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SHAH v. STANLEY

United States District Court, S.D. New York


October 15, 2004.

SANDIP SHAH, Plaintiff,
v.
MORGAN STANLEY, et al., Defendants.

The opinion of the court was delivered by: RICHARD HOLWELL, District Judge

Supplemental Memorandum Opinion to Order of September 29, 2004

I. INTRODUCTION

This case revolves around a securities firm's alleged conflicts of interest in issuing analyst reports rating and evaluating companies while those companies were actual or potential investment banking clients of the firm. Plaintiff Sandip Shah filed this putative class action on behalf of himself and other similarly situated individuals who purchased shares of the securities firm, Morgan Stanley, during the period in which the bank "employ[ed these] undisclosed improper business practices." (Compl. ¶ 1.) Plaintiff brings this action pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, alleging that "[t]he practices themselves and the failure [of defendants] to disclose their existence artificially inflated the prices of Morgan Stanley stock." (Id.)

  This is not the first case to address the alleged conflicts of interest between the investment banking activities and the investment advisory activities of securities firms. See, e.g., Fogarazzo v. Lehman Bros., Inc., No. 03 Civ. 5194 (SAS), 2004 WL 1151542 (S.D.N.Y. May 21, 2004); Demarco v. Lehman Bros., Inc., 309 F. Supp. 2d 631 (S.D.N.Y. 2004) (hereinafter "Demarco v. Lehman"); In re Worldcom, Inc. Sec. Litig., 294 F. Supp. 2d 431 (S.D.N.Y. 2003) (hereinafter "Worldcom III"); In re Merrill Lynch & Co. Research Reports Sec. Litig., 289 F. Supp. 2d 416 (S.D.N.Y. 2003) (hereinafter "Merrill III"); In re Worldcom, Inc. Sec. Litig., 219 F.R.D. 267 (S.D.N.Y. 2003) (hereinafter "Worldcom II"); In re Merrill Lynch & Co. Research Reports Sec. Litig., 272 F. Supp. 2d 243 (S.D.N.Y. 2003) (hereinafter "Merrill II"); Pfeiffer v. Goldman, Sachs & Co., No. 02 Civ. 6912 (HB), 2003 WL 21505876 (S.D.N.Y. Jul. 1, 2003); In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351 (S.D.N.Y. 2003) (hereinafter "Merrill I"). These cases, which follow on the heels of an investigation and report issued by the New York State Attorney General, are brought typically by investors in a publicly-traded company who allege that a securities firm issued false and misleading analyst reports concerning the company in order to secure or maintain lucrative investment banking business, for example, as an underwriter for the subject company's initial public offering ("IPO"). See, e.g., Fogarazzo, 2004 WL 1151542; Demarco v. Lehman, 309 F. Supp. 2d at 631; Merrill III, 289 F. Supp. 2d at 416; Worldcom II, 219 F.R.D. at 267; Pfeiffer, 2003 WL 21505876, at *1; Merrill I, 273 F. Supp. 2d at 351. In the present case, however, plaintiff is a shareholder in the securities firm rather than an investor in a company that was the subject of analyst reports prepared by the firm. As such, the fraud plaintiff alleges is not that the securities firm's analyst reports were false, but that the securities firm hid information from its shareholders about its own improper business practices in preparing the analyst reports, which practices exposed the firm to substantial undisclosed liabilities. (See Compl. ¶¶ 1, 5, 32.) Defendants Morgan Stanley, Morgan Stanley & Co., Inc. (a subsidiary of Morgan Stanley) (collectively "Morgan Stanley"), Philip J. Purcell (Chairman and Chief Executive Officer of Morgan Stanley), and Mary Meeker (a senior analyst and managing director of Morgan Stanley & Co., Inc.) (collectively "defendants") have moved to dismiss plaintiff's complaint pursuant to Fed.R. Civ. P. 12(b)(6), 9(b), and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), and to strike certain allegations pursuant to Fed.R. Civ. P. 12(f). For the reasons stated herein, defendants' motion to dismiss the complaint is granted.

  II. FACTS

  Except as otherwise noted, the following facts are alleged in the complaint and are presumed true for the purposes of this motion.*fn1 Plaintiff purchased shares of Morgan Stanley common stock between July 1, 1999, and April 10, 2002 (the alleged "Class Period"). (See Compl. ¶¶ 1, 21.) Plaintiff alleges that, unbeknownst to him and other individuals who purchased Morgan Stanley stock during the Class Period, defendants "engaged in a series of undisclosed acts and practices that created conflicts of interest for [their] research analysts with respect to investment banking considerations." (Id. ¶ 32.)

  These questionable practices were employed to help Morgan Stanley compete for IPO business, which "resulted in lucrative banking fees and the promise of future investment banking and related businesses such as fees from secondary offerings, making bridge loans and other corporate financing transactions, and advising on mergers and acquisitions." (Id. ¶¶ 31-32.) To that end, "Morgan Stanley compensated its research analysts in large part based on the degree to which they helped generate investment banking business for Morgan Stanley, offered its research coverage as a marketing tool to gain investment banking business, and failed to establish adequate procedures to protect analysts from conflicts of interest." (Id. ¶ 32.)

  During the Class Period, defendants allegedly made false and misleading statements to hide these practices and their questionable nature. (See Compl. ¶ 34.) These statements can be grouped into six categories. The first category consists of statements that describe Morgan Stanley's stock rating system (e.g., "Strong Buy" or "Neutral"). (See id. ¶ 35, 62-63.) The second category consists of statements extolling the quality of Morgan Stanley's research (e.g., "The deep breadth of experience of Morgan Stanley's . . . equity research team is second to none," id. ¶ 38). (See id. ¶¶ 37-39, 46, 47, 49, 53, 64.) The third category consists of statements to the effect that Morgan Stanley has high ethical standards and complies with all relevant industry rules and regulations. (See id. ¶¶ 41-42, 60.) The fourth category consists of statements announcing awards that Morgan Stanley and its analysts had received (e.g., "[Morgan Stanley's] Equity Research team placed first in The Street.com's first annual `Analyst Rankings' poll," id. ¶ 44). (See id. ¶ 49, 50-51, 54.) The fifth category consists of disclaimer statements in Morgan Stanley's equity research reports (e.g., "[Morgan Stanley] may also perform or seek to perform investment banking services for those companies, id. ¶ 56). The sixth and last category consists of one statement in a "press release in response to the dismissal of a class action lawsuit concerning Meeker's research that was brought against Morgan Stanley and Mary Meeker by investors in two internet companies[:] `Our research is thorough and objective, and Mary Meeker's integrity is beyond reproach.'" (Id. ¶ 58.)

  Plaintiff alleges that all these statements violated securities laws "in that they failed to disclose that during the Class Period defendants were engaged in a series of undisclosed and improper business practices pursuant to which Morgan Stanley failed to issue quality, objective, unbiased research reports concerning the common stocks of the companies for which Morgan Stanley provided or sought to provide investment banking services." (Id. ¶ 36, 40, 45, 48, 52, 55, 57, 59, 61, 65.) Plaintiff further alleges that these statements were fraudulent because the practices, "if discovered, threatened to erode public, client and investor confidence in Morgan Stanley and expose Morgan Stanley to substantial liability from government and regulatory authorities and private litigants." (Id.)

  Notably, plaintiff does not allege that any particular analyst report for any particular company was false. Rather, plaintiff's claim is for concealment of material information about Morgan Stanley's own operations — "undisclosed and improper business practices." (Id.; see also id. ¶¶ 67 ("investors relied upon defendants' materially false and misleading statements concerning the integrity and honesty of the business practices"), 68 ("quality, legitimacy and integrity of a company's management and business practices are central factors in an investors' [sic] assessment of a company's `investment quality.'"); 70 ("Had Lead Plaintiff and the Class known the truth concerning Morgan Stanley's business practices during the Class Period . . . they would not have acquired Morgan Stanley stock"); 71 ("statements that a company makes to investors about its business practices not only foreseeable[y] relate to — but, indeed, directly impact — the stock price of a public company").)

  However, defendants' statements were not the only information available to the public during the Class Period. Prior to the Class Period, numerous newspaper articles reported on the conflicts of interest that analysts faced in the securities industry.*fn2 For example, on May 2, 1996, over three years before the alleged Class Period, the Wall Street Journal published an article revealing that "[t]he recommendations by underwriter analysts show significant evidence of bias and possible conflict of interest." Roger Lowenstein, Today's Analyst Often Wears Two Hats, Wall St. J., May 2, 1996, at C1. The source of conflict, the article explained, is that "[a]nalysts get paid, in part, according to their contribution to corporate finance." Id. The article further explained that "the analyst's incentive to nurture IPOs conflicts with his role as an objective stock-picker" and that "the analyst's worth is increasingly dependent on his or her ability to bring in deals." Id. The article concluded that "[s]ince this is unlikely to change, investors, journalists and others who deal with the Street would do well to keep in mind that, often times, the analyst is wearing two hats." Id.

  Several months later, on October 3, 1996, an article in the Boston Globe concluded that "analysts are systematically overly optimistic about long-term earnings forecasts for equity offerings [due to] the relationship between the analysts and the investment banking business that pays their bills." Steve Bailey & Steven Syre, Taking Analysts' Tempting Forecasts with Grain of Salt, Boston Globe, Oct. 23, 1996, at C1. The article continued:

"The integrity of the process was always supposed to be protected by the `Chinese wall' that separated the analysts and the investment banking business. But as commissions from trading have fallen on an increasingly competitive Wall Street, investment research hasn't been able to pay its own way. Instead, analysts have become an important sales tool for the investment bankers to land their super-profitable deals. A top analyst and the credibility he or she brings can be the difference between landing a deal or not — and the pay for the most sought-after analysts can top $5 million a year. Can that analyst then turn around and dis the firm's full-freight client? Amy Sweeney of the Harvard Business School thinks not. `It is just a huge conflict of interest for the analysts,' she says. Adams Harkness' Frankel doesn't disagree: `That pressure is clear in the industry.'" Id.
  Approximately a year before the Class Period, on April 8, 1998, the Wall Street Journal published another article stating that "analysts often won't issue a `sell' because they don't like to anger companies that could be their firm's investment-banking clients." John Hechinger, Heard in New England: Analysts May Hate to Say "Sell," But a Few Companies Do Hear It, Wall St. J., Apr. 8, 1998, at NE2. The article noted that "[t]he pressure on analysts is growing [because t]he Chinese wall that existed at most brokerage houses between analysts and investment bankers has broken down." Id. (quotations omitted). Thus, of the 2,066 analysts' stock ratings examined by the article, less than one percent stated "sell". Id.

  In addition to the articles discussing the conflicts of interest of analysts in the securities industry, multiple newspaper articles before and during the Class Period reported specifically on the conflicts of interest confronting Morgan Stanley's analysts, including Meeker, as they assisted Morgan Stanley in soliciting investment banking business. For example, an article in New Yorker magazine, published just before the Class Period on April 26, 1999, explained that although Meeker's "main responsibility is recommending technology stocks to investors, . . . she also works closely with Morgan's corporate-finance department, which specializes in underwriting [IPOs] for a hefty commission." John Cassidy, The Woman in the Bubble: How Mary Meeker helps Internet entrepreneurs become very, very rich, New Yorker, Apr. 26, 1999, at 48. The article went on to describe how Meeker used her "credibility" with investors as a selling point in soliciting IPO clients for Morgan Stanley. See id.

  Midway through the Class Period, on March 20, 2000, Fortune magazine published an article stating:

"In the best of all worlds, analysts on Wall Street and at tech-industry research firms would spend their time giving unbiased, educated opinions about companies, markets, and trends. But in this world, filled as it is with dot-com money blowing every which way, objectivity seems a luxury few can afford. Analysts of all stripes — from Morgan Stanley's Mary Meeker on down to lowly researchers at the likes of the Aberdeen Group — increasingly derive a portion of their compensation, directly or indirectly, from the companies they cover. That helps put pressure on the quality of their work and encourages them to become more like cheerleaders than independent observers. . . . [A]nalysts are increasingly answering to another master: corporate banking." Erick Schonfeld, The High Price of Research; Caveat investor: Stock and research analysts covering dot-coms aren't as independent as you think, Fortune, Mar. 20, 2000, at 118.
  On May, 14, 2001, almost a year before the end of the Class Period, Fortune magazine published an issue featuring only Meeker on the cover with a headline reading, "Can we ever trust Wall Street again?", and subheadings reading "Where Mary went wrong" and "Inside the IPO racket". See Fortune, May 14, 2001, at cover. The feature article noted that, "Meeker's refusal to downgrade her stock is only a small piece of a bigger story[;] Meeker did things that utterly compromised her as a stock picker." Peter Elkind, Where Mary Meeker Went Wrong, Fortune, May 14, 2001, at 69. The article explained: "Though it's hardly news anymore that the Chinese Wall once separating investment banking from Wall Street research has eroded, what you realize in talking to Meeker is the extent to which these two supposedly conflicting functions — keeping companies happy and giving investors honest stock advice — are now organically intertwined. She talks unashamedly, for instance, about how she has used her research to help land banking deals for Morgan Stanley.

 

Plenty of publications, including this one, have pointed out that analysts have become far more involved in the process of landing banking business than they once were. The modern analyst helps the banking team smoke out promising companies, sits in on strategy sessions, and promises — implicitly at least — to `support' the company once it has gone public with favorable research. That this makes tough-minded, independent stock research difficult, if not impossible, is no longer even an issue at most firms; investment banking brings in far more money than, say, brokerage commissions from grateful investors, thankful for unbiased research. Indeed, these days most analysts' pay is directly linked to the number of banking deals they're involved in." Id.
  The noteworthiness of Meeker's situation, explained the article was that "[r]ather than supporting Morgan's Internet banking effort, [Meeker] began driving it." Id. As a result, Meeker is "being accused of selling out investors to keep Morgan Stanley's banking clients happy." Id.

  Shortly following this Fortune magazine feature article, there were at least nine lawsuits filed against defendants based on their allegedly improper business practices stemming from the conflicts of interest. See Compl., Senders v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7621 (S.D.N.Y. Aug. 15, 2001); Compl., Soto v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7611 (S.D.N.Y. Aug. 15, 2001); Compl., Lloyd v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7263 (S.D.N.Y. Aug. 6, 2001); Compl., Malvan v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7262 (S.D.N.Y. Aug. 6, 2001); Compl., Stein v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7248 (S.D.N.Y. Aug. 6, 2001); Compl., Pludo v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7072 (S.D.N.Y. Aug. 1, 2001); Compl., Thompson v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7071 (S.D.N.Y. Aug. 1, 2001); Compl., Korsinsky v. Credit Suisse First Boston, No. 112752-2001 (N.Y. Sup. Ct. June 29, 2001) (discussed in Pfeiffer v. Goldman, Sachs & Co., No. 02 Civ. 6912 (HB), 2003 WL 21505876, at *3-4 (S.D.N.Y. July 1, 2003); Class Action Compl., Cinicolo v. Morgan Stanley Dean Witter & Co., Index No. 01603279 (N.Y. Sup. Ct. June 29, 2001), attached as Ex. A to Supplemental Dec. of Katherine J. Alprin (hereinafter "State Complaint"). The State Complaint, which was filed in New York state court on June 29, 2001, and was available to the public, alleged that:

"Morgan Stanley boasted in brochures disseminated during the Class Period to potential retail investors, and on its website, that among its `greatest strengths' is its `top-ranked research' and `award-winning global research' team." (State Compl. ¶ 7.)
"For the past several years, Morgan Stanley's research analysts have subordinated retail customers' interests to serve the firm's own more profitable investment banking business." (Id. ¶ 15.)
"Morgan Stanley's research analysts, like investment bankers, began to receive bonuses in the late 1990's which were related to the amount of investment banking business they attracted." (Id. ¶ 22.)
"Mary Meeker has been one of Morgan Stanley's `superstar' research analysts for the past several years. Meeker has, under the guise of objective research analysis, specialized in promoting the purchase by investors of the stocks of internet-related companies." (Id. ¶ 23.)
"Morgan Stanley proposed to prospective underwriting clients that it would use Meeker and other Morgan Stanley analysts to issue favorable reports on companies which [Morgan Stanley] underwrote." (Id. ¶ 26.)*fn3
  In the spring of 2002, towards the end of the Class Period, the New York State Attorney General, Eliot Spitzer, publicly released documents and emails "revealing widespread abuses [along the lines of the questionable practices alleged here] involving analyst research at another firm, Merrill Lynch." (Compl. ¶ 74.) Plaintiff alleges that "[t]he release of these documents shocked the investment community and fueled worries . . . that other banks would be implicated in the scandal." (Id.)

  On April 10, 2002, shortly after the release of Merrill Lynch's documents, various news organizations reported that Morgan Stanley was also a reputed target of the Attorney General's investigation into the questionable practices of securities firms regarding analyst research. (See id. ¶ 75.) On April 11, 2002, the New York State Attorney General confirmed these reports by announcing his investigation of Morgan Stanley. (See id.)

  Between April 10 and April 11, 2002, Morgan Stanley's stock dropped from $54.51 to below $51.64 per share — a drop of 5.27 percent. (See id. ¶ 77.) Morgan Stanley's stock continued to decline throughout April 2002. (See id. ¶¶ 80-81.)

  On May 6, 2002, the Securities Exchange Commission ("SEC") issued a two-week deadline for Morgan Stanley and other securities firms to produce to the SEC documents relating to analyst conflicts of interests. (See id. ¶ 82.) That day, Morgan Stanley's stock dropped $2.95 to $45.05 per share — a drop of 6.2 percent. (See id.)

  On April 28, 2003, approximately one year after the New York State Attorney General's announcement of his investigation of Morgan Stanley, Morgan Stanley agreed to settle all the claims brought against it by various regulators by paying $125 million and enacting "certain reforms meant to prevent the kinds of undue influence on analyst opinions that the regulators found [to have] occurred during the Class Period." (Id. ¶ 86.) Morgan Stanley did not, however, admit to any wrongdoing. (See id. ¶ 86.) In conjunction with the settlement, the New York State Attorney General issued findings that provided specific examples of Morgan Stanley's allegedly improper business practices.*fn4 (See id. ¶ 87.) The findings showed that Morgan Stanley analysts were often included as part of a "team" responsible for consummating investment banking deals, including performing banking-related activities such as participating in road shows, and were often responsible for drafting portions of pitchbooks used to solicit clients. (See id. ¶¶ 89, 95.) The complaint alleges that the findings also indicated that Morgan Stanley implicitly or explicitly offered to provide positive coverage if a potential banking client retained Morgan Stanley and indeed provided positive coverage when Morgan Stanley was retained. (See id. ¶¶ 90-91, 93, 100-01.) Contrarily, analysts were told to refuse coverage of companies from whom there was insufficient investment banking business and analysts were compensated in large part in accordance with the investment banking revenues attributable to that analyst. (See id. ¶¶ 92-99.)

  On July 18, 2003, plaintiff filed the present action.

  III. DISCUSSION

  On a motion to dismiss, the allegations in the complaint are accepted as true and all reasonable inferences are drawn in the plaintiff's favor. See Marcus v. Frome, 329 F. Supp. 2d 464, 468 (S.D.N.Y. 2004). "The Court's function on a motion to dismiss is not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Id. (quotations omitted). A motion to dismiss should only be granted if it appears that the plaintiff can prove no set of facts in support of their claim that would entitle them to relief. See id.

  Section 10(b) makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security [,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). To that end, under Rule 10b-5, it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).

  Five elements are necessary to state a claim under § 10(b) and Rule 10b-5. See In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998). Plaintiff must allege that the defendant: "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Id. (citations omitted).

  Defendants argue that plaintiff has identified no actionable statements or omissions because (a) all the information purportedly omitted was already public; (b) the securities laws do not require Morgan Stanley to accuse itself of wrongdoing; and (c) plaintiff's claims all reduce to allegations of corporate mismanagement, not violations of securities laws. (See Defs.' Mem. of Law at 7-13.) Defendants also argue that the complaint does not plead fraud with particularity because (a) plaintiff fails to specify why the purported misstatements are false or why the misstatements implicate conflicts of interest and (b) the allegations of scienter are inadequate. (See id. at 13-19.) Defendants further argue that, since plaintiff has not stated a claim against Morgan Stanley, the claims against the individual defendants based on control person liability must be dismissed. (See id. at 19-21.) Finally, defendants argue that plaintiff's claims are time-barred.*fn5 (See id. at 21-24.)

  The Court agrees that plaintiff's claims are time-barred because plaintiff was on inquiry notice of the alleged fraud no later than May 14, 2001, the date of Fortune magazine's feature article about Morgan Stanley and Meeker. Since plaintiff does not allege that he undertook any inquiry after that date, knowledge of the alleged fraud is imputed to plaintiff as of May 14, 2001, and accordingly his complaint is untimely. See LC Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003). Because the Court so concludes, the Court does not reach defendants' other arguments.

  Under the limitations provision of the Sarbanes-Oxley Act, "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 . . . may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation."*fn6 28 U.S.C. § 1658. The two-year limitations period begins to run after a plaintiff "obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge." LC Capital Partners, 318 F.3d at 154 (2d Cir. 2003) (quotations omitted). A plaintiff in a federal securities case will be deemed to have actual knowledge of the fraud for purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. See Fogarazzo, 2004 WL 1151542, at *17 (quotations omitted). Alternatively, when the circumstances would suggest to an investor of ordinary intelligence the probability that fraud had occurred, a plaintiff is on "constructive or inquiry notice". See id. (quotations omitted). Such circumstances are often compared to "storm warnings." LC Capital Partners, 318 F.3d at 154 (quotations omitted). As the Second Circuit explained:

The duty of inquiry results in the imputation of knowledge of a fraud in two different ways, depending on whether the investor undertakes some inquiry. If the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose. However, if the investor makes some inquiry once the duty arises, we will impute knowledge of what an investor `in the exercise of reasonable diligence, should have discovered' concerning the fraud, and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud. Id.
Because plaintiff filed suit on July 18, 2003, and has not alleged that he undertook any inquiry at any time, whether plaintiff's claims are time-barred depends on whether a duty of inquiry arose prior to July 18, 2001, two years before this suit was filed. See id. "Dismissal is appropriate when the facts from which knowledge may be imputed are clear from the pleadings and the public disclosures themselves." White v. H&R Block, Inc., No. 02 Civ. 8965 (MBM), 2004 WL 1698628, at *5 (S.D.N.Y. Jul. 28, 2004) (quotations omitted). This does not mean that plaintiff needs to be able to learn the details of the fraud, but only that plaintiff is "capable of perceiving the general fraudulent scheme based on the information available to [him]." Id. (quotations omitted); accord Fogarazzo, 2004 WL 1151542, at *17 ("An investor does not need to have notice of the entire fraud being perpetrated to be on inquiry notice"). "The information that triggers inquiry notice of the probability of an alleged securities fraud is any financial, legal, or other data, including public disclosures in the media about the financial condition of the corporation and other lawsuits alleging fraud committed by the defendants, available to the plaintiff providing him with sufficient storm warnings to alert a reasonable person to the probability that there were either misleading statements or significant omissions involved in the sale of the securities." Dietrich v. Bauer, 76 F. Supp. 2d 312, 343-44 (S.D.N.Y. 1999) (quotations omitted). "Accordingly, a Court may properly consider media reports for this purpose, even on a motion to dismiss." Fogarazzo, 2004 WL 115142, at *17 (citing LC Capital Partners, 318 F.3d at 155).

  However, the available information, including media reports, must establish a probability, not merely a possibility, that fraud has occurred. See id. Thus, "whether a plaintiff had sufficient facts to place it on inquiry notice is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6)." LC Capital Partners, 318 F.3d at 156 (quotations omitted). Yet, "[w]here the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of fraud can be gleaned from the complaint and papers integral to the complaint, resolution of the issue on a motion to dismiss is appropriate." Id. (quotations omitted).

  Plaintiff's complaint lists three elements that make up the crux of the alleged undisclosed improper business practices: that "Morgan Stanley [1] compensated its research analysts in large part based on the degree to which they helped generate investment banking business for Morgan Stanley, [2] offered its research coverage as a marketing tool to gain investment banking business, and [3] failed to establish adequate procedures to protect analysts from conflicts of interest." (Compl. ¶ 32.) All three of these elements are set forth in no uncertain terms in the May 14, 2001, Fortune magazine article and, indeed, are charges leveled repeatedly in the financial press long before May 2001. Moreover, these facts are alleged with equal detail in the State Complaint, filed on June 29, 2001, which contains allegations strikingly similar to the present complaint. The nine lawsuits, including the State Complaint, filed on the heels of the May 14, 2001, Fortune article — lawsuits with the same subject matter as the present complaint — serve as uncontroverted evidence irrefutably demonstrating that plaintiff was on inquiry notice no later than May 14, 2001. See, e.g., LC Capital Partners, 318 F.3d at 155 (affirming dismissal because duty of inquiry arose from one press article and one litigation); Merrill II, 272 F. Supp. 2d at 265 (finding plaintiff was on inquiry notice because articles described the conflicts of interest at defendant securities firm); Merrill I, 273 F. Supp. 2d at 380-82 (finding plaintiff was on inquiry notice because articles described defendant's conflicts of interest, dearth of sell ratings, and use of disparaging language to describe to positively rated companies); In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 692-93 (S.D.N.Y. 2000) (dismissing complaint as time-barred because one article and one public filing placed plaintiff on inquiry notice).

  Plaintiff claims that he was not on inquiry notice until the New York State Attorney General issued its report on Morgan Stanley. (See Tr. at 42.)*fn7 However, the findings of the report and the exhibits on which plaintiff relies, see Compl. ¶¶ 87-101, simply provide examples of and support for facts already reported in the press, including but not limited to the May 14, 2001, Fortune magazine article. Cf. Pfeiffer, 2003 WL 21505876, at *4 (finding plaintiffs were on actual notice when Korsinsky complaint was filed and that "inclusion of e-mails from CSFB analysts does not change the fact that plaintiffs in June 2001 . . . knew enough to allege that fraud"). Those internal documents might add to the details of the allegedly undisclosed improper business practices, but, as confirmed by the myriad actions filed in the summer of 2001, including the State Complaint that is markedly similar to the present complaint, plaintiff should have been "capable of perceiving the general fraudulent scheme based on the information available to [him]" no later than May 2001. White, 2004 WL 1698628, at *5 (quotations omitted); see also Merrill I, 273 F. Supp. 2d at 379-80 (rejecting plaintiff's argument that suit could not have been brought before attorney general's affidavit was made public and holding that "the statute begins to run as long as plaintiffs are aware of the existence of the alleged false statements, regardless of whether they were aware of the alleged fraudulent intent").

  Indeed, this action presents a more compelling case for holding that plaintiff had inquiry notice than other actions in this district with the same holding, see, e.g, Merrill II, 272 F. Supp. 2d at 265; Merrill I, 273 F. Supp. 2d at 380-82. As noted above, unlike any of the related cases cited by plaintiff, plaintiff here is a shareholder in a securities firm, not an investor in a company that was the subject of research analyst reports prepared by the securities firm. As a general matter, investors in XYZ company might be unaware (or less aware) of media articles describing the business practices at a securities firm that issues analyst reports covering that company because the investors are focused on finding information about their company, not about the securities firm. However, shareholders in a securities firm are focused on the firm itself and, thus, are expected to be aware of media articles regarding the firm's business practices. See White, 2004 WL 1698628, at *13 ("if the market absorbed all public information, then it must have absorbed all the information available from the articles published in newspapers from coast to coast"). Given that (a) plaintiff is an investor in Morgan Stanley; (b) the improper business practices that lie at the center of plaintiff's complaint were repeatedly exposed in the financial press years before the start of the Class Period; (c) the May 14, 2001, issue of Fortune magazine featured Meeker alone on the magazine cover and squarely conveyed in its main article all the elements of the improper business practices that were allegedly undisclosed; (d) at least nine lawsuits were initiated against defendants immediately following the May 14, 2001, Fortune article; and (e) at least one of the nine lawsuits was based on a complaint with allegations that mirrored the present complaint, the uncontroverted evidence irrefutably demonstrates that plaintiff was on inquiry notice no later than May 14, 2001. See LC Capital Partners, 318 F.3d at 155; White, 2004 WL 1698628, at *6. Plaintiff also argues that he did not have inquiry notice until after April 28, 2003, because "the PSLRA-mandated evidentiary support [for] plaintiff's claims could not have been discovered until April 28, 2003 when the [New York Attorney General] released the internal [Morgan Stanley] documents."*fn8 (Pl. Mem. of Law in Opp'n at 16.) Citing Levitt v. Bear Stearns & Co., 340 F.3d 94 (2d Cir. 2003) and Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000), plaintiff argues that "what inquiry notice means is that you have to have enough information to be able to put together a PSLRA-compliant case." (Tr. at 36.) The Court disagrees.

  Acceptance of plaintiff's argument would make "inquiry notice" a meaningless concept and neither Levitt nor Rothman support such a construction. If inquiry notice equated to having sufficient information to file a complaint that satisfied the PSLRA pleading standard, there would be no need for — and thus no duty of — inquiry. As LC Capital Partners makes clear, "inquiry notice" means only "notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge." 318 F.3d at 154 (quotations omitted) (emphasis in original). In other words, "inquiry notice" means notice of facts that "would suggest to an investor of ordinary intelligence the probability that she has been defrauded." Id. (quotations omitted).

  Levitt and Rothman, which explore when a complaint becomes time-barred after inquiry notice, do not contradict the definition of inquiry notice articulated in LC Capital Partners. Levitt involved a putative class action brought by investors who bought shares of ML Direct, Inc. from a Long Island brokerage firm during the IPO of ML Direct, Inc. See Levitt, 340 F.3d at 96. The brokerage firm was alleged to have manipulated the IPO, which occurred in September 1996, and plaintiffs sued the clearing agent of the brokerage firm (Bear Stearns) as a "secondary wrongdoer" in February 1999. See id. at 100-03. In 1997, following the IPO, a number of lawsuits and arbitrations were initiated against both the brokerage firm and Bear Stearns. See id. at 99-100. The district court held that storm warnings put plaintiffs on inquiry notice in May 1997, and plaintiffs did not dispute on appeal that they were on inquiry notice — "[i]ndeed, Plaintiffs concede[d] . . . that their duty of inquiry arose [even earlier] during the last calendar quarter of 1996, almost contemporaneously with their actual knowledge of their investment losses."*fn9 See id. at 102. The issue on appeal was, since plaintiffs were on inquiry notice in late 1996, when after that point should "a reasonable investor have discovered Bear Stearns' alleged involvement in the [brokerage firm's] fraudulent scheme"? Id. After noting that the case was atypical because plaintiffs sought to impose liability on a secondary wrongdoer, the Second Circuit reasoned that "once Plaintiffs were on inquiry notice that they had been defrauded, they were required to exercise reasonable diligence in discovering the facts establishing Bear Strearns' knowing participation in the [brokerage firm's] fraudulent scheme before filing suit." Id. at 103. However, the Second Circuit concluded, "We cannot say at this point that they did not do so." Id. The Second Circuit ruled that "the District Court erred in dismissing the complaint as time barred because there are factual disputes concerning the scope of the inquiry conducted by Plaintiffs and the question of whether a reasonable inquiry could have revealed enough information to satisfy the pleading requirements for § 10(b) primary violator liability, Rule 9(b), and the PSLRA, and those factual disputes should not have been resolved in favor of Bear Stearns on a motion to dismiss." Id. at 104 (emphasis added). As noted, in the present case, plaintiff does not allege that he made any inquiry once being put on inquiry notice no later than May 2001. Consequently, the discussion in Levitt of what constitutes reasonably diligent inquiry after being put on notice is not germane to the facts of this case.

  Similarly, in Rothman, the Second Circuit found that facts alleged in a prior complaint against a company regarding accounting misstatements put plaintiffs on inquiry notice of fraud by the company's accountant. See Rothman, 220 F.3d at 96. Knowledge of the limited facts underlying inquiry notice "certainly obliged the [plaintiffs] to inquire into [the accountant's] role in the accounting improprieties that the [plaintiffs] began to suspect in December 1997," when the original complaint was filed. Id. The Court then explained that "whether [plaintiffs'] claim against [defendant] is time-barred turns on when, after obtaining inquiry notice in December 1997, the [plaintiffs], in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud by [defendant]." Id. at 97 (emphasis in original). The Second Circuit concluded that it could not "determine, as a matter of law, the point in time after December 1997 that the [plaintiffs], in the exercise of reasonable diligence, should have discovered the facts underlying their fraud claim against [defendant]" and remanded the case for fact-finding on this issue. Id. at 98.

  In the present action, there is no dispute concerning the scope or the diligence of the inquiry conducted by plaintiff because there is no allegation that plaintiff undertook any inquiry. Rather, the issue here is when plaintiff was on inquiry notice. Specifically, plaintiff argues that he was not on inquiry notice until April 28, 2003, when the New York State Attorney General issued findings. However, Levitt and Rothman do not address the issue of when a plaintiff is on inquiry notice, see LC Capital Partners, 318 F.3d at 154 (citing Rothman for proposition that "if the investor makes some inquiry once the duty arises, we will impute knowledge of what an investor in the exercise of reasonable diligence, should have discovered concerning the fraud and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud"); White, 2004 WL 1698628, at *6 n. 4 (discussing Levitt), and thus most certainly do not stand for the proposition that inquiry notice exists only when a plaintiff has sufficient information to file a complaint that satisfies the heightened PSLRA pleading standard. Here, there is uncontroverted evidence demonstrating that plaintiff was on inquiry notice no later than May 14, 2001, and plaintiff was "obliged . . . to inquire" after that date. See Rothman, 220 F.3d at 96.

  Plaintiff argues, in the alternative, that if the Court were to find that plaintiff was on inquiry notice before April 28, 2003, "there is no way we or anybody else in the class could have gotten our hands on this evidence until April 28, 2003." (Tr. at 42.) Therefore, presumably, the Court should find that plaintiff is relieved of his duty of inquiry or to find that his duty has been satisfied.

  As a preliminary matter, given the substantial similarities between the present complaint and the State Complaint, as discussed earlier, plaintiff does not appear to have gained much relevant information from the New York State Attorney General's report. Moreover, the Court could consider "whether a reasonable inquiry could have revealed enough information to satisfy the pleading requirements," Levitt, 340 F.3d at 104, if plaintiff alleged that he undertook some inquiry. However, plaintiff cannot simply sit back, assert that inquiry would not have been fruitful, and sail past his duty of inquiry without having done any inquiry.*fn10 See LC Capital Partners, 318 F.3d at 156 ("Once the facts on the face of the complaint and related documents give rise to a duty of inquiry, it is appropriate to require a plaintiff, resisting a motion to dismiss on limitations grounds, at least to allege that inquiry was made"). The law is clear: "[i]f the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose." Id. at 154.

  The other cases on which plaintiff relies are similarly unavailing. In each of those cases, shareholders of certain companies brought fraud claims against securities firms alleging that the firms had issued misleading analyst reports about the companies in which plaintiffs were shareholders in order to secure lucrative investment banking business. In this context, the courts concluded that prior public disclosure of conflicts of interest and improper business practices in the securities industry did not put plaintiffs on inquiry notice of the specific scheme to issue false reports regarding plaintiffs' companies. See Fogarazzo, 2004 WL 1151542, at *18-19 ("those reports do not disclose the systematic misrepresentations charged in this suit"); Demarco v. Lehman, 309 F. Supp. 2d at 636-37 ("Plaintiffs, however, could not bring suit at the point of such disclosures . . . because they had no basis for believing that [defendant] had intentionally lied when he issued his prior positive reports"); Worldcom III, 294 F. Supp. 2d at 448 ("The events at issue in those [other] cases projected far more developed warnings to the investing public than were present here"). In the present case, plaintiff does not attack as false any analyst report prepared by Morgan Stanley regarding any company. Rather, plaintiff alleges a failure to adequately disclose improper business practices arising out of conflicts of interest between Morgan Stanley's investment advisory and investment banking activities. This structural flaw in the securities industry was on public display in numerous articles leading up to the break in the market for technology stocks in 2001. With respect to Morgan Stanley, these improper business practices were specifically focused upon in the May 14, 2001, Fortune article, as is evidenced by the multiple litigations spawned by this story. Thus, plaintiff was on inquiry notice no later than May 2001 of defendants' alleged failure to adequately disclose the improper business practices that lie at the heart of his complaint.*fn11

  Plaintiff's complaint is therefore time-barred because plaintiff did not conduct any inquiry and his complaint was filed more than two years after plaintiff had sufficient information to alert a reasonable person to the probability that defendants' statements regarding its business practices were (allegedly) misleading. IV. CONCLUSION

  For the foregoing reasons, defendants' motion to dismiss [8-1] is GRANTED. Plaintiff's complaint is dismissed in its entirety.*fn12 The Clerk shall enter judgment in defendants' favor and close this case.

  SO ORDERED.


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