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IN RE NTL INC. SECURITIES LITIGATION

United States District Court, S.D. New York


December 6, 2004.

In re NTL INC. SECURITIES LITIGATION. This Document Relates to: All Cases.

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

MEMORANDUM OPINION

Following the collapse of the Internet and technology boom, courts have been faced with numerous actions against telecommunication and other technology companies whose stock prices declined precipitously. This controversy involves one such former telecommunications giant, NTL, Inc. ("NTL"), a New York based corporation that provides telephone, cable television, Internet and broadband communications services in the United Kingdom, Ireland and parts of continental Europe.*fn1

  In the late 1990s, NTL pursued an aggressive growth strategy, largely financed by substantial debt. Defendants allegedly knew that this debt threatened NTL's financial condition, but represented otherwise in their public statements. Moreover, plaintiffs claim that NTL and its directors defrauded investors by failing to disclose material problems that undermined NTL's financial stability. By April 2002, the stock price had decreased to less than one dollar, and the company filed for bankruptcy. These securities fraud suits followed.

  I. The Pleadings

  A. The Class Complaint

  Plaintiffs in No. 02 Civ. 3013 ("Class Plaintiffs") purportedly represent a class of purchasers of NTL common stock and debt securities between August 2000 and November 2001 ("Class Period"). They sue NTL*fn2 and four individual defendants*fn3 under the Securities Exchange Act of 1934 (the "Exchange Act")*fn4 and Rule 10b-5 thereunder.*fn5

  The complaint alleges that NTL, beginning in 1993, pursued a strategy of growth through acquisition, acquiring eleven companies in 1998-2000.*fn6 The two largest of these acquisitions, Cable Wireless Communications ("ConsumerCo") and Cablecom, together cost over $16.5 billion. NTL issued debt securities to finance these acquisitions, resulting in debt of $15.1 billion by 2000.*fn7

  Throughout this period, NTL, like all public companies, communicated with the investing public through SEC filings, press releases and interviews. While some statements were purely factual, others expressed optimism about NTL's future or portrayed the company in a positive light. For example, defendant Knapp, the chief executive officer, commented in a July 18, 2001, press release, "[o]ur current operating results are very strong and we have always had great confidence in the future. In our upcoming presentation we will be describing how our increasingly strong performance will make our current funding sufficient for us to reach free cash flow positive by the end of 2003."*fn8 Nevertheless, NTL stock declined steadily throughout the Class Period from approximately $48 per share at the beginning to $1.60 per share on November 29, 2001.*fn9

  This for the most part is not a case involving outright falsehoods. Most of plaintiffs' allegations are to the effect that otherwise routine statements by NTL were materially misleading because defendants failed to disclose NTL's alleged internal problems in order to inflate NTL stock price. These alleged problems fall into two major categories, the allegations of which are premised entirely upon information and belief:*fn10 (1) difficulties in integrating acquired companies, and (2) problems with the customer base. In addition, plaintiffs in a few instances allege that defendants themselves made affirmative statements or are responsible for affirmative misstatements or material omissions made in third-party analyst reports.

  Plaintiffs sue NTL and the individual defendants both as primary violators of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and as control persons under Section 20(a) of the Exchange Act.*fn11 The individual defendants move to dismiss.

  B. The Gordon Complaint

  Plaintiffs in No. 02 Civ. 7377 ("Gordon Plaintiffs") are individuals and a limited partnership that purchased or acquired NTL securities between January 12, 2000 and April 16, 2002 ("Applicable Period"). The defendants in the class action all are sued here as well save Stephen Carter.

  The second amended complaint ("Gordon Complaint") adopts the Class Complaint in its entirety and adds a few allegations.*fn12 It complains of several additional statements and makes additional allegations in support of its scienter allegation, the majority of which result from the personal relationship between Frederick Gordon and defendant Blumenthal.*fn13 For example, the Gordon Complaint alleges that defendants made additional misleading statements directly to Gordon.*fn14 It contains also additional allegations as to why statements were misleading.

  The Gordon Plaintiffs sue NTL and the individual defendants as primary violators under Section 10(b) of the Exchange Act, Rule 10b-5, and 17 C.F.R. § 229.303, and for common law fraud. The individual defendants are sued also as control persons under Section 20(a). All defendants, including NTL, move to dismiss the second amended complaint.

  II. Standard Governing Motions to Dismiss

  In deciding a Rule 12(b)(6) motion, the Court accepts as true all allegations in the complaint and draws all reasonable inferences in the plaintiff's favor.*fn15 Dismissal is inappropriate "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."*fn16 Although such motions are addressed to the pleadings, a district court may consider also the full text of documents partially quoted in the complaint where the documents are "integral" to it and relied upon by plaintiffs.*fn17 Accordingly, review of the exhibits attached to defendants' moving papers is appropriate.*fn18

  As this is a securities fraud case, the complaints must meet also the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These have three particularly relevant effects here. First, the complaints must state the circumstances constituting fraud with particularity.*fn19 They "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."*fn20 Second, where an allegation regarding a misstatement or omission is made on information and belief, the PSLRA requires that "the complaint shall state with particularity all facts on which that belief is formed."*fn21 Finally, bald allegations of scienter will not suffice. Plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."*fn22 The precise application of these standards is at the heart of these motions.

  III. Section 10(b) and Rule 10b-5 Claims

  In order to state a claim under Section 10(b) of the Exchange Act and Rule 10b-5, "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff."*fn23 Scienter is "an intent to deceive, manipulate or defraud."*fn24

  A. Particularity Requirement

  Defendants argue that plaintiffs have failed to state the circumstances of the alleged fraud with the requisite particularity and have resorted instead to "puzzle pleading" — reproducing blocks of text from allegedly deceptive NTL statements without specifying which portions are misleading.*fn25 The Court disagrees. For the most part, the complaints specifically identify the date, publication and speaker*fn26 of each of the alleged misstatements or omissions.*fn27

  The particularity requirement demands also that plaintiffs sufficiently plead why the statements were fraudulent.*fn28 Plaintiffs attempt to do so by reciting detailed reasons after each alleged misstatement. For example, Class Plaintiffs claim that many statements were misleading because they failed to disclose that NTL was experiencing problems with integration of acquired companies, keeping churn rates low by under-reporting customer terminations, and maintaining nonpaying subscribers on subscriber lists. They allege that other statements were misleading because defendants misrepresented that the integration of ConsumerCo was proceeding smoothly or that NTL was fully financed when in fact there were integration and working capital problems. The Gordon Plaintiffs, for their part, claim that statements were misleading because defendants misrepresented their ability to meet EBITDA projections and satisfy credit agreements. To the extent that the complaints contain facts supporting the existence and materiality of these problems, they satisfy the particularity requirement.*fn29 It is to this that the Court now turns.

  B. NTL's Alleged Problems

  To support their claim that defendants' failure to disclose material problems made otherwise unobjectionable statements misleading, plaintiffs must allege an adequate basis for supposing that such problems actually existed. Where the allegations are premised upon information and belief, as is true of the majority,*fn30 the PSLRA requires that "the complaint . . . state with particularity all facts upon which the belief is formed."*fn31 This standard is satisfied where plaintiffs "plead with particularity sufficient facts to support [the alleged] beliefs."*fn32 The type of facts and particularity required are determined on a case-by-case basis.*fn33

  Whether plaintiffs have pleaded with particularity sufficient facts to support their beliefs involves two separate inquiries. First, are the specific factual allegations that the problems existed based on adequate sources? In other words, have plaintiffs sufficiently identified the sources upon which their beliefs are based, and are these sources likely to have known the relevant facts? Second, do plaintiffs' factual allegations permit an inference that NTL was experiencing material problems during the relevant times? In other words, the facts alleged must support not only an inference that problems actually existed, but also an inference that the alleged problems would have been material to the reasonable investor.*fn34

  1. Integration Problems

  The first category of alleged problems concerns NTL's ability to integrateits acquired companies, in particular its largest acquisition, ConsumerCo. Class Plaintiffs allege that NTL was experiencing significant difficulties in this regard based on the following subsidiary assertions: (1) employees at NTL and ConsumerCo refused to speak to one another, (2) NTL's customer service unit was unable to handle the expanded customer base, (3) NTL's billing systems were duplicative and uncoordinated following the acquisitions, and (4) Knapp admitted that NTL was having integration problems at an October 2000 meeting.*fn35

  The initial inquiry is whether these subsidiary factual allegations are premised upon adequate sources. Where plaintiffs rely on personal sources alone to support their allegations, as they do here, they need only describe the sources "with sufficient particularity to support the probability" that someone in the informant's position would possess the information alleged.*fn36

  Here, plaintiffs rely on former sales and marketing employees for the integration problem allegations, identifying each source by name or position at the company during the Class Period. Because it is likely that these sales and marketing employees would have been knowledgeable about customer service and integration problems, the allegations are adequately sourced.

  The question whether plaintiffs are justified by these subsidiary allegations in drawing the conclusion that the company was experiencing integration problems of such significance that they would have been important to a reasonable investor is another matter. The complaint, apart from largely rhetorical flourishes of indeterminate meaning,*fn37 contains little or no hard information concerning the extent or prevalence of the subsidiary "facts" relied upon. Claims of "frequent" failures to complete service appointments,*fn38 for example, are meaningless unless one knows what "frequent" means. Indeed, the only quantitative information regarding the impact of problems with customer service is reference to an NTL survey, the date of which is not given, that allegedly found an average on-hold time of 25 minutes and that over 35 percent of callers disconnected before reaching a customer service representative.*fn39 But the complaint contains no information that would permit determination of the significance of these two facts. There is no indication of the period over which the reported average hold time and disconnect rates were observed — an extremely busy night or weekend would be a matter of far less significance than a problem that persisted over weeks or months. Nor is any indication of what is normal in the operation of customer service call-in facilities. In the main, therefore, the Class Complaint fails adequately to allege facts that support their assertion, on information and belief, that substantial problems existed in integrating NTL's acquisitions.

  There is one exception. The complaint asserts, on the basis of an allegedly first hand report, that defendant Knapp told an October 2000 meeting of NTL managers that the company had accumulated excessive debt and was having difficulty integrating the acquired companies. He is quoted as having said that NTL was "in trouble . . . [and] have got to cut back" and as having instructed those present to keep the briefing confidential.*fn40 The Court therefore is persuaded that the complaint alleges enough to justify the conclusion that the company was experiencing material integration problems as early as October 2000.

  2. Subscriber Base Problems

  Plaintiffs allege a second major problem that NTL failed to disclose: its use of unfair or fraudulent practices that artificially inflated the company's subscriber base. According to the Class Complaint, NTL hyped its reported subscriber numbers by (1) refusing to allow customers to terminate accounts, (2) acquiring new customers by offering free installation or services and then billing for them nonetheless, (3) recruiting customers in low income areas and weakening credit requirements, and (4) including non-paying customers, such as those with free Internet service, on subscriber rolls.*fn41 According to a senior marketing executive said to be knowledgeable on the subject, NTL recorded "as many as 75,000 more subscribers than it actually had" during the Class Period.*fn42

  Here, the factual allegations supporting plaintiffs' belief come from statements of former sales employees and former customers. The Class Complaint adequately describes these sources by their names or positions at the company, and it is likely that individuals in such positions would have access to the information reported.

  The majority of the factual allegations permit an inference that NTL engaged in inappropriate behavior to inflate subscriber numbers.*fn43 For example, refusing to allow customers to terminate their accounts and including non-paying subscribers on subscriber rolls, if that occurred, would have portrayed NTL as having more paying subscribers than it actually had.

  The Class Plaintiffs are justified also in asserting that the failure to disclose this information was material. The extent of the overstatement of the customer base in these circumstances, which the complaint does not make clear, is not alone dispositive of the materiality issue. The dishonesty inherent in manipulating customers to inflate reported results has independent significance because it reflects on the integrity of management.*fn44

  3. Negative Cash-Flow of ConsumerCo

  The Gordon Complaint alleges that two statements not sued upon in the Class Complaint were misleading because, inter alia, defendants failed to disclose that ConsumerCo had become cash-flow negative by the time of the acquisition and was a deteriorating asset.*fn45

  The basis for this allegation is a statement allegedly made by defendant Knapp directly to plaintiff Gordon.*fn46 The allegation therefore is adequately sourced.

  It cannot be said on a motion to dismiss that the cash flow status of ConsumerCo would not have been material to a reasonable investor in May 2000. Hence, plaintiffs have pleaded sufficiently that NTL's failure to disclose the cash flow status of its largest acquisition was a material omission.

  4. Other Alleged Problems

  The complaints allege a number of statements that allegedly were misleading for reasons that do not fit so neatly into the preceding categories. But these claims are not pleaded with the requisite particularity. All are examples of attempts to plead fraud by hindsight or are purely conclusory.

  a. Fraud by Hindsight

  Plaintiffs argue that several statements were misleading because defendants failed to disclose that, inter alia, (1) work force reductions were not occurring as promised,*fn47 (2) NTL would not be able to meet EBITDA, revenue or additional subscriber projections without the use of fraudulent practices,*fn48 (3) NTL's compliance with its loan covenants was dependent upon its deceptive customer practices,*fn49 and (4) Cablecom, an asset Knapp indicated the company wished to sell in 2001, had no equity.*fn50

  Neither complaint alleges sufficient facts to support the assertions that material problems existed in most of these respects at the times the statements complained of were made. For example, the Gordon Complaint alleges that NTL could not meet its EBITDA, revenue or subscriber projections based solely upon the fact that NTL never met any of these projections. This is nothing more than an effort to allege fraud by hindsight.*fn51 We have not yet come to the point that a lack of clairvoyance constitutes fraud.*fn52

  b. Insufficient Factual Support

  In some instances, the complaints argue that statements were misleading by asserting, without support, that the opposite of the statement was true. For example, they allege that (1) statements attributed to Knapp in two August 10, 2000, Bloomberg articles were misleading because he reportedly stated that NTL was "fully financed" when in fact it was not,*fn53 (2) NTL's November 2000 workforce reduction was motivated by the company's need to service its debt obligations and not the desire to eliminate duplications, as the company explained,*fn54 (3) NTL's former chief operating officer, Leigh Wood, left the company because management had lost confidence in her abilities and not because of marital difficulties, as Blumenthal told Gordon in May 2000,*fn55 and (4) the acquisition of ConsumerCo did not improve NTL's operating results, as it claimed in its 2000 annual report.*fn56

  There is no factual support for any of these allegations in the complaints. A "conclusory allegation that the opposite of a statement . . . is true, without further factual elaboration, is insufficient."*fn57 5. Duty to Disclose

  Even if material integration and subscriber base problems existed, defendants argue, they cannot form the basis for a securities fraud claim. These, they contend, reflected only corporate mismanagement, the existence of which is not subject to a duty to disclose.*fn58

  Defendants correctly assert that Santa Fe Industries, Inc. v. Green*fn59 and its progeny hold that allegations of garden-variety corporate mismanagement are not actionable under the federal securities laws. Plaintiffs, in other words, may not bootstrap state-law fiduciary duty claims into securities law claims.*fn60 Nevertheless, once a corporation speaks on a subject, it must speak truthfully and completely.*fn61 Hence, a failure to disclose facts that amount to mismanagement may render other statements misleading. Where the failure to disclose these facts involves an element of deception or manipulation, a federal securities law claim may lie.*fn62

  The essence of plaintiffs' claims here, to the extent they involve corporate mismanagement, is that the failure to disclose NTL's internal problems rendered statements that NTL did make misleading. Thus, they do not rely on mismanagement per se but on alleged deception. Defendants' argument therefore lacks merit. C. Scienter

  1. Pleading Requirements

  Plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind."*fn63 This may be done "either (a) by alleging facts that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness."*fn64

  a. Motive and Opportunity

  In alleging motive and opportunity, plaintiffs must demonstrate the presence of "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged" as well as "the means and likely prospect of achieving concrete benefits by the means alleged."*fn65 But "[g]eneral allegations that the defendants acted in their economic self-interest are not enough."*fn66 Nor are allegations of motives "generally possessed by most corporate directors and officers."*fn67 Accordingly, the Second Circuit has found insufficient as motives capable of grounding a fraud allegation desires such as (1) maintaining a bond or credit rating,*fn68 (2) prolonging executive compensation,*fn69 (3) increasing executive compensation by inflating the value of a stock,*fn70 and (4) making the issuer appear profitable.*fn71

  b. Conscious Misbehavior and Recklessness

  The other permissible basis for the requisite allegation of scienter is facts constituting strong circumstantial evidence of conscious misbehavior or recklessness. Conscious misbehavior encompasses deliberately illegal conduct.*fn72 Recklessness, on the other hand, is conduct that is highly unreasonable and "an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it."*fn73 Allegations of defendants' knowledge of facts or access to contradictory information usually are sufficient to state a claim based on recklessness.*fn74 It is well established, however, that "[w]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information."*fn75 Whether a complaint has "specifically identified" a report or statement is highly fact specific and should be determined in light of the complaint as a whole.*fn76

  2. NTL

  a. Class Complaint

  The Class Complaint is replete with allegations that NTL knew of or recklessly disregarded the existence of the integration and subscriber base problems.*fn77 As for knowledge of the integration problems, the complaint bases its allegations of scienter on internal reports*fn78 and studies*fn79 and the alleged statement by Knapp at the October 2000 meeting.*fn80 There is no need to determine whether the complaint has specifically identified the internal reports and studies, as the allegation that defendant Knapp admitted that NTL was experiencing integration problems in the October 2000 meeting is sufficient to justify an inference of fraudulent intent for pleading purposes based on a theory of conscious misbehavior or recklessness.

  The allegations of NTL's knowledge or reckless disregard of subscriber base problems also are sufficient. Plaintiffs argue that NTL management was aware of the alleged deceptive practices to increase artificially the subscriber numbers.*fn81 While the complaint fails to describe who exactly it considers to have been in NTL management, the allegations permit the inference that some members of NTL's upper echelon, such as Scott Faulkner, the managing director of NTL's consumer business unit, were aware of the practices of refusing to allow NTL customers to terminate their accounts as well as the impact of such practices on the churn rate. Moreover, while the complaint does not allege exactly who directed sales representatives to sign up customers, knowing they would be unable to pay bills, it permits the inference that some level of management directed this practice.

  b. Gordon Complaint

  The Gordon Complaint alleges that NTL failed to disclose that its largest acquisition, ConsumerCo, had become cash-flow negative by the transaction's closing. Plaintiffs specifically identify the statement allegedly demonstrating NTL's knowledge of this fact, as defendant Knapp allegedly admitted as much to plaintiff Gordon in a September 2001 conversation.*fn82 Defendants correctly argue that the statement only addresses what they knew in September 2001 and not at the time of the alleged misstatements in May 2000. Even so, it seems unlikely that NTL would not have known the financial status of its acquisition when the transaction concluded. This certainly permits, at this stage, a strong inference of fraudulent intent.

  3. Individual Defendants

  Plaintiffs argue that the complaints provide adequate support for their allegations of fraudulent intent on the part of the individual defendants by alleging facts showing both motive and opportunity and recklessness.

  a. Motive and Opportunity

  (i) Class Complaint

  The Class Complaint alleges that the individual defendants were motivated to commit securities fraud (i) to maintain access to capital markets, (ii) to abide by credit agreements, and (iii) to protect their compensation, which was heavily dependent on the success of the integration efforts.*fn83 The first two allegations are insufficient for the reasons discussed above. The Second Circuit has found the third alleged motive to be equally insufficient, as "incentive compensation can hardly be the basis on which an allegation of fraud is predicated."*fn84 Class Plaintiffs therefore have failed to allege the concrete and personal benefit required to properly allege motive.

  (ii) Gordon Complaint

  The Gordon Plaintiffs assert an additional motive on the parts of defendants Knapp, Blumenthal and Gregg, arguing that an inflated stock price allowed the individual defendants to engage in insider trading, especially the receipt and exercise of stock options by the individual defendants.*fn85 But the allegation that the individual defendants received or exercised stock options is insufficient in a case like this. There simply is no reason to infer fraud from the acquisition of shares by insiders where the thrust of the alleged fraud is the concealment of bad news, as such share acquisitions would be contrary to the insiders' self interest.*fn86

  The allegation that defendant Blumenthal sold 93,148 shares of NTL stock for $8.34 million in April 2000*fn87 is appears more troublesome, but only marginally so. While allegations of insider trading may permit an inference of scienter, plaintiffs must allege also that the insider trades were unusual.*fn88 Relevant factors in determining whether insider trading activity is unusual include the amount of profit, the percentage of defendant's holdings that were sold, and the number of insiders who sold stock.*fn89 There is no per se rule, however, that sale of a particular monetary amount or percentage of total holdings is unusual.*fn90

  The complaint alleges that Blumenthal received options to purchase 7.25 million shares on May 30, 2000 alone, valued by NTL at up to $735 million.*fn91 Apart from the April 2000 sale, there no allegation that Blumenthal or any other individual defendant sold stock at any other time during the Applicable Period.*fn92 In this context, Blumenthal's sale of 93,148 shares in April 2000 only weeks before exercising an option to buy 7.25 million shares in the following month is not suggestive of a desire to get rid of his holdings in advance of the disclosure of bad news. Accordingly, the allegation of Blumenthal's sale does not justify an inference of scienter.*fn93

  b. Conscious Misbehavior or Recklessness

  Plaintiffs argue that the individual defendants knew of or recklessly disregarded the existence of the integration problems, as well as the use of deceptive practices to inflate the perceived size of the subscriber base. The Gordon Plaintiffs claim also that the individual defendants knew of ConsumerCo's negative cash-flow in May 2000. The basic allegations are the same as those discussed above for NTL. The additional inquiry here is whether the facts alleged lead to an inference of scienter on the part of each of the individual defendants.

  (i) Integration Problems

  Defendant Knapp's statement concerning integration problems at the October 2000 management meeting is clear support for the proposition that he had access to facts contradicting his public statements. While there is no allegation that the other individual defendants were present at this meeting, nearly one hundred top managers of NTL allegedly attended. This permits the inference that the other individual defendants, all of whom were involved in the daily management of the company, would have learned of information presented at such a large meeting even if they did not attend.*fn94

  (ii) Subscriber Base Problems

  Whether each individual defendant knew or recklessly disregarded information about the alleged fraudulent practices inflating the subscriber numbers is less clear. There is no support for the allegations that any individual defendant knew of or recklessly disregarded the deceptive practices used by some employees to inflate artificially the subscriber numbers. For example, while the complaint alleges that Knapp and Blumenthal were telephoned to discuss the practice of refusing to allow customers to terminate accounts, defendants correctly point out that the Class Complaint does not allege that they were reached or what they were told.

  The complaints permit the inference, however, that defendants Knapp and Blumenthal knew from internal reports that the number of paying subscribers was declining and, thus, that any reported figures during this time were misleading. For the most part, the Class Complaint has provided general information as to the substance, frequency and authors of the internal reports. For example, the complaint alleges that sales and marketing employees "informed upper management of NTL's stagnant or declining subscriber base and chronic customer retention problems through direct communications, meetings, and in-regularly-prepared reports forwarded to Defendants Knapp and Blumenthal."*fn95 Accordingly, the allegations permit the inference that defendants Knapp and Blumenthal knew that the reported subscriber base was increasing only by including non-paying subscribers in the released figures. Such allegations are sufficient to overcome a motion to dismiss.

  The allegations of scienter for defendant Carter are sufficient as well. The Class Complaint refers to a conference call between NTL management and analysts in November 2001. After the call, the customer marketing director allegedly asked defendant Carter how he could reassure investors when he knew that NTL was not "going to be okay," to which defendant Carter allegedly responded, "[w]hat I tell [the analysts] is nine-tenths bullshit and one-tenth selected fact."*fn96 While this statement does not indicate what knowledge defendant Carter possessed about the alleged subscriber problems, it supports a strong inference that he did not believe what he told the analysts and that he was aware of some major internal problems. Thus, the Class Complaint sufficiently pleads scienter for defendant Carter as of November 2001.*fn97

  The allegations of scienter with respect to the claims based on failure to disclose subscriber base problems for defendant Gregg are insufficient, even under the most liberal interpretation of the Second Circuit's requirement that plaintiffs specifically identify reports containing contradictory information. The Class Complaint contains numerous allegations that reports were forwarded to Gregg.*fn98 Yet the Class Complaint fails to allege the content of these reports at even the most general level.*fn99 The Gordon Complaint does not contain any additional allegations that defendant Gregg knew or recklessly disregarded the subscriber base problems.

  (iii) Negative Cash-Flow of ConsumerCo

  Finally, the Gordon Plaintiffs argue that the individual defendants knew that ConsumerCo had become cash-flow negative, but failed to disclose that fact in two May 2000 statements concerning the acquisition. The allegation of scienter is certainly sufficient for defendant Knapp, as he admitted his knowledge to Gordon in September 2001. But there simply is no basis for an inference of fraudulent intent on behalf of defendants Blumenthal or Gregg. Allegations that they should have known about ConsumerCo's financial state based solely on their executive positions are not enough to plead scienter.*fn100 Thus, the Gordon Plaintiffs have failed to plead a securities fraud claim with respect to Blumenthal's statement to Gordon in May 2000.*fn101 The pleadings, however, are sufficient under the group pleading doctrine with respect to all three individual defendants for the May 2000 press release.*fn102

  D. Alternate Grounds for Dismissal

  Defendants argue that the majority of the alleged misleading statements are not actionable because they were statements of general optimism or were made by third parties.

  1. Optimistic Statements

  Several of the remaining alleged misleading statements are optimistic projections or positive statements about the company's financial health. Defendants argue that these statements were mere puffery*fn103 or appropriately qualified forward-looking statements.*fn104

  a. Puffery

  Vague expressions of optimism, or puffery, are insufficient to support a claim for securities fraud.*fn105 Projections of future performance may be actionable under Section 10(b) if they are worded as guarantees or supported by specific facts or if the speaker does not reasonably believe them.*fn106 Corporate officials need not, however, present an overly gloomy picture of current performance and future prospects, as long as their statements are consistent with reasonably available data.*fn107

  Defendants argue that several of the challenged statements were nothing more than vague expressions of optimism regarding operating results or NTL's future in general. For example, in August 2000, NTL issued a press release concerning its prior quarter's operating statistics in which Knapp reportedly stated, "[w]e are extremely proud of this quarter's operating performance. . . . The second quarter was the most successful in our history. . . . We believe tremendous opportunities await us."*fn108

  The Class Complaint allegations permit an inference that defendants had no reasonable basis for such positive statements by November 2001, but no earlier. It was at this time that NTL began reporting slowing revenue and subscriber growth and that defendant Carter allegedly admitted the company was misrepresenting existing facts to analysts.*fn109 That defendants allegedly had earlier knowledge of declining revenue or subscriber numbers does not mean that they had no adequate basis for releasing optimistic statements. Thus, to the extent plaintiffs have alleged misstatements based on optimistic statements prior to November 2001, the statements are not actionable. b. Forward-Looking Statements

  Under the safe-harbor provision of the PSLRA, a statement concerning projections or future plans "generally does not give rise to a securities fraud claim if either: (1) it is accompanied by meaningful cautionary language, or (2) the plaintiff fails to prove the statement was made with actual knowledge that it was false or misleading."*fn110 It applies "to forward-looking statements only and not to material omissions or misstatements of historical fact."*fn111 Both oral and written communications may qualify for protection.*fn112

   Forward looking statements include financial projections, descriptions of future plans or objectives of management, and discussions of future economic performance.*fn113 Here, defendants identify numerous statements as forward looking, including (1) expectations that the company would be "free cash flow positive" by the end of 2003,*fn114 (2) the company's plan to target additional subscribers,*fn115 and (3) projections of cost savings or future earnings.*fn116

   Plaintiffs argue that these statements do not fall under the safe-harbor provision because they are not accompanied by the requisite cautionary language or identified as forward looking. That statements are not accompanied by cautionary language or identified as forward looking does not end the analysis, however. Plaintiffs still must allege facts that permit the inference that defendants made the statements with actual knowledge of their falsity in order to remove forward-looking statements from the protection of the safe-harbor provision.

   The allegations in the Class Complaint fail to permit such an inference before November 2001, when defendant Carter essentially admitted that he was misrepresenting existing facts to analysts. Hence, the majority of these statements are within the safe-harbor provision to the extent they are forward looking.*fn117 The one exception is defendant Knapp's statement on November 7, 2001, that NTL would turn free-cash flow positive by the end of 2003.*fn118 Plaintiffs have alleged sufficient facts supporting their claim that defendants knew at this time that any projections were based on a misrepresentation of existing facts. Hence, the statement does not merit the protection of the safe-harbor provision.*fn119

   2. Statements by Securities Analysts

   Defendants argue also that they should not be responsible for statements made by "third-party securities analysts" during the Class Period.*fn120 Corporate officials may face liability "for false and misleading information disseminated through analysts' reports by alleging that the officials either: (1) intentionally fostered a mistaken belief concerning a material fact that was incorporated into reports, or (2) adopted or placed their imprimatur on the reports."*fn121

   Class Plaintiffs here argue that defendants intentionally fostered mistaken beliefs that later were incorporated into analysts' reports.*fn122 To impute analyst statements to defendants, the Class Complaint must allege that analysts relied on specific information provided to them by defendants.*fn123 By this standard, the complaint is clearly insufficient. While the complaint refers to some conference calls between defendants and analysts, it does not identify the exact statements allegedly made by defendants, nor allege that these statements ever reached the public.*fn124 Instead, it appears that plaintiffs are trying to hold defendants responsible for a different group of analyst statements — those issued in response to defendants' public statements.*fn125 To the extent defendants made misleading statements to the public, they are already subject to liability. That analysts absorbed these statements does not establish an independent basis of liability.

   IV. Section 20(a) Claim — Control Person Liability

   Plaintiffs claim that each of the individual defendants is liable as a controlling person under Section 20(a) of the Exchange Act, which provides that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action."*fn126

   The parties agree that the elements of Section 20(a) liability include both a primary violation and the defendant's control over the primary violator. The part company on the question remains whether plaintiffs must allege also culpable participation by the control person.

   This is an interesting question on which courts, both within and outside this circuit, are deeply divided.*fn127 As the Court has concluded, in light of the group pleading doctrine, that the complaints state legally sufficient claims for relief against the individual defendants as primary violators, there is no present need to reach this question. Hence, the motion to dismiss the Section 20(a) claims is denied without prejudice. Defendants may raise the point anew if plaintiffs fail to establish a primary violation by any of the individual defendants at trial.

   V. Additional Claims by Gordon Plaintiffs

   The Gordon Complaint asserts two causes of action that are not included in the Class Complaint. First, the Gordon Plaintiffs argue that NTL and the individual defendants violated 17 C.F.R. § 229.303 by failing to report to the SEC alleged negative trends with ConsumerCo's subscriber base. They make common law fraud claims against all defendants as well.

   A. 17 C.F.R. § 229.303

   The Gordon Plaintiffs assert a claim against NTL and the individual defendants for failure to comply with the reporting requirements governing SEC Form 10-Q. Item 303 of SEC Regulation S-K requires management to "[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations."*fn128

   While a violation of Item 303, in some circumstances, may give rise to a claim under Section 10(b) of the Exchange Act, there is no private cause of action for violation of Regulation S-K.*fn129 Thus, Gordon Plaintiffs' claim for alleged violation of 17 C.F.R. § 229.303 is dismissed.

   B. Common Law Fraud Claims

   The Gordon Complaint states also claims for common law fraud against all defendants. To the extent that the Court has not dismissed the federal claims and defendants challenge on jurisdictional grounds only, defendants' motion to dismiss the state law claims is denied.

   VI Conclusion

   For the foregoing reasons, the motion of the individual defendants to dismiss the Class Complaint and the motion of defendants to dismiss the Gordon Complaint are disposed of as follows:

(a) The motions are granted insofar as they complain of
(i) the statements alleged in Class Cpt. ¶¶ 78, 82, 90, 94, 111, 118, 126-28, 130, 135, 138, 150-52, 154, 164 and Gordon Cpt. ¶¶ 43, 45, 63, 74, 78, 83, 89, 98, 103, 105, 112, 114, 118-19, 121, 122, 124, 137,
(ii) the forward looking statements and general expressions of optimism alleged in Class Cpt. ¶¶ 69, 71, 75, 80, 92, 100-01, 106, 109, 115, 122, 124, 132, 134 and Gordon Cpt. ¶¶ 52, 64, 66, 76, 80, 82, 96, 100, 102, and
(iii) alleged violation of 17 C.F.R. § 229.303.
(b) The motions are denied in all other respects.
SO ORDERED.


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