The opinion of the court was delivered by: Charles S. Haight, Jr., Senior United States District Judge
CONSOLIDATED CLASS ACTION (LEAD)
MEMORANDUM OPINION AND ORDER
In this securities fraud action, a purported class of shareholders in 51job, Inc. ("51job" or the "Company") alleges that 51job and several of its high-level officers and directors - President and CEO Rick Yan, CFO Kathleen Chien, and Chairman of the Board Donald Lucas -- made false and misleading statements with respect to the company's revenues and expected growth, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.*fn1
Between January 21, 2005 and March 10, 2005, seven putative class actions alleging securities fraud were filed against the defendants. On July 26, 2005, this Court consolidated these actions and appointed Floyd W. Webster, Keith Webster, Kent Webster, Amil Dipadova, and Robert Wistrand (collectively, the "Webster Group") as Lead Plaintiffs. On August 25, 2005, the Webster Group filed its complaint. Pursuant to Federal Rule of Civil Procedure 12(b)(6), defendants move to dismiss the complaint for failure to satisfy the heightened pleading requirements for securities fraud under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4.*fn2 For reasons set forth below, defendants' motion to dismiss is granted, with leave to plaintiffs to replead.
A. Plaintiffs' Factual Allegations
Plaintiffs' complaint alleges the following facts. 51job is a Shanghai-based provider of human resource services in China, with a focus on employee-recruitment and related services. Compl. ¶ 2. On September 28, 2004, 51job held its initial public offering ("IPO"). Id. The 1P0 was highly successful, as the Company was required to offer additional shares to cover over-allotments and the share price increased from $14 to $20.75 on the first day of trading. Compl. 111 2-3.
On November 4, 2004, 51job announced favorable financial results for the third quarter of 2004. Compl. ¶ 28. In a press release, defendants reported total revenues of RMB 135.0 million (US $16.3 million) and net revenues of RMB 128.1 million (US $15.5 million) in the third quarter of 2004.*fn3 Id. Revenues, net income, and gross margin had increased significantly over their levels in the third quarter of 2003. Id. Defendant Yan stated, "We believe that these third quarter results clearly demonstrate the soundness of our business plan and our execution capability." Id. The press release also reported fourth quarter performance projections: "For the fourth quarter of 2004, the Company estimates total revenues in the range of RMB 140 million to RMB 145 million and diluted earnings per share between RMB 0.42 and RMB 0.44." Compl. 1129.
The price of 51job shares increased significantly in the period following the November 4, 2004 press release - from $28.29 on November 4, 2004 to a high of $55.37 during the Class Period. Compl. ¶ 31.
Before the market opened on January 18, 2005, 5 1 job issued a press release announcing several negative developments. First, the Company's sales had declined in the latter part of December 2004. Compl. ¶ 32. Second, the Company lowered its guidance for the fourth quarter of 2004. Expected fourth quarter revenues were reduced from RMB 140 million to RMB 117-121 million, and expected fully diluted earnings per common share were reduced from RMB 0.42-0.44 to RMB 0.24-0.27. Id. Furthermore, 51job announced that its third quarter online recruitment services revenues needed to be revised. Due to a timing adjustment. approximately RMB 2-3 million of online recruitment services revenues originally reflected in the third quarter needed to be included in the fourth quarter. Id. The revised fourth quarter guidance incorporated this adjustment. Id. In addition, the Company announced that it had discontinued sale of stationery and other office supplies to business customers. Id.
Following the January 18, 2005 announcement, the price of 51job shares plummeted. Compl. 1133. The share price fell from $43.82 on January 15, 2005 to 528.32 on January 18, 2005, the next trading day. Id. This decrease reflected a one-day drop of 35%, on unusually heavy trading volume of 7.4 million shares. Id.
In their first claim, plaintiffs allege that statements in the November 4, 2004 press release -- regarding third quarter 2004 revenues and fourth quarter 2004 projections -- violated § 10(b) of the Exchange Act and Rule 10b-5.*fn4 Plaintiffs assert that these statements were materially false and misleading because: (1) the Company "improperly recognized advertising revenue" and materially misstated revenues for the third quarter of 2004, (2) defendants "failed to disclose that the Company's business was experiencing a material downturn in advertising revenue," (3) the Company "failed to adjust its aggressively positive earnings announcements even in light of the sharp downturn in business, which was well known to defendants," and (4) 51job's statements about the Company's "historical results and expected growth were lacking in any basis and deceived investors." Comp!. 30. Plaintiffs assert that, due to defendants' high-level positions and access to information about the Company's finances, "defendants had actual knowledge of the misrepresentations and omissions of material facts . ., or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them." Compl. 16, 45. Plaintiffs allege that the market price of 51job shares was artificially inflated by defendants' false and misleading statements, and that members of the putative plaintiff class suffered damages as a result. Compl. ¶¶ 46-48.
In their second claim, plaintiffs allege that the individual defendants, as controlling persons of 5 Ijob, are liable for their wrongful conduct under § 20(a) of the Exchange Act.
On a motion to dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6), the district court's function "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980); see Ricciuti v. New York City Transit Auth., 941 F.2d 119, 124 (2d Cir. 1991). In reviewing a motion to dismiss, the district court must "take the well-pleaded factual allegations in the complaint as true," Papasan v. Allain, 478 U.S. 265, 283 (1986), and "draw all reasonable inferences in the plaintiffs' favor." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). The complaint may be dismissed under Rule 12(b)(6) "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In reviewing a Rule 12(b)(6) motion, the court may consider the following materials: "(1) facts alleged in the complaint and documents attached to it or incorporated in it by reference, (2) documents 'integral' to the complaint and relied upon in it, even if not attached or incorporated by reference, (3) documents or information contained in defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it in framing the complaint, (4) public disclosure documents required by law to be, and that have been, filed with the Securities and Exchange Commission, and (5) facts of which judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence." In re Merrill Lynch & Co., 273 F. Supp. 2d 351, 356-57
(S.D.N.Y. 2003) (citations omitted).
To state a claim under § 10(b) and Rule 10b-5, a plaintiff must "plead 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 plaintiff's reliance on the defendant's action caused injury to the plaintiff" Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000).
In addition, a claim for securities fraud must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA. These requirements involve: (1) the particularity of the facts pleaded, and (2) scienter. Defendants contend that plaintiffs' complaint must be dismissed because it fails to satisfy these requirements.*fn5
A. Particularity of the Facts Pleaded
When a complaint alleges fraud, Rule 9(b) requires that "the circumstances constituting fraud . . . shall be stated with particularity." To satisfy Rule 9(b), a complaint alleging securities fraud must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (citations and internal quotation marks omitted).
Similarly, the PSLRA requires that "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). The Second Circuit has concluded that this provision does not literally require "all facts" on which the belief has been formed - rather, "plaintiffs need only plead ...