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United States District Court, S.D. New York

July 20, 2004.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



  This suit arises out of the failed initial public offering ("IPO") of Intralinks, Inc. ("Intralinks"), and the subsequent private financing undertaken by the company. Plaintiffs allege multiple violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),*fn1 specifically Rule 10b-5 promulgated thereunder.*fn2 Plaintiffs also assert claims under the Employee Retirement Income Security Act of 1974 ("ERISA"),*fn3 and under state law.*fn4 Defendants now move, pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6) or 12(e), for: (1) dismissal of the first nine counts of the Complaint for failure to state a claim, (2) denial of supplemental jurisdiction over plaintiffs' state law claims, and (3) dismissal of the Complaint for lack of subject matter jurisdiction, or, in the alternative, (4) a more definite statement. Plaintiffs oppose dismissal and seek leave to amend the Complaint.


  The factual allegations of the Complaint are assumed to be true for the purposes of the motion to dismiss.

  A. Adams and Muldoon Found Intralinks

  In 1996, Adams and Muldoon, with others, co-founded and incorporated Intralinks.*fn5 Intralinks provides and manages secure digital workspaces for the execution of financial and commercial transactions.*fn6 Adams served as Director, President, and Chief Executive Officer from Intralinks's founding until February 2000, and as Chairman of the Board from May to October of 2000.*fn7 Muldoon served as Intralinks's Chief Financial Officer and Treasurer from Intralinks's founding through 2000, as Director through 1998, and as an observer to the Board through January 2001.*fn8 All plaintiffs owned Intralinks stock or stock options prior to Intralinks's January 31, 2001 financing (the "G financing").*fn9

  B. Intralinks Implements the 1997 Stock Incentive Plan

  In 1997, Intralinks introduced a Stock Incentive Plan (the "1997 Plan") to award compensation to company officers.*fn10 Adams was granted a total of 823,788 stock options and Muldoon was granted a total of 261,152 stock options pursuant to the 1997 Plan.*fn11

  C. Intralinks Agrees to Undertake Its IPO with JP Morgan as Lead Underwriter

  By January 2000, Intralinks had raised $65,000,000 in private financing, and was a successful private company.*fn12 On April 16, 2000, defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc. (collectively, "JP Morgan"), and Banc of America Securities, L.L.C., and William Blair & Co., L.L.C. (together with JP Morgan, "Bank defendants") agreed to underwrite Intralinks's IPO for a seven percent underwriting fee.*fn13 JP Morgan represented to Intralinks that 85% of the stock would be sold to investors who would hold the stock for a long period of time ("strong hands").*fn14 JP Morgan also represented to Intralinks that it would price the IPO if the Intralinks IPO was oversubscribed by fifteen percent, the difference between the total IPO offering and the percentage of shares being sold into "strong hands."*fn15

  Plaintiffs allege that representations regarding both the Bank defendants' compensation and JP Morgan's intentions regarding the IPO were materially false because JP Morgan intended to engage in illegal aftermarket activities after the IPO.*fn16 Such activities include "laddering" (requiring customers to make purchases in the aftermarket in exchange for an allocation of stock during the IPO), "spinning" (buying back the IPO allocation and then re-selling the stock to the customers in order to receive increased commissions on the sale), and the use of undisclosed tie-in agreements.*fn17

  D. JP Morgan Extends Private Loans to Adams and Muldoon

  In the Spring of 2000, JP Morgan extended $500,000 lines of credit to Adams and Muldoon.*fn18 In order to secure the loans, Adams and Muldoon entered into pledge agreements, pledging their Intralinks stock to JP Morgan as collateral.*fn19 JP Morgan represented to Adams and Muldoon that JP Morgan would protect the value of the collateral and look solely to the collateral for payment.*fn20

  E. JP Morgan Refuses to Price Intralinks's IPO

  After hiring the Bank defendants to underwrite the IPO, plaintiffs subsequently embarked upon a "road show," a marketing trip designed to generate interest in Intralinks prior to the IPO, which was scheduled for July 26, 2000.*fn21 As of July 24, 2000, the Intralinks IPO was oversubscribed.*fn22 On July 24, just before the end of the road show and the scheduled pricing date, the Bank defendants convinced Adams and Intralinks "to increase the number of shares offered in the IPO from 4.6 million to 5.3 million" due to strong demand*fn23 Prior to July 26, JP Morgan refused an all-cash offer from someone identified as William Frey to purchase $2,500,000 worth of Intralinks stock, allegedly because Frey would not engage in the illegal practices of spinning and laddering.*fn24

  On July 26, 2000, Intralinks filed a registration statement for the IPO with the Securities Exchange Commission ("SEC").*fn25 Thereafter, JP Morgan refused to price and sell the IPO.*fn26 The only reason given for the failure to price was a vague reference to the stock not being sufficiently over-subscribed.*fn27 However, 7.7 million shares were subscribed for the 5.4 million share offering.*fn28 Plaintiffs allege that, in reality, JP Morgan refused to price the deal because it learned that it might become the subject of an SEC inquiry into its IPO allocation practices and feared criminal prosecution for such practices.*fn29 Intralinks never made an IPO, and today remains a privately held company.

  F. Adams and Muldoon Enter into Exit Agreements with Intralinks

  In September of 2000, pursuant to a bridge loan executed by Intralinks, defendant William Blair valued Intralinks's common stock at $8.50 per share; the total value of Intralinks was estimated to be $202 million.*fn30 On October 29, 2000, Adams executed an Exit Agreement with Intralinks, pursuant to which all of his stock options became immediately vested at prices ranging from $1.14 to $2.60 per share.*fn31 Muldoon entered into a similar agreement on December 29, 2000.*fn32 The $8.50 per share price was the most recent valuation of Intralinks's common stock when Adams and Muldoon executed their Exit Agreements.*fn33 G. Defendant Intralinks Executes G Financing

  Plaintiffs further allege that sometime in October, 2000 Intralinks began planning a new round of private financing, the G financing, the details of which were not disclosed to Adams and Muldoon.*fn34 Plaintiffs allege that Intralinks's management set up a secret website, "IntraLinks-Services," to disclose the financing to all shareholders except plaintiffs.*fn35 William Blair conducted another evaluation of the company in January of 2001 for the G financing. The January, 2001 pre-financing valuation of Intralinks was $55 million, almost $150 million less than the September valuation.*fn36 Furthermore, a change in the valuation formula resulted in a 1200% increase in the number of outstanding Intralinks shares, from 17,223,656 to 221,000,000.*fn37 This valuation reflected a price of $0.54 per share, down from the September valuation of $8.50 per share.*fn38

  The initial closing of Intralinks's G financing occurred on January 31, 2001. The financing raised $30.15 million in new financing and had an additional $12.8 million of debt converted to Series G Preferred Stock.*fn39 Through the G financing, Intralinks increased the number of B, C, D, E, and F preferred shares, thus protecting all shareholders, other than plaintiffs, from drastic dilution in the value of their shares.*fn40

  Plaintiffs allege that in order to maintain the value of their own stock, Intralinks's Board of Directors created a new pool of options in the G financing representing the equivalent of fifteen percent of Intralinks's total stock.*fn41 JP Morgan was also allowed to protect its interest in Intralinks by exchanging worthless stock warrants executable at $8.50 per share for common stock valued at $0.54 per share.*fn42 Plaintiffs claim that they learned about the "Intralinks-Services" website just two weeks prior to the closing of the G financing, and were only able to determine the extent of the damage that the G financing would have on their holdings after its closing on January 31.*fn43 III. LEGAL STANDARD

  "Given the Federal Rules' simplified standard for pleading, `[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'"*fn44 The task of the court in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof."*fn45 When deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor.*fn46

  At the motion to dismiss stage, the issue "is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test."*fn47

  Given the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) governing fraud claims, plaintiffs must allege all elements of a 10b-5 claim with specificity in order to survive a motion to dismiss.*fn48


  As stated above, plaintiffs have withdrawn claims one, two, three, seven, and eight of the Complaint.*fn49 This leaves four federal claims — claims four, five, six, and nine. Defendants now move to dismiss all of these claims.

  A. Claim Four — 10b-5 Claim Based on the Registration Statement

  Plaintiffs allege that defendants violated Section 10(b) of the Exchange Act,*fn50 and Rule 10b-5 promulgated thereunder,*fn51 by making material misstatements and omissions in the July 26, 2000 registration statement. Defendants move to dismiss this claim, asserting that plaintiffs lack standing.*fn52

  To successfully plead a claim under Rule 10b-5, a plaintiff must allege that the fraud occurred "in connection with the purchase or sale of securities."*fn53 The Supreme Court has interpreted this to mean that only a purchaser or seller of a security has standing to sue under Rule 10b-5.*fn54 "Early in the development of such actions under § 10(b) and Rule 10b-5 . . . [the Second Circuit] ruled that no private action under those provisions is available to persons who were neither buyers nor sellers of the relevant securities."*fn55

  There is no allegation in this Complaint that anyone bought or sold stock in reliance on the registration statement, as no IPO ever occurred. Plaintiffs have not provided a single case suggesting that an agreement to undertake an IPO, without any purchase or sale of securities, can form the basis for a Rule 10b-5 claim. Moreover, any agreement to undertake the IPO could not have been made in reliance upon the registration statement, as that statement was not filed until July 26, 2000, well after the agreement. Because it is clear from the pleadings that no purchase or sale occurred in connection with the registration statement, plaintiffs lack standing to bring claim four. B. Claim Five — 10b-5 Claim Based on the Exit Agreements and the "G Financing"

  Claim five purports to plead a 10b-5 violation by Intralinks based on the Exit Agreements entered into by Adams and Muldoon and the subsequent G financing of Intralinks.*fn56 Essentially, plaintiffs allege that the failure of Intralinks' board of directors to disclose the details of the G financing to Adams and Muldoon prior to the execution of the Exit Agreements constituted fraud.*fn57 Defendants move to dismiss this claim, alleging that it is time barred and fails to adequately plead scienter.*fn58 Because the claim is time barred, I will not address the scienter argument.

  1. Statute of Limitations

  Section 9(e) of the Exchange Act provides that "[n]o action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation. . . ."*fn59 On July 30, 2002, Congress enacted the Sarbanes-Oxley Act of 2002 (the "Act"), which provides, in relevant part, that:

[A] private right of action that involves a claim of fraud, deceit,
manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(47)), may be brought not later than . . . 2 years after the discovery of the facts constituting the violation. . . .*fn60
This court need not decide whether section 9(e)'s one-year limitation or Sarbanes-Oxley's two-year limitation applies, because plaintiffs' claim is barred even under the longer two-year period.


A plaintiff in a federal securities case will be deemed to have discovered fraud for purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. . . . Moreover, when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry.*fn61
"Discovery of facts for the purposes of this statute of limitations `includes constructive or inquiry notice, as well as actual notice.'"*fn62

  To be placed on inquiry notice, plaintiffs "need not be able to learn the precise details of the fraud, but they must be capable of perceiving the general fraudulent scheme based on the information available to them."*fn63 A plaintiff in a securities fraud case "is charged with knowledge of publicly available news articles and analysts' reports,"*fn64 to the extent that they constitute "storm warnings" sufficient to trigger inquiry notice.*fn65 "The issue that the Court must consider is . . . whether Plaintiffs `had constructive notice of facts sufficient to create a duty to inquire further into that matter. An investor need not have notice of the entire fraud to be on inquiry notice.'"*fn66

  Available information must establish "a probability, not a possibility" of fraud to trigger inquiry notice.*fn67 Moreover, in the context of dismissal, "defendants bear a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law. Inquiry notice exists only when uncontroverted evidence irrefutably demonstrates when plaintiff discovered or should have discovered the fraudulent conduct."*fn68

  Once sufficient storm warnings appear, "plaintiffs must exhibit `reasonable diligence' in investigating the possibility that they have been defrauded. If they fail to meet this obligation, plaintiffs will be held to have had `constructive knowledge' of the fraud against them."*fn69 2. Claim Five Is Time Barred

  The original Complaint in this action was filed on July 21, 2003.*fn70 Defendants argue that claim five is time barred because plaintiffs had actual knowledge of the G financing in or around January 2001, and knowledge of the dilution of their stock shortly thereafter.*fn71 Furthermore, defendants point to a March 16, 2001 letter from William O'Connor, plaintiffs' attorney at that time, threatening, in substance, to bring this very claim.*fn72 Obviously, if plaintiffs had constructive notice of this claim in March of 2001, it is time barred.

  Plaintiffs contend that they did not have such notice. "Plaintiffs do not claim that they didn't have some idea that the `G' Round was `fishy,' but the extent of the concealment and the fraudulent misrepresentations continues to be revealed day-by-day."*fn73 In fact, plaintiffs allege, certain facts regarding the defendants' misconduct did not come to light until January 2004.*fn74

  The fact that plaintiffs continue to gather information regarding claim five does not change the fact that they were on constructive notice of the claim in March of 2001. Although defendants bear a heavy burden at the motion to dismiss stage, that burden has been satisfied here. In the March 16 letter, plaintiffs accused Intralinks of making "untrue statements of material fact and the omission of other material facts . . . which operated as a fraud and deceit against the Common Shareholders and the Option Holders."*fn75 The letter goes on to detail the G financing, the "Intralinks-Services" website, the dilution of plaintiffs' shares from $8.50 per share to $0.54 per share, and the alleged self-dealing of Intralinks's board of directors.*fn76

  Given the detail present in the March, 2001 letter, plaintiffs were clearly aware of the alleged scheme at that time. The fact that they were not yet aware of every detail is irrelevant. Because March of 2001 is more than two years before the filing of the Complaint, claim five is time barred under both Section 9(e)'s one-year statute of limitations and Sarbanes-Oxley's two-year statute of limitations.*fn77 C. Claim Six — 10b-5 Claim Based on the Pledge Agreements

  Claim six alleges that JP Morgan violated Rule 10b-5 in connection with the $500,000 loans to Adams and Muldoon and the related stock pledges.*fn78 Adams and Muldoon claim that prior to entering into the pledge agreements, JP Morgan fraudulently represented that it would look solely to the value of the collateral (plaintiffs' Intralinks stock) for repayment. JP Morgan moves to dismiss, arguing that plaintiffs could not have reasonably relied on the alleged misstatements when they pledged their stock as collateral for the loans.*fn79

  "The general rule is that reasonable reliance must be proved as an element of a securities fraud claim."*fn80 JP Morgan submits that given the language of the pledge agreement, Adams and Muldoon cannot demonstrate that they reasonably relied on any oral representation that JP Morgan would look solely to the stock for repayment. Specifically, the pledge agreements state, in relevant part:

The remedies provided herein in favor of the Bank shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other remedies in favor of the Bank existing at law or in equity. . . . The pledge of the Collateral hereby shall not in any way preclude or restrict any recourse by the Bank against the Obligor or any other person or entity liable with regard to the Secured Obligations or any other collateral therefor.*fn81
  Plaintiffs allege that when entering into the loan and pledge agreements, they relied on JP Morgan's oral representations that the Bank would look solely to the collateral for repayment.*fn82 However, as a matter of law, these representations cannot overcome the plain language of the pledge agreements, which provides that the pledge is not the only method of recovery available to JP Morgan.*fn83 Just as "[r]eliance on statements which are directly contradicted by the clear language of the offering memorandum through which plaintiffs purchased their securities cannot be the basis for a federal securities fraud claim,"*fn84 neither can reliance on statements directly contradicted by a pledge agreement, where the pledge constitutes the alleged sale of securities. Because plaintiffs cannot plead reliance, claim six is dismissed.

  D. Claim Nine — ERISA Claim

  Plaintiffs' final federal claim is that the dilution in the value of their stocks violated ERISA. Defendants move to dismiss this claim on the ground that plaintiffs' stock options are not protected by ERISA.

  1. Applicable Law

  "To state a claim under ERISA, a plaintiff must allege and establish the existence of an `employee benefit plan' that is governed by ERISA."*fn85 Contrary to plaintiffs' claim that the existence of an ERISA plan is a question of fact,*fn86 whether a plan is governed by ERISA "is cognizable on a Rule 12(b)(6) motion; where the record contains the undisputed terms of the disputed plan, as the record does here, a Court may decide the applicability of ERISA as a matter of law."*fn87

  There are two types of ERISA plans, "employee welfare benefit plans" and "employee pension benefit plans."*fn88 Plaintiffs argue that the 1997 Stock Incentive Plan is an "employee pension benefit plan."

  An "employee pension benefit plan" is defined as:

any plan, fund, or program . . . established or maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to termination of covered employment or beyond.*fn89
Specifically excluded from this definition are "payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees."*fn90 "A bonus plan excluded from ERISA will be found where payments made are not to provide retirement income, but, instead, to serve some other purpose, such as providing increased compensation as an incentive or reward for a job well done."*fn91

  2. The 1997 Plan Is Not an ERISA Plan

  Defendants argue that neither the Exit Agreements nor the 1997 Plan are governed by ERISA, and that claim nine must therefore be dismissed.*fn92 Plaintiffs contend that because the 1997 Plan systematically defers compensation, involves managerial discretion, and is a written plan intended to protect the employees' options, it qualifies as an ERISA plan, and that Plaintiffs have therefore stated a claim under ERISA.*fn93

  Plaintiffs' argument is wholly without merit. The 1997 Plan does not qualify as an "employee pension benefit plan" — it is clearly a bonus plan. The first paragraph of the Plan states that its purpose is "to attract and retain the best available talent and to encourage high levels of employee performance which benefit the Company and its shareholders."*fn94 It provides key personnel "with financial incentives to put forth their maximum efforts for the success of the Company's business."*fn95 Because the 1997 Plan's purpose was to provide incentives for employee performance, not retirement income, it clearly qualifies as a bonus plan.

  A bonus plan can be an ERISA plan if it systematically defers payment until the termination of employment or beyond. The 1997 Plan does not have these characteristics. It specifically states that options may only be granted during the period from 1997 to 2000. Furthermore, "the term of each option shall not be more than 10 years from the date of grant."*fn96 Most revealing, "options may be subject to earlier termination in the event of Option Holder's termination of service."*fn97 There is nothing in this language, nor anywhere in the Plan, that suggests that the granting of options or the exercise of such options is deferred to or beyond the termination of employment. In fact, the language suggests that the compensation committee could specifically decide not to allow the exercise of options if employment is terminated. "Where, as here, a bonus plan by its terms neither provides retirement income nor systematically defers income to the termination of participants' employment or beyond, the applicable regulation requires that it be excluded from the definition of `pension plan' under ERISA."*fn98 Because the 1997 Plan does not qualify as a pension plan under ERISA, claim nine is dismissed.

  E. State Law Claims

  Where a complaint pleads both federal and common-law claims, "the district court may decline to exercise supplemental jurisdiction" over state claims if "the district court has dismissed all claims over which it has original jurisdiction."*fn99 Although invocation of section 1367(c) is discretionary, "in the usual case in which all federal law claims are eliminated before trial, the balance of factors to be considered under the [supplemental] jurisdiction doctrine — judicial economy, convenience, fairness, and comity — will point toward declining to exercise jurisdiction over the remaining state law claims."*fn100 In the case before me, the only remaining claims are premised on state law. Because this litigation is at a relatively early stage, the "balance of factors" all weigh in favor of dismissal pursuant to section 1367(c).


  For the foregoing reasons, defendants' motion to dismiss is granted. Because no federal causes of action remain, the Complaint is dismissed in its entirety for lack of subject matter jurisdiction.*fn101 Plaintiffs' request for leave to amend is denied.*fn102 Defendants' motion for costs is denied. The Clerk of the Court is directed to close these motions [Nos. 15 & 21 on the docket sheet] and this case. SO ORDERED.

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