The opinion of the court was delivered by: JED RAKOFF, District Judge
Plaintiffs in these three now-consolidated class actions
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
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).
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
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"
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,
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
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Third, Lehman argues that plaintiffs' claims should be
dismissed pursuant to the "bespeaks caution" doctrine, see
Halperin v. eBanker USA.com, 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 ...