United States District Court, S.D. New York
January 6, 2004.
IN RE WORLDCOM, INC. SECURITIES LITIGATION, This Document Relates to: 02 Civ. 3288 (DLC); IN RE PAINE WEBBER GOALS SECURITIES LITIGATION
The opinion of the court was delivered by: DENISE COTE, District Judge
OPINION & ORDER
This Opinion addresses a motion to dismiss claims brought in one of the
many actions arising from the collapse of WorldCom, Inc. ("WorldCom"). On
June 25, 2002, WorldCom made the first of several announcements that it
would restate publicly filed financial reports; since then, WorldCom has
admitted that its financial reports filed with the SEC from 1999 through
the first quarter of 2002 were overstated by approximately $9 billion. A
host of lawsuits have been filed alleging claims in connection with
WorldCom's collapse, and have been assigned to this Court by the Judicial
Panel on Multi-District Litigation ("MDL Panel").
Defendant UBS AG ("UBS") has moved to dismiss the Consolidated Amended
Class Action Complaint ("Complaint") filed on behalf of purchasers of 12%
GOALs() securities issued by UBS (the "GOALs"). The GOALs are notes that
referred to the performance of the stock of WorldCom, and this lawsuit
has been consolidated with the securities litigation arising from the
collapse of WorldCom (the "Securities Litigation").
This motion raises the issue of whether the accurate description of
historical prices for a company's stock can support a claim for a
violation of Section 11 of the Securities Act of 1933, when those prices
were artificially inflated through another party's fraud. Finding that an
accurate description of stock prices cannot support such a claim, the
motion to dismiss brought by UBS is granted.
The initial class action complaint in the GOALs litigation, Tuttelman
v. Ebbers, 03 Civ. 1052, was filed on February 14, 2003, against former
WorldCom officers and directors. It pleaded violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") in
connection with the GOALs.
The GOALs are notes issued by UBS that paid an annual interest rate of
12% over two years, payable semi-annually. The GOALs matured on January
24, 2003. The amount of the investor's
principal to be repaid at maturity depended on the performance of
WorldCom common stock during the term of the notes. In brief, if the
price of WorldCom common stock rose, investors would be repaid their full
principal in cash at maturity; if it fell below certain trigger points,
they would be repaid their principal in a pre-set number of WorldCom
shares. The GOALs were listed on the American Stock Exchange and traded
in the secondary market.
On March 18, a second class action, Sky v. Ebbers, 03 Civ. 1897, was
filed in connection with the GOALs. The Sky complaint named former
officers and directors of WorldCom and included UBS as a defendant,
alleging that UBS had violated Section 11 of the Securities Act of 1933
("Securities Act"). An Order of August 8 consolidated the two actions as
the In re Paine Webber GOALs Securities Litigation ("GOALs Litigation")
and consolidated the the GOALs Litigation with the Securities Litigation
for pretrial purposes.
On August 22, the Complaint for the GOALs Litigation was served. The
Complaint names former officers and directors of WorldCom and Worldcom's
former outside auditor, Arthur Andersen LLP, as defendants, and alleges
that they violated the Exchange Act. It also names UBS as a defendant.
The Complaint alleges that UBS violated Section 11 of the Securities Act
based on the recitation of the historical prices for WorldCom's common
stock contained in the Prospectus Supplement of January 17, 2002. The
chief allegations in the Complaint relevant to UBS and to this motion to
dismiss include the following.
UBS issued $19.5 million of GOALs pursuant to a Registration Statement
and Prospectus dated May 17, 2001, and a Prospectus Supplement of January
17, 2002 (collectively "Prospectus"). UBS received the balance of the
proceeds from the offering after an underwriting discount was subtracted.
The class period was defined as beginning on January 17, 2002, the date
of the Prospectus Supplement for the GOALs, through and including June
25, 2002, the date on which WorldCom first announced that it would
undertake a massive restatement of its financial statements.
The Prospectus Supplement, which is incorporated by reference in the
Complaint, listed historical stock price information for WorldCom,
including its common stock closing prices for each quarter for the years
1998 through 2001, and as of January 17, 2002, under the heading
"Historical Performance of WorldCom Shares." It advised that it had
obtained the trading price information "from Bloomberg L.P., without
independent verification," and warned that "YOU SHOULD NOT TAKE THE
HISTORICAL PRICES OF WORLDCOM SHARES AS AN INDICATION OF FUTURE
The Complaint alleges that
The trading prices of WorldCom's stock listed in the
Prospectus Supplement were artificially inflated as a
result of the wrongdoing of the non-UBS defendants,
and were therefore materially false and misleading. .
. . The value of the GOALs(), which was based on
WorldCom's common stock prices, declined substantially
during the Class Period as a result of UBS's
violations of the securities laws.
The Prospectus Supplement also informed investors that UBS did not
"know whether WorldCom, Inc. has disclosed all events occurring before
the date of this prospectus supplement including events that
would affect the accuracy or completeness of" WorldCom's public filings,
or "the market price of WorldCom Shares, and therefore, the exchange rate
the calculation agent uses to determine the number of WorldCom shares you
will receive. . . ." It advised that investors "SHOULD UNDERTAKE SUCH
INDEPENDENT INVESTIGATION OF WORLDCOM, INC. AS IN YOUR JUDGMENT IS
APPROPRIATE TO MAKE AN INFORMED DECISION WITH RESPECT TO AN INVESTMENT IN
GOALS()." It gave directions on how to locate WorldCom's public filings.
It represented that it had "not participated in the preparation of any"
of WorldCom's public filings or made any "`due diligence' investigation
or any inquiry of WorldCom, Inc. in connection with the offering of
GOALs," and did "not make any representation that the publicly available
documents or any other publicly available information about WorldCom,
Inc. are accurate or complete."
The Federal Rules of Civil Procedure require complaints to contain "a
short and plain statement of the claim showing that the pleader is
entitled to relief." Rule 8(a)(2), Fed.R.Civ.P. Pleadings are to give
"fair notice" of a claim in order to enable the opposing party to answer
and prepare for trial, and to identify the nature of the case. Simmons
v. Abruzzo, 49 F.3d 83, 86 (2d Cir. 1995); Salahuddin v. Cuomo,
861 F.2d 40, 42 (2d Cir.
1988). "Rule 8(a)'s simplified pleading standard applies to all civil
actions, with limited exceptions." Swierkiewicz v. Sorema, N.A.,
534 U.S. 506, 513 (2002).
To dismiss an action pursuant to Rule 12(b)(6), a court must determine
that "it appears beyond doubt, even when the complaint is liberally
construed, that the plaintiff can prove no set of facts which would
entitle him to relief." Jaghory v. New York State Dep't of Educ.,
131 F.3d 326, 329 (2d Cir. 1997) (citations omitted). In construing the
complaint, the court must "accept all factual allegations in the
complaint as true and draw inferences from those allegations in the light
most favorable to the plaintiff." Id. "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." Swierkiewicz, 534 U.S.
at 514 (citation omitted).
Although the court's focus should be on the pleadings, it may also
any written instrument attached to [the complaint] as
an exhibit or any statements or documents incorporated
in it by reference, as well as public disclosure
documents required by law to be, and that have been,
filed with the SEC, and documents that the plaintiffs
either possessed or knew about and upon which they
relied in bringing the suit.
Rothman v. Gregor, 220 F.3d 81
, 88 (2d Cir. 2000) (citations omitted);
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42
, 47-48 (2d Cir.
1991). The court need not credit general conclusory allegations that "are
belied by more specific
allegations of the complaint." Hirsch v. Arthur Andersen & Co.,
72 F.3d 1085, 1092 (2d Cir. 1995).
Section 11 of the Securities Act provides that any signer, director of
the issuer, preparing or certifying accountant, or underwriter may be
liable if "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. . . ." 15 U.S.C. § 77k(a)
(emphasis supplied).*fn1 "The section 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 v. Huddleston, 459 U.S. 375,
"[A]ny person acquiring a security issued pursuant to a materially
false registration statement" has a cause of action
under Section 11 "unless the purchaser knew about the false statement at
the time of acquisition." DeMaria v. Andersen, 318 F.3d 170, 175 (2d
Cir. 2003) (citation omitted). Purchasers have standing to sue whether
they purchased at the time of the initial public offering or in the
secondary market. Those who purchased within twelve months after the
issuance of the registration statement need not prove reliance in order
to recover. Id. at 176; 15 U.S.C. § 77k(a).
Allegations that "material facts have been omitted" from a registration
statement or "presented in such a way as to obscure or distort their
significance" are sufficient to state a claim for violation of Section
11. I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co.,
936 F.2d 759, 761 (2d Cir. 1991) (citation omitted). Material facts may
"include not only information disclosing the earnings and distributions
of a company but also those facts which affect the probable future of the
company and those which may affect the desire of investors to buy, sell,
or hold the company's securities." Kronfeld v. Trans World Airlines,
Inc., 832 F.2d 726, 732 (2d Cir. 1987) (citation omitted). The "central
inquiry" in determining whether a statement is misleading under Section
11 is "whether defendants' representations, taken together and in
context, would have misled a reasonable investor about the nature of the
investment." I. Meyer Pincus, 936 F.2d at 761 (citation omitted); see
also DeMaria, 318 F.3d at 180.
The plaintiffs contend that the false and misleading statements made by
UBS were the historical WorldCom common stock prices for the period 1998
through early 2002 listed in the Prospectus Supplement.*fn2 Since
Section 11 is a strict liability statute, and since the stock prices were
artificially inflated by fraud and therefore materially false and
misleading, they argue that the reporting of WorldCom's stock prices was
also false and misleading as a misrepresentation of the true value of
The plaintiffs have not stated a Section 11 claim against UBS. They do
not allege that the stock prices listed in the Prospectus Supplement were
not correctly reported. They do not point to any other statement by UBS
in which UBS makes any representation about WorldCom, the reliability of
its financial statements, the accuracy of its public statements, or the
utility of the historical stock prices as a predictor of future stock
performance. To the contrary, the Prospectus Supplement specifically
disclaims that it is making any representations in this regard.
Although the pleading requirements for a Section 11 claim are minimal,
Section 11 does require that a plaintiff identify an "untrue statement of
a material fact" or allege that the registration statement "omitted to
state a material fact."
15 U.S.C. § 77k. "Not every bad investment is the product of
misrepresentation." Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 8
(2d Cir. 1996). The plaintiffs have failed to allege that the historical
stock prices were falsely described. Their allegation that the stock
prices were artificially inflated by the WorldCom fraud does not cure this
pleading deficiency. They have identified no statement (or omission) by
UBS that related to the reliability of the stock prices as an indicator
of WorldCom's financial health in either the past or the future. See
DeMaria, 318 F.3d at 181 (affirming dismissal of Section 11 claims
because any erroneous information in the prospectus "would not have
misled the average investor in light of the accurate information in the
prospectus."); Olkey, 98 F.3d at 6 (affirming dismissal of securities
fraud suit, including Section 11 claims, where prospectus outlined the
risks entailed in investing in mortgage-backed securities); In re Sofamor
Danek Group, Inc., 123 F.3d 394, 401 n.3 (6th Cir. 1997) ("It is clear
that a violation of federal securities law cannot be premised upon a
company's disclosure of accurate historical data.") (citation omitted).
The plaintiffs have asked for leave to amend. Under Rule 15,
Fed.R.Civ. P., leave to amend shall be "freely given when justice so
requires," Fed.R.Civ.P. 15(a), and whether to grant leave to amend is
within the discretion of the district court. See John Hancock Mut. Life
Ins. Co. v. Amerford Int'l Corp., 22 F.3d 458, 462 (2d Cir. 1994).
Generally, a party will be allowed "to amend its pleadings in the absence
of a showing by the
nonmovant of prejudice or bad faith." Block v. First Blood Assoc.,
988 F.2d 344, 350 (2d Cir. 1993). "Where it appears that granting leave
to amend is unlikely to be productive, however, it is not an abuse of
discretion to deny leave to amend." Lucente v. Int'l Bus. Mach. Corp.,
310 F.3d 243, 258 (2d Cir. 2002) (citation omitted). It is appropriate to
deny leave to amend if the proposed amendment is futile. Id.; see also
Foman v. Davis, 371 U.S. 178, 182 (1962). An amendment may be futile if,
for example, it would not survive a motion to dismiss brought pursuant to
Rule 12(b)(6), see Lucente, 310 F.3d at 258, or if the claims the
plaintiff seeks to add would be barred by the applicable statute of
limitations, see Grace v. Rosenstock, 228 F.3d 40, 53 (2d Cir. 2000).
The plaintiffs have not included any proposed amended pleading or
indicated what they might allege to cure the deficiency identified in the
motion to dismiss. The plaintiffs have already been permitted to file one
amended pleading through the filing of this Consolidated Amended Class
Action Complaint. In the absence of any identification of how a further
amendment would improve upon the Complaint, leave to amend must be denied
For the reasons stated above, the motion brought by UBS to dismiss the
claims against it in the GOALs Litigation is granted.