January 18, 2006
DAVID JOFFEE, CATHERINE STONE, TERENCE KRUSKA, ROBERT J. BLUME, AMALIA CONCIATORI, BOB EISELE, SYLVIA S. EISELE, BARRY KEITH HERMAN, ELLEN NYSTROM HERMAN, ALAN JAMES, MARC A. KOEHLER, SHERRIE E. KOEHLER, EDWARD B. LEINBACH, BRUCE LILES, LINDA LILES, DAVID J. MILLER, GENNUS MILLER, JEFFREY A. MORRIS, SUZANNE N. MORRIS, LDX OPTRONICS, INC., JOHN R. MURPHY, SUELLEN C. MURPHY, SUSAN C. MURPHY, TIMOTHY J. MURPHY, RYAN J. MURPHY, STUART NEWBORN, DIANE NEWBORN, JOHN POLONCHAK, MYRTLE POLONCHAK, KURT SCHMITZ, LESLIE SCHMITZ, JAMES SIMPSON, RICHARD VAZQUEZ, JEFFREY R. ZAHN, JAMES OLSON, KATHRYN OLSON, RICHARD NORDEN, DENIS CROWTHER AND DARLENE CROWTHER, PLAINTIFFS,
LEHMAN BROTHERS, INC. KENNETH N. GOLDMAN, M.D., AND DAVID M. GRUBER, M.D., DEFENDANTS.
The opinion of the court was delivered by: Sweet, D.J.
Defendants Lehman Brothers Inc., Kenneth N. Goldman, M.D., and David Gruber, M.D. (collectively "Lehman" or the "Defendants") have moved pursuant to Rules 12(b)(6) and 9(b), Fed. R. Civ. P., and the Private Securities Litigation Reform Act (the "PSLRA") to dismiss the third amended complaint ("TAC" or "Complaint") of David Joffee and thirty-six other individuals, and a subchapter 5 corporation (the "Plaintiffs"). For the reasons set forth below, the motion is granted.
On May 7, 2004, the Plaintiffs filed their complaint. Lehman moved to dismiss, and the Plaintiffs filed their second amended complaint. Lehman again moved to dismiss, which motion was granted by order and opinion of the Court dated June 23, 2005 (the "June 23 Opinion"), No. 04 Civ. 3507 (RWS), 2005 U.S. Dist. LEXIS 12313 (S.D.N.Y. June 30, 2005), familiarity with which is assumed. The Plaintiffs filed their TAC, which is the subject of the instant motion, on July 21, 2005.
Lehman again moved to dismiss and the motion was heard and marked fully submitted on October 5, 2005.
The TAC has alleged that the Defendants failed to disclose that Lehman's research department was little more than an extension of the investment banking division (TAC ¶¶ 34-84); that misleading Lehman Reports succeeded in generating the false impression that Sunrise had greater potential for success than it actually did; that the Reports were calculated to counter the skepticism in the marketplace (prompted by the financial difficulties, under-capitalization issues challenging Sunrise, and the debate over the efficacy of Sunrise's product); and that as a result of their respective reliance on the buy recommendations and price targets in the Lehman Reports, Plaintiffs suffered losses of approximately $6.5 million in the value of their investments in Sunrise. (TAC ¶¶ 1, 9-30.) The TAC has also alleged that Defendants' misrepresentations concerning the demand for Sunrise's product and services, and their sales prospects, were the proximate cause of these losses. (TAC, ¶¶ 118-128.)
The standard to be applied in the determination of a Rule 12(b)6 motion was set forth in the June 23 Opinion and is equally applicable to the instant motion.
Plaintiffs allege that they suffered economic losses because they purchased Sunrise stock at artificially inflated prices in reliance on the market price of Sunrise's stock and excerpts from seven different Lehman Analyst Reports covering Sunrise and rating Sunrise's stock a "Buy" (the "Analyst Reports"). (TAC ¶¶ 96, 119.) Plaintiffs' claims rest exclusively on these Analyst Reports excerpts, which Plaintiffs allege were false and misleading because they failed to disclose the following:
! The Shortcomings Of The Hyperion Laser -- when the Sunrise laser device was used in accordance with the FDA-approved protocol, patients experienced side effects such as induced astigmatism, early regression, and unpredictability of vision correction. Goldman and Gruber were allegedly told about some of the laser's shortcomings by unnamed ophthalmologists in October 2000. (TAC ¶¶ 100, 102, 103). ! The U.S. Medical Agreement -- Sunrise and U.S. Medical corporation entered into an Agreement whereby U.S. Medical would purchase and distribute 20 Sunrise laser units in return for the purchase by Sunrise of 4% of the privately owned stock in U.S. Medical, which approximated the cost of the 20 units (TAC ¶ 103); and ! Lehman's Interest In Sunrise --Lehman participated in an $11.7 million private placement for Sunrise Securities through affiliates called LBI Group, and a Lehman employee was also a Sunrise director. (TAC ¶¶ 31, 86, 87).
(The "Omitted Information"). Plaintiffs allege that together this information renders false and misleading Lehman's predictions for the marketability and projected sales of Sunrise's Hyperion laser and that Lehman should have tempered its opinions and projections with warnings concerning the Omitted Information. (TAC ¶¶ 118, 126.) Each of the pieces of Omitted Information upon which Plaintiffs base their claims was publicly disclosed before Lehman ceased its coverage of Sunrise on April 3, 2001 in either: (1) Sunrise's contemporaneous filings with the SEC; (2) the Analyst Reports themselves; and/or (3) in the publicly-posted FDA letter approving the sale of Sunrise's laser device (cited at TAC ¶ 88). Plaintiffs contend that the August 20, 2000 Analyst Report stated that projected sales of Sunrise's Hyperion laser device had been increased for the second half of 2000. (TAC ¶ 96.) Plaintiffs allege that this was false and misleading on the one hand, and also allege the truth of that very allegation on the other. (Compare TAC ¶ 96 to TAC ¶ 104.) The Complaint also contains allegations concerning communications between unnamed investors and Goldman and Gruber. (See TAC ¶¶ 110-113).
The TAC alleges that Lehman was motivated to inflate its projections to induce the market to invest in Sunrise because Lehman had an investment interest ...
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