The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge
Plaintiffs bring this action for violations of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") on behalf of a putative class of investors in Mamma.Com, Inc. ("Mamma.Com"), a publicly traded Canadian corporation. Defendants Mamma.Com, David Goldman ("Goldman"), Guy Fauré ("Fauré"), and Daniel Bertrand ("Bertrand") (collectively "defendants") move to dismiss the complaint on the grounds that plaintiffs: 1) fail to plead fraud with adequate particularity; 2) fail to adequately allege scienter; and 3) fail to plead loss causation. For the following reasons, defendants' motion to dismiss is DENIED.
Mamma.Com, an Ontario corporation with its principal place of business in Montreal, was primarily engaged in operating an internet search engine named Mamma.com. (Compl. ¶ 18).*fn1 Plaintiffs bring this action on behalf of a class of individuals who purchased Mamma.Com stock on the open market between March 2, 2004 and February 16, 2005. (Compl. ¶ 32). Plaintiffs allege that, throughout this period, Mamma.Com was "secretly controlled, influenced and/or owned by Irving Kott . . ." (Compl. ¶ 3). Plaintiffs claim that Kott, who is also a named defendant in this action,*fn2
is a "notorious Canadian stock swindler with a long history of criminal activity and stock fraud." (Compl. ¶¶ 3, 43-46).*fn3 Plaintiffs claim that defendants, in numerous SEC filings and press releases issued before and during the class period, failed to disclose Kott's involvement with Mamma.Com, a fact that would have materially impacted the share price.
A. Plaintiffs' Allegations
In support of their allegation of control by Kott, plaintiffs principally rely on press reports and statements by various confidential sources. Many of these sources refer to Kott's control over Intasys Corporation ("Intasys"), a predecessor of Mamma.Com (plaintiffs allege that Intasys changed its name to Mamma.Com on January 6, 2004). (Compl. ¶ 38). Specifically, plaintiffs cite a March 29, 2005 article published by Dow Jones, which quoted unnamed former Intasys executives as stating that Kott "'ran the shares and . . . ran the financing behind the corporate stuff'" and that "'the word'" was that Kott was "'the Godfather.'" (Compl. ¶¶ 47-48).
The Dow Jones article also recounted the experience of an outside
executive, Fazel Naghshineh, who had attempted to sell his business to
Intasys in 1999. (Compl. ¶
49). According to Naghshineh, Kott "lead the negotiations on behalf
of Intasys." (Id.) In an April 12, 2005 article in the National Post,
Naghshineh stated that he was told Kott "'was the main financier, the
man with the money.'" (Compl. ¶ 50).*fn4 In addition,
plaintiffs cite a confidential source, "CS-1," who also attempted to
sell his business to Intasys. That source alleges that he was told by
Sami Shamma, then President and CEO of Intasys, that he "'would have
to meet with Kott [to do a deal] because [Kott] called the shots.'"
(Compl. ¶ 51). Another confidential source, "CS-6," who also
negotiated to sell a company to Intasys, met with Kott and was told
that Kott "'controlled everything.'" (Compl. ¶ 52).*fn5
Both confidential sources actually negotiated with Kott
directly. (Compl. ¶¶ 51-52).
CS-1 also stated that he was told by Michael Tinmouth, then director of finance for Intasys, that Kott "could 'guarantee [that Intasys'] stock price . . . would be somewhere around $6'" per share. (Compl. ¶ 53). In addition, "CS-3," a former Intasys employee who worked in the Montreal office, met Kott when he visitied Goldman. (Compl. ¶ 55). "CS-5," another former employee, stated that Kott visited Intasys' offices "a number of times." (Compl. ¶ 56). "CS-4," a former director of Intasys, also met Kott. (Compl. ¶ 55).*fn6
On January 11, 2005, the Globe and Mail reported that "SEC probes Mamma.[C]om over . . . Kott; Seeking information on possible links to stock promoter with history of legal woes . . ." (Compl. ¶ 108). The article stated that Mamma.[C]om had requested "current and former management and directors . . . to disclose any contact they might have had with" Kott or his family members. (Id.) On February 16, 2005, Mamma.Com announced that PricewaterhouseCoopers ("PWC") had refused to serve as independent auditor for 2004 and might disavow previous audit reports if the allegations regarding Kott's involvement were substantiated. (Compl. ¶ 111). That same day, Mamma.Com announced that the board had "initiated an investigation" under the auspices of a special committee made up of independent directors, outside counsel and forensic accountants to determine whether "an individual and persons acting jointly or in concert with him may have had a controlling influence on the Company in the past as a result of undisclosed shareholdings. . ." (Compl. ¶ 112). On April 12, 2005, the SEC's probe into control of Mamma.Com was upgraded to a "'formal investigation.'" (Compl. ¶ 114).
B. Misrepresentations and Omissions
Plaintiffs allege that defendants materially misrepresented Mamma.Com's management structure and financial outlook by failing to disclose Kott's involvement with the company. Mamma.Com's Form 20-F for 2003, filed with the SEC on May 27, 2004, stated that "the Company is not directly or indirectly owned or controlled by another corporation(s) . . . or by any other natural or legal person(s). . ." (Compl. ¶ 82).*fn7
A code of ethics accompanied the Form 20-F. The code represented that the company would comply with all applicable legal and regulatory standards and that directors would monitor compliance with those standards. (Id.)
In addition, plaintiffs cite numerous SEC filings and press releases issued between March 2004 and February 2005 that they allege mislead investors by failing to disclose Kott's involvement with Mamma.Com. For example, on April 6, 2004, Mamma.Com issued a press release announcing that the SEC had initiated an informal inquiry into "intense" trading activity in the company. (Compl. ¶ 67). In the press release, Goldman stated that the company was "confident that all information and disclosures are fully compliant with all . . . SEC and other regulatory disclosure requirements" and that the "[c]ompany [was] not aware of any non-public information that might bear upon the recent activity in the market. . ." (Compl. ¶ 68).*fn8 In addition, in connection with its Form 6-K filed on July 8, 2004, Mamma.Com filed a Securities Purchase Agreement relating to a private placement of common stock. (Compl. ¶ 93). The Purchase Agreement represented that all SEC reports filed within the preceding two years were accurate and complete and that the company was not "in violation of any statute, rule or regulation of any governmental authority. . ." (Id.)
In response to the January 11, 2005 Globe and Mail article that disclosed the possibility of Kott's involvement with Mamma.Com, the company issued a press release. (Compl. ¶ 109). The press release, dated January 13, 2005, stated that Mamma.Com "has cooperated completely with the SEC's informal inquiry" and that the company's "current directors and ...