO Sec. Litig., 01 Civ. 4941

In re Sequenom, Inc. IPO Sec. Litig., 01 Civ. 10831

In re Silicon Image, Inc. IPO Sec. Litig., 01 Civ. 10903

In re Silicon Laboratories, Inc. IPO Sec. Litig., 01 Civ. 11218

In re SilverStream Software, Inc. IPO Sec. Litig., 01 Civ. 5600

In re Sirenza Microdevices, Inc. IPO Sec. Litig., 01 Civ. 10596

In re SmartDisk Corp. IPO Sec. Litig., 01 Civ. 6870

In re SMTC Corp. IPO Sec. Litig., 01 Civ. 10838

In re SonicWALL, Inc. IPO Sec. Litig., 01 Civ. 10941

In re Sonus Networks, Inc. IPO Sec. Litig., 01 Civ. 9921

In re Spanish Broadcasting System, Inc. IPO Sec. Litig., 01 Civ. 10753

In re Stamps.com Inc. IPO Sec. Litig., 01 Civ. 4186

In re StarMedia Network, Inc. IPO Sec. Litig., 01 Civ. 6846

In re Storage Networks, Inc. IPO Sec. Litig., 01 Civ. 7181

In re Stratos Lightwave, Inc. IPO Sec. Litig., 01 Civ. 6821

In re Support.com, Inc. IPO Sec. Litig., 01 Civ. 10756

In re Switchboard, Inc. IPO Sec. Litig., 01 Civ. 10595

In re Sycamore Networks, Inc. IPO Sec. Litig., 01 Civ. 6001

In re Talarian Corp. IPO Sec. Litig., 01 Civ. 7474

In re Telaxis Communications Corp. IPO Sec. Litig., 01 Civ. 5267

In re Telecommunication Systems, Inc. IPO Sec. Litig., 01 Civ. 9500

In re TeleCorp PCS, Inc. IPO Sec. Litig., 01 Civ. 11249

In re TenFold Corp. IPO Sec. Litig., 01 Civ. 9797

In re Terra Networks, SA IPO Sec. Litig., 01 Civ. 6288

In re theGlobe.com, Inc. IPO Sec. Litig., 01 Civ. 7247

In re TheStreet.com, Inc. IPO Sec. Litig., 01 Civ. 10970

In re Tibco Software, Inc. IPO Sec. Litig., 01 Civ. 6110

In re Ticketmaster Online-Citysearch, Inc. IPO Sec. Litig., 01 Civ. 10822

In re Tickets.com, Inc. IPO Sec. Litig., 01 Civ. 6008

In re Tippingpoint Technologies, Inc. (F/k/a Netpliance) IPO Sec. Litig., 01 Civ. 10976

In re TiVo, Inc. IPO Sec. Litig., 01 Civ. 5269

In re Transmeta Corp. IPO Sec. Litig., 01 Civ. 6492

In re Triton Network Systems, Inc. IPO Sec. Litig., 01 Civ. 10115

In re Turnstone Systems, Inc. IPO Sec. Litig., 01 Civ. 9981

In re Tut Systems, Inc. IPO Sec. Litig., 01 Civ. 9563

In re UAXS Global Holdings, Inc. IPO Sec. Litig., 01 Civ. 9719

In re United Pan-Europe Communications, N.V. IPO Sec. Litig., 01 Civ. 10744

In re USInternetworking, Inc. IPO Sec. Litig., 01 Civ. 9348

In re UTStarcom, Inc. IPO Sec. Litig., 01 Civ. 9604

In re VA Linux Systems, Inc. IPO Sec. Litig., 01 Civ. 0242

In re Valicert, Inc. IPO Sec. Litig., 01 Civ. 10889

In re Valley Media, Inc. IPO Sec. Litig., 01 Civ. 9745

In re Value America, Inc. IPO Sec. Litig., 01 Civ. 5739

In re Variagenics, Inc. IPO Sec. Litig., 01 Civ. 10999

In re Ventro Corp. IPO Sec. Litig., 01 Civ. 3450

In re Verado Holdings (f/k/a Firstworld) IPO Sec. Litig., 01 Civ. 9558

In re VerticalNet, Inc. IPO Sec. Litig., 01 Civ. 5241

In re Via Net.Works, Inc. IPO Sec. Litig., 01 Civ. 9720

In re Viador, Inc. IPO Sec. Litig., 01 Civ. 10040

In re Viant Corp. IPO Sec. Litig., 01 Civ. 6403

In re Vicinity Corp. IPO Sec. Litig., 01 Civ. 6906

In re Vignette Corp. IPO Sec. Litig., 01 Civ. 9514

[1000]  In re Virage, Inc. IPO Sec. Litig., 01 Civ. 7866

[1001]  In re Virata Corp. IPO Sec. Litig., 01 Civ. 10833

[1002]  In re Vitria Technology, Inc. IPO Sec. Litig., 01 Civ. 10092

[1003]  In re Vixel Corp. IPO Sec. Litig., 01 Civ. 10053

[1004]  In re WebMD (f/k/a Healtheon) IPO Sec. Litig., 01 Civ. 6768

[1005]  In re WebMethods, Inc. IPO Sec. Litig., 01 Civ. 10830

[1006]  In re Webvan Group, Inc. IPO Sec. Litig., 01 Civ. 6365

[1007]  In re Wink Communications, Inc. IPO Sec. Litig., 01 Civ. 10638

[1008]  In re Wireless Facilities, Inc. IPO Sec. Litig., 01 Civ. 4779

[1009]  In re Women.com Networks, Inc. IPO Sec. Litig., 01 Civ. 10866

[1010]  In re World Wrestling Federation Entertainment, Inc. IPO Sec. Litig., 01 Civ. 10972

[1011]  In re XCare.net, Inc. IPO Sec. Litig., 01 Civ. 10075

[1012]  In re Xpedior, Inc. IPO Sec. Litig., 01 Civ. 10984

[1013]  In re Z-Tel Technologies, Inc. IPO Sec. Litig., 01 Civ. 5074

[1014]  In re Ziff-davis, Inc. (CNET Networks) IPO Sec. Litig., 01 Civ. 7669

[1015]  Appendix 2: Section 11

[1016]  Cases in Which the Section 11 Claims Are Dismissed:

[1017]  1. In re Agile Software Corp. IPO Sec. Litig.*fn191

[1018]  2. In re Caliper Technologies Corp. IPO Sec. Litig.

[1019]  3. In re Click Commerce Inc. IPO Sec. Litig.

[1020]  4. In re DigitalThink, Inc. IPO Sec. Litig.

[1021]  5. In re eBenX, Inc. IPO Sec. Litig.

[1022]  6. In re eGain Communications Corp. IPO Sec. Litig.

[1023]  7. In re Exfo Electro Optical Engineering, Inc. IPO Sec. Litig.

[1024]  8. In re GT Group Telecom, Inc. IPO Sec. Litig.

[1025]  9. In re MetaSolv Software, Inc. IPO Sec. Litig.

[1026]  10. In re Resonate, Inc. IPO Sec. Litig.

[1027]  Appendix 3: Section 15

[1028]  Individual Defendants Against Whom the Section 15 Claims Are Dismissed:

[1029]  1. Agile Software Corp.: Bryan T. Stoller*fn192

[1030]  2. Agile Software Corp.: Thomas P. Shanahan*fn193

[1031]  3. GT Group Telecom, Inc.: Daniel R. Milliard

[1032]  4. GT Group Telecom, Inc.: Stephen H. Shoemaker

[1033]  Appendix 4: Rule 10b-5 Claims Against Individual Defendants

[1034]  INDIVIDUAL DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE DENIED:

[1035]  A. Individual Defendants for Whom Scienter Has Been Adequately Alleged:

[1036]  1. Ask Jeeves, Inc.: Robert W. Wrubel

[1037]  2. Braun Consulting, Inc.: John C. Burke

[1038]  3. Braun Consulting, Inc.: Thomas J. Duvall

[1039]  4. Breakaway Solutions, Inc.: Keith Comerford

[1040]  5. Calico Commerce, Inc.: William B. Paseman

[1041]  6. Clarent Corp: Syaru Shirley Lin

[1042]  7. Covad Communications Group, Inc.: Robert Knowling, Jr.

[1043]  8. Covad Communications Group, Inc.: Timothy Leahy

[1044]  9. Critical Path Inc.: David C. Hayden

[1045]  10. Critical Path, Inc.: David A. Thatcher

[1046]  11. Deltathree.com, Inc.: Mark T. Hirschorn

[1047]  12. Diversa Corp.: Karen Eastham

[1048]  13. Expedia, Inc.: Gregory B. Maffei

[1049]  14. Extreme Networks, Inc.: Gordon L. Stitt

[1050]  15. Extreme Networks, Inc.: Vito E. Palermo

[1051]  16. Extreme Networks, Inc.: Peter Wolken

[1052]  17. Extreme Networks, Inc.: Charles Carinalli

[1053]  18. Extreme Networks, Inc.: Promod Haque

[1054]  19. Foundry Networks, Inc.: Bobby R. Johnson

[1055]  20. Foundry Networks, Inc.: Timothy D. Heffner

[1056]  21. Gadzoox Networks, Inc.: Dr. Alistair Black

[1057]  22. Gadzoox Networks, Inc.: Christian E. Munson

[1058]  23. Global Crossing Ltd: Gary Winnick

[1059]  24. Global Crossing Ltd: Lodwrick Cook

[1060]  25. Global Crossing Ltd: David L. Lee

[1061]  26. Global Crossing Ltd: Abbott L. Brown

[1062]  27. Global Crossing Ltd: Barry Porter

[1063]  28. Global Crossing Ltd: Hillel Weinberger

[1064]  29. Global Crossing Ltd: Jack M. Scanlon

[1065]  30. Global Crossing Ltd: Dan J. Cohrs

[1066]  31. GlobeSpan, Inc.: Armando Geday

[1067]  32. GlobeSpan, Inc.: Robert McMullen

[1068]  33. GlobeSpan, Inc.: James Coulter

[1069]  34. GlobeSpan, Inc.: Thomas Epley

[1070]  35. IMPSAT Fiber Networks, Inc.: Enrique M. Pescaroma

[1071]  36. Informatica Corp.: Guarav S. Dhillon

[1072]  37. Informatica Corp: Diaz H. Nesamoney

[1073]  38. iVillage, Inc.: Candice Carpenter

[1074]  39. JNI Corp.: Gloria Purdy

[1075]  40. MCK Communications, Inc.: Steven J. Benson A4-1

[1076]  41. MCK Communications, Inc.: Paul K. Zurlo

[1077]  42. Microtune, Inc.: Douglas J. Bartek

[1078]  43. Microtune, Inc.: Everett Rogers

[1079]  44. Net2Phone, Inc.: Clifford M. Sobel

[1080]  45. NetRatings, Inc.: David A. Norman

[1081]  46. Northpoint Communications Group, Inc.: Henry P. Huff

[1082]  47. Openwave Systems, Inc.: Alain Rossman

[1083]  48. Optio Software, Inc.: F. Barron Hughes

[1084]  49. Optio Software, Inc.: Wayne Cape

[1085]  50. Preview Systems, Inc.: Vincent Pluvinage

[1086]  51. Retek, Inc.: John Buchanan

[1087]  52. Retek, Inc.: Gregory A. Effertz

[1088]  53. Rhythms Netconnections, Inc.: Scott C. Chandler

[1089]  54. Rhythms Netconnections, Inc.: Catherine M. Hapka

[1090]  55. Rhythms Netconnections, Inc.: John L. Walecka

[1091]  56. Support.com, Inc.: Brian M. Beattie

[1092]  57. Transmeta Corp.: T. Peter Thomas

[1093]  58. Transmeta Corp.: Murray A. Goldman

[1094]  59. Transmeta Corp.: Paul M. McNulty

[1095]  60. USInternetworking, Inc.: Christopher McCleary

[1096]  61. USInternetworking, Inc.: Stephen E. McManus

[1097]  62. USInternetworking, Inc.: Andrew A. Stern

[1098]  63. Value America, Inc.: Dean M. Johnson

[1099]  64. Wink Communications, Inc.: Mary Agnes Wilderotter A4-2

[1100]  

INDIVIDUAL DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE GRANTED:

[1101]  B. Individual Defendants Not Alleged to Have Signed the Registration Statement

[1102]  1. Cobalt Networks: Gordon A. Campbell

[1103]  2. Cobalt Networks: Stephen W. Dewitt

[1104]  3. Cobalt Networks: Kenton D. Chow

[1105]  4. Commerce One, Inc.: Thomas J. Gonzalez II

[1106]  5. Covad Communications Group, Inc.: Charles McMinn

[1107]  6. Foundry Networks, Inc.: H. Earl Ferguson

[1108]  7. Global Crossing, Ltd: James C. Gorton

[1109]  8. Global Crossing, Ltd.: Rolla P. Huff

[1110]  9. iVillage, Inc.: Alison Abraham

[1111]  10. JNI Corp.: Charles McKnett

[1112]  11. JNI Corp.: Thomas K. Gregory

[1113]  12. Openwave Systems Inc.: Malcolm Bird

[1114]  13. PSI Technologies Holdings, Inc.: Helen Tiu

[1115]  14. Retek, Inc.: Gordon Masson

[1116]  15. Transmeta Corp.: Douglas Laird

[1117]  16. Transmeta Corp: James N. Chapman

[1118]  17. Webvan Group, Inc.: Robert Swan

[1119]  18. Webvan Group, Inc.: Mark Holtzman

[1120]  C. Individual Defendants Not Alleged to Have Sold (and/or Owned) Shares:

[1121]  1. Agile Software Corp: Bryan T. Stolle

[1122]  2. Agile Software Corp: Thomas P. Shanaham

[1123]  3. B2B Internet HOLDRS: Ahmass L. Fakahany

[1124]  4. B2B Internet HOLDRS: John L. Steffans

[1125]  5. B2B Internet HOLDRS: E. Stanley O'Neal

[1126]  6. B2B Internet HOLDRS: George A. Shieren

[1127]  7. Breakaway Solutions, Inc.: Christopher H. Greendale

[1128]  8. Calico Commerce, Inc.: Arthur F. Knapp

[1129]  9. Calico Commerce, Inc.: Alan P. Naumann

[1130]  10. Calico Commerce, Inc.: Bernard J. LaCroute

[1131]  11. Calico Commerce, Inc.: William D. Unger

[1132]  12. Carrier1 International SA: Mark A. Pelson

[1133]  13. Carrier1 International SA: Glenn M. Creamer

[1134]  14. Carrier1 International SA: Stig Johansson

[1135]  15. Carrier1 International SA: Joachim W. Bauer

[1136]  16. Carrier1 International SA: Victor A. Pelson

[1137]  17. Carrier1 International SA: Thomas J. Wynne

[1138]  18. Covad Communications Group, Inc: Frank Marshall

[1139]  19. Critical Path, Inc.: Douglas T. Hickey

[1140]  20. Deltathree.com, Inc.: Amos Sela

[1141]  21. Deltathree.com, Inc.: Elie Wurtman

[1142]  22. Deltathree.com, Inc.: Jacob Davidson

[1143]  23. Deltathree.com, Inc.: Itzhak Fisher,

[1144]  24. Deltathree.com, Inc.: Nir Tarlovsky

[1145]  25. Deltathree.com, Inc.: Donald R. Shassian

[1146]  26. Deltathree.com, Inc.: Jacob Z. Schuster

[1147]  27. Deltathree.com, Inc.: Avery S. Fischer

[1148]  28. Diversa Corp.: James H. Cavanaugh

[1149]  29. eToys, Inc.: Edward C. Lenk

[1150]  30. eToys, Inc: Steven J Schoch

[1151]  31. Global Crossing, Ltd.: Joseph P. Clayton

[1152]  32. Global Crossing, Ltd.: Jay R. Bloom

[1153]  33. Global Crossing, Ltd.: Dean C. Kehler

[1154]  34. Global Crossing, Ltd.: Jay R. Levine

[1155]  35. Global Crossing, Ltd.: William D. Phoenix

[1156]  36. Global Crossing, Ltd.: Bruce Raben

[1157]  37. Global Crossing, Ltd.: Michale R. Steed

[1158]  38. GT Group Telecom, Inc.: Daniel R. Milliard

[1159]  39. GT Group Telecom, Inc.: Stephen H. Shoemaker

[1160]  40. iBeam Broadcasting Corp.: Peter Desnoes

[1161]  41. iBeam Broadcasting Corp.: Chris Dier

[1162]  42. Immerson Corp.: Victor Viegas

[1163]  43. IMPSAT Fiber Networks, Inc.: Guillermo Joffe

[1164]  44. IMPSAT Fiber Networks, Inc.: Ricardo A. Verdauger

[1165]  45. InforMax, Inc.: Alex Titomirov

[1166]  46. Internet Initiative Japan: Koichi Suzuki

[1167]  47. Internet Initiative Japan: Yasuhiro Nashi

[1168]  48. Internet Infrastructure HOLDRS: Ahmass L. Fakahany

[1169]  49. Internet Infrastructure HOLDRS: John L. Steffens

[1170]  50. iPrint Technology, Inc. (f/k/a iPrint.com) Richard P. Farros

[1171]  51. iPrint Technology, Inc. (f/k/a iPrint.com): James McCormick

[1172]  52. iVillage, Inc.: Douglas McCormick

[1173]  53. iVillage, Inc.: Sanjay Muraldihar

[1174]  54. iVillage, Inc.: Craig T. Monaghan

[1175]  55. iXL Enterprises, Inc.: U. Bertram Ellis, Jr.

[1176]  56. iXL Enterprises, Inc.: M. Wayne Boylston

[1177]  57. Jazztel P.L.C.: Antonio Carro

[1178]  58. Jazztel P.L.C.: Miguel Salis

[1179]  59. Jazztel P.L.C.: Antonio Canton

[1180]  60. JNI Corp: Terry M. Flanagan

[1181]  61. Korea Thrunet Co., Ltd.: Yong-The Lee

[1182]  62. Korea Thrunet Co., Ltd.: Jong-Kil Kim

[1183]  63. Korea Thrunet Co., Ltd.: Boo-Woong Yoo

[1184]  64. Maxygen, Inc.: Russell J. Howard

[1185]  65. Maxygen, Inc.: Simba Gill

[1186]  66. Net2000 Communications, Inc.: Peter B. Callowhill

[1187]  67. Net2000 Communications, Inc.: Clayton A. Thomas, Jr.

[1188]  68. Net2000 Communications, Inc.: Clyde Heintzelman

[1189]  69. Net2000 Communications, Inc.: Donald F. Clarke

[1190]  70. Net2000 Communications, Inc.: Eric Geis

[1191]  71. Net2000 Communications, Inc.: Reid Miles

[1192]  72. Netcentives, Inc.: West Shell III

[1193]  73. Netcentives, Inc.: John F. Longinotti

[1194]  74. Network Plus Corp.: George Alex

[1195]  75. OmniSky, Corp.: Patrick S. McVeigh

[1196]  76. OmniSky, Corp.: Lawrence Winkler

[1197]  77. OmniSky, Corp.: Michael Malesardi

[1198]  78. Onyx Software Corp.: Sarwart H. Ramdan

[1199]  79. Onyx Software Corp.: Brent R. Frei

[1200]  80. Pacific Internet Ltd.: Chiam Heng Huat

[1201]  81. Pacific Internet Ltd.: Nicholas Lee Meng Tuck

[1202]  82. Pacific Internet Ltd.: Chan Wing Leong

[1203]  83. PlanetRx.com, Inc.: William Razzouk

[1204]  84. PlanetRx.com, Inc.: David Beirne

[1205]  85. PlanetRx.com, Inc.: Christos Cotsakos

[1206]  86. PlanetRx.com, Inc.: Michael Moritz

[1207]  87. PlanetRx.com, Inc.: Steve Valenzuela

[1208]  88. Preview Systems, Inc.: G. Bradford Solso

[1209]  89. PSI Technologies Holdings, Inc.: Thelma Oribello

[1210]  90. PSI Technologies Holdings, Inc.: Arthur Young

[1211]  91. PSI Technologies Holdings, Inc.: Jose A. Concepcion III

[1212]  92. Razorfish, Inc.: Jeffrey Dachis

[1213]  93. Razorfish, Inc.: Per I. G. Bystedt

[1214]  94. Razorfish, Inc.: Jonas Svensson

[1215]  95. Razorfish, Inc.: Craig Kanarick

[1216]  96. Razorfish, Inc.: Kjell Nordstrom

[1217]  97. Rhythms Netconnectins, Inc.: Kevin R. Compton

[1218]  98. Rhythms Netconnectins, Inc.: Keith B. Geeslin

[1219]  99. Rhythms Netconnectins, Inc.: Ken L. Harrison

[1220]  100. Rhythms Netconnectins, Inc.: Susan Mayer

[1221]  101. Rhythms Netconnectins, Inc.: William R. Stensrud

[1222]  102. Rhythms Netconnectins, Inc.: Edward J. Zander

[1223]  103. Saba Software, Inc.: Terry Carlitz

[1224]  104. Spanish Broadcasting System, Inc.: Raul Alarcon, Sr.

[1225]  105. Spanish Broadcasting System, Inc.: Raul Alarcon, Jr.

[1226]  106. Spanish Broadcasting System, Inc.: Joseph A. Garcia

[1227]  107. Stratos Lightwave, Inc.: William J. McGinley

[1228]  108. Transmeta Corp.: Larry R. Carter

[1229]  109. Transmeta Corp.: R. Hugh Barnes

[1230]  110. Transmeta Corp.: Mark K. Allen

[1231]  111. Transmeta Corp.: Merle A. McClendon

[1232]  112. Valicert, Inc.: Timothy Conley

[1233]  113. Valicert, Inc.: Joseph Amram

[1234]  114. Valley Media, Inc.: Barnet J. Cohen

[1235]  115. Valley Media, Inc.: Robert R. Cain,

[1236]  116. Valley Media, Inc.: J. Randolph Cerf

[1237]  117. Value America, Inc: Rex Scatena

[1238]  118. Value America, Inc: Thomas Morgan

[1239]  119. Verado Holdings, Inc. (f/k/a Firstworld): Paul C. Adams

[1240]  120. Verado Holdings, Inc. (f/k/a Firstworld): Sheldon S. Ohringer

[1241]  121. Verado Holdings, Inc. (f/k/a Firstworld): Jeffrey L. Dykes

[1242]  122. Virage, Inc.: Alfred J. Castino

[1243]  123. Virage, Inc.: Paul G. Lego

[1244]  124. Webvan Group, Inc.: Louis H. Borders

[1245]  125. Webvan Group, Inc.: George T. Shaheen

[1246]  126. Webvan Group, Inc.: Kevin R. Czinger

[1247]  127. Women.com Networks, Inc.: Marlene McDaniel

[1248]  128. World Wrestling Federation Entertainment, Inc.: Vincent K. McMahon

[1249]  129. World Wrestling Federation Entertainment, Inc.: Linda E. McMahon

[1250]  130. World Wrestling Federation Entertainment, Inc.: August J. Liguori

[1251]  131. XPedior, Inc.: Steven M. Isaacson

[1252]  132. XPedior, Inc.: James W. Crownover

[1253]  133. Xpedior, Inc.: David N. Campbell

[1254]  

D. Individual Defendants Whose Stock Sales Are Not Alleged with Sufficient Particularity

[1255]  1. Carrier1 International SA: Jonathan E. Dick

[1256]  2. Expedia, Inc.: Richard N. Barton

[1257]  3. Expedia, Inc.: Gregory S. Stanger

[1258]  4. Globespan, Inc.: John Marren

[1259]  5. MedicaLogic, Inc.: Frank J. Spina

[1260]  6. Network Plus Corp.: Robert T. Hale, Jr.

[1261]  7. Network Plus Corp.: James J. Crowley

[1262]  8. Transmeta Corp: David R. Ditzel

[1263]  9. Value America Inc.: Craig A. Winn

[1264]  10. Value America Inc.: Glenda M. Dorchak

[1265]  11. Value America Inc.: Sandra T. Watson

[1266]  12. Women.com Networks, Inc.: Michael Perry

[1267]  

E. Individual Defendants Alleged to Have Sold Less Than Ten Percent of Their Total Holdings

[1268]  1. Braun Consulting, Inc.: Steven J. Braun

[1269]  2. Breakaway Solutions, Inc.: Gordon Brooks

[1270]  3. Diversa Corp.: Jay M. Short

[1271]  4. Gadzoox Networks, Inc.: Bill Sickler

[1272]  5. GlobeSpan, Inc.: Keith Geeslin

[1273]  6. iVillage, Inc.: Nancy Evans A4-6

[1274]  7. JNI, Corp.: Eric P. Wenaas

[1275]  8. MedicaLogic, Inc.: Mark K. Leavitt

[1276]  9. NetRatings, Inc.: David J. Toth

[1277]  10. Net2000 Communications, Inc.: Mitchell Reese

[1278]  11. Network Plus Corp.: Robert T. Hale

[1279]  12. Northpoint Communications Group, Inc.: Michael W. Malaga

[1280]  13. Saba Software, Inc: Bobby Yazdani

[1281]  14. Support.com, Inc.: Radha Basu

[1282]  15. Transmeta Corp.: William P. Tai

[1283]  16. Wink Communications, Inc.: Brian P. Dougherty A4-7

[1284]  Appendix 5: Rule 10b-5 Claims Against Issuers

[1285]  A. Issuers Not Named as Defendants

[1286]  1. AirGate, PCS

[1287]  2. Aspect Medical Systems, Inc.

[1288]  3. B2B Internet HOLDRS

[1289]  4. CommTouch Software, Inc.

[1290]  5. DrKoop.com, Inc.

[1291]  6. Internet Infrastructure HOLDRS

[1292]  7. LookSmart, Ltd.

[1293]  8. Numerical Technologies, Inc.

[1294]  ISSUER DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE DENIED:

[1295]  B. Issuer Defendants for Whom Scienter Has Been Adequately Alleged:

[1296]  1. 724 Solutions, Inc.

[1297]  2. Aether Systems, Inc.

[1298]  3. Agile Software Corp.

[1299]  4. Akamai Technologies, Inc.

[1300]  5. Ask Jeeves, Inc.

[1301]  6. Ashford.com, Inc.

[1302]  7. Autobytel.com, Inc.

[1303]  8. Avanex Corp.

[1304]  9. Backweb Technologies, Ltd.

[1305]  10. Be Free, Inc.

[1306]  11. Bookham Technology PLC

[1307]  12. Bottomline Technologies, Inc.

[1308]  13. Braun Consulting, Inc.

[1309]  14. Breakaway Solutions, Inc.

[1310]  15. Bsquare Corp.

[1311]  16. Buy.com

[1312]  17. Cacheflow, Inc.

[1313]  18. Caldera Systems, Inc.

[1314]  19. Calico Commerce, Inc.

[1315]  20. Capstone Turbine Corp.

[1316]  21. Centra Software, Inc.

[1317]  22. Chartered Semiconductor Manufacturing, Ltd.

[1318]  23. Chinadotcom Corp.

[1319]  24. Choice One Communications, Inc.

[1320]  25. Chordiant Software, Inc.

[1321]  26. Clarent Corp.

[1322]  27. Cobalt Networks, Inc.

[1323]  28. Commerce One, Inc.

[1324]  29. Concur Technologies, Inc.

[1325]  30. Copper Mountain Networks, Inc.

[1326]  31. Covad Communications Group, Inc.

[1327]  32. Critical Path, Inc.

[1328]  33. CyberSource Corporation

[1329]  34. Daleen Technologies, Inc.

[1330]  35. Delano Technology Corp.

[1331]  36. Deltathree.com

[1332]  37. Dice, Inc. (Earthweb)

[1333]  38. Digital Impact, Inc.

[1334]  39. Digital Insight Corp.

[1335]  40. Digital Island, Inc.

[1336]  41. Digital River, Inc.

[1337]  42. DigitalThink, Inc.

[1338]  43. DoubleClick, Inc.

[1339]  44. Drugstore.com, Inc.

[1340]  45. El Sitio, Inc.

[1341]  46. E.piphany, Inc.

[1342]  47. eBenX, Inc.

[1343]  48. eGain Communications Corp.

[1344]  49. E-LOAN, Inc.

[1345]  50. Eloquent, Inc.

[1346]  51. Engage Technologies, Inc.

[1347]  52. eToys, Inc.

[1348]  53. Evolve Software, Inc.

[1349]  54. Exchange Applications, Inc.

[1350]  55. Exfo Electro Optical Engineering, Inc.

[1351]  56. Expedia, Inc.

[1352]  57. Extreme Networks, Inc.

[1353]  58. Fatbrain.com, Inc.

[1354]  59. F5 Networks, Inc.

[1355]  60. Finisar Corp.

[1356]  61. FirePond, Inc.

[1357]  62. FreeMarkets, Inc.

[1358]  63. Gadzoox Networks, Inc.

[1359]  64. Global Crossing Ltd.

[1360]  65. GlobeSpan, Inc.

[1361]  66. GoTo.com

[1362]  67. GT Group Telecom, Inc.

[1363]  68. Handspring, Inc.

[1364]  69. Hoover's Inc.

[1365]  70. iBasis, Inc.

[1366]  71. iManage, Inc.

[1367]  72. Immersion Corp.

[1368]  73. Informatica Corp.

[1369]  74. InterNAP Network Services Corp.

[1370]  75. Internet Capital Group, Inc.

[1371]  76. Intersil Holding Corp.

[1372]  77. InterTrust Technologies Corp.

[1373]  78. Interwave International Ltd.

[1374]  79. Interwoven, Inc.

[1375]  80. Intraware, Inc.

[1376]  81. iPrint Technologies, Inc.

[1377]  82. iTXC Corp.

[1378]  83. iVillage, Inc.

[1379]  84. iXL Enterprises, Inc.

[1380]  85. JNI Corp.

[1381]  86. Juniper Network, Inc.

[1382]  87. Kana Software, Inc.

[1383]  88. Keynote Systems, Inc.

[1384]  89. Liberate Technologies, Inc.

[1385]  90. Lionbridge Technologies, Inc.

[1386]  91. Liquid Audio, Inc.

[1387]  92. Loudeye Technologies, Inc.

[1388]  93. Manufacturers Services Ltd.

[1389]  94. MarketWatch.com, Inc.

[1390]  95. Marvell Technologies

[1391]  96. Maxygen, Inc.

[1392]  97. MCK Communications, Inc.

[1393]  98. Mediaplex, Inc.

[1394]  99. MedicaLogic, Inc.

[1395]  100. Metawave Communications Corp.

[1396]  101. Microtune, Inc.

[1397]  102. Modem Media, Inc.

[1398]  103. MP3.com, Inc.

[1399]  104. Multex.com, Inc.

[1400]  105. NaviSite, Inc.

[1401]  106. Neoforma, Inc.

[1402]  107. Net Perceptions, Inc.

[1403]  108. Net2000 Communications, Inc.

[1404]  109. Net2Phone, Inc.

[1405]  110. Netcentives

[1406]  111. Netro Corp.*fn194

[1407]  112. NETsilicon, Inc.

[1408]  113. Network Engines, Inc.

[1409]  114. Network Plus Corp.

[1410]  115. Netzero, Inc.

[1411]  116. New Focus, Inc.

[1412]  117. NextCard, Inc.

[1413]  118. Next Level Communications, Inc.

[1414]  119. Niku Corporation

[1415]  120. Nuance Communications, Inc.

[1416]  121. OmniSky Corp.

[1417]  122. ONI Systems Corp.

[1418]  123. Onvia.com, Inc.

[1419]  124. Onyx Software Corp.

[1420]  125. Openwave Systems, Inc.

[1421]  126. OTG Software, Inc.

[1422]  127. Pacific Internet Ltd.

[1423]  128. Packeteer, Inc.

[1424]  129. Palm, Inc.

[1425]  130. Paradyne Networks, Inc.

[1426]  131. pcOrder, Inc.

[1427]  132. PlanetRx.com, Inc.

[1428]  133. Portal Software, Inc.

[1429]  134. Predictive Systems, Inc.

[1430]  135. Priceline.com, Inc.

[1431]  136. Primus Knowledge Solutions, Inc.

[1432]  137. Prodigy Communications, Inc.

[1433]  138. PurchasePro.com, Inc.

[1434]  139. Quest Software, Inc.

[1435]  140. Quicklogic Corp.

[1436]  141. Radio One, Inc.

[1437]  142. Radware Ltd.

[1438]  143. Razorfish, Inc.

[1439]  144. Red Hat, Inc.

[1440]  145. Redback Networks, Inc.

[1441]  146. Regent Communications, Inc.

[1442]  147. Register.com, Inc.

[1443]  148. Retek, Inc.

[1444]  149. Rhythms NetConnections, Inc.

[1445]  150. RoweCom, Inc.

[1446]  151. Satyam Infoway, Ltd.

[1447]  152. ScieQuest.com, Inc.

[1448]  153. Selectica, Inc.

[1449]  154. Silicon Image, Inc.

[1450]  155. Silicon Laboratories, Inc.

[1451]  156. SilverStream Software, Inc.

[1452]  157. SmartDisk Corp.

[1453]  158. SMTC Corp. 159. SonicWALL, Inc.

[1454]  160. Spanish Broadcasting System, Inc.

[1455]  161. Stamps.com

[1456]  162. StarMedia Networks, Inc.

[1457]  163. StorageNetworks, Inc.

[1458]  164. Sycamore Networks, Inc.

[1459]  165. TeleCorp PCS, Inc.

[1460]  166. Terra Networks, SA

[1461]  167. theGlobe.com, Inc.

[1462]  168. Tibco Software, Inc.

[1463]  169. Turnstone Systems, Inc.

[1464]  170. Tut Systems, Inc.

[1465]  171. UAXS Global Holdings, Inc.

[1466]  172. United Pan-Europe Communications, N.V.

[1467]  173. USInternetworking, Inc.

[1468]  174. VA Linux Systems

[1469]  175. Ventro Corp.

[1470]  176. VerticalNet, Inc.

[1471]  177. Viant Corp.

[1472]  178. Vignette Corp.

[1473]  179. Virata Corp.

[1474]  180. Vitria Technology, Inc.

[1475]  181. WebMD (f/k/a Healtheon)

[1476]  182. WebMethods, Inc.

[1477]  183. Webvan Group, Inc.

[1478]  184. Women.com Networks, Inc.

[1479]  185. Z-Tel Technologies, Inc.

[1480]  ISSUER DEFENDANTS WHOSE MOTIONS TO DISMISS 10B-5 CLAIMS ARE GRANTED:

[1481]  C. Issuers Against Whom There Are No Allegations of Motive

[1482]  1. Aclara Biosciences, Inc.

[1483]  2. Agency.com, Ltd.

[1484]  3. Agilent Technologies Inc.

[1485]  4. Airnet Communications Corp.

[1486]  5. Airspan Networks, Inc.

[1487]  6. Alamosa PCS Holdings

[1488]  7. Alloy Online, Inc.

[1489]  8. Apropos Technology, Inc.

[1490]  9. Audible, Inc.

[1491]  10. AvantGo, Inc.

[1492]  11. Avenue A, Inc.

[1493]  12. Avici Systems, Inc.

[1494]  13. Blue Martini Software, Inc.

[1495]  14. Brocade Communications Systems, Inc.

[1496]  15. Caliper Technologies Corp.

[1497]  16. Carrier1 International SA

[1498]  17. Click Commerce Inc.

[1499]  18. Corio, Inc.

[1500]  19. Corvis Corp.

[1501]  20. CoSine Communications, Inc.

[1502]  21. Data Return Corp.

[1503]  22. deCode Genetics, Inc.

[1504]  23. Digimarc Corp.

[1505]  24. Digitas, Inc.

[1506]  25. Diversa Corp.

[1507]  26. Equinix, Inc.

[1508]  27. Extensity, Inc.

[1509]  28. Fairmarket, Inc.

[1510]  29. Focal Communication Corp.

[1511]  30. Foundry Networks, Inc.

[1512]  31. GRIC Communications, Inc.

[1513]  32. High Speed Access Corp.

[1514]  33. IMPSAT Fiber Networks, Inc.

[1515]  34. InforMax, Inc.

[1516]  35. Inforte Corp.

[1517]  36. InsWeb Corp.

[1518]  37. Integrated Information Systems, Inc.

[1519]  38. Internet Initiative Japan

[1520]  39. Jazztel P.L.C.

[1521]  40. Korea Thrunet Co., Ltd.

[1522]  41. Lante Corporation, Inc.

[1523]  42. Latitude Communications, Inc.

[1524]  43. Marimba, Inc.

[1525]  44. Martha Stewart Living Omnimedia, Inc.

[1526]  45. MatrixOne, Inc.

[1527]  46. McData Corp.

[1528]  47. NetRatings, Inc.

[1529]  48. NetSolve, Inc.

[1530]  49. Nextel Partners, Inc.

[1531]  50. NorthPoint Communications Group, Inc.

[1532]  51. OmniVision Technologies, Inc.

[1533]  52. On Semiconductor Corp.

[1534]  53. Oplink Communications, Inc.

[1535]  54. Optio Software, Inc.

[1536]  55. OraPharma, Inc.

[1537]  56. Oratec Interventions, Inc.

[1538]  57. Orchid Biosciences, Inc.

[1539]  58. Organic, Inc.

[1540]  59. Pac-West Telecomm, Inc.

[1541]  60. Perot Systems Corp.

[1542]  61. Preview Systems, Inc.

[1543]  62. Proton Energy Systems, Inc.

[1544]  63. PSI Technologies Holdings, Inc.

[1545]  64. Radio Unica Communicatins Corp.

[1546]  65. Repeater Technologies, Inc.

[1547]  66. Resonate, Inc.

[1548]  67. Saba Software, Inc.

[1549]  68. Sequenom, Inc.

[1550]  69. Sirenza Microdevices, Inc.

[1551]  70. Sonus Networks, Inc.

[1552]  71. Stratos Lightwave, Inc.

[1553]  72. Support.com, Inc.

[1554]  73. Switchboard, Inc.

[1555]  74. Talarian Corp.

[1556]  75. TenFold Corp.

[1557]  76. TheStreet.com, Inc.

[1558]  77. Ticketmaster Online-Citysearch, Inc.

[1559]  78. Tippingpoint Technologies, Inc.

[1560]  79. TiVo, Inc.

[1561]  80. Transmeta Corp.

[1562]  81. Triton Network Systems, Inc.

[1563]  82. UTStarcom, Inc.

[1564]  83. Valicert, Inc.

[1565]  84. Valley Media, Inc.

[1566]  85. Value America, Inc.

[1567]  86. Variagencics, Inc.

[1568]  87. Verado Holdings Inc.

[1569]  88. Viador, Inc.

[1570]  89. Virage, Inc.

[1571]  90. Vixel Corp.

[1572]  91. Wink Communications, Inc.

[1573]  92. World Wrestling Federation Entertainment, Inc.

[1574]  93. Xcare.net, Inc.

[1575]  

D. Issuers Whose Acquisitions Are Not Alleged with Sufficient Particularity

[1576]  1. Antigenics, Inc.

[1577]  2. Ariba, Inc.

[1578]  3. AsiaInfo Holdings, Inc.

[1579]  4. AutoWeb.com, Inc.

[1580]  5. FlashNet Communications, Inc.

[1581]  6. Gigamedia Ltd.

[1582]  7. iBeam Broadcasting Corp.

[1583]  8. Inrange Technologies Corp.

[1584]  9. Integrated Telecom Express, Inc.

[1585]  10. Lexent, Inc.

[1586]  11. McAfee.com Corp.

[1587]  12. MetaSolv Software, Inc.

[1588]  13. OpenTV Corp.

[1589]  14. Ravisent Technologies, Inc.

[1590]  15. Telecommunication Systems, Inc.

[1591]  16. Tickets.com, Inc.

[1592]  17. Via Net.Works, Inc.

[1593]  18. Vicinity Corp.

[1594]  19. Wireless Facilities, Inc.

[1595]  20. XPedior, Inc.

[1596]  21. Ziff-Davis, Inc. (CNET Networks)

[1597]  

E. Issuer Defendants Alleged to Have Made Acquisitions After December 31, 2001

[1598]  1. Accelerated Networks, Inc.

[1599]  2. Telaxis Communications Corp.

[1600]  Appendix 6: Section 20

[1601]  Individual Defendants Against Whom the Section 20 Claims Are Dismissed:

[1602]  1. Carrier1 International SA: Glenn M. Creamer

[1603]  2. Carrier1 International SA: Stig Johansson

[1604]  3. Carrier1 International SA: Joachim W. Bauer

[1605]  4. Carrier1 International SA: Victor A. Pelson

[1606]  5. Carrier1 International SA: Mark A. Pelson

[1607]  6. Carrier1 International SA: Thomas J. Wynne

[1608]  7. Carrier1 International SA: Jonathan E. Dick

[1609]  8. Diversa Corp.: Karen Eastham

[1610]  9. Diversa Corp.: James H. Cavanaugh

[1611]  10. Diversa Corp.: Jay M. Short

[1612]  11. Foundry Networks, Inc.: H. Earl Ferguson

[1613]  12. Foundry Networks, Inc.: Bobby R. Johnson

[1614]  13. Foundry Networks, Inc.: Timothy D. Heffner

[1615]  14. iBeam Broadcasting Corp.: Peter Desnoes

[1616]  15. iBeam Broadcasting Corp.: Chris Dier

[1617]  16. IMPSAT Fiber Networks, Inc.: Enrique M. Pescaroma

[1618]  17. IMPSAT Fiber Networks, Inc.: Ricardo A. Verdaguer

[1619]  18. IMPSAT Fiber Networks, Inc.: Guillermo Joffe

[1620]  19. InforMax, Inc.: Alex Titomirov

[1621]  20. Internet Initiative Japan: Koichi Suzuku

[1622]  21. Internet Initiative Japan: Yasuhiro Nashi

[1623]  22. Jazztel P.L.C.: Antonio Carro

[1624]  23. Jazztel P.L.C.: Miguel Salis

[1625]  24. Jazztel P.L.C.: Antonio Canton

[1626]  25. Korea Thrunet Co., Ltd: Yong-The Lee

[1627]  26. Korea Thrunet Co., Ltd: Jong-Kil Kim

[1628]  27. Korea Thrunet Co., Ltd: Boo-Woong Yoo

[1629]  28. NetRatings, Inc.: David A. Norman

[1630]  29. NetRatings, Inc.: David J. Toth

[1631]  30. Northpoint Communications Group, Inc.: Henry P. Huff

[1632]  31. Northpoint Communications Group, Inc.: Michael W. Malaga

[1633]  32. Optio Software, Inc.: F. Barron Hughes

[1634]  33. Optio Software, Inc.: Wayne Cape

[1635]  34. Preview Systems, Inc.: Vincent Pluvinage

[1636]  35. Preview Systems, Inc.: G. Bradford Solso

[1637]  36. PSI Technologies Holdings, Inc.: Arthur Young

[1638]  37. PSI Technologies Holdings, Inc.: Jose A. Concepcion, III

[1639]  38. PSI Technologies Holdings, Inc.: Helen Tiu

[1640]  39. PSI Technologies Holdings, Inc.: Thelma Oribello

[1641]  40. Saba Software, Inc.: Bobby Yazdani

[1642]  41. Saba Software, Inc.: Terry Carlitz

[1643]  42. Stratos Lightwave, Inc.: William J. McGinley

[1644]  43. Support.com, Inc.: Brian M. Beattie A6-1

[1645]  44. Support.com, Inc.: Radha R. Basu

[1646]  45. Transmeta Corp.: T. Peter Thomas

[1647]  46. Transmeta Corp.: Murray A. Goldman

[1648]  47. Transmeta Corp.: William P. Tai

[1649]  48. Transmeta Corp.: Douglas Laird

[1650]  49. Transmeta Corp.: James N. Chapman

[1651]  50. Transmeta Corp.: David R. Ditzel

[1652]  51. Transmeta Corp.: R. Hugh Barnes

[1653]  52. Transmeta Corp.: Paul M. McNulty

[1654]  53. Transmeta Corp.: Mark K. Allen

[1655]  54. Transmeta Corp.: Merle A. McClendon

[1656]  55. Transmeta Corp.: Larry R. Carter

[1657]  56. Valicert, Inc.: Joseph Amram

[1658]  57. Valicert, Inc.: Timothy Conley

[1659]  58. Valley Media, Inc.: Barnet J. Cohen

[1660]  59. Valley Media, Inc.: Robert R. Cain

[1661]  60. Valley Media, Inc.: J. Randoph Cerf

[1662]  61. Value America, Inc.: Dean M. Johnson

[1663]  62. Value America, Inc.: Craig A. Winn

[1664]  63. Value America, Inc.: Rex Scatena

[1665]  64. Value America, Inc.: Glenda M. Dorchak

[1666]  65. Value America, Inc.: Sandra T. Watson

[1667]  66. Value America, Inc.: Thomas Morgan

[1668]  67. Verado Holdings, Inc. (f/k/a Firstworld): Sheldon S. Ohringer

[1669]  68. Verado Holdings, Inc. (f/k/a Firstworld): Jeffrey L. Dykes

[1670]  69. Verado Holdings, Inc. (f/k/a Firstworld): Paul C. Adams

[1671]  70. Virage, Inc.: Alfred J. Castino

[1672]  71. Virage, Inc.: Paul G. Lego

[1673]  72. Wink Communications, Inc.: Mary Agnes Wilderotter

[1674]  73. Wink Communications, Inc.: Brian P. Dougherty

[1675]  74. World Wrestling Federation Entertainment, Inc.: Vincent K. McMahon

[1676]  75. World Wrestling Federation Entertainment, Inc.: Linda E. McMahon

[1677]  76. World Wrestling Federation Entertainment, Inc.: August J. Liguori

[1678]  77. XPedior, Inc.: Steven M. Isaacson

[1679]  78. XPedior, Inc.: James W. Crownover

[1680]  79. Xpedior, Inc.: David N. Campbell A6-2


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