The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge
AMENDED OPINION AND ORDER
Plaintiffs, a group of investors, allege that Defendants, comprising a
number of companies and the investment bank Credit Suisse First Boston
Corp. ("CSFBC"), engaged in a concerted scheme to defraud the market by
publishing artificially deflated revenue projections for the companies in
which Plaintiffs invested. This scheme allegedly created a market
environment in which investors expected each company to exceed its
revenue forecasts.*fn1 Plaintiffs now move for leave to amend their
complaint, and Defendants oppose that motion on the ground that amendment
would be futile. Plaintiffs also move to appoint Robert W. Tenney as lead
plaintiff pursuant to the Private Securities Litigation Reform Act
("PSLRA"), 15 U.S.C. § 78u-4(a)(3), and Defendants do not oppose that
motion.
Plaintiff Amy Liu filed her original complaint (the "Initial
Complaint") in the Southern District of Florida on February 28, 2003,
alleging that she bought shares from a single issuer, Commerce One, Inc.
("Commerce One").*fn2 The Initial Complaint sought to bring an action on
behalf of purchasers of 49 additional issuers from which Liu had not bought any securities, and
alleged that those issuers conspired with CSFBC and various of its
affiliates.*fn3 In June 2003, Plaintiffs filed a First Amended
Complaint, adding named plaintiffs Antoine Kasprzak, who purchased shares
of Airspan Networks, Inc. ("Airspan") and Robert Tenney, who purchased
shares of Commerce One, and dropping 31 of the 50 original issuer
defendants.*fn4 Plaintiffs' claims against Commerce One were dismissed
by the Florida court on July 16, 2003, for lack of service, and
Plaintiffs voluntarily dismissed their claims against Airspan on July
22, 2003.*fn5 "On August 12, 2003, when the MDL panel ordered the Liu
action transferred to this Court [as part of In re Initial Public
Offering Securities Litigation], only eight issuers remained in the
action."*fn6 On October 2, 2003, Plaintiffs filed this motion, together
with their proposed SAC. III. THE PROPOSED SECOND AMENDED COMPLAINT
The following facts are alleged in the SAC, and are deemed true for the
purposes of this motion.
Plaintiffs allege that the following named plaintiffs purchased
securities of various issuers in the open market during each relevant
Subclass Period: Amy Liu purchased an undisclosed number of Commerce One
securities; Antoine Kasprzak purchased 1,000 shares of Airspan
securities; Robert Tenney purchased over 20,000 shares of Commerce One
securities; Robert Tate purchased 10,000 shares of Bsquare Corp.
("Bsquare") securities; Mary Gorton purchased 5,350 shares of CacheFlow,
Inc. ("CacheFlow") securities; Carla Kelly purchased 3,500 shares of
Efficient Networks, Inc. ("Efficient Networks") securities; Henry
Ciesielski purchased 200 shares of eMachines, Inc. ("eMachines")
securities and 45 shares of McData Corp. ("McData") securities; Ed Grier
purchased 7,900 shares of E.piphany, Inc. ("E.piphany") securities; Frank
Turk purchased 200 shares of Handspring, Inc. ("Handspring") securities;
Jennie Papuzza purchased 200 shares of InterNAP Network Services Corp.
("InterNAP") securities; Stanley Warren, as trustee for the Warren Family
Trust, purchased 1,000 shares of Lightspan Partnership, Inc.
("Lightspan") securities; Ellen Dulberger purchased 1,000 shares of SupportSoft, Inc., formerly Support.com, Inc.
("SupportSoft") securities; Craig Mason purchased 500 shares of Tanning
Technology Corp. ("Tanning") securities; Sharon Brewer purchased over
4,000 shares of Tumbleweed Communications Corp. ("Tumbleweed")
securities; and Lloyd Hinn purchased 1,000 shares of Tumbleweed
securities.*fn7
Defendant CSFBC is a Massachusetts corporation doing business as an
investment bank, and was at all relevant times a registered broker-dealer
and member of the National Association of Securities Dealers, Inc.
("NASD").*fn8 CSFBC was a lead underwriter for the IPOs of each of the
following issuers: Airspan, Bsquare, CacheFlow, Commerce One, eMachines,
Efficient Networks, E.piphany, Handspring, InterNAP, Lante Corp.
("Lante"), Lightspan, McData, New Focus, Inc. ("New Focus"),
SupportSoft, Tanning and Tumbleweed (collectively, the "Issuers").*fn9
CSFBC is a wholly-owned subsidiary of defendant Credit Suisse First
Boston (USA), Inc. ("CSFB-USA"), a Delaware corporation, which is in turn
a wholly-owned subsidiary of defendant Credit Suisse First Boston, Inc. ("CSFBI"), also a Delaware corporation.*fn10 CSFBI is
jointly owned by defendant Swiss bank Credit Suisse First Boston ("CS")
and defendant Swiss holding company Credit Suisse Group ("CSG").*fn11 CS
is wholly owned by CSG.*fn12 On or about November 3, 2000, CS acquired
an underwriter, Donaldson Lufkin & Jenrette, Inc. ("DLJ"), which
subsequently became CSFB-USA.*fn13 Defendants Frank Quattrone, George
Boutros and William Brady were employed by CS to operate and manage
CSFBC's Technology Group (the "Technology Group"). "CSFB Defendants"
comprises CSFBC, CSFBI, CSFB-USA, CS, CSG and the Technology Group.
Plaintiffs name as defendants five of the sixteen Issuers (the "Issuer
Defendants"), to wit: Efficient Networks, eMachines, Lightspan, Tanning,
and Tumbleweed. Plaintiffs do not name as Issuer Defendants the other
eleven Issuers managed by the CSFBC Defendants, specifically Airspan,
Commerce One, Bsquare, CacheFlow, McData, E.piphany, Handspring,
InterNAP, Lante, New Focus, and SupportSoft.*fn14
Plaintiffs allege that various individuals affiliated with the Issuer
Defendants who signed the registration statements associated with each
company's IPO (the "Issuer Individuals")*fn15 "directly participated and
[were] integrally involved in the management of the Issuer, [were]
directly involved in the day to day operations of the Issuer and [were]
privy to confidential proprietary information concerning the Issuer," and
that, as such, those individuals are properly treated as a group for
pleading purposes.*fn16 Plaintiffs further allege that each of the
Defendants knowingly made misstatements and omissions on which they knew
members of the Class were likely to rely, and thus are subject to joint and several liability under the PSLRA.*fn17 Plaintiffs allege that the
Technology Group, CSFBC and each of the Issuer Defendants "pursued a
conspiracy, common enterprise, and/or common course of action and acted
in concert with and conspired with one another, in furtherance of their
common plan . . ., "*fn18 Quattrone, Boutros and Brady, together with
the Technology Group and CSFBC, were the central actors in the
conspiracy, creating separate but nearly identical schemes involving each
of the Issuers, and developed the "system of fraud" alleged by
Plaintiffs.*fn19 "Each Issuer Individual, because of his or her position
of control and authority . . . was able to and did control the contents
of the various quarterly and annual financial reports, research reports,
revenue data, SEC filings, and press releases for the Issuer with which
he or she was employed."*fn20 The central core of conspirators provided
each Issuer Defendant "with copies of that Issuer's [allegedly
fraudulent] reports, releases, and filings . . . prior to or shortly
after their issuance and the Issuer Individuals had the ability and
opportunity to prevent their issuance or to cause them to be corrected."
The issuance of these reports "manipulated, misrepresented, and failed to disclose the
true facts regarding Issuers' revenues, earnings, markets, business,
management, financial condition, and future prospects."*fn21 Plaintiffs
allege that each defendant acted either "knowingly or in such a reckless
or grossly negligent manner as to constitute a fraud and deceit upon
Issuer's shareholders."*fn22
Plaintiffs allege that they were not put on notice of the alleged
wrongdoing until counsel, while investigating the Initial Complaint,
uncovered the scheme in February 2003.*fn23 Plaintiffs further allege
that the alleged fraud had never been the subject of media attention
before the Initial Complaint was filed, and further that CSFB and
Quattrone affirmatively "undertook to conceal from Government regulators
and the investing public the fraudulent scheme."*fn24 Plaintiffs contend
that "many of the essential facts reflecting the fraudulent scheme were
not discovered until March of 2003, when Plaintiffs' counsel received additional documents detailing the fraud."*fn25 Plaintiffs
further contend that they did not discover Quattrone's and CSFBC's
spoliation and concealment of evidence until after the Initial Complaint
was filed.*fn26
Plaintiffs bring this suit on behalf of themselves and the members of a
putative class (the "Class") comprising all "persons and entities who
purchased common stock of each Issuer" during the Class Period.*fn27 The
Class Period is itself composed of sixteen Subclass Periods, which
correspond to purchases made in the aftermarkets for each of the sixteen
Issuers.*fn28 The Class excludes all purchasers who bought stock during
the IPO of each Issuer, all Defendants and persons or entities controlled
by them, any conspirators identified within the SAC but not sued, and all
purchasers who sold their stock for a profit during the Class Period.*fn29 Each Issuer's securities were actively traded on the NASDAQ during
each Subclass Period, and the Defendants conspired to manipulate the
publicly available information regarding each issue to create false
expectations of "upside surprise."*fn30 Plaintiffs allege that the
members of the Class are so numerous that joinder would be impracticable,
that the named plaintiffs' claims are typical of those of Class members
as a whole, and that the named plaintiffs will adequately protect the
interests of the class as a whole, and have retained counsel competent in
class and securities litigation.*fn31
Plaintiffs allege that, while marketing its services to prospective
Issuers, the Technology Group introduced a scheme called "Pop and
Performance," which is referenced by name on a number of marketing slides
used by the Technology Group.*fn32 The "Pop" a strong rise in share
price in the aftermarket immediately following an IPO occurred because
Defendants conducted each IPO at a deep discount compared to the actual
expected value of the issue.*fn33 Defendants informed certain potential purchasers of this
underpricing, and those individuals immediately bought large quantities
of the new issue at deeply discounted prices, causing a large price
increase immediately following the offering, which attracted other
purchasers to the security.*fn34 Plaintiffs allege that the "Performance"
in the Technology Group's formula refers to a system involving the
dissemination of artificially low revenue forecasts with the knowledge
that the actual revenue reports would exceed those forecasts, coupled
with the dissemination of statements encouraging the public to buy each
stock because of its strong revenue growth or potential for upside
surprise.*fn35
Plaintiffs allege that CSFBC had both the opportunity and motive to
commit fraud.*fn36 CS hired Quattrone and other investment bankers to
form the Technology Group, and granted Quattrone "unusual autonomy" to
structure the practice of the Technology Group.*fn37 Quattrone
established a separate research department within the Technology Group (the `Technology Research Team"),
which reported directly to Quattrone.*fn38 The Technology Research Team
included a number of equity research analysts, including some members who
enjoyed such good reputations that their public reports regularly
influenced the prices of securities on which they reported.*fn39 The
Technology Group used the reputation of these "All-Star" analysts "to
lure potential clients to its IPO practice."*fn40 Quattrone and the
other investment bankers in the Technology Group influenced the content
of the reports produced by the Technology Research Team, for each of the
companies brought public by the Technology Group.*fn41 The Technology
Group participated only in IPOs for which CSFBC was either the lead
manager or one of multiple "co-lead" managers.*fn42 CSFBC's leadership
position in these offerings enabled it to dominate many aspects of the
offering, including the conduct of due diligence regarding each Issuer,
the review and dissemination of performance forecasts, and the final determination of the initial offering price of
the stock.*fn43
Plaintiffs allege that CSFBC, Quattrone and the members of the
Technology Group each had direct incentives to maximize the number of
offerings they administered and ensure that each issuer's stock price
rose after its initial offering.*fn44 CSFBC and the Technology Group
"benefited from the fraud in the following ways: (1) payment of
investment banking fees; (2) payment related to secondary offerings; (3)
profits (actual and expected) from secret pre-IPO investments; (4)
allocations of lucrative IPO shares; (5) increased commissions as a
result of market making activity; and (6) other ancillary benefits,
including bonuses, publicity and the like."*fn45 Plaintiffs further
allege that CSFBC collected fees for conducting the IPOs for the Issuers
in excess of $148,474,000.*fn46 Quattrone and the other members of the
Technology Group also profited from increased business; they enjoyed a
profit-sharing agreement with CSFBC which entitled them to a large
proportion of the revenue generated by the Technology Group, a sum which may have been as large as $500,000,000 in 1999.*fn47
CSFBC also compensated its research analysts for investment business they
helped generate, including a share of the fees collected by the
Technology Group.*fn48
CSFBC, Quattrone and the Technology Group also benefited by the
increased demand both for the stocks they successfully promoted and for
their investment services.*fn49 Quattrone maintained a list of clients
within the Technology Group, and divided lucrative IPO allocations among
those clients, which were referred to internally as the "Friends of
Frank," a play on the more common "friends and family" plans whereby
underwriters distribute limited numbers of IPO shares to preferred
investors.*fn50 A number of hedge funds established by Quattrone and his
associates were among the beneficiaries of these IPO allocations.*fn51
CSFBC also profited directly from Quattrone's investment activities by
giving Quattrone $25,000,000 each year to invest on CSFBC's behalf in potential underwriting clients that were about to go public.*fn52
Plaintiffs further allege that CSFBC had actual knowledge of its
wrongdoing.*fn53 The Technology Group highlighted its success in
creating "Pop and Performance" in its presentations to prospective
clients.*fn54 The Technology Group knowingly set its IPO prices below
the issue's expected value, and communicated this price depression to
CSFBC's sales staff, which in turn used this information to create
interest in each Issuer's IPO.*fn55 The Technology Group conducted
detailed valuation analyses to form its opinions of the correct value of
each Issuer's company and to determine a corresponding projected stock
price, and referred to its purposeful understating of that estimate, in
various internal memos, as the "IPO Discount."*fn56 The Technology Group
presented the underpricing scheme to each Issuer, describing the purpose
and effect of understating the price for the IPO, and Issuers
subsequently adopted the discounted financial projections into the
forecast information they disseminated before their IPOs.*fn57 CSFBC's sales force then instructed the public
that each Issuer would likely enjoy strong revenue growth.*fn58
Moreover, after the required quiet period following each IPO, the
Technology Research Team's analysts published research reports
incorporating the discounted financial projections, and recommending each
issue as either a "Buy" or a "Strong Buy," as well as highlighting each
issue's potential for future upside surprise.*fn59
In July of 1998, CS agreed to establish a venture capital fund (the
"Venture Fund") managed by Quattrone, Boutros and Brady, contributing 99%
of the fund's equity through Merchant Capital, a CS subsidiary, and
claiming 80% of the profits of the fund.*fn60 Quattrone, Boutros and
Brady, doing business as QBB Management I LLC ("QBB Management"),
contributed 1% of the equity for the Venture Fund and reaped 20% of its
profits.*fn61 Merchant capital loaned QBB Management the 1% it needed to
establish the Venture Fund.*fn62 Beginning in the fall of 1999, Technology Group employees had the opportunity to share in
the investments of the Venture Fund through a series of corporations
created for the sole purpose of holding securities in issuers that the
Technology Group was about to take public.*fn63 Eventually, Merchant
Capital established two more funds with participation from CS and CSFBC
employees.*fn64
Despite the initial underpricing of their IPOs, the Issuer Defendants
profited from the success of Defendants' scheme.*fn65 Large price gains
in early trading increased publicity regarding the Issuers, and sustained
price growth increased each Issuer's bargaining power in future merger or
acquisition negotiations, as well as increasing the profitability of any
future public offerings.*fn66 The Issuer Individuals also profited from
stock price increases because higher stock prices increased the value of
their own substantial stock holdings.*fn67 The Technology Group and
CSFBC further enticed each Issuer Defendant with the prospect of "piggyback" offerings taking advantage of the artificially
high prices in the aftermarket.*fn68 These "piggyback" offerings also
allowed various Issuer Individuals to package some of their stock with
stock from the Issuer Defendants in offerings as soon as ninety days
after the initial offering, circumventing the usual six month waiting
period before which insiders would not have been permitted to sell their
stock in the market.*fn69 Each Issuer Defendant was presented with the
opportunity to defraud the public when CSFBC presented them with the
unusual structure of the Technology Group, which allowed investment
bankers to exert direct influence over the reports of associated
analysts.*fn70
Plaintiffs allege that each Issuer Defendant had actual knowledge of
its fraudulently understated prices because it had engaged in detailed
discussions with the Technology Group regarding IPO pricing, including
the advantages of pricing an IPO artificially low.*fn71 Each Issuer
Defendant was similarly aware of the discounting of revenue forecasts
"because the Technology Group had explained to each Issuer . . . the
purpose and strategy of discounting forecasted revenues in conjunction with the IPO."*fn72 Each Issuer Defendant had delivered to
the Technology Group's investment bankers the Issuer's projected income
statement, and was aware that the predictions issuing from the Technology
Group's analyst wing substantially differed from those internally
generated forecasts.*fn73
Plaintiffs allege that the Technology Group's standard practice was to
communicate the actual value of an issue and the discounted proposed
offering price to CSFBC's sales staff using two documents, an internal
"Equity Sales Book" and a "Sales Points Broadcast" (collectively referred
to as the "Sales Memo").*fn74 The Sales Memo, which provided "the basis
for sales pitches to potential buyers of Issuers' stock," failed to
describe the discounting of each Issuer's offering price.*fn75
Plaintiffs allege that this omission made CSFBC's statements regarding
the offering price of each issue misleading.*fn76 The Sales Memo also
contained statements reflecting the revenue forecast for each Issuer, which plaintiffs contend was fraudulently understated.*fn77 Plaintiffs
allege ...