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IN RE ATLAS AIR WORLDWIDE HOLDINGS

July 7, 2004.

In re ATLAS AIR WORLDWIDE HOLDINGS, INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: WILLIAM CONNER, Senior District Judge

OPINION AND ORDER

Lead plaintiff Messner & Smith ("lead plaintiff") and plaintiff John Mahoney (collectively "plaintiffs") brought this action against defendants Richard Shuyler, Brian Rowe, Douglas Carty, Stanley Gadek, James Matheny and Stuart Weinroth (collectively "the individual defendants"), and Morgan Stanley & Co., Inc. ("Morgan Stanley") alleging claims under the Securities Act of 1933 (the "Securities Act") and the Securities and Exchange Act of 1934 (the "Exchange Act").*fn1 Defendants move to dismiss pursuant to section 21D(b)(3)(B) of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim. Morgan Stanley also moves pursuant to FED. R. CIV. P. 12(f) to strike Mahoney's class action allegations. For the reasons stated herein, Morgan Stanley's and Shuyler, Carty, Gadek and Weinroth's motions to dismiss are denied in their entirety. Morgan Stanley's motion to strike is also denied. Rowe and Matheny's motions to dismiss are granted in part and denied in part.

BACKGROUND

  I. Introduction

  Plaintiffs commenced this action on behalf of: (1) all those who purchased or otherwise acquired Atlas Air common stock between April 18, 2000 and October 15, 2002; and (2) all those who purchased or otherwise acquired Atlas Air common stock traceable to a Prospectus Supplement (the "September Prospectus Supplement") utilized in a September 2000 secondary public offering (the "September Secondary Offering"). The Registration Statement pertaining to the September Secondary Offering incorporated the September Prospectus Supplement. (Complt. ¶ 1.)*fn2 The following allegations appear in the Complaint.*fn3

  Atlas Air was founded by Michael A. Chowdry in 1992 and went public in 1995. (Id. ¶ 29.) Atlas assembled a fleet of Boeing 747-400 and 747-200 cargo planes and became a leader in the outsourced heavy cargo market. (Id. ¶¶ 29-30.) The company leased its aircraft to various international airlines and provided crews, maintenance and insurance pursuant to aircraft, crew, maintenance and insurance contracts ("ACMI contracts"). Under these ACMI contracts, the airlines paid an hourly rate for the use of Atlas Air's planes and services and guaranteed to utilize them a specified minimum number of hours each month. (Id. ¶ 30.)

  In April 2000, Atlas began to lose clients because many airlines discovered that it was more cost effective to purchase and maintain their own fleet of cargo planes. (Id. ¶ 32.) Around this time, management represented to analysts that it would focus on controlling its crew and maintenance expenses to counteract the reduction in demand Analysts concluded that because 40% of the company's operating expenses could be attributed to crew and maintenance costs, Atlas Air could significantly improve earnings per share by controlling those expenses.

  On January 25, 2001, Atlas Air suffered a severe setback when Chowdry died in a plane crash in Colorado. (Id. ¶ 33.) After the death of Chowdry, who by all accounts was a very "hands on" Chief Executive Officer ("CEO") and a "customer relationship builder," Atlas Air lost significant contracts. According to a former employee responsible for purchasing and contracts, business declined by approximately 20% in the months following Chowdry's death. (Id. ¶ 34.) Atlas Air experienced more significant setbacks during the industry-wide decline caused by the attacks that occurred on September 11, 2001. Despite Atlas Air's troubles during 2000 and 2001, the company reported record earnings until the Summer of 2001.

  II. The Allegedly False or Misleading Statements

  On April 18, 2000, the beginning of the proposed class period, defendant Shuyler, who was serving as the company's Executive Vice President at the time, (id. ¶ 18(a)), announced in a press release record earnings for the first quarter of 2000 with other positive news and stated "these achievements continue to reflect the ongoing strength of the international freight market and the unique nature of Atlas' business model." (Id. ¶ 55.) In May 2000, Atlas Air filed with the SEC a Form 10-Q that reported its financial results for the quarter. (Id. ¶ 57.) Atlas reported net income of $12 million, maintenance expense of $33.6 million, net accounts receivable of $100.2 million and net property and equipment of $1.6 billion. The Form 10-Q was signed by defendant Gadek, the company's acting Chief Financial Officer ("CFO") at the time.*fn4 (Id. ¶ 18(c), 57.)

  In May 2000, the company announced a public offering of common stock pursuant to a previously-filed shelf registration (the "May 2000 Offering"). (Id. ¶ 59.) The company sold approximately three million primary shares in the May 2000 Offering for proceeds of approximately $90 million. (Id. ¶ 62.) Shuyler sold 100,000 secondary shares in the May 2000 Offering for proceeds of $3.175 million. The September Prospectus Supplement confirming the terms of the May 2000 Offering incorporated the company's Form 10-Q for the first quarter of 2000. (Id. ¶ 63.) Morgan Stanley served as lead underwriter for the May 2000 Offering. (Id. ¶ 59.)

  On July 25, 2000, Atlas Air issued another press release announcing record earnings for the second quarter of 2000. (Id. ¶ 65.) Shuyler stated:
[O]ur ongoing cost-efficiency programs continued to yield favorable results. . . . Additionally, we are pleased to see Atlas' consistently strong financial record further recognized by the financial marketplace during the quarter. Not only did we successfully issue 3.5 million shares of common stock in the second quarter, but we were selected for inclusion in the S & P MidCap 400 Index. We believe these accomplishments are real testaments to the strength of the business model we have created at Atlas.
(Id. ¶ 65.) In August 2000, Atlas Filed a Form 10-Q that reported the company's financial results for the second quarter of 2000. The company reported net income of $19 million, maintenance expense of $34.7 million, net accounts receivable of $135.4 million and net property of $1.6 billion. (Id. ¶¶ 66-67.) Defendant Weinroth, who was Atlas Air's acting CFO at the time, (id. ¶ 18(f)), signed the Form 10-Q. (Id. ¶ 67.)

  On September 18, 2000, Atlas filed the September Prospectus Supplement relating to the September Secondary Offering. The September Prospectus Supplement incorporated the company's Forms 10-Q for the first and second quarters of 2000. (Id. ¶ 69.) Shuyler and Rowe, who was a director at the time, signed the Registration Statement for this offering. (Id. ¶ 186.) Shuyler sold 100,000 shares for proceeds of $4.35 million in the September Secondary Offering. (Id. ¶ 69.) Chowdry sold 1.4 million shares for proceeds in excess of $60 million. No other Atlas executives participated in the September Secondary Offering and the company did not realize any proceeds from the offering. Morgan Stanley served as the lead underwriter.

  On October 24, 2000, Atlas Air announced record earnings for the third quarter of 2000. (Id. ¶ 71.) Shuyler stated in the press release detailing the third quarter results that Atlas' "cost efficiency and debt reduction programs continued to bear fruit." (Id.) In November 2000, Atlas filed a Form 10-Q, which was signed by Weinroth, reporting its third quarter financial results. The company reported net income of $23.1 million, maintenance expense of $37.8 million, net accounts receivable of $127.7 million and net property of $1.5 billion. (Id. ¶ 72.)

  On January 26, 2001, Atlas Air issued a press release announcing earnings for the fourth quarter 2000 and fiscal year 2000 that beat Wall Street estimates. (Id. ¶¶ 74, 77.) Analysts attributed the company's ability to increase its earnings in the face of lower than expected demand to "good cost controls and excellent cash flow management." (Id. ¶¶ 76-77.) Atlas filed a Form 10-K for the fiscal year 2000 that was signed by Shuyler, Weinroth, Matheny, who was serving as President and Chief Operating Officer ("COO") at the time, and Rowe, who became Chairman of the Board of Directors in January 2001. (Id. ¶ 79.) The company reported net income for the year of $85.3 million, maintenance expense of $148 million, net accounts receivable of $117 million, and net property of $1.3 billion. Atlas also reported that its allowance for bad debt was $9.2 million and that it had spare parts and inventory of $11.4 million. (Id. ¶ 79.)

  On April 24, 2001, Atlas Air announced record earnings for the first quarter of 2001. (Id. ¶ 81.) Shuyler stated: "Our favorable first quarter financial performance was achieved in a very difficult economic environment. . . . Our continued focus on expenses helped boost our pre-tax and net income margins in a low growth period." (Id.) In May 2001, Atlas Air filed a Form 10-Q signed by Weinroth that set forth its financial results for the first quarter of 2001. (Id. ¶ 82.) The company reported net income of $14.4 million, maintenance expense of $29.4 million, net accounts receivable of $125.1 million and net property of $1.4 billion.

  In June 2001, analysts reported that approximately thirty-seven of Atlas Air's planes were idle due to the company's inability to enter into new ACMI contracts. (Id. ¶ 84.) The analysts speculated at this time that Atlas Air's "blue chip" customers were purchasing only the minimum number of hours required by their ACMI contracts. (Id.) As a result, the analysts reduced earnings estimates from $2.34 a share to $1 a share. (Id.) On July 31, 2001, Atlas announced its second quarter financial results for 2001. (Id. ¶ 85.) Earnings were considerably lower than they had been in previous quarters. Shuyler explained:
Atlas Air's second quarter financial performance, while consistent with our expectations, reflects the very difficult air freight environment the industry currently faces. Nevertheless, Atlas was able to show a small profit, despite the sharp decline in demand from existing long-term customers which has resulted in several under-utilized or idle aircraft.
(Id.) In August 2001, Atlas filed a Form 10-Q signed by Carty, the company's CFO at the time, that set forth the company's financial statements pertaining to the second quarter of 2001. The company reported net income of $0.3 million, maintenance expense of $32.2 million, net accounts receivable of $102.6 million and net property of $1.4 billion.

  On November 1, 2001, Atlas announced that it had suffered a loss of $4.2 million during the third quarter of 2001 and stated that reduced demand and the effects of the attacks on September 11, 2001, were to blame. (Id. ¶ 88.) Shuyler stated: "While Atlas had previously acted to reduce our costs and capital spending, the benefit of those actions will not begin to be realized until the fourth quarter. . . . Atlas continues to maintain a strong financial condition, as evidenced by our cash and investment balances of $359 million." (Id.) Shortly thereafter, the company filed a Form 10-Q signed by Carty that set forth the company's financial results for the third quarter of 2001. In addition to the loss, the company reported maintenance expense of $28.5 million, net accounts receivable of $128.5 million and net property of $1.4 billion.

  In January 2002, Atlas announced its results for the fourth quarter of 2001 and the fiscal year 2001. (Id. ¶ 91.) For the year, Atlas posted a net loss of $62.9 million. In April 2002, Atlas filed a Form 10-K signed by Carty, Shuyler, Matheny and Rowe for the fiscal year 2001. In addition to the loss, the company reported maintenance expense of $139.1 million, net property of $22.5 million, and an allowance for bad debt of $22.5 million.

  III. Atlas Announces the Re-Audit of its 2000 and 2001 Financial Statements

  On October 16, 2002, Atlas Air announced that it was initiating a re-audit of its financial results for fiscal years 2000 and 2001 "based on a determination by the company that adjustments must be made in certain areas, which will require a restatement of certain prior financial reports." (Id. ¶ 94.) Shuyler explained:
In April, we appointed Ernst & Young to replace Arthur Anderson as our independent auditor. Since that time, we have been conducting a systematic review of our financial records and accounting policies. We have now determined that adjustments will be required in the areas of inventory obsolescence, maintenance expense, and allowance for bad debt, which will necessitate the restatement of certain prior financial reports. As a result, we will undertake re-audit of the prior two fiscal years.
(Id.) Shuyler estimated that the restatement "would reduce after-tax income by roughly $65 million." (Id.) The press release stated that "until the re-audit is completed, the company cautions that its historical financial statements should not be relied upon." (Id. ¶ 7.) On the day of this announcement, the price of Atlas Air's common stock fell 79 cents, or 30%, to $1.89 a share.*fn5 (Id. ¶ 95.) Subsequent to this announcement, the SEC notified Atlas Air that it had begun an informal investigation of the company. (Id. ¶ 96.) The SEC has since formalized its investigation. (Id. ¶ 101.)

  In November 2002, Atlas announced that it was unable to file a Form 10-Q for the third quarter of 2002 until the re-audit of 2000 and 2001 was completed. (Id. ¶ 99.) In an April 2003 press release, Atlas Air announced that it was unable to file its Form 10-K for the fiscal year 2002 "due primarily to difficulties encountered in obtaining the necessary historical records and data to enable the Company's accountants, Ernst & Young, to re-audit 2000 and 2001 results, which were previously audited by Arthur Anderson." (Id. ¶ 105.)

  In September 2003, the company disclosed that the re-audit revealed that its reported financial results would need to be restated by approximately $363.8 million, a figure that was much larger than Shuyler initially had estimated. (Id. ¶ 107.) The net effect of Atlas Air's restatement was to reduce retained earnings from $185 million to an accumulated deficit of $178 million. (Id.) The company also announced that it was unlikely that Ernst & Young would be able to complete the re-audit because of "the Company's inability to locate certain financial records." This inability to locate records made it "impossible to determine the period or periods to which certain adjustment relate[d] . . . [or] issue restated consolidated financial statements for the years ended December 21, 2001 and 2000 or any prior period." (Pls. Mem. Opp. Mot. Dismiss, Ex. 1; Complt. ¶ 107.) The company also announced its intention to file a pre-negotiated Chapter 11 bankruptcy petition. (Complt. ¶ 107.) Atlas Air's failure to file SEC documents resulted in the stock being delisted by the New York Stock Exchange and put the company in default on several of its debt obligations. Atlas filed a Chapter 11 bankruptcy petition in January 2004.

  Several lawsuits alleging violations of federal securities laws followed the company's negative announcements. This Court previously consolidated several of these actions and named Messner & Smith lead plaintiff. See Weinberg v. Atlas Air Worldwide Holdings, Inc., 216 F.R.D. 248, 256 (S.D.N.Y. 2003) (Conner, J.). Morgan Stanley and each of the individual defendants move to dismiss the Complaint for failure to state a claim. Morgan Stanley also moves to strike Mahoney's claims because it contends that Mahoney filed a false certification and was added as a plaintiff without leave of the Court.

  DISCUSSION

  I. Governing Standard

  On a motion to dismiss pursuant to Rule 12(b)(6), the court must accept as true all of the well pleaded facts and consider those facts in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999); Faulkner v. Verizon Communications, Inc., 156 F. Supp.2d 384, 390 (S.D.N.Y. 2001) (Conner, J.). On such a motion, the issue is "whether the claimant is entitled to offer evidence to support the claims." Scheuer, 416 U.S. at 236. A complaint should not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Padavan v. United States, 82 F.3d 23, 26 (2d Cir. 1996) (quoting Hughes v. Rowe, 449 U.S. 5, 10 (1980)). Generally, "[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." 2 JAMES WM. MOORE ET. AL., MOORE'S FEDERAL PRACTICE § 12.34[1][b] (3d ed. 1997); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1088 (2d Cir. 1995). Allegations that are so conclusory that they fail to give notice of the basic events and circumstances of which the plaintiff complains, are insufficient as a matter of law. See Martin v. New York State Dep't of Mental Hygiene, 588 F.2d 371, 372 (2d Cir. 1978). In assessing the legal sufficiency of a claim, the court may consider those facts alleged in the complaint, documents attached as an exhibit thereto or incorporated by reference, see FED.R.CIV. P. 10(c); De Jesus v. Sears, Roebuck & Co., Inc., 87 F.3d 65, 69 (2d Cir. 1996), and documents that are "integral" to plaintiff's claims, even if not explicitly incorporated by reference. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 46-48 (2d Cir. 1991).

  II. Plaintiffs' Exchange Act Claims

  A. Plaintiffs' Prima Facie Case Under § 10(b) ...


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