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
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 ...