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March 29, 2004.


The opinion of the court was delivered by: JED RAKOFF, District Judge


Plaintiffs in these three now-consolidated class actions Page 2 represent a class of purchasers who bought stock in a company called RealNetworks, Inc. ("RealNetworks") between July 11, 2000 and July 18, 2001. See Consolidated Class Action Complaint ("Complaint") ¶ 1. RealNetworks, which initially went public in November 1997, provides software products and services for Internet media delivery. Id. ¶ 2.

  One of RealNetworks' investment banks was defendant Lehman Brothers ("Lehman"), which served as co-managing underwriter of RealNetworks' secondary offering of common stock in June 1999. Complaint ¶ 2. Lehman also publishes research analyst reports on selected companies. At all times here relevant, these reports had a five point rating system that reflected how the analyst covering the stock and writing the report believed the stock would perform relative to the market generally, with "1" being the most positive in terms of recommending a purchase. Id. ¶ 15.

  The Lehman research analyst who covered RealNetworks and whose reports are at issue in the instant case is co-defendant Michael Stanek.*fn1 Complaint ¶ 1. Stanek issued thirteen research reports on RealNetworks during the class period, all of which rated RealNetworks as a "1" and recommended purchase Page 3 of its stock. Complaint ¶¶ 18-36.

  On April 28, 2003, the Securities and Exchange Commission ("SEC") publicly released emails it had gathered as part of its investigation of Lehman's research analyst reports. Complaint ¶ 37. In one of these emails, dated July 18, 2000, Stanek told an institutional investor that "[RealNetworks] has to be short bigtime." Id. ¶ 22. The institutional investor replied on July 19, 2000, saying "nice call on [RealNetworks]. . . I mean all the upside from crappy ad business . . . why aren't people jumping up and down saying this sucked??? . . . nice call on your part anyhow." Stanek replied in turn that "we bank these guys so I always have to cut the benefit of the doubt." Id. In another email, written in January 2001, Stanek stated that "if it's in my group it's a short." Id. ¶ 34.

  Shortly following the public disclosure of these emails, the plaintiffs filed these actions, which were then consolidated. The Consolidated Class Action Complaint, filed on September 22, 2003, alleges violations of Section 10b (and Rule 10b-5 promulgated thereunder) and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and t(a). Page 4

  See Complaint ¶¶ 68-79. Specifically, the Complaint alleges that the plaintiff class was fraudulently induced to purchase shares in RealNetworks by Lehman's allegedly inflated ratings and recommendations, and that they suffered substantial losses when the company's true condition became known. Id. ¶¶ 18-36.

  Lehman moves to dismiss the Complaint on no fewer than five separate grounds. For the reasons stated below, the motion to dismiss is denied in its entirety.

  First, Lehman argues that plaintiffs have failed to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4b(1), with respect to pleading the falsity of the Lehman reports on which plaintiffs allegedly relied. The PSLRA raises the already heightened pleading requirements of Rule 9(b) to a requirement that, in a securities fraud lawsuit, the plaintiff "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).

  The primary statements here alleged to be misleading are the ratings themselves and the accompanying "bullish" Page 5 analysis. Lehman argues that since the texts of the research reports contain some language skeptical of RealNetworks' value, the public was adequately informed of the risks involved. But the very fact that, notwithstanding the skeptical language, the reports gave RealNetworks the highest possible "buy" rating is tantamount to a statement that the reader of the reports should discount the skeptical language — a materially misleading statement in light of what Stanek actually knew and believed, as indicated by the emails. At the very least, it is a question for the jury. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 (2d Cir. 2000) (truth-on-the-market defense is "intensely fact-specific" and "rarely an appropriate basis for [dismissal]").

  Lehman responds that Stanek's two emails, written in July 2000 and January 2001, respectively, are not sufficient to support the pleading that all the research reports issued between July 2000 and July 2001 were misleading. But the consistency of Stanek's expression of his secretly negative views of the stock in July 2000 and January 2001 could support a reasonable inference that this was his view throughout this six-month period and, indeed, throughout the period that he continued to give RealNetworks his very highest rating (i.e., through July, 2001). Page 6

  Second, Lehman argues that plaintiffs have failed to meet the PSLRA standard for pleading scienter, i.e., "plaintiffs must `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000). But as already indicated with respect to the issue of falsity, supra, the stark difference between what Stanek was effectively recommending to readers of his reports, i.e., "buy," and what he was effectively recommending to preferred customers in his emails, i.e. "sell," supports a reasonable inference of an intent to mislead and defraud the former. Indeed, falsity and intent here overlap, for effectively the false statement in the reports is "Based on my investigation of the company and the application of my expertise, I honestly believe you should buy" when the truth is "Based on my investigation of the company and the application of my expertise, I honestly believe you should sell." See Commissioner v. Culbertson, 337 U.S. 733, 743n.12 (1949) ("the state of a man's mind is as much a fact as the state of his digestion") (quoting Edgington v. Fitzmaurice, 29 L.R.Ch. Div. 459, 483 (Bowen, L.J.)).*fn2 Page 7


  Third, Lehman argues that plaintiffs' claims should be dismissed pursuant to the "bespeaks caution" doctrine, see Halperin v. eBanker, Inc., 295 F.3d 352, 357 (2d Cir. 2002), because the reports in question expressed numerous reservations about RealNetworks and the risks of investing therein. This argument, which considerably overlaps with Lehman's first argument, supra, fails because a reasonable fact-finder could conclude that Lehman, in repeatedly and disingenuously giving RealNetworks its highest "buy" rating, was effectively representing that it did not believe the risks involved should deter a prudent investor from purchasing RealNetworks, whereas in fact (according to Stanek's emails taken most favorably to plaintiffs) it actually believed ...

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