The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge
This case arises out of a merger transaction (the
"Acquisition") between plaintiff NM IQ LLC ("NM IQ") and the
now-bankrupt OmniSky Corporation ("OmniSky"). NM IQ commenced an
action in New York State Court against OmniSky and three of its
officers, alleging fraud, fraudulent inducement and mutual
mistake. The court dismissed these claims for lack of standing
and failure to state a cause of action. Upon leave of the court,
seven members of NM IQ were added as plaintiffs. These plaintiffs
then filed an amended complaint alleging the same claims against
OmniSky and two of the officers. Again, the court dismissed for
failure to state a cause of action.
Prior to filing their amended complaint in the state court, the
same plaintiffs commenced an action in this Court against the
original three OmniSky officers. This action added claims under
Sections 10(b) and 20(a) of the Securities Exchange Act ("1934
Act") to the common law fraud, fraudulent inducement and mutual
mistake claims before the state court. Defendants have moved to
dismiss under Fed.R.Civ.P. 12(b)(6) and 9(b) on grounds of
res judicata, statute of limitations, failure to state claims
and failure to plead fraud with sufficient particularity. For the
reasons that follow, the Court finds the State Court dismissals
preclusive of Plaintiffs' claims before this Court. Defendants'
motion is therefore granted. FACTUAL BACKGROUND
The Complaint alleges the following facts. OmniSky Corporation
("OmniSky") was a wireless technology company that offered
service for use on handheld mobile devices. (Compl. ¶ 20). These
services permitted subscribers to access the Internet, send and
receive e-mail, and conduct e-commerce transactions. (Id.). At
the time of the events giving rise to the Complaint, Defendant
Patrick S. McVeigh ("McVeigh") was OmniSky's chairman and chief
executive officer; defendant Lawrence S. Winkler ("Winkler") was
chief financial officer; and defendant Ray Cleeman ("Cleeman")
was vice president of finance and treasurer. (Id.).
In October 2000, one month after OmniSky's initial public
offering, OmniSky representatives commenced discussions with
representatives of technology companies Nomad, Inc. and Nomad LTD
(collectively "Nomad") concerning a possible acquisition. (Id.
¶¶ 22-25). Defendants McVeigh and Cleeman, along with
then-president Barak Berkowitz ("Berkowitz"), were the primary
negotiators for OmniSky. (Id. ¶ 25). Jacob Davidson
("Davidson"), a founder of Nomad and beneficial interest-holder
in plaintiffs 2bVentures LLC ("2b") and Back Bay Capital Partners
LLC ("Back Bay"), was the primary spokesman for Nomad. (Id. ¶
25). In anticipation of the Acquisition, the seven non-NM IQ
plaintiffs, who collectively owned 94% of Nomad, created NM IQ
and transferred their interests to the new entity. (Id. ¶ 12). NM IQ was formed for the sole purpose of effecting the merger
transaction with OmniSky. (Id.).
Three representations by Defendants during the merger
negotiations form the basis of Plaintiffs' claims. The first
involved OmniSky's ability to fund itself going forward. In
October and November 2000, Cleeman provided Davidson with eight
reports by Wall Street analysts. (Id. ¶ 30). The analysts'
consensus was that OmniSky had sufficient on-hand cash, would not
need additional funding until late in 2001 and would achieve
profitability by 2003. (Id. ¶ 31). Plaintiffs also allege that
McVeigh represented to Davidson during a November 16, 2000
meeting that OmniSky had sufficient capital under its current
business model to continue funding its own and Nomad's operations
into 2002. (Id. ¶ 26(a)). While Plaintiffs made allegations
concerning OmniSky's ability to fund itself in the state action,
their Memorandum of Law states that these allegations are not
before this Court. (Pl. Mem. of Law at 32-33).
The second representation also involves the Wall Street
analysts' reports. Four of the reports estimated that OmniSky
would generate between 220,000 and 225,000 subscribers by the end
of 2001. (Id. ¶ 43). Plaintiffs allege that Cleeman represented
that he and OmniSky adopted the reports and that they accurately
represented OmniSky's financial condition. (Id. ¶ 34).
Plaintiffs claim that they relied on these reports in their
determination to enter into the merger with OmniSky. (Id. ¶
37). The third representation involved a statement by McVeigh to
Davidson at the November 16, 2000 meeting that OmniSky "had
secured a commitment from Verizon to invest an additional $20
million in funding." (Id. ¶ 26(b)). Plaintiffs allege that they
relied on this commitment because they assumed that Verizon, a
well-capitalized investor in technology ventures, had conducted
extensive independent due diligence. (Id. ¶ 28). Plaintiffs
also believed, and Defendants allegedly represented, that
Verizon's name recognition would attract other investors to
OmniSky. (Id. ¶¶ 27, 28(c)).
During the second week of November 2000, Defendants attended an
offsite meeting of OmniSky's senior executives. (Id. ¶ 29).
Plaintiffs allege that they knew nothing of this meeting at the
time. (Id.). At this meeting, an OmniSky vice president gave a
presentation (the "Presentation") that included an agenda and
timetable for revising the budget downward. (Id. ¶ 29, 39).
This Presentation scheduled revised budget figures for a
subsequent presentation on December 11, 2000. (Id. ¶ 42). The
Presentation also stated subscriber projections of 158, 688 by
the end of 2001, a 30% decrease from the estimates in the Wall
Street reports. (Id. ¶¶ 41, 44).
After the November Presentation, Plaintiffs allege that OmniSky
prepared documents containing the revised subscriber projection
and planning budget cuts. (Id. ¶ 45). According to spreadsheets
allegedly prepared for a December 11 presentation, OmniSky
planned budget cuts of $3.5 million at the end of 2000 and $32 million from 2001 operating expenses to compensate for
lower-than-expected subscriber totals. (Id. ¶ 50).
On November 21, 2000, after one month of negotiations,
Plaintiffs and OmniSky executed an agreement in principle (the
"Letter of Intent") setting forth the terms for OmniSky's
acquisition of Nomad. (Id. ¶¶ 6, 51). Plaintiffs allege that
Defendants did not disclose the reduction in subscriber
projections or the proposed budget cuts at this time. (Id. ¶
51). The Letter of Intent provided that OmniSky would pay Nomad's
shareholders 2.5 million shares of unregistered OmniSky common
stock, followed by payments of 600,000 and 400,000 shares
approximately six months and one year after the acquisition.
(Id. ¶ 52).
Cleeman faxed documents for the closing of the acquisition to
Davidson on December 30, 2000. (Id. ¶ 55). Davidson asked
Cleeman whether OmniSky would meet the subscriber targets in the
Wall Street reports. (Id. ¶ 56). To Davidson's surprise,
Cleeman responded deceitfully, Plaintiffs allege that he did
not know the status of those projections. (Id. ¶ 57). Davidson
then contacted Berkowitz, who allegedly gave assurances that
OmniSky "was on track to meet its projections." (Id. ¶ 58).
Davidson signed the acquisition documents on December 30.
(Id.). The remaining plaintiffs executed a Share Exchange
Agreement on January 3, 2001, and OmniSky announced the
acquisition on the following day. (Id.). Defendants provided
another report by Wall Street analyst Morgan Stanley Dean Witter on the date of the announcement. (Id. ¶ 61). This report
supported earlier representations as to OmniSky's financial
condition and subscriber estimates in excess of 220,000 for the
end of 2001. (Id.).
At an offsite meeting with OmniSky management on January 15-16,
2001, before the acquisition closed, Davidson was "shocked" to
learn that OmniSky had not met its subscriber targets and was
setting much lower goals. (Id. ¶ 62). Nevertheless, Plaintiffs
claim that the "financial entanglement" of OmniSky and Nomad
"made it virtually impossible" to cancel the deal prior to
closing. (Id.). Plaintiffs explain that "[i]n November 2000,
the Nomad Businesses had a ready source of investment to continue
their operations, but had instead taken an infusion of capital
from OmniSky as part of the Acquisition upon signing the [Letter
of Intent]." (Id.). Plaintiffs also note that all sides had
already signed the Share Exchange Agreement prior to the closing.
On January 18, 2001, Plaintiffs closed the sale of Nomad to
OmniSky on the terms of the Share Exchange Agreement, which
followed the terms of the Letter of Intent. (Id. ¶ 67). At the
closing, Plaintiffs executed lock-up agreements that incorporated
terms in the Share Exchange Agreement. (Id. ¶ 70). Under these
agreements, Plaintiffs were permitted to sell their shares of
OmniSky stock after time periods ranging from 180 to 330 days.
(Id. ¶ 70). In March 2001, McVeigh allegedly advised Davidson that OmniSky
was in a liquidity crisis. (Id. ¶ 73). On July 15, 2001, a
meeting was held to discuss Project Northstar, a reevaluation of
OmniSky's business in light of its financial difficulties. (Id.
¶ 82). This meeting included discussions of various scenarios
along with the amount of additional funding required and the date
through which OmniSky could operate under the given scenario.
(Id. ¶ 87). Possibilities included the closing of OmniSky's
European operations, receipt of the promised $20 million from
Verizon or both. (Id. ¶ 88-91). Plaintiffs allege that during
this meeting, Cleeman made a presentation not distributed in hard
copy to the participants. (Id. ¶ 93). Cleeman allegedly stated
that if Verizon invested the $20 million, OmniSky would survive,
and if Verizon did not invest, OmniSky would file for bankruptcy
During the week of September 11, 2001, Davidson attended a
meeting at which he was advised that OmniSky had failed to secure
the $20 million from Verizon, to cut sufficient costs and to
raise sufficient revenue. (Id. ¶ 95). On September 21, 2001,
Winkler reported to the OmniSky Board of Directors that OmniSky
had failed to raise additional capital and would run out of cash
by December. (Id. ¶ 96). Trading in OmniSky common stock was
suspended in late 2001, and OmniSky filed for bankruptcy in
December 2001. (Id. ¶ 97) PROCEEDINGS IN STATE COURT
On December 5, 2001, Plaintiff NM IQ filed a complaint
("Initial Complaint") in New York State Supreme Court, New York
County, against OmniSky, McVeigh, Winkler and Cleeman. (Tarnofsky
Affd., Exh. O). The Initial Complaint asserted fraud, fraudulent
inducement and mutual mistake claims in connection with the
Acquisition. This Complaint, inter alia, alleged
misrepresentations as to OmniSky's ability to fund itself and the
Verizon investment, but did not address the subscriber
projections. The defendants moved to dismiss. On January 3, 2003,
Justice Karla Moskowitz (the "State Court") issued a non-final
order granting the motion. NM IQ LLC v. OmniSky Corp., Index
No. 605806/01 (N.Y. Sup. Ct. N.Y. Co. Jan. 3, 2003) ("January
2003 Order") (Tarnofsky Affid., Exh. P). At the threshold, the
State Court determined that NM ...