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June 28, 2004.


The opinion of the court was delivered by: DENISE COTE, District Judge


Defendants Citigroup Inc. ("Citigroup"), Citigroup Global Markets Inc., formerly known as Salomon Smith Barney Inc. ("SSB"), and Jack Grubman ("Grubman") (collectively, "SSB Defendants") have moved to dimiss a class action complaint asserting federal securities law claims based on a derivative security whose value was linked to the value of the common stock of WorldCom, Inc. ("WorldCom"). The plaintiffs assert Sections 11 and 12(a)(2) claims under the Securities Act of 1933 ("Section 11," "Section 12(a)(2)," and "Securities Act"), and Sections 10(b) and 20(a) claims under the Securities Exchange Act of 1934 ("Section 10(b)," "Section 20(a)," and "Exchange Act") in connection with an instrument called Targeted Growth Enhanced Terms Securities With Respect to the Common Stock of MCI WorldCom, Inc. ("TARGETS"). For the following reasons, the motion to dismiss is granted in part.


  On June 25, 2002, WorldCom announced a massive restatement of its financial statements. Government investigations and prosecutions followed. WorldCom entered bankruptcy in the summer of 2002, and has recently emerged from bankruptcy.

  Civil litigation had anticipated the June 25 announcement. The first class action concerning WorldCom securities was filed in this district on April 30, 2002. The WorldCom class actions in this district were consolidated on August 15, 2002, and the WorldCom securities litigation as a whole, including many actions bringing individual as opposed to class claims and actions filed throughout the nation and transferred here by the Judicial Panel on Multi-District Litigation, was consolidated through Orders of December 23, 2002, and May 22, 2003 (collectively, the "Securities Litigation"). See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2002 WL 31867720, at *1 (S.D.N.Y. Dec. 23, 2002); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2003 WL 21219037 (S.D.N.Y. May 22, 2003).

  Two class actions have been filed in connection with derivative securities that were linked to WorldCom's stock price. On February 13, 2003, an action brought on behalf of purchasers of "GOALs" was filed.*fn1 On January 6, 2004, that action was dismissed for failure to state a claim. In re PaineWebber GOALs Sec. Litig., 303 F. Supp.2d at 390. Of particular relevance to this motion, the GOALs complaint was dismissed on the ground that it failed to plead the existence of a false statement when it relied for such an allegation on the accurate listing of historical WorldCom stock prices in the GOALs prospectus. Id.

  The first TARGETS action was filed on November 26, 2003. A second action was filed on December 18, 2003. A consolidated class action complaint ("Complaint") was filed on March 5, 2004. Plaintiffs seek recovery for those who purchased TARGETS between June 22, 1999 and April 21, 2002, and were damaged thereby.

  The initial TARGETS registration statement became effective on February 3, 1999; there was an amended registration statement of March 8, 1999. 5,600,000 of TARGETS shares were issued by an SSB affiliate in June 1999. As the June 24, 1999 prospectus for the TARGETS ("Prospectus") advised investors, WorldCom was not affiliated with the issuer of TARGETS and had no obligations with respect to TARGETS. The Prospectus reported the history of WorldCom stock prices from 1994 to the second quarter of 1999.

  TARGETS are synthetic equity-linked debt securities. Investors in TARGETS were entitled to receive a predetermined dividend for each quarter between purchase date and maturity date. The TARGETS were due August 15, 2002. The redemption value at maturity was linked to the trading price of WorldCom's common stock at that time with a cap on appreciation that allowed purchasers to participate in the "first 40% of appreciation in the price" of WorldCom stock. The Complaint asserts that the price of TARGETS in the secondary market rose and fell with the price of WorldCom stock.*fn2

  The Complaint alleges that the Prospectus failed to disclose conflicted business relationships between the SSB Defendants and WorldCom in violation of Sections 11 and 12(a)(2).*fn3 The complaint filed on October 11, 2002 in the consolidated WorldCom class action describes an alleged illicit, quid pro quo relationship between the SSB Defendants and WorldCom that was undisclosed to investors and it is on those allegations which the plaintiffs in the TARGETS litigation rely. The allegations are described in some detail in the May 19, 2003 Opinion on the first wave of motions to dismiss the WorldCom class action complaint and that discussion is incorporated here. See In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d 392, 404-406 (S.D.N.Y. 2003). The Complaint also alleges violations of Sections 10(b) and 20(a), as well as Rule 10b-5, based on purported omissions from the Prospectus and SSB's research reports on WorldCom.

  The SSB Defendants have moved to dismiss on the ground that many of the claims are time-barred; that the claims based on the Prospectus' listing of historical WorldCom stock prices fail to plead a misrepresentation or material omission; that the Section 10(b) claims based on the Prospectus fail adequately to plead scienter; that the Section 10(b) claims based on the research reports fail to plead statements made "in connection with" TARGETS; and that the Section 12(a)(2) claim is defective to the extent that it seeks recovery from SSB for secondary market purchases. Discussion

  When considering a motion to dismiss, a court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 68 (2d Cir. 2000). "Dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief." Raila v. United States, 355 F.3d 118, 119 (2d Cir. 2004).

  Plaintiffs' Sections 11, 12(a)(2), and 20(a) claims are governed by the pleading standard set forth in Rule 8(a), Fed.R.Civ. P.*fn4 See In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d at 406-08, 415-16, 419-20, 423. Under Rule 8(a), a complaint adequately states a claim when it contains "a short and plain statement of the claim showing that the pleader is entitled to relief." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002) (citing Rule 8(a)(2), Fed.R. Civ. P). Thus, under Rule 8(a)'s liberal pleading standard, a complaint is sufficient if it gives "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Id. (citation omitted). Plaintiffs' Section 10(b) and Rule 10b-5 claim is governed by Rule 9(b), Fed.R. Civ. P., and the heightened pleading standard in the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. 104-67, 109 Stat. 737 (1995). See In re Scholastic Corp., 252 F.3d 63, 69-70 (2d Cir. 2001); In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d at 410.

  1. Securities Act Claims

  The SSB Defendants move to dismiss the Securities Act claims on the ground, inter alia, that they are barred by the three year statute of limitations contained in the Securities Act. In addition, they argue that there is no Section 12(a)(2) cause of action for aftermarket purchases. Because the Securities Act claims must be dismissed based on these two ...

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