United States District Court, S.D. New York
February 10, 2004.
ROGER A. PODANY, for himself and all others similarly situated, Plaintiffs -v- ROBERTSON STEPHENS, INC., and PAUL JOHNSON, Defendants; ANTHONY V. FINAZZO, for himself and all others similarly situated, Plaintiffs -v- ROBERTSON STEPHENS, INC., and PAUL JOHNSON, Defendants
The opinion of the court was delivered by: GERARD E. LYNCH, District Judge Page 2
OPINION AND ORDER
The above-captioned cases concern allegations that an equity analyst
engaged in a scheme, with the knowledge of his employer broker-dealer, to
commit securities fraud by publishing false statements of opinion about
certain issuers in reports disseminated by the broker-dealer. The
proposed plaintiff classes, composed of purchasers of the issuers' stock,
argue that the defendant analyst opined positively about the effect of
announced mergers on the issuers' stock, not because he truly believed
that the mergers would have a beneficial effect on the issuers, but
rather because he owned stock in the target companies and stood to gain
enormous personal profits from the impending stock-swap mergers if the
issuers' stock prices remained high.
The complaint alleges that the analyst, Paul Johnson, purchased shares
in privately-held telecommunications start-up companies likely to become
merger targets, with the intent of using his position as an equity
analyst to fraudulently drum up demand for shares in the acquirer in
order to receive a windfall when his stock in the target was converted
into higher-valued acquirer stock. Plaintiffs argue that defendants never
disclosed the analyst's interest in the target companies, and that
defendants had no reasonable factual basis to issue positive reports
about the issuers in light of what defendant knew or should have known
about the announced mergers. The larger context of the alleged fraud is
the volatile market in telecommunications stock that existed in the late
1990s. More specifically, the context includes other, similar allegations
against these defendants; this Court recently denied a motion to dismiss
the somewhat similar
claim that these defendants schemed to defraud purchasers of stock
in the Corvis Corporation. See DeMarco v. Robertson Stephens,
Dkt. No. 03 Civ. 590 (GEL), 2004 WL 51232 (S.D.N.Y. Jan. 9, 2004).
Plaintiffs are purchasers of the issuers' stock, and rely on a
fraud-on-the-market theory to argue that defendants' false statements of
opinion artificially inflated the issuers' share prices, and contributed
to plaintiffs' losses. Defendants move to dismiss both complaints for
failure to state claims upon which relief may be granted. The
above-captioned cases are brought independently by separate plaintiffs,
but because of the identity of the defendants, the similarity of the
alleged schemes, and the similarity of legal issues raised, the Court
will resolve both motions in this opinion. For the reasons that follow,
the motions to dismiss shall be granted.
For purposes of these motions to dismiss, the facts alleged in the
complaints must be accepted as true.
During the period addressed in this complaint, defendant Robertson
Stephens, Inc. ("Robertson Stephens" or "RS") was active as a
broker-dealer that provided financial services including securities
underwriting, investment banking and the publication of equity analysis.
Defendant Paul Johnson was then an equity analyst at Robertson Stephens
specializing in telecommunications and internet companies, and was
described as "well-regarded and highly visible" in a Wall Street Journal
article in December 2001. (Finazzo Am. Compl. ¶ 28,
Podany Am. Compl. ¶ 25.)
Robertson Stephens was in the business of publishing research reports
authored by analysts like Johnson, which contained information about the
rated issuer, analysis of the issuer's
business, and purchase recommendations regarding the issuer's stock
based on the analyst's opinion. Research reports drafted by Johnson or
members of his staff were distributed to RS's institutional clients, and
were available to RS's clients on its website. (Finazzo Am.
Compl. ¶ 26.) The reports culminated in purchase recommendations that
took the form of concise rating statements such as "buy," "strong buy"
and "long term attractive," which were often "widely broadcast to the
investing public free of charge" without the accompanying analysis.
(Podany Am. Compl. ¶ 26.) These short rating
recommendations were frequently picked up and disseminated by other media
outlets such as Bloomberg News Service and websites like Yahoo! Finance
or CBS Market Watch. (Id.)
The analyst reports contained disclaimers stating that "Robertson
Stephens, its managing directors, its affiliates, and/or its employees
may have an interest in the securities of the issues described and may
make purchases or sales while this report is in circulation." After
September 26, 2000, the disclaimer stated that it applied to "the
research analysts authoring this report." (Finazzo Am. Compl.
Robertson Stephens Analyst Reports on Redback Networks, Inc.
The Finazzo complaint concerns RS analyst reports on Redback
Networks, Inc. ("Redback"), a company whose products enable carriers,
cable operators and internet service providers to manage large numbers of
subscribers using high speed internet access. (Finazzo Am.
Compl. ¶ 17.) Plaintiffs allege that defendants knowingly issued
false statements of opinion about the value of publicly-traded Redback
stock in order to artificially prop up its stock price after Redback
announced a merger with Siara Systems, Inc. ("Siara") a privately-held
company engaged in the business of developing optical networking
equipment. (Id. ¶ 35.) Plaintiffs allege
that Johnson was motivated to publish false opinions because he
owned stock in Siara, and would profit enormously by the merger if
Redback's stock price remained high. Plaintiffs further allege that
Robertson Stephens knew of the fraud, yet continued to publish the false
statements of opinion without taking steps to monitor or correct them.
In January 1999, Johnson invested $50,000 of his own funds in Siara
through a private placement, thus violating an internal Robertson
Stephens rule requiring approval before investing in a private company.
(Id. ¶ 36.) RS learned that Johnson owned undisclosed Siara
stock in September 1999, yet failed to monitor Johnson's research reports
accordingly. (Id. ¶ 100.) By March 1999, Johnson had become
a member of a four-person technical advisory board at Siara that assisted
the company in defining its products. He remained on that board up
through the consummation of Siara's merger with Redback (Id.
¶¶ 38, 45.)
On May 18, 1999, Robertson Stephens co-managed the initial public
offering ("IPO") of Redback stock. (Id. ¶ 39.) On June 14,
1999, Robertson Stephens issued its first report on Redback, culminating
in a "buy" rating. (Id. ¶ 40.) That was followed by two
more research reports, on July 23 and October 14, 1999, reiterating the
buy recommendation. (Id. ¶¶ 41, 42.)
In late October 1999, an internal committee at Redback discussed
possible merger targets, and at some point shortly thereafter Redback
contacted Siara to discuss a possible combination. The companies
negotiated a merger during November 1999. (Id. ¶ 43). On
November 27, 1999, Siara accepted Redback's offer to acquire Siara at a
purchase price of 38% of the post-merger company. On November 29, Redback
announced that it would acquire Siara (a company with no products, no
customers and no revenue, that had posted a half million dollar loss for
the previous year), in exchange for Redback stock then valued at $4.3
billion. (Id. ¶¶ 44, 46.)
Robertson Stephens issued research reports on Redback touting the
proposed acquisition of Siara on November 29 and 30, 1999, and
recommending that investors buy Redback stock. (Id. ¶¶ 52,
54.) Redback's share price rose by 10% on November 29. (Id.
¶ 53.) Plaintiffs allege that the November 29 and 30 reports were
false statements of opinion because they did not disclose Johnson's
interest in Siara,*fn1 and because defendants had no reasonable basis to
be positive about the merger because in actuality the merger was a risky
financial proposition for Redback, since the price was very high for a
target with no present assets, and since Siara would require a
significant infusion of funding to develop its products. (Id.
¶¶ 47, 57.)
Robertson Stephens published another Redback research report with a buy
rating on January 20, 2000, and issued a press release. (Id.
¶ 59.) When the acquisition was consummated on March 8, 2000, Redback
stock closed at $327.69. The stock price had more than doubled from the
day the merger was announced on November 29, 1999. (Id. ¶
61.) As a result of the merger, Johnson received 30,069 shares of Redback
stock, worth approximately $9.9 million. (Id.) The complaint
does not allege that Johnson ever sold the Redback stock he acquired
through the merger.
Robertson Stephens continued to issue "buy' ratings for Redback stock
post-merger. It published Redback reports on April 13, June 6, July 13,
and October 13, 2000, all maintaining a "buy" rating. (Id.
¶¶ 62, 64, 66.) Plaintiffs allege that the opinions contained in these
reports were false and misleading because defendants lacked a reasonable
basis for the recommendations, and failed to disclose that Johnson
acquired Redback stock in exchange for his
Siara stock. (Id. ¶¶ 65, 68.) On January 10, 2000,
Robertson Stephens upgraded Redback to a "strong buy" rating, and
subsequently downgraded Redback to "buy" on January 18, 2000.
(Id. ¶¶ 73, 78.) Robertson Stephens maintained the "buy"
rating in reports and press releases issued on January 22, April 3, and
April 12, 2001. (Id. ¶¶ 78, 82, 84.) RS never deviated
downward from its "buy" rating, even when other analysts downgraded
The Finazzo plaintiffs commenced this action on June 6, 2003,
charging both defendants with violating § 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder, and charging Robertson Stephens with violating § 20(a) of
the Exchange Act. The consolidated amended complaint was filed on
September 5, 2003. In sum, plaintiffs claim that RS reports on Redback
issued on November 29 and 30, 1999 (Id. ¶¶ 47, 57), April
13, June 6, July 13 and October 13, 2000 (Id. ¶¶ 62, 64-66,
68), contained false statements of opinion because defendants lacked a
reasonable basis for those opinions, and because defendants failed to
disclose Johnson's ownership of Siara stock at the time of the March 8,
Robertson Stephens Analyst Reports on Sycamore Networks, Inc.
The Podany plaintiffs allege that defendants published false
statements of opinion in reports covering the stock of Sycamore Networks,
Inc. ("Sycamore"), as part of a scheme similar to the one described
above. In October 1999, Robertson Stephens underwrote the EPO for
Sycamore, a company engaged in the production of optical communications
systems for telecommunications networks. (Podany Am. Compl.
¶¶ 15, 36.) Robertson Stephens initiated its
ratings coverage of Sycamore with a report authored by Johnson on
November 16, 1999, with a "buy" recommendation. (Id. ¶ 36.)
On January 10, 2000, Johnson purchased $75,000 worth of shares in Sirocco
Systems, Inc., a privately-held company engaged in the production of
devices that manage bandwidth within telecommunications networks.
(Id. ¶¶ 37, 16.)
Almost five months later, on June 6, 2000, Sycamore announced a merger
with Sirocco to take place in the following quarter, whereby all Sirocco
stock would be exchanged for Sycamore stock worth approximately $2.9
billion. (Id. ¶ 38.) Plaintiffs allege that Johnson stood
to gain almost $2 million in Sycamore stock when the merger was
consummated, if Sycamore's price did not drop between the announcement
date and the date of consummation. (Id. ¶ 42.) Johnson
began touting the merger as soon as it occurred, both in the media and in
an RS research report on Sycamore dated June 6, reiterating the "buy"
rating. (Id. ¶¶ 43-44.) Robertson Stephens issued another
positive report on Sycamore dated August 25, 2000, again repeating the
buy rating. (Id. ¶ 47.) During the summer of 2000, the
price of Sycamore stock rose from the low $100 range to the $150 range,
and when the stock-swap merger finally occurred on September 7, 2000,
Johnson's Sirocco stock was converted into $2.3 million of Sycamore
stock. (Id. ¶¶ 50-51.)
After the merger, the price of Sycamore stock declined. Robertson
Stephens published reports reiterating its "buy" rating on November 15,
2000, February 14, 2001, and March 15, 2001, when the stock closed at
$68.438, $26.313, and $12.188, respectively. (Id. ¶¶ 52, 53,
55.) After Sycamore announced a downward earnings adjustment on April 5,
2001, including a $130-140 million restructuring charge, RS published its
April 6 report, downgrading Sycamore's rating to "Long Term Attractive."
The stock closed that day at $7.25. (Id. ¶¶ 56, 58.)
stock price subsequently rose a bit, because plaintiffs allege that
the publication of a New York Times article on May 27, 2001, caused the
Sycamore price to drop from $11.01 to $10.23 between May 25 and May 29.
(Id. ¶¶ 59-60.)
The Podany plaintiffs initiated this lawsuit on May 30, 2003,
charging Johnson and RS with violating § 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder, and charging Robertson Stephens
with control person liability under § 20(a) of the Exchange Act. The
consolidated amended complaint was filed on September 5, 2003. In sum,
plaintiffs claim that the RS reports on Sycamore issued on June 6, August
25, and November 15, 2000, and February 14, 2001 (Id. ¶¶ 49,
54), contained false statements of opinion because defendants lacked a
reasonable basis for their recommendations, and because Johnson failed to
disclose his ownership of Sirocco stock at the time of the September 7,
I. Standard on a Motion to Dismiss
On a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court
must accept as true all well-pleaded factual allegations in the complaint
and view them in the light most favorable to the plaintiff, drawing all
reasonable inferences in its favor. Leeds v. Meltz, 85 F.3d 51,
53 (2d Cir. 1996). The Court will not dismiss a complaint for failure to
state a claim "unless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim that would entitle him to
relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Beyond
the facts in the complaint, the Court may consider "any written
instrument attached to it as an exhibit or any statements or documents
incorporated in it by reference." Cortec Indus., Inc. v. Sum
Holding, L.P., 949 F.2d 42, 47 (2d Cir. 1991). While the Federal
Rules of Civil Procedure generally require only notice
pleading, where, as here, plaintiff alleges fraud, "the
circumstances constituting fraud . . . shall be stated with
particularity." Fed.R.Civ.P. 9(b): see Stern v. Gen. Elec.
Co., 924 F.2d 472, 476 (2d Cir. 1991) ("[Allegations of fraud must
be supported by particular statements indicating the factual
circumstances on which the theory of fraud is based."). "Rule 9(b) is
designed to further three goals: (1) providing a defendant fair notice of
plaintiffs claim, to enable preparation of defense; (2) protecting a
defendant from harm to his reputation or goodwill; and (3) reducing the
number of strike suits." Di Vittorio v. Equidyne Extractive Indus.,
Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
II. Section 10(b) Claims
A. Legal Standard
The Securities Exchange Act protects investors by proscribing,
in connection with the purchase or sale of any
security registered on a national securities
exchange or any security not so registered,
. . . any manipulative or deceptive device or
contrivance in contravention of such rules and
regulations as the Commission may prescribe as
necessary or appropriate in the public interest or
for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5, promulgated by the Commission,
makes it unlawful "[t]o 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." 17 C.F.R. § 240.10b-5fb): see SEC v.
Texas Gulf Sulphur Co., 401 F.2d 833
, 847-48 (2d Cir. 1968)
(explaining that the SEC "promulgated [Rule 10b-5] pursuant to the grant
of authority given the SEC by Congress in Section 10(b) of the Securities
Exchange Act of 1934," by which Congress sought "to prevent inequitable
and unfair practices and to insure fairness in
securities transactions generally, whether conducted face-to-face,
over the counter, or on exchanges").
B. Heightened Pleading Requirements
For federal securities fraud claims, the Private Securities Litigation
Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737,
reinforces the heightened pleading standards that apply to all claims of
fraud or mistake under Fed.R.Civ.P. 9(b). Under the PSLRA, complaints
alleging securities fraud must, first, "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)(B); and second, "with respect to each act or omission
alleged . . ., state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind."
Id. § 78u-4(b)(2); see Kalnit v. Eichler,
264 F.3d 131, 138 (2d Cir. 2001). That state of mind is scienter, which means
"intent to deceive, manipulate or defraud." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976); see also
Kalnit, 264 F.3d at 138 (same).
The Second Circuit has made clear, however, that the PSLRA "`did not
change the basic pleading standard for scienter in this circuit.'"
Id., quoting Novak v. Kasaks, 216 F.3d 300, 310 (2d
Cir. 2000). Both before and after the PSLRA, the law required plaintiffs
bringing claims under § 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, to
allege scienter with particularity. Id; compare Novak, 216 F.3d at 307
(emphasizing that securities fraud allegations must "give rise to a
strong inference of fraudulent intent"), with
15 U.S.C. § 78u-4(b)(2) (codifying the PSLRA's requirement that securities
complaints "state with particularity facts giving rise to a strong
inference that the defendant acted with [scienter]").
C. Misrepresentation of Opinion
To state a cause of action under § 10(b) and Rule 10b-5, a
plaintiff must allege that "the defendant, in connection with the
purchase or sale of securities, made a materially false statement or
omitted a material fact, with scienter, and that plaintiff's reliance on
defendant's action caused injury to the plaintiff." Lawrence v.
Cohn, 325 F.3d 141, 147 (2d Cir. 2003) quoting Ganino
v. Citizens Util. Co., 228 F.3d 154, 161 (2d Cir. 2000). See
In re WorldCom, Inc. Securities Litigation, Dkt. No. 02 Civ. 3288
(DLC), 2003 WL 21219049 (S.D.N.Y. May 19, 2003).
The sine qua non of a securities fraud claim based on false opinion is
that defendants deliberately misrepresented a truly held opinion.
See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083,
1095-96 (1991). In other words, plaintiffs must allege with particularity
that defendants did not sincerely believe the opinion they purported to
hold. As one judge of this court recently put it, "[p]laintiffs who
charge that a statement of opinion . . . is materially misleading,
must `allege with particularity' `provable facts' to demonstrate that the
statement of opinion is both objectively and subjectively false."
Bond Opportunity Fund v. Unilab Corp., Dkt. No. 99 Civ. 11074
(JSM), 2003 WL 21058251, at *5 (S.D.N.Y. May 9, 2003), citing
Virginia Bankshares, 501 U.S. at 1093-98. It is not sufficient
to allege, as plaintiffs have done in both cases addressed here, that it
would have been possible to reach a different opinion than that reached
by defendant based on information available to defendant at the time, or
even that the defendant's opinion was unreasonable. A securities fraud
action may not rest on allegations that amount to second-guesses of
defendants' opinions about the future value of issuers'
made all too easy with the benefit of hindsight.
While in a misstatement of fact case the falsity and scienter
requirements present separate inquiries, in false statement of opinion
cases such as these, the falsity and scienter requirements are
essentially identical. That is because a material misstatement of
fact is alleged by pointing to the true fact about the world that
contradicts the misstatement. But even if the statement of fact (`the
company made x million dollars in profit last year") turns out to be
objectively false, it could have been made in good faith; subjective
intent to commit fraud is a wholly separate inquiry from whether the
statement is objectively true. However, a material misstatement of
opinion is by its nature a false statement, not about the
objective world, but about the defendant's own belief. Essentially,
proving the falsity of the statement "I believe this investment is sound"
is the same as proving scienter, since the statement (unlike a statement
of fact) cannot be false at all unless the speaker is knowingly
misstating his truly held opinion. As with all inquiries into someone's
state of mind, plaintiffs must typically rely on circumstantial evidence
for the defendants' words and actions.
For instance, the complaint in the related DeMarco case
(involving defendants' ratings of Corvis stock) described acts and
statements inconsistent with the defendants' published opinions about the
value of Corvis stock. The DeMarco plaintiffs alleged that, at
the very time that Johnson and Robertson Stephens advised the market to
purchase Corvis stock, Johnson made specific statements to RS insiders,
in effect asserting that Corvis stock was overvalued and should be sold.
The inference of insincerity in that case was also supported by the
additional allegation that while advising the market to buy Corvis stock,
defendants sold their own Corvis stock at the earliest opportunity. That
action was contrary to defendants' published advice, and
supported the inference that the published opinion was
fraudulent.*fn3 The plaintiffs in DeMarco thus alleged
specific provable words and actions of defendants from which a reasonable
factfinder could infer that the published "buy" recommendation was not
merely bad advice, but a false statement of opinion, and that the
defendants' truly held belief was that it was advisable to sell Corvis
The Finazzo and Podany plaintiffs, by contrast,
point to no inconsistent statements or actions by defendants from which a
factfinder could infer that the published opinions were not truly held.
In the absence of evidence of statements or actions inconsistent with the
published opinions about Redback and Sycamore, the complaints in
Finazzo and Podany offer three other kinds of
evidence to support the allegation that defendants knowingly made false
statements of opinion as part of a scheme to artificially inflate prices
of those shares. First, plaintiffs present detailed facts about the
proposed mergers, from which they argue that no reasonable analyst could
have genuinely held positive opinions about the likely effects of the
mergers on the acquiring companies. Second, they allege that Johnson's
interest in the target companies was undisclosed, and that this conflict
of interest shows that defendants had motive to publish false opinions.
Finally, plaintiffs allege that the defendants engaged in similar
fraudulent schemes concerning other issuers rated by Robertson Stephens,
most particularly with respect to the RS
reports on Corvis, in support of the conclusion that defendants'
opinions about Redback and Sycamore were also false. For the reasons that
follow, even taking all facts in the light most favorable to plaintiffs,
as the Court must do on these motions to dismiss, the evidence asserted
in the complaints does not meet the Virginia Bankshares
standard requiring that fraudulent opinion be alleged "with
particularity" by way of "provable facts/'
Reasonableness of the Opinions
In support of the allegation that the opinions were not genuinely held,
the Podany and Finazzo complaints present detailed
information about the proposed mergers. They ask the Court to put itself
in the defendants' shoes and analyze the purchase-worthiness of the
issuers' stock in light of that information, and to conclude that it
would have been wiser to advise against the purchase of issuer stock
because the proposed mergers were too risky for the acquiring companies.
This is precisely the kind of second-guessing with the benefit of
hindsight that Virginia Bankshares and its progeny counsel
against. As another court in this Circuit has noted, although
Virginia Bankshares did not directly address the question of
whether a showing as to objective inaccuracy of an opinion is sufficient
to state a claim, the logic of the decision indicates that both objective
and subjective falsity is required. See Freedman v. Value Health.
Inc., 958 F. Supp. 745, 753 (D. Conn. 1997). As the
Freedman court observed, liability premised on objective
wrongness of an opinion alone would risk holding federal securities law
defendants liable for good-faith, if negligent, errors. Id. at
752. See also McKesson HBOC, Inc. Securities Litigation,
126 F. Supp.2d 1248, 1265 (N.D. Cal. 2000) (noting that objective falsity is
insufficient to state a claim because "the securities laws do not create
a general cause of action for negligence by investment advisers.")
While plaintiffs do not expressly argue that objective falsity is
sufficient, they collapse allegations of the objective wrongness of the
opinions with claimed subjective insincerity by arguing that the
objective wrongness of the opinions was so obvious that a reasonable
person could not have held those opinions, concluding that defendants
must have been lying when they published them. There are strong policy
reasons why courts do not engage in this kind of second-guessing of
forward-looking opinions. Most simply, relying on an inference that an
opinion that turned out to have been very misguided must have been
subjectively insincere would encourage lawsuits every time a drop in
share price proves that an earlier-uttered forward-looking opinion turned
out to have been too optimistic. The Second Circuit has firmly rejected
this "fraud by hindsight" approach. See Stevelman v. Alias Research,
Inc., 174 F.3d 79, 85 (2d Cir. 1999) ("optimism that is shown only
after the fact to have been unwarranted does not, by itself, give rise to
an inference of fraud"); Shields v. Cititrust Bancorp Inc.,
25 F.3d 1124, 1129 (2d Cir. 1994). The securities laws are not intended as
investor insurance every time an investment strategy turns out to have
been mistaken. See In re Merrill Lynch & Co., Inc. Research
Reports Securities Litigation, 273 F. Supp.2d 351, 358 (S.D.N.Y.
2003) (noting that the securities laws are not meant to underwrite
investor risk). Thus, the ultimate inaccuracy of defendants'
recommendations cannot be the sole basis for liability in a § 10(b)
action for misstatement of opinion. While a jury may consider evidence
that an opinion was not soundly based in assessing scienter, such
evidence is not sufficient to allege scienter, and assertions that the
opinions must have been false because in hindsight it would have been
more prudent to make different recommendations do not constitute the
required particularized allegations of "provable facts" supporting an
inference that the opinions were not truly held.
The Finazzo and Podany plaintiffs also allege that
the insincerity of defendants' opinions is evidenced by defendants'
motive to lie,*fn4 which in turn is supported by defendants' failure to
disclose Johnson's interest in the target companies prior to the mergers.
The complaints themselves demonstrate, however, that Johnson's interest
in the target companies was indeed disclosed by the broad disclaimers in
the RS reports stating that "Robertson Stephens, its managing directors,
its affiliates, and/or its employees may have an interest in the
securities of the issues described and may make purchases or sales while
this report is in circulation." (Finazzo Am. Compl. ¶ 89.)
This language is broad enough to alert investors that the persons
drafting the research reports may have had an interest in the issuer
being rated, and/or in other companies mentioned in the report such as
the targets of proposed mergers with the rated issuer.*fn5 Of course,
disclosure of a potential conflict of interest does not completely
insulate defendants from allegations that the opinions were fraudulent
by the conflicted interest.*fn6 However, where a potential
conflict of interest is disclosed, the allegation of motive is weaker
than where it is not.
The allegations that Johnson owned shares in the target companies could
constitute additional evidence for a factfinder considering whether the
opinions were sincerely held. However, the existence of motive alone is
not a strong indicator of falsity of the opinions,*fn7 especially where,
as here, a disclosure covers exactly the conflict described. Furthermore,
the ownership by analysts of stock in the companies they analyzed was a
well-known feature of the telecommunications markets, as may be inferred
from the disclaimers in the RS reports, which are quoted by plaintiffs.
Again, while this does not insulate defendants from allegations of
issuing fraudulent opinions, the fact that the motive is common to the
industry and specifically disclosed in these cases reduces the weight of
motive in establishing the falsity of the opinions.*fn8
Similar Fraudulent Schemes
Finally, in support of the allegation that defendants issued false
statements of opinion concerning Redback and Sycamore stock with intent
to defraud, plaintiffs assert that defendants engaged in similar schemes
regarding other issuers, particularly the Corvis Corporation. This
decision has already referred to the related lawsuit regarding Corvis, in
which the plaintiffs alleged that these same defendants knowingly
published opinions they did not truly hold in order to artificially
inflate the Corvis stock price until they could secretly sell their own
Corvis shares. As this Court held in that case, those plaintiffs survived
a motion to dismiss because they alleged statements and actions
inconsistent with defendants' published opinions about Corvis from which
a reasonable factfinder could infer the insincerity of the published
opinions. DeMarco.2004 WL 51232, at *4.
While the commission of similar fraudulent schemes may be admissible
evidence of defendants' state of mind under Federal Rule of Evidence
404(b), alleging the existence of such other schemes does not
sufficiently plead that the opinions in these cases were
fraudulent. The PSLRA requires that each separate instance of fraud be
pled with particularity. This accords with common sense and fairness,
since otherwise one successfully-alleged misstatement of opinion against
a given defendant would permit plaintiffs to allege claims for all
similar opinions uttered by that defendant, based on allegations that
would otherwise be insufficient as to those particular opinions
themselves. Robertson Stephens was in the business of publishing opinions
about stock purchases, and presumably published opinions about numerous
different issuers. Specific allegations of fraud as to any one opinion,
although it may raise awareness among potential plaintiffs or spur action
by regulatory agencies, is not legally sufficient under § 10(b) to
fraud as to all opinions published by that defendant. To
hold otherwise would declare open season on all opinions issued by RS
even in the absence of the particularized allegations of fraud required
by Fed.R.Civ.P. 9(b) and the PSLRA.
Plaintiffs offer three kinds of evidence in support of the allegations
of false opinions regarding Redback and Sycamore stock. First, they
allege that, based on the information available at the time, no
reasonable person could have held the published opinions. Second, they
allege that Johnson had motive to lie because he owned shares in the
target companies and stood to gain from the merger if the price of the
acquiring companies' stock remained high. While the complaints claim that
the interest was undisclosed, the complaints themselves reveal that the
disclaimer did indeed reveal the potential conflict of interest. And
finally, plaintiffs allege that the defendants had engaged in at least
one other, similar scheme concerning another issuer by publishing false
opinions in order to artificially inflate share prices.
Taken individually, each of the above elements makes a weak showing
from which misstatement of opinion may be inferred: The first, because
courts are not in the business of second-guessing forward-looking
opinions; particularly in the wild days of the technology stock bubble,
opinions that with hindsight might appear reckless often represented the
conventional wisdom of Wall Street. The second, because generalized
allegations of motive, especially when the alleged conflict is disclosed,
are insufficient to allege fraudulent intent; analysts' ownership of the
stocks they touted, when disclosed, could constitute evidence of belief
in a company's prospects as well as of a motive to inflate the stock's
value, particularly when there is no allegation that the stock was
profitably "dumped" after the analysts' reports artificially "pumped"
its value. And the last, because allegations concerning similar
schemes do not allege fraud in a given case with the requisite
particularity; alleging fraud in a different transaction does not
undercut plaintiffs' obligation to allege provable facts giving rise to
an inference of scienter in the transaction at hand. Aggregating these
three elements does not solve the plaintiffs' problem in the
Podany and Finazzo cases. While the three kinds of
allegations may constitute evidence that a factfinder could consider, the
complaints do not allege with particularity provable facts to demonstrate
that the opinions about Sycamore and Redback were objectively and
Unless plaintiffs allege specific facts from which a factfinder can
infer that the published opinions in this case were not truly held at the
time they were made, they have not met the heightened pleading standard
for a misrepresentation of opinion claim under § 10(b). Since the
complaints fail to adequately plead falsity of the opinions, the analysis
of the claims under § 10(b) and Rule 10b-5 need proceed no further,
and those claims are dismissed. Finally, the claims in both cases against
Robertson Stephens for violation of the control person provision of §
20(a) are dismissed because plaintiffs have failed to state a primary
violation of the Exchange Act. See In re Scholastic Corp. Securities
Litigation, 252 F.3d 63, 77-78 (2d Cir. 2001).*fn9
For the foregoing reasons, defendants' motions to dismiss the
complaints in Podany and Finazzo are granted.