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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


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 Page 3 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 Page 4 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. ¶ 89.)

 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 Page 5 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.) Page 6

  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 ...

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