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
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
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.
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 ...