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In re: Holding Corp. Sec. Litig.

July 14, 2006

IN RE HOLDING CORP. SECURITIES LITIGATION


The opinion of the court was delivered by: Laura Taylor Swain, Judge

This Document Relates To: All Actions

MASTER FILE

OPINION AND ORDER

Defendant Authentidate Holding Corporation and the individual Defendants in this securities litigation have brought a motion to dismiss lead Plaintiffs' Consolidated Amended Securities Class Action Complaint ("Complaint") pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act ("PSLRA.") Defendants principally argue that several of Plaintiffs' claims are time-barred, that Plaintiffs lack standing to bring a claim under Section 11 of the Securities Act, that Plaintiffs have failed sufficiently to plead loss causation as to their patent-related claims, that the Amended Complaint fails to plead facts demonstrating fraud as to each Defendant, and that Defendant Authentidate Holding Corp. ("Authentidate" or the "Company") did not misrepresent or omit to disclose a material fact. The Court has jurisdiction of this matter pursuant to 28 U.S.C. 3 133 1.

For the reasons that follow, Plaintiffs' claims premised on the non-disclosure of the contract with the United States Postal Service, Plaintiffs' claims premised on the nondisclosure of any performance metrics or language regarding termination contained within that contract, and Plaintiffs' claims regarding non-disclosure of the Patent Office's rejection of Defendants' patent applications are dismissed with prejudice. All of Plaintiffs' remaining claims are dismissed without prejudice and with leave to replead.

DISCUSSION

In deciding a motion brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss a complaint for failure to state a claim, "the court must accept as true all of the well pleaded facts and consider those facts in the light most favorable to the plaintiff." Hudson Valley Black Press v. Internal Revenue Serv., 307 F. Supp. 2d 543, 545 (S.D.N.Y. 2004). A complaint should not be dismissed "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." Conley v. Gibson 355 U.S. 41,45-46 (1957). A court may consider, in deciding a motion to dismiss, -9 documents that are integral to the complaint or are incorporated by reference in the pleadings. See Rizzo v. The MacManus Group. Inc., 158 F. Supp. 2d 297,301 (S.D.N.Y. 2001) (a court may consider "documents that are incorporated by reference in the pleadings" when deciding a motion to dismiss under Rule 12(b)(6)), and Sable v. SouthrnarWEnvicon Capital Corn., 819 F. Supp. 324,328 (S.D.N.Y. 1993) (in deciding a motion to dismiss, a court "may consider documents which form the basis of allegations of fraud if the documents are 'integral to the complaint."') (internal citations omitted)).

In order to state a claim for securities fiaud under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule lob-5 promulgated by the SEC thereunder (collectively, "Section 10(b)"), a plaintiff must demonstrate 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 plaintiffs reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir.2000).

Section 11 of the Securities Act of 1933 ("Section 11" and "Securities Act") imposes civil liability on persons preparing materially misleading registration statements. To state a claim under Section 1 1, an injured plaintiff need allege only that a defendant made or participated in making a "material misstatement or omission" in a registration statement for a security the plaintiff acquired; liability for such misstatements extends to, among others, underwriters of securities and to anyone who consented to be "named as having prepared or certified [a] report or valuation which is used in connection with the registration statement." 15 U.S.C.A. 5 77k(4), (5) (West 2006).

To state claims under Section 20(a) of the Exchange Act, 15 U.S.C. 5 78(t)(a) (for control person liability as to Section 10(b) claims), and Section 15 of the Securities Act, 15 U.S.C. 5 770 (for control person liability as to Section 11 claims), plaintiff must allege (i) a primary violation by a controlled person, and (ii) control by the defendant of the primary violator. Section 20(a) imposes the additional requirement that the plaintiff allege culpable participation.

Statute of Limitations

Section 13 of the Securities Act provides that no action for a violation of Section 11 may be maintained "unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . . In no event shall any such action be brought to enforce a liability . . . more than three years after the security was bona fide offered to the public." 15 U.S.C.A. 5 77m (West 2006). Section 9(e) of the Exchange Act contains a similar limitation which applies to violations of Sections 10(b) and 20(a). 15 U.S.C. 5 78i(e). Section 804 of the Sarbanes-Oxley Act of 2002 extended the statute of limitations for "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." The new deadline, which is codified at 28 U.S.C. fj 1658(b), is the earlier of (1) "2 years after the discovery of the facts constituting the violation" or (2) "5 years after such violation." 28 U.S.C. 5 1658(b) (West, 2006).

Thus, as both parties acknowledge, the relevant statute of limitations for the fraud claims asserted under Sections 10(b) and 20(a) in this action is two years and the statute of limitations for Section 11 claims not sounding in fraud (as Plaintiffs acknowledge is the case here; see P1. Opp. at 30 n. 37) is one year. The limitations period begins when a plaintiff has actual or inquiry notice of the facts underlying its potential claims. Plaintiffs will be deemed to have discovered fraud for statute of limitations purposes when a reasonable investor of ordinary intelligence would have discovered its existence. Dodds v. Cima Sec.'s. Inc., 12 F.3d 346, 350 (2d Cir. 1993).

This action was commenced on June 6,2005. Defendant argues (and Plaintiffs do not appear to contest) that any claims premised on the alleged non-disclosure of the contract with the United States Postal Service, or premised on the non-disclosure of any performance metrics or language regarding termination contained within that contract, are time-barred, as the agreement itself (along with information regarding the metrics) was publicly filed on September 27,2002, more than two years prior to the filing of the Complaint. The Court finds that the disclosures in Defendants' public filing, when viewed as a whole and even when construed in the light most favorable to Plaintiffs, were sufficient to put Plaintiffs on inquiry notice of the facts constituting the alleged fraud to the extent that claims are premised on non-disclosure of the contract with the United States Postal Service, or the non-disclosure of any performance metrics or contractual language regarding termination. Thus, all such claims are time-barred and are ...


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