The opinion of the court was delivered by: Denise Cote, District Judge
This Document Relates to: All Actions
On June 3, 2005, Ramp Corporation ("Ramp") filed for bankruptcy. Securities class action complaints against Ramp officers and its auditor, BDO Seidman LLP ("BDO"), followed swiftly. Having been unable to locate any false statement regarding Ramp's financial condition in either of the annual financial statements audited by BDO, plaintiffs have alleged other misstatements and omissions which they contend violated the federal securities laws. With one exception, all the plaintiffs' claims must be dismissed, largely for their failure to allege loss causation. Because they have been given ample opportunity to amend their pleadings, those claims that are dismissed, are dismissed with prejudice.
Three class action lawsuits were filed between July 19 and September 16, 2005, pleading securities law violations against Ramp executives and BDO. An Order of October 18, consolidated the actions, appointed lead counsel for the putative plaintiff class, and required lead counsel to file a consolidated amended complaint by December 16 ("Consolidation Order").*fn1 The Consolidation Order also scheduled motions to dismiss. In a letter dated March 9, lead counsel notified the Court that it was seeking the defendants' consent to file a second consolidated amended complaint ("Complaint"). The Court required the lead plaintiffs to attach the proposed pleading to their opposition to the pending motions to dismiss, which was due shortly thereafter. As a consequence, plaintiffs have opposed the motions to dismiss with their own motion to amend. The individual defendants ("Individual Defendants") and BDO oppose the amendment, arguing that it is futile and does not cure the deficiencies identified in the motions to dismiss. The motion to amend is granted, and this Opinion shall address the motions to dismiss in the context of the most recent articulation of the plaintiffs' case.
The Complaint brings two claims under the Securities Exchange Act of 1934 (the "Exchange Act"): a claim under Section 10(b), and a claim under Section 20(a). Both claims are brought on behalf of a class of purchasers of Ramp securities between December 18, 2002 and May 20, 2005 (the "Class Period"). Taken with the documents that are integral to the Complaint, it alleges the following.
Ramp was touted as a risky, high tech company that faced a long road to profitability. Its technology, which was designed to enable doctors and others providing health care services to communicate prescriptions as well as laboratory orders and results electronically, was aimed at saving health care costs for both doctors and patients, and held out the promise of reducing errors in the filling of prescriptions. Ramp's stock was listed on the American Stock Exchange ("AMEX").
The Individual Defendants include Darryl Cohen ("Cohen"), who joined Ramp as its President and CEO in 2002. Cohen became Chairman of the Board in October 2003. Defendant Mitchell Cohen became Executive Vice President, CFO and Secretary of Ramp in November 2003. Defendant Andrew Brown ("Brown") joined Ramp in October 2003 as President, COO and a Director. Defendant Jeffrey Stahl ("Stahl") was a Director from October 2003 to June 2005, and a member of its Audit Committee in 2004. The last Individual Defendant is Ron Munkittrick, who was hired as CFO in October 2004.
Ramp raised money through private investment, public equity transactions known as PIPEs. A PIPE is the purchase by a private investor of stock at a discount to the current market value. A "structured PIPE" issues debt which can be converted into either common or preferred shares. PIPEs are ordinarily exempt from registration under Section 4(2) of the Securities Act of 1933 ("Securities Act"). According to the Complaint, if an investment in a company is made through a PIPE transaction while the company has an S-3 registration statement pending, then the private placement is subject to Section 5 of the Securities Act and may be rescinded by the investor.*fn2 The investors have the option of receiving their money back or proceeding with a resale of their shares.
On February 13, 2003, Ramp filed an S-3 registration statement to register over 22 million shares on behalf of selling shareholders who had previously acquired shares in PIPEs. The S-3 became effective on May 14. Thus, according to the Complaint, the period from February 13 to May 14 was a black-out period during which time Ramp could not lawfully sell stock without a registration statement. Nonetheless, despite that restriction, on May 15, Ramp filed its first quarter 2003 Form 10-Q, which disclosed an April 2003 private placement of $400,000 in convertible notes. The Complaint asserts that this filing should have also disclosed that the private placement was entered into during the black out period, had been "consummated in violation of the Securities Act," and that the shares and investment funds were subject to the investors' right of rescission. The Complaint alleges that there were a series of illegal PIPE transactions in 2003 and repeated failures to make appropriate disclosures about the PIPE transactions in SEC filings during that year and the following year.
Ramp changed auditors in June 2003. The outgoing auditors were Erhardt Keefe Steiner & Hottman, PC ("EKS&H"). A press release announcing the termination of the relationship acknowledged that EKS&H had advised Ramp of "reportable conditions which related to controls over documentation for certain of the Company's equity transactions and accounting for certain exit costs associated with office closings." The company added that it had hired new personnel and reorganized its accounting records to address these issues. BDO replaced EKS&H.
C. August 2003 Press Release:
Serca Ramp had announced in June 2003 that it was entering into a letter of intent to purchase Serca, a technology company. By August, Ramp concluded that Serca's technology was flawed, and it announced in a press relase that it was pulling out of the deal but would still purchase technology from Serca. This was a waste of corporate resources and the press release falsely described Ramp's assessment of the Serca technology. Ramp squandered money by trying to integrate the Serca technology with its own.
On September 22, 2003, the SEC sent Ramp a letter asking why Ramp had not included later offerings in its Form S-3. The additional offerings had been disclosed in the 2d Quarter Form 10-Q and an amended Form S-3. Certain people associated with Ramp held an emergency meeting to address the concerns expressed by the Saltsman Group, an investor in Ramp, about the proper response to this inquiry. The Saltsman Group did not want to disclose their private placement to the SEC, fearing that a disclosure would delay registeration of their shares for resale.
Seeking to hide the existence of the private placement, Ramp responded to the SEC letter on September 26 with the statement that "the disclosure in previously filed amendments to the Registration Statement was drafted in such a way that the [SEC] Staff was likely to assume that an offering was ongoing. We apologize for the confusion caused by prior counsel's draftsmanship." This response to the SEC was engineered by defendant Brown and outside investors. At that time, Brown was a paid consultant and not a member of management. The extent of control exercised by outside investors over Ramp, as evidenced by this and other events, was not disclosed to Ramp shareholders through any public filing.
Brown joins Ramp On October 7, 2003, Brown was elected to the Board of Directors. On October 15, Ramp issued a press release announcing Brown's selection as Ramp's new President and COO.
F. November 2003 Press Release
On November 3, 2003, Ramp issued a press release announcing that it had approximately "500 active users" of its technology and that over "400 additional physicians" were in the process of installing the technology. In fact, Ramp had only 100 doctors signed up as of January 2004. In response to the press release, the price of Ramp stock jumped from $27 to $48 within a few days.
Ramp was developing a system to allow physicians to show patients which pharmacy would give the patient the lowest price on drugs. Cohen "made it clear" to senior management that they could lie to pharmacies about the number of physicians who had joined Ramp's programs in order to sign up pharmacies as participants. As a result of this scheme, the company drugstore.com was falsely told that over 5,000 doctors were using Ramp's technology and it agreed to participate in Ramp's CarePoint program. The agreement with drugstore.com was announced through a December 11, 2003 press release.
H. December 2003 Cash Gift to Brown
An advisor to Ramp investors paid Brown a cash gift in December 2003. Brown kept this gift secret until the Spring of 2005. The SEC and FBI are currently investigating this gift.
Brown Replaces Cohen In the Spring of 2004, independent directors of Ramp decided to fire Cohen and have Brown run Ramp until a more qualified successor could be found. Trying to save his job, on March 8, Cohen made a written presentation to the Board. He admitted that as of January 2004, only 100 doctors had signed up for Ramp's eprescribing programs.
Brown worked with a private investor in Ramp, Hilltop Partners ("Hilltop"), to force the ouster of independent directors and save his job. Colluding with Brown, Hilltop wrote to Ramp on March 23, demanding the immediate return of its investment unless misrepresentations made by Ramp to Hilltop were addressed. Hilltop then demanded that the independent Audit Committee members resign or Hilltop would sue the Board. The independent directors resigned. On April 26, Ramp announced that Cohen had resigned and that Brown had been appointed CEO and Chairman of the Board. It "falsely" described Brown's prior experience when it failed to disclose that Brown had received a cash gift from an advisor to a Ramp investor.
Because of Hilltop's influence over Ramp, it was required to file a Form 13-D. Because that filing was not made, the public was unaware of Hilltop's power over the Board.
On April 14, 2004, Ramp filed its Form 10-K for 2003. It incorporated financial statements, which reported massive losses, that were certified by BDO. The certification included BDO's assessment that the financial statements "present fairly, in all material respects, the financial position of Ramp Corporation and subsidiaries at December 31, 2003... in conformity with accounting principles generally accepted in the Unted States of America." The Complaint alleges that the certification was false because ...