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IN RE LORAL SPACE & COMMUNICATIONS LTD.

United States District Court, S.D. New York


February 23, 2004.

IN RE LORAL SPACE & COMMUNICATIONS LTD. SECURITIES LITIGATION, This document relates to: ALL ACTIONS

The opinion of the court was delivered by: JOHN KOELTL, District Judge

OPINION and ORDER

This action is based upon an amended consolidated class action complaint alleging violations of the federal securities laws arising out of allegedly false and misleading public statements made by the defendant, Loral Space & Communications Ltd. ("Loral"), a Bermuda company, regarding the performance and financial condition of Globalstar, L.P. ("Globalstar"), a telecommunications company in which Loral had heavily invested. The lead plaintiff, Joe F. Moore, Jr., sues on behalf of himself and others (the "plaintiffs") who purchased shares of Loral stock between November 4, 1999 and April 2, 2001 (the proposed "class period"). The plaintiffs assert claims against Loral; Bernard L. Schwartz ("Schwartz"), the Chief Executive Officer and Chairman of the Board of Directors of both Loral and Globalstar; and Richard L. Townsend ("Townsend"), the Chief Financial Officer and Senior Vice-President of Loral and Chief Financial Officer of Globalstar (collectively, the "defendants"). Page 2

This action originated out of a series of individual lawsuits that were consolidated pursuant to Federal Rule of Civil Procedure 42(a). In an order dated March 2, 2002, the Court designated Joe F. Moore, Jr., the lead plaintiff for the proposed class in the consolidated action pursuant to the procedures specified in § 21D of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78u-4 et seq.*fn1 The plaintiffs thereafter filed a Consolidated Class Action Complaint (the "Complaint") asserting (1) violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j (b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against all defendants; and (2) violations of § 20(a) of the Exchange Act, 15 U.S.C. § 78t, against defendant Schwartz.

  The defendants moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on various grounds. The parties appeared before the Court on May 9, 2003 for argument on the motion to dismiss. At that conference, the plaintiffs requested leave to amend the Complaint. The Court granted leave to amend the Complaint within thirty days, and denied the motion to dismiss as moot without prejudice to renewal against any amended complaint.

  On June 9, 2003, the plaintiffs filed a Second Consolidated Class Action Complaint (the "Amended Complaint"). Defendants Schwartz and Townsend now move to dismiss the Amended Complaint Page 3 pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) as well as the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) ("PSLRA").*fn2 The defendants contend that the plaintiffs have failed adequately to plead scienter, that many of the alleged misrepresentations or omissions are not actionable because they are forward-looking statements or mere corporate "puffery," that the plaintiffs cannot demonstrate reliance given the total mix of information about Globalstar in the marketplace, and that the plaintiffs have not adequately pleaded loss causation. Defendant Schwartz also moves to dismiss the § 20(a) control person liability claim on the grounds that the plaintiffs have failed to plead a primary violation of the securities laws.

  I

  On a motion to dismiss, the allegations in the complaint are accepted as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). In deciding a motion to dismiss, all reasonable inferences are drawn in the plaintiffs' favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). The Court's function on a motion to dismiss is "not to weigh the Page 4 evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the defendants' motion to dismiss should be granted only if it appears that the plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. See Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 514 (2002); Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Grandon, 147 F.3d at 188; Goldman, 754 F.2d at 1065.

  In deciding the motion, the Court may consider documents that are referenced in the complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or the plaintiffs knew of when bringing suit, or matters of which judicial notice may be taken. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991); Vtech Holdings Ltd. v. Lucent Techs., Inc., 172 F. Supp.2d 435, 437 (S.D.N.Y. 2001). "[W]hen a plaintiff chooses not to attach to the complaint or incorporate by reference a document upon which it relies and which is integral to the complaint, the court may nonetheless take the document into consideration in deciding the defendant[s'] motion to dismiss, without converting the proceeding to one for summary judgment." Int'l Audiotext Network, Inc. v. AT&T Co., Page 5 62 F.3d 69, 72 (2d Cir. 1995) (internal citation and quotation marks omitted); see Yucyco, Ltd. v. Republic of Slovenia, 984 F. Supp. 209, 215 (S.D.N.Y. 1997). Accordingly, the following facts alleged in the Amended Complaint are accepted as true for the purposes of this motion.

  Loral is a Bermuda exempt company with its principal executive offices in New York, New York. (Am. Compl. ¶ 13.) Loral is one of the world's leading satellite communication companies and has substantial activities in satellite manufacturing and satellite-based communication services. (Id.) Loral's satellite-related business includes acting, through a subsidiary, as the General Managing Partner of Globalstar, L.P. ("Globalstar"), which commenced operations in October 1999 and which owns and operates a global telecommunications network designed to serve virtually every populated area of the world. (Id.) As of November 9, 1999, Loral owned 43% of the equity of Globalstar. (Id.) As of December 31, 1999, Loral's total assets amounted to $5.6 billion. (Am. Compl. ¶ 10.)

  Bernard L. Schwartz was, at all relevant times, the Chief Executive Officer and Chairman of the Board of Directors of both Loral and Globalstar. (Am. Compl. ¶ 14.) Schwartz owned 2.5% of the common stock of Loral and 1.7% of the common stock of Globalstar. (Id.) Richard J. Townsend was, at all relevant times, Chief Financial Officer of both Loral and Globalstar, as well as Senior Vice President of Loral. (Am. Compl. ¶ 15.) Page 6

  Globalstar was founded by Loral and Qualcomm Incorporated ("Qualcomm") with the stated goal of owning and operating a satellite constellation network that would serve every populated area of the world. (Am. Compl. ¶ 29.) Globalstar mobile phones function as cellular phones where terrestrial cellular service is available, and, where cellular service is not available, they link up with the Globalstar network of low-earth orbit satellites. (Id.) Loral's business plan was to use the Globalstar system to provide a cost-effective communications solution for areas that were either underserved or not served by existing telecommunications infrastructure. (Id.)

  In 1995, Globalstar received an FCC license to construct and launch its satellite constellation network, and it began placing satellites in orbit in 1998. (Am. Compl. ¶ 30.) The Globalstar system of 48 satellites became operational in 1999, and full commercial service began in the first quarter of 2000. (Id.) The Globalstar system operates through a series of "gateways," each of which serves a large geographic area. (Am. Compl. ¶ 31.) The gateways consist of large antennas that relay calls between the satellites and local public telephone networks, as well as other equipment and software that keep the system operational. (Id.)

  The Globalstar system did not meet Loral's expectations, and Globalstar's poor performance contributed to Loral's net loss of $1,469,678,000 for the year 2000, which was reported in Page 7 Loral's 2000 Form 10-K filed on April 2, 2001. (Am. Compl. ¶¶ 104-105.) By April 3, 2001, the price of Loral stock had sunk to $1.15 per share, from about $18 per share at the beginning of the class period, which was also before the well publicized stock market decline in 2000. (Am. Compl. ¶¶ 11, 106.)

  The plaintiffs allege that during the class period, the defendants misled the investing public, including the plaintiffs, to believe that Globalstar was meeting or exceeding expectations, and that Globalstar was a viable investment and asset of Loral. (Am. Compl. ¶ 9.) The plaintiffs allege that the defendants made allegedly false and misleading statements concerning Globalstar in public interviews, press releases, and conference calls with investment analysts from November 1999 through January 2001. (See, e.g., Am. Compl. ¶¶ 36-37, 40, 42, 46, 61, 64-65, 69-70, 75, 76, 86, 89.) The plaintiffs also allege that the defendants made other allegedly false and misleading statements in Loral's Form 10-K for the year ended December 31, 1999, in Loral's Form 10-Q for the quarter ending March 31, 2000, in Loral's Form 10-Q for the quarter ended June 30, 2000, and in Loral's Form 10-Q for the quarter ending September 30, 2000. (See, e.g., Am. Compl. ¶¶ 53, 56-58, 62-63, 85, 99, 103.)

  The alleged misrepresentations and omissions relate to several broad categories of facts and circumstances concerning Loral and the performance of the Globalstar system. First, the Page 8 plaintiffs allege that the defendants consistently overstated and misrepresented the actual and projected number of subscribers to the Globalstar communications service, even though the defendants knew that Globalstar was falling short in its attempts to attract subscribers. (Am. Compl. ¶¶ 9, 33-36, 37a, 38-39, 43-45, 46a, 61, 64-65, 72-75, 88-89, 92, 108.) Second, the plaintiffs allege that the defendants failed to disclose in a timely fashion the difficulties Globalstar had encountered in rolling out numerous gateways, difficulties that included regulatory delays in some foreign countries and problems encountered in China, one of Loral's largest anticipated foreign markets. (Am. Compl. ¶¶ 36, 37b, 46b, 46c, 47, 67-69, 108-109.) Third, the plaintiffs allege that the defendants failed to disclose that Globalstar's success was affected by the growing market for cellular telephones. (Am. Compl. ¶¶ 10, 37c, 46b.) Fourth, the plaintiffs allege that adequate disclosures were not made with respect to the inability of the Globalstar system to support inter-gateway roaming, a problem which depressed customer demand and corporate revenues. (Am. Compl. ¶¶ 36, 37d, 44, 69, 108.) Fifth, the plaintiffs allege that in the aftermath of the bankruptcy of Iridium, another company in the space-based communications industry, the defendants misrepresented the differences between Globalstar and Iridium in order to mislead investors into thinking that Globalstar would not face a similar fate as Iridium. (Am. Page 9 Compl. ¶¶ 33, 35, 41-42, 48-49.) Sixth, the plaintiffs allege that Loral made misrepresentations about its intentions to continue to support and invest in Globalstar. (Am. Compl. ¶¶ 70, 86.) Finally, the plaintiffs allege that the defendants failed to recognize an impairment of Loral's investment in Globalstar in Loral's public financial statements until April 2001, a failure that the plaintiffs allege violated Loral's own accounting procedures as well as Generally Accepted Accounting Principles ("GAAP"), and a failure that the plaintiffs allege caused Loral's public filings with the SEC to be materially false and misleading. (Am. Compl. ¶¶ 7-8, 39-40, 53, 58-60, 62-63, 77, 82-85, 96-99, 103.)

  II

  The defendants contend that the plaintiffs' § 10(b) and Rule 10b-5 claim should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) because the plaintiffs have failed adequately to plead scienter pursuant to Federal Rule of Civil Procedure 9(b) and the PSLRA.

  Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) provides in relevant part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
  (b) To use or employ, in connection with the purchase or sale of any security registered on a national Page 10 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.

 Similarly, Rule 10b-5, promulgated under § 10(b) and codified at 17 C.F.R. § 240.10b-5, provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(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.
  In order to state a claim brought pursuant to § 10b and Rule 10b-5, a plaintiff must allege sufficiently that "in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that the plaintiff's reliance on defendant's action caused [the plaintiff] injury." Rothman v. Gregor, 220 F.3d 81, 89 (2d Cir. 2000) (alteration in original) (citing Chill v. Gen. Elec. Co., 101 F.3d 263, 266 (2d Cir. 1996)); see also Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001) (citing San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Page 11 75 F.3d 801, 808 (2d Cir. 1996)); Buxbaum v. Deutsche Bank, 196 F. Supp.2d 361, 372 (S.D.N.Y. 2002).

  In the context of securities fraud statutes, scienter "means intent to deceive, manipulate, or defraud, or at least knowing misconduct." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996) (citations omitted); see also S.E.C. v. Todt, No. 98 Civ. 3980, 2000 WL 223836, at *9 (S.D.N.Y. Feb. 25, 2000), aff'd, 7 Fed. Appx. 98 (2d Cir. 2001). Scienter may be inferred from proof of "facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness" or from proof that a defendant had "both motive and opportunity to commit fraud." Rothman, 220 F.3d at 90; see also Kalnit, 264 F.3d at 138; Chill, 101 F.3d at 267. An "egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of . . . recklessness." Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000) (quotations omitted).

  Moreover, allegations of securities fraud under § 10(b) and Rule 10b-5 are subject to Federal Rule of Civil Procedure 9(b) and the PSLRA's requirements regarding scienter. See 15 U.S.C. § 78u-4(b)(2); Chill, 101 F.3d 263, 266 (2d Cir. 1996); Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127-28 (2d Cir. 1994). Under the PSLRA, "plaintiffs must state with particularity facts giving rise to a strong inference that the defendant acted with Page 12 the required state of mind," namely, the intent to "deceive, manipulate, defraud, or knowing misconduct." Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999). "The requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128, quoted by Press, 166 F.3d at 538.

  The defendants argue that the plaintiffs have not pleaded scienter adequately under either of these two approaches.

  A

  The defendants first contend that the plaintiffs cannot raise a strong inference of fraud because the plaintiffs have failed to allege that the defendants had both motive and opportunity to commit fraud. In the Amended Complaint, the plaintiffs allege that the defendants were motivated to make material misrepresentations concerning Globalstar's financial condition because the viability of Loral depended on the success of Globalstar, and because the profitability of Globalstar was important to securing additional financing on favorable terms. (See, e.g., Am. Compl. ¶¶ 10-11, 32, 87.) In their papers opposing the motion to dismiss, the plaintiffs add a separate allegation that defendant Schwartz was motivated to commit the alleged fraud in order to protect his reputation as a leading Page 13 businessman. Even assuming that opportunity is not in dispute, neither of these allegations adequately demonstrates motive.

  The Court of Appeals has explained that allegations of motive are sufficient if they "entail concrete benefits that could be realized by one or more of the false statements and wrongful disclosures alleged." Kalnit, 264 F.3d at 139 (internal quotation marks omitted). The plaintiffs "must assert a concrete and personal benefit to the individual defendants resulting from the fraud." Id. Motives generally possessed by most corporate directors and officers do not suffice. Id. Therefore, the Court of Appeals has concluded that motive is not adequately pleaded where the plaintiffs allege that the defendants have a desire for the corporation to appear profitable or a desire to keep stock prices high in order to increase officer compensation. Id.; see also Novak, 216 F.3d at 307-08 (collecting cases). By contrast, the Court of Appeals has held that motive is adequately pleaded where the plaintiffs allege that the defendants sold their own shares while at the same time misrepresenting corporate performance in order to inflate stock prices. See Kalnit, 264 F.3d at 139; Novak, 216 F.3d at 307-08 (collecting cases).

  The plaintiffs allege in the Amended Complaint that the defendants were motivated to hide Globalstar's deteriorating financial position because Loral's success depended on the viability of Globalstar, and because Loral hoped to secure Page 14 additional financing on the most favorable terms possible. These are the types of generalized motives that the Court of Appeals has concluded do not suffice to establish scienter, because they "could be imputed to any publicly-owned, for-profit endeavor." Chill, 101 F.3d at 268 (finding allegations that corporation willfully blinded itself to facts casting doubt on subsidiary's purported profitability in order to justify $1 billion investment in subsidiary insufficient to establish motive); see also Rombach v. Chang, 355 F.3d 164, 177 (2d Cir. 2004) (allegations that defendants attempted to artificially inflate and maintain price of corporation's common stock in order to complete a previously arranged corporate acquisition and to retire debt not sufficient to demonstrate motive); San Leandro, 75 F.3d at 814 (company's desire to maintain high bond and credit ratings is not sufficient motive from which to infer scienter).

  The plaintiffs' reliance on this Court's decision in In re Credit Suisse First Boston Corp. Securities Litigation, 1998 WL 734365 (S.D.N.Y. Oct. 20, 1998), is misplaced. In that case, the Court did not hold-that the plaintiffs had alleged a sufficient motive to establish scienter. See id. at *10 n.3. In any event, the motive alleged in that case was more direct and concrete than that alleged here. The plaintiffs in Credit Suisse alleged "that the defendants had short positions in the stock and issued sell recommendations in order to drive down the Page 15 price of the stock and thus directly profit their investment." Id. at *10. The plaintiffs in this case have not alleged a similarly personal and concrete benefit that the defendants realized from the alleged fraud.

  The plaintiffs attempt to bolster their allegations of motive in their opposition papers. They insist that defendant Schwartz was motivated to misrepresent Globalstar's financial condition so that he could protect his professional reputation. This allegation is also insufficient. In Shields, the Court of Appeals rejected as inadequate the plaintiffs' allegations that the defendants were motivated to inflate the corporation's stock price in order to protect their executive positions and compensation and prestige. Shields, 25 F.3d at 1130. Similarly, in Acito, the Court of Appeals rejected as insufficient the plaintiffs' allegations that the defendants were motivated to defraud the public because an inflated stock price would increase their incentive-based compensation. See Acito, 47 F.3d at 54. The Court of Appeals concluded that "[i]f scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions." Id.; see also Rombach, 355 F.3d at 177. The plaintiffs' allegation that defendant Schwartz was motivated to protect his reputation as a businessman is even more generalized than the motives alleged in Shields and Acito, It would be difficult to Page 16 find a corporate officer who does not wish to protect his or her professional reputation. Moreover, the plaintiffs' argument that Schwartz was motivated to engage in fraud to protect his professional reputation — when there was substantial risk that any such fraud would eventually be disclosed — is, at the very least, strained. See Shields, 25 F.3d at 1130 ("It is hard to see what benefits accrue from a short respite from an inevitable day of reckoning.")

  For these reasons, even assuming that opportunity is not in dispute, the plaintiffs have failed to allege motive sufficiently to establish scienter.

  B

  Because the plaintiffs have failed adequately to plead motive and opportunity to commit fraud, the Amended Complaint can survive the defendants' motion to dismiss only if the facts alleged in the Amended Complaint constitute circumstantial evidence of conscious misbehavior or recklessness by the defendants. The Court of Appeals has noted that, even in the context of a motion to dismiss, "this is a highly fact-based inquiry." Kalnit, 264 F.3d at 142. The inquiry thus requires that the Court consider all of the allegations in the Complaint in their totality. See In re Scholastic Corp. Secs. Litig., 252 F.3d 63, 74-77 (2d Cir. 2001); In re Duane Reade Inc. Secs. Litig., No. 02 Civ. 6478, 2003 WL 22801416, at *9 (S.D.N.Y. Nov. 25, 2003) (noting that court should consider allegations in Page 17 complaint "in their totality" in determining whether plaintiffs have adequately pleaded conscious misbehavior or recklessness). In addition, "the strength of the circumstantial allegations must be correspondingly greater" where motive is not apparent. Kalnit, 264 F.3d at 142 (internal quotation marks omitted).

  The Court of Appeals has explained that "reckless conduct is, at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Chill, 101 F.3d at 269 (internal quotation marks omitted); Kalnit, 264 F.3d at 142. For example, plaintiffs can plead scienter based on recklessness when they "specifically allege[] defendants' knowledge of facts or access to information contradicting their public statements." Novak, 216 F.3d at 308. In some cases, recklessness can be inferred from "[a]n egregious refusal to see the obvious, or to investigate the doubtful. . . . " Chill, 101 F.3d at 269 (internal quotation marks omitted). In any event, the facts alleged must be sufficiently strong circumstantial evidence of the alleged recklessness that the alleged facts give rise to a strong inference of fraudulent intent. See id. (collecting cases).

  For the reasons explained below, with respect to each set of alleged material misrepresentations or omissions, the plaintiffs have not adequately alleged facts that give rise to Page 18 an inference of conscious misbehavior or recklessness on the part of the defendants.

  1

  The plaintiffs allege that the defendants' statements concerning the actual and potential number of Globalstar subscribers are circumstantial evidence of conscious misbehavior or recklessness. The plaintiffs allege that, during the class period, the defendants made material misrepresentations concerning projected consumer demand for the Globalstar service, even though the defendants knew that those projections were unreasonable and unattainable. (See, e.g., Am. Compl. ¶¶ 33-35, 38-39, 43-44, 61.) The plaintiffs allege that the defendants knew that the projections were unattainable because the defendants allegedly received weekly reports disclosing the low number of actual Globalstar subscribers. (See, e.g., Am. Compl. ¶¶ 37a, 108.) The plaintiffs also allege that the defendants knew that the subscriber projections were false when made in December 1999 because "according to a former Globalstar senior business development manager," the subscriber projections were based on the premise that the majority of Globalstar's 38 planned gateways were in operation as of October 1999, when there were in fact allegedly only three gateways then in operation. (Am. Compl. ¶ 37(b).)

  For example, the plaintiffs allege that defendant Schwartz stated in an Aerospace Daily article published on November 4, Page 19 1999 that he expected Globalstar to have between 650,000 and 1,000,000 telephone subscribers worldwide by the end of 2000. (Am. Compl. ¶ 33.) The plaintiffs allege that in an interview published in Satellite News on December 6, 1999, Schwartz indicated that Globalstar would have 35,000 to 40,000 subscribers by the end of 1999, and about 650,000 subscribers by the end of 2000. (Am. Compl. ¶ 34.) The plaintiffs further allege that Schwartz estimated 500,000 subscribers by the end of 2000 when he was interviewed for a Wall Street Journal article published on February 24, 2000 as well as during an investor conference call on March 8, 2000. (Am. Compl. ¶¶ 43-44.) The plaintiffs also allege that Schwartz stated in a May 4, 2000 conference call with investment analysts that there were 75,000 phones "in the system" without clarifying that the number referred to the phones in Globalstar's distribution system, not the number of phones purchased or in use. (Am. Compl. ¶ 61.)

  The plaintiffs allege that all of these statements were materially false and misleading. (Am. Compl. ¶¶ 36, 43, 46, 61.) However, the defendants' public statements during the class period indicate that the defendants disclosed not only that subscriber demand was unpredictable, but also that Globalstar subscribers were fewer than had been previously predicted. For example, in Globalstar's Form 10-K for the Year ending December 31, 1998, which was filed substantially before Globalstar began Page 20 commercial service, the defendants warned in no uncertain terms, "THE GLOBALSTAR SYSTEM IS NOT OPERATIONAL, AND UNTIL IT IS, WE CAN'T PREDICT CUSTOMER DEMAND FOR THE SERVICE." (Globalstar Form 10-K for the Year ending Dec. 31, 1998 ("Globalstar 1998 Form 10-K") attached as Ex. 2 to Affidavit of Francis J. Menton, Jr. ("Menton Aff.") sworn to July 31, 2003, at 15.) The substance of this warning was reiterated in Loral's 1999 Form 10-K, which stated, "THE GLOBALSTAR SYSTEM HAS JUST COMMENCED OPERATIONS AND WE CANNOT PREDICT CONSUMER DEMAND FOR THE SERVICE." (Loral Form 10-K for the Year ending Dec. 31, 1999 ("Loral 1999 Form 10-K") attached as Ex. 7 to Menton Aff. at 18.) Loral's 1999 Form 10-K further stated that Loral could not assure investors "that Globalstar will attract enough subscribers either to compete effectively or to implement fully its current business plan." (Id. at 23-24.) Moreover, in quarterly financial statements issued after Globalstar commenced commercial service in the first quarter of 2000 the defendants disclosed that the actual number of subscribers had not met expectations. (See, e.g., Loral Form 10-Q for Quarterly Period ending June 30, 2000 ("Loral June 2000 Form 10-Q") attached as Ex. 32 to Menton Aff. at 19 ("Globalstar's subscriber demand to date has been lower than anticipated. . . .").) On October 27, 2000, six months before the end of the class period, the defendants disclosed that Globalstar had only 21,300 subscribers. (Am. Compl. ¶ 92.) Page 21

  Even during the March 8, 2000 conference call, when defendant Schwartz decided not to revise the previous projection of 500,000 subscribers by the end of 2000, Schwartz cautioned against relying too firmly on the anticipated subscribers. Indeed, at the outset of the call, Schwartz warned that any information from the first quarter of 2000 was "not reliable." (Transcript of March 8, 2000 Conference Call attached as Ex. 12 to Menton Aff., at 3.) On the basis of several weeks of actual experience Schwarz noted that the launch of the service "is a little bit slower than we had hoped," but he was "hopeful that we'll be able to recover — later in the year now; I don't know that we will be able to do that." (Id. at 27.) Schwartz indicated that he was reluctant to revise the previous projections of 600,000 phones and 500,000 subscribers by the end of the year, "because I don't know what to change it to, and I won't know what to change it to until later in the year when the experience gets a little bit stronger for us to base an assessment on." (Id. at 27.) Schwartz cautioned with respect to the projection that "at this stage of the game, the numbers are entirely too sketchy to have a firm stand on it."(Id.)

  These relevant warnings and disclosures, prior to and during the class period, show that the defendants acknowledged that any predictions of potential Globalstar customers would remain uncertain. These disclosures necessarily tempered the defendants' optimistic projections of future Globalstar Page 22 subscribers. Therefore, the disclosure in October 2000 that the Globalstar had only 21,300 subscribers does not raise a strong inference of fraudulent intent with respect to the earlier projections, because the defendants continually cautioned that the projections were not firm or reliable and could be revised downward once further information was available as the year progressed. Without more, therefore, the projections themselves could not provide sufficient circumstantial evidence of conscious misbehavior or recklessness by the defendants. Indeed, the cautions, the necessarily hypothetical nature of the projections, the frank admission of the slow start, and the disclosure of the actual subscriber number undercut the plaintiffs' speculation that the defendants were consciously attempting to defraud investors.*fn3 To raise an inference of fraudulent intent, the plaintiffs must allege with particularity facts demonstrating that the defendants "knew facts or had Page 23 access to information suggesting that their public statements were not accurate." Novak, 216 F.3d at 311.

  The plaintiffs allege that the defendants knew that the projections were materially misleading because the defendants allegedly were privy to internal Loral reports and memoranda that directly contradicted the defendants' projections of consumer demand for the Globalstar service. The plaintiffs allege that the defendants received weekly and monthly reports updating the number of subscribers and the number of airtime minutes sold. (See Am. Compl. ¶¶ 37a, 74, 76-77, 108.) However, the plaintiffs have not adequately identified the reports and memoranda that ostensibly contained facts contradicting the defendants' statements. See Novak, 216 F.3d at 309 ("Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information."); San Leandro, 75 F.3d at 812 ("Plaintiffs' unsupported general claim of the existence of confidential company sales reports that revealed the larger decline in sales is insufficient to survive a motion to dismiss."). Nor have the defendants adequately alleged when the defendants first began to have access to this weekly and monthly data. The plaintiffs allege that the defendants must have had access to such information because the defendants referred to such weekly and monthly reports in some of their public statements; however, the public statements alleged in the Page 24 Amended Complaint that refer to such reports were not made until the middle of 2000. (See Am. Compl. 74, 76-77.) Moreover, the reports described referred to actual subscribers and airtime minutes actually sold.*fn4 Such statistics could not have been available until, at the earliest, the first quarter of 2000, when the system first became commercially operational. (See Am. Compl. ¶ 30.) That was the time when Schwartz announced publicly that the rollout was a little bit slower than had been hoped for, that projections were not reliable, and that, although he was hopeful, he did not know whether Globalstar would be able to recover later in the year. "[A]s long as the public statements are consistent with reasonably available data, corporate officials need not present an overly gloomy or cautious picture of current performance and future prospects." Novak, 216 F.3d at 309.

  Because the plaintiffs have not alleged with sufficient particularity the nature, the content, the reliability, or the availability of the allegedly contradictory internal reports, the allegations concerning this information do not provide sufficient circumstantial-evidence to raise a strong inference of the defendants' fraudulent intent. The plaintiffs' general Page 25 allegation that internal company reports contradicted the defendants' projections of Globalstar's eventual subscribers is insufficient to raise an inference that the defendants were reckless in making those projections. See Novak, 216 F.3d at 309 ("Corporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them. Thus, allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud." (internal citation omitted)).

  The plaintiffs' allegations concerning the unnamed Globalstar source are also insufficient to raise a strong inference of the defendants' fraudulent intent. The plaintiffs allege that a former Globalstar senior business development manager stated that the December 1999 subscriber projections for the end of 2000 were based on the premise that a majority of Globalstar's 38 planned gateways were in operation as of October 1999, even though the defendants knew that only three gateways were actually operational at that time. (See Am. Compl. ¶ 37(b).) At the pleading stage, "confidential" sources need not 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." Novak, 216 F.3d at 314. Page 26

  Even assuming that a "senior business development manager" would possess the information alleged, the allegation is not specific enough to raise a strong inference of fraudulent intent. To plead scienter, the information alleged to be contradictory must suggest that the defendants knew, or were reckless in not knowing, that the subscriber projections were false or without any reasonable basis. The plaintiffs do not allege that the Globalstar "senior business development manager" ever alleged that the projections were false or misleading or should be withdrawn. The plaintiffs also do not allege that the unnamed Globalstar manager ever stated that the projections could not be achieved by the end of 2000. While the plaintiffs conclusorily allege that the defendants knew that the delay in rolling out gateways made the subscriber projections unrealistic, they provide no factual basis for that assertion. (See Am. Compl. ¶ 37(b).) When the actual subscribers fell behind initial projections, Schwartz acknowledged that fact and coupled it with the hope, but not the promise, that Globalstar would be able to recover in the later part of the year. (See Ex. 12 to Menton Aff. at 27.)

  Globalstar's progress in opening gateways was reported throughout the class period. The plaintiffs do not allege that the defendants ever misrepresented the number of gateways that were actually operational. Indeed, the defendants continually disclosed the number of gateways that were actually operational. Page 27 In a February 2000 press release, for example, the defendants stated that only ten gateways were operational. (Am. Compl. ¶ 39.) Loral's Form 10-Q for the quarter ending March 31, 2000, dated May 15, 2000, reported that as of March 31, 2000, eleven gateways were operational. (Loral Form 10-Q for the quarter ending March 31, 2000 ("Loral March 2000 Form 10-Q") attached as Ex. 19 to Menton Aff., at 17.) Loral's Form 10-Q for the quarter ending June 30, 2000, dated August 11, 2000, stated that seventeen gateways were operational. (Loral June 2000 Form 10-Q at 19.) Moreover, there is no contention that Loral misrepresented the rather meager actual revenues and usage of Globalstar throughout the class period. Loral's Form 10-Q for the quarter ending March 31, 2000 reported that Globalstar was in the development stage through 1999, began commercial operation in 2000, realized revenues of $600,000 for the quarter ended March 31, 2000, and increased its $42 million loss in 1999 to $57 million, measured by earnings before interest, taxes, depreciation, and amortization ("EBITDA"). (Loral March Form 10-Q at 20.) Loral's Form 10-Q for the quarter ended June 30, 2000, reported that Globalstar realized revenues of $700,000, on 1,137,000 minutes of billable service, and that Globalstar's EBITDA increased to $52 million in 2000. (Loral June Form 10-Q at 23.) Loral also candidly reported that "Globalstar's subscriber demand has been lower than anticipated and it mustachieve revenue quickly in order to meet a financial covenant Page 28 that will become effective in March 2001. . . ." (Id. at 19.) The plaintiffs' allegation does not raise a strong inference of fraudulent intent by the defendants.

  This case differs from cases such as Cosmas v. Hasset, 886 F.2d 8 (2d Cir. 1989), where the Court of Appeals concluded that the plaintiffs had raised a strong inference of fraudulent intent where the defendants stated that sales to China would be "ail important new source of revenue," even though they knew that China had imposed new import restrictions that made it "impossible" for the corporation at issue to make any sales to that country. Id. at 12-13. To raise a strong inference of fraudulent intent, as the plaintiffs did in Cosmas, the Amended Complaint must contain more specific allegations of the defendants' knowledge of facts or access to information timely contradicting the subscriber projections and the ability of Globalstar eventually to meet such projections than the plaintiffs have alleged here.

  Therefore, the defendants' statements concerning the actual and projected number of Globalstar subscribers are not sufficient circumatantial evidence of conscious misbehavior or recklessness by the defendants such that the statements raise a strong inference of fraudulent intent. See Shields, 25 F.3d at 1129 ("[M]isguided optimism is not a cause of action, and does not support an inference of fraud. We have rejected the Page 29 legitimacy of alleging fraud by hindsight." (internal quotation marks omitted)).*fn5

  2

  The plaintiffs allege that, throughout the class period, the defendants misrepresented the pace at which the gateway rollout was proceeding, and failed to disclose that Globalstar was having problems with specific gateways, particularly those related to China.

  The plaintiffs specifically allege (1) that during a March 8, 2000 conference call Schwartz failed to disclose problems with respect to Globalstar's rollout in South and East Africa Page 30 (Am. Compl. ¶¶ 46b); (2) that as of March 2000, the defendants knew that the two of the three anticipated China gateways were not operational, and therefore Globalstar would fall far short of its anticipated 58,000 Chinese subscribers (Am. Compl. ¶ 47); and (3) that Globalstar's May 25, 2000 announcement that 100,000 new Chinese subscribers would exist by 2002-2003 was fraudulent given Globalstar's knowledge of the failure of the China gateways. (Am. Compl. ¶¶ 67-69.)

  In the context of the substantial and ongoing public disclosures that Loral and Globalstar made in their public SEC filings, these alleged facts do not raise an inference of conscious misbehavior or recklessness. In its 1998 Form 10-K, Globalstar disclosed the obvious facts that its operations could be delayed by, among other things, "regulatory delays," "delay in the integration of Globalstar's system into the land-based network," "changes in technical specifications," "construction delays," "launch delays or failures," and "slower-than-anticipated consumer acceptance." (Globalstar 1998 Form 10-K at 16-17.) The disclosures placed investors on notice that delays could, occur in rolling out the Globalstar system's technological infrastructure, including the gateways. Similar warnings were repeated in subsequent public filings. (See, e.g., Loral 1999 Form 10-K at 18 ("Globalstar service providers could fail to obtain local partners; to acquire, install or adequately Page 31 maintain and operate the Globalstar gateways; or to obtain the regulatory licenses needed for service in their countries.").)

  Moreover, prior to the Globalstar system coming on-line, Globalstar indicated that the nature of foreign operations entailed inherent uncertainty and risk, and it was therefore impossible to guarantee success regarding foreign markets or their subscribers. (See Globalstar 1998 Form 10-K at 17 ("GLOBALSTAR FACES RISKS INHERENT IN FOREIGN OPERATIONS."); Loral 1999 Form 10-K at 18 ("Globalstar service providers could fail to obtain local partners. . . . If Globalstar is unable to offer service in any particular region or country, it will not benefit from the potential demand in that region or country."). Given these broad disclosures in which the defendants plainly reveal the risks inherent in operations in foreign markets, the defendants' statements concerning the possible success of foreign operations do not give rise to an inference of fraudulent intent. The plaintiffs' conclusory allegations of fraud are further undercut by the fact that, as explained above, there is no allegation that Loral failed to disclose the actual number of gateways that were in fact operational, and Loral did disclose the progress of opening gateways. Indeed, the plaintiffs' own allegations make it clear that Loral accurately announced in May 2000 that it opened only one of three gateways in China and the other two were only expected to be opened toward the end of 2000. (See Am. Compl. ¶ 67.) Page 32

  3

  The plaintiffs allege that the defendants failed to disclose the impact that the growing market for cellular telephones would have on the demand for Globalstar's services. (Am. Compl. ¶¶ 10, 37c, 46b.) In the context of the consistent disclosures by the defendants, there is no basis to infer from this alleged omission that the defendants acted with scienter. For example, prior to the class period, it was reported:

It is expected that as land-based telecommunications service expands to regions currently not served by wireline or cellular services, demand for Globalstar service in those regions may be reduced. If such systems are constructed at a more rapid rate than that anticipated by Globalstar, the demand for Globalstar service may be reduced at rates higher than those assumed by Globalstar. . . . New technology could render Globalstar obsolete or less competitive by satisfying consumer demand in alternative ways . . .
(Globalstar 1998 Form 10-K at 13-14.) This warning was substantially reiterated in Loral's 1999 Form 10-K. (See Loral 1999 Form 10-K at 23-24 ("Globalstar faces intense competition for customers from various companies, including providers of land-based mobile phone services. . . .").) Given the defendants' disclosures concerning the relevant competitive market forces, including cellular telephone services, the defendants' alleged failure to disclose that Globalstar's success would be affected by the growing market for cellular telephones does not give rise to an inference of conscious misbehavior or recklessness on the part of the defendants. Page 33

  4

  The plaintiffs allege that the defendants failed to disclose problems arising out of the Globalstar system's inability to support calls placed by subscribers in one gateway to subscribers in another gateway, a feature known as "inter-gateway roaming." (Am. Compl. ¶¶ 36, 37d, 69.) The plaintiffs allege that during a March 8, 2000 conference call Schwartz misled investors by indicating that inter-gateway roaming problems were limited to specific gateways, and that those problems would be resolved by April 2000. (Am. Compl. ¶ 44.)

  The statements regarding inter-gateway roaming are not sufficient circumstantial evidence of conscious misbehavior or recklessness by the defendants. As noted above, the defendants consistently indicated that technological difficulties could be expected in implementing the Globalstar system. The defendants disclosed that the gateways could encounter technological hurdles; the inter-gateway roaming problem was one of those hurdles. (See, e.g., Globalstar 1998 Form 10-K at 16-17.) There are no facts alleged that would suggest that the defendants' statements or omissions concerning inter-gateway roaming were either intentionally or recklessly false or misleading. The defendants made substantial disclosures concerning the technological difficulties that could arise in a space-based telecommunications systems, and any statements or omissions that the defendants made concerning inter-gateway Page 34 roaming within the Globalstar system do not give rise to an inference of fraudulent intent.

  5

  The plaintiffs allege that the defendants' statements distinguishing Globalstar from Iridium, which filed for bankruptcy after failing to establish a space-based telecommunications system similar to Globalstar's, give rise to an inference of fraudulent intent. The plaintiffs allege that in interviews with Aerospace Daily, International Herald Tribune, CNET News.com, and Daily Deal.com, and in an appearance on a CNBC news show, Schwartz materially misrepresented the differences between Iridium's bankruptcy and Globalstar's future prospects. (Am. Compl. ¶¶ 33, 35, 41-42, 48-49.)

  However, in the context of the defendants' other disclosures about Iridium, the statements by Schwartz do not give rise to a strong inference of fraudulent intent. For example, Loral's 1999 Form 10-K contains the following explicit disclosure concerning Iridium:

  Since telephone systems using low-earth orbit satellites are a new commercial technology, we cannot predict demand for Globalstar's service. The first company to launch service in this industry, Iridium L.L.C. filed for bankruptcy in August 1999. More recently, Iridium announced that it was terminating commercial service on March 17, 2000 and that it was commencing the process of liquidating its assets. If Globalstar fails to generate sufficient cash flow from operations through the marketing efforts of its service providers, it will be unable to fund its operating costs or service its debt. Page 35

  (Loral 1999 Form 10-K at 17.) This statement discloses the existence of Iridium's failures and indicates that Globalstar could conceivably suffer the same fate. In the context of this overall and generalized warning, any representations made by Schwartz in attempting to distinguish Globalstar from Iridium do not give rise to an inference of fraudulent intent.

  6

  The plaintiffs allege that investors were misled by the defendants' statements that Loral would continue to support Globalstar, and that these statements are further circumstantial evidence of conscious misbehavior or recklessness on the part of the defendants. The plaintiffs allege that the defendants made misrepresentations regarding Loral's intentions to invest in Globalstar on at least two occasions. The plaintiffs allege that in a June 2000 interview with Reuters, Schwartz stated that Loral "would continue to back Globalstar" and that Loral "would continue to make this investment because we think it is a very good business. That is why we are not going to get out of the business." (Am. Compl. ¶ 70.) The plaintiffs further allege that in an August 27, 2000 interview with The New York Times Schwartz stated that he remained optimistic about Globalstar and that Loral would continue to be a financial supporter of Globalstar. (Am. Compl. ¶ 86.) The plaintiffs allege that these statements were made at the same time that Loral was Page 36 balking at the prospect of continuing its financial support of Globalstar. (Id.)

  These statements do not provide sufficient circumstantial evidence of conscious misbehavior or recklessness on the part of the defendants. The plaintiffs have not alleged any facts that suggest that the statements were intentionally or recklessly false. The plaintiffs' conclusory allegation that Loral was "balking" at future financial support of Globalstar is insufficient. See Shields, 25 F.3d at 1129 (concluding that "pleading technique [that] couple[s] a factual statement with a conclusory allegation of fraudulent intent" is insufficient to raise a strong inference that the defendants knew or recklessly disregarded facts).

  Moreover, to the extent that Loral did in fact reduce its financial support of Globalstar, the defendants' prior disclosures concerning the risk involved in the Globalstar venture indicated that Loral's future investment in Globalstar was not guaranteed and would not necessarily continue indefinitely. For example, Loral's 1999 Form 10-K stated: "We intend to use our available cash, and the net proceeds from our February 2000 offering of preferred stock to help pay for the growth and operation of our businesses. If any of our subsidiaries or affiliates finds itself faced with an imminent default, we may be faced with a choice between providing additional support to that company or accepting the loss of some Page 37 or all of our equity investment." (Loral 1999 Form 10-K at 17.) Loral's 1999 Form 10-K also disclosed the boundaries of its investment in Globalstar, the fact that Globalstar was in need of additional financing, and the fact that no assurances could be made that additional funding would be available. (See Loral 1999 Form 10-K at 44-45.) The substance of these disclosures was reiterated in Loral's subsequent filings with the SEC. (See, e.g., Loral March Form 10-Q at 23-24.)

  Given the defendants' statements in public disclosures that Loral's financial investment in Globalstar was not unconditional, and given the plaintiffs' failure to allege any facts suggesting that defendant Schwartz's statements about Loral's ongoing financial support of Globalstar were intentionally or recklessly false when they were made, Schwartz's statements do not give rise to a strong inference of fraudulent intent.

  7

  The plaintiffs also allege that the defendants violated their own internal accounting practices as well as Generally Accepted Accounting Principles ("GAAP") by failing to take an impairment charge on its investment in Globalstar before April 2, 2001, the date on which it actually took the charge. (See Am. Compl. ¶¶ 7-8, 39-40, 53, 58-60, 62-63, 77, 82-85, 96-99, 103.) The plaintiffs specifically allege that Loral's delay in writing down its investment in Globalstar violated Financial Accounting Page 38 Standards Board Statement Nos. 5 and 121. The plaintiffs also allege that by using a twenty-year amortization period Loral falsely indicated that Globalstar continued to be a viable business. The plaintiffs contend that these alleged violations of accounting principles give rise to a strong inference of scienter.

  These allegations are similar to those that the Court of Appeals in Shields found insufficient to plead scienter. See Shields, 25 F.3d 1128-29. As in Shields, the plaintiffs' allegations lack "particularized facts to support the inference that the defendants acted recklessly or with fraudulent intent." Id. at 1129. The plaintiffs use the Amended Complaint "to couple a factual statement with a conclusory allegation of fraudulent intent," but as the Court of Appeals explained in Shields, to plead scienter plaintiffs must allege facts that give rise to a strong inference that the defendants knew or recklessly disregarded information contradicting the alleged misstatements or omissions. Id.

  The plaintiffs try to avoid this problem by alleging that the defendants had internal reports that indicated that Loral should have taken an impairment charge long before April 2, 2001. These are the same internal reports that the plaintiffs allege included information that contradicted the defendants' statements concerning the actual and projected Globalstar subscribers. However, for the reasons stated above, the Page 39 plaintiffs have not adequately identified the ostensible reports or the specific information contained in them that the defendants either intentionally or recklessly disregarded when determining whether to take an impairment charge on its investment in Globalstar. There are no allegations that there were any internal reports that suggested that the failure to take an impairment charge earlier was an incorrect application of accounting principles, much less an error so grievous that it exceeded differences over accounting principles and rose to the level of fraud.

  As the public filings discussed above indicate, the evolving poor performance of Globalstar during 2000 was publicly disclosed. When the impairments became so severe as to require specific accounting charges, and whether the requirements of the accounting principles were satisfied, necessarily involved issues of judgment. See Thor Power Tool Co. v. Comm'r Internal Revenue, 439 U.S. 522, 544 (1979) ("`Generally accepted accounting principles' . . . tolerate a range of `reasonable' treatments, leaving the choice among alternatives to management.".) The failure to comply with standard accounting practices, without more, does not constitute circumstantial evidence of misconduct or recklessness. "Mere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud." Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999) Page 40 (quotations omitted); see also Chill, 101 F.3d at 270 ("Allegations of a violation of GAAP provisions or SEC regulations, without corresponding fraudulent intent, are not sufficient to state a securities fraud claim."); S.E.C. v. Price Waterhouse, 797 F. Supp. 1217, 1240 (S.D.N.Y. 1992) (noting that "misapplication of accounting principles" is insufficient to state securities fraud claim). The plaintiffs have failed to allege sufficient facts to show that the failure to take an earlier impairment charge was so clearly required by accounting principles that the failure to take such a charge was fraudulent, particularly in view of the disclosures of the ongoing poor performance of Globalstar. Therefore, the plaintiffs allegations that the defendants violated various accounting practices by incorrectly calculating Globalstar's losses and by failing to recognize impairment losses in Loral's public SEC filings do not give rise to the necessary inference of fraud.

  Accordingly, the plaintiffs have failed to plead scienter under either of the two approaches permitted for securities fraud claims. None of the allegations in the Amended Complaint, either individually or in combination, give rise to the strong inference of scienter required by Rule 9(b) and the PSLRA. Page 41 Therefore, the defendants' motion to dismiss the § 10(b) and Rule 10b-5 claim for failure to state a claim is granted.*fn6

  III

  The defendants also move to dismiss the plaintiffs' claims on the grounds that the statements identified by the plaintiffs as misrepresentations or omissions are not actionable under § 10(b) or Rule 10b-5 because they are statements that are merely predictive statements reflecting the defendants' optimism about Globalstar. As the Court of Appeals recently stated, "[u]nder the bespeaks caution doctrine, `alleged misrepresentations in a stock offering are immaterial as a matter of law [if] it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering.'" Rombach, 355 F.3d at 173 (quoting Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002)). In making this determination, the Court must analyze

 

the allegedly fraudulent materials in their entirety to determine whether a reasonable investor would have been misled. The touchstone of the inquiry is not whether isolated statements within a document were true, but whether defendants' representations or omissions, considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered.
Id. (quoting Halperin, 295 F.3d at 357). The Court of Appeals also observed that "expressions of puffery and corporate Page 42 optimism do not give rise to securities violations." Id. at 174.

  Although not all of the categories of statements in the Amended Complaint are statements predicting future events or are of an optimistic quality, three sets of statements do fall in this category, namely: (1) statements regarding the expected number of Globalstar subscribers that the defendants expected to have by a certain time (see, e.g., Am. Compl. ¶¶ 33-36, 38-39, 43-44, 46a, 61); (2) statements regarding the number of expected Chinese subscribers (see Am. Compl. ¶¶ 47, 67-69); and (3) statements by Schwartz predicting when inter-gateway roaming problems would be fixed. (See Am. Compl. ¶ 44.) For the reasons explained above, when these statements are placed in the context of all of statements made by the defendants, no reasonable investor could have been misled by them, because they are statements about predicted future events and reflected the company's optimism. As such, they are not actionable under the Exchange Act. See San Leandro, 75 F.3d at 811-12 (collecting cases) (holding defendants had no duty to disclose adverse sales figures notwithstanding prior statements that projected continued growth and profitability); Lasker v. New York State Elec. & Gas Corp., 85 F.3d 55, 58-59 (2d Cir. 1996) (per curiam) (affirming district court's determination that company's statements regarding future earnings, sales goals, and desire for continued prosperity constituted unactionable puffery); Page 43 Shields, 25 F.3d at 1129-30 ("People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their stewardship and the prospects of the business that they manage.").*fn7

  IV

  The defendants also move to dismiss the plaintiffs' claim against Schwartz, an individual defendant, brought under Section 20(a) of the Exchange Act.

  Section 20(a) provides that "[e]very 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 or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t. To make out a prima facie case under Section 20(a) a plaintiff "must show a primary violation [of the Exchange Act] by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in Page 44 some meaningful sense a culpable participant in the fraud perpetrated by the controlled person." First Jersey Sec. Inc., 101 F.3d at 1472 (quotation marks and internal alterations omitted). For the reasons states above, the plaintiffs have failed to allege sufficient facts to demonstrate a violation of § 10(b) of the Exchange Act by Loral; therefore, the plaintiffs have not satisfied the first element of a § 20(a) claim. Consequently, the § 20(a) claim against defendant Schwartz is dismissed.

  CONCLUSION

  The Court has considered all of the remaining arguments of the parties, and they are either moot or without merit. For the reasons stated above, the defendants' motion to dismiss the claims in the Amended Complaint against defendants Schwartz and Townsend is granted.

  SO ORDERED.


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