The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge
This class action is brought on behalf of shareholders of Medis Technologies, Ltd. ("Medis" or the "Company") against: (1) Medis; (2) its Chief Executive Officer ("CEO") Robert K. Lifton ("Lifton"); and (3) its business development manager/marketing representative Andrew Udis ("Udis") (collectively, "Defendants"). In its First Amended Class Action Complaint ("Amended Complaint"), Plaintiff, a unit of similarly situated shareholders, alleges that Defendants either knowingly or recklessly misrepresented the true nature of Medis's initial product sales to the investing public and thereby committed securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiff also alleges that Defendants Lifton and Udis (the "Individual Defendants") are liable as control persons under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Defendants now move to dismiss Plaintiff's Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), alleging that Plaintiff fails to properly plead scienter. For the reasons stated below, Defendants' motion to dismiss is GRANTED.
On a motion to dismiss for failure to state a claim, the court "must accept as true all of the factual allegations contained in the complaint," and construe the complaint in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1975 (2007) (citation and quotations omitted); In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007). "Legal conclusions, deductions or opinions couched as factual allegations," however, are not entitled to a "presumption of truthfulness." In re NYSE Specialists, 503 F.3d at 95 (quotation omitted). The Court may consider "any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference . . . and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)).
II. FACTS ALLEGED IN THE AMENDED COMPLAINT*fn1
Medis is a development stage company which designs, develops, and markets a liquid fuel cell device called the 24/7 PowerPack ("PowerPack") for the mobile handset and portable consumer electronics markets.*fn2 (Amended Complaint ("AC") ¶ 2.) During the four-day period from April 13, 2007 through April 17, 2007 (the "Class Period"), Medis was registered with the Securities and Exchange Commission ("SEC") pursuant to the Exchange Act and was traded on the NASDAQ National Market ("NASDAQ"). (AC ¶ 19.) Lifton served as Chairman and CEO of Medis throughout the Class Period. (AC ¶ 20.) Udis served as the business development manager for Medis and has been described in various Medis SEC filings as a "marketing representative."*fn3 (AC ¶ 21.)
A. The Medis Announcements
On Friday, April 13, 2007, Medis issued a press release, and later filed a corresponding 8-K with the SEC, entitled, "MEDIS TECHNOLOGIES BEGINS COMMERCIAL SALES OF ITS FUEL CELL 24/7 POWER PACK" (the "Press Release"). (AC ¶ 34 & Ex. 1.) It states in relevant part:
Friday April 13, 10:02 am ET . . . MEDIS TECHNOLOGIES LTD. (NASDAQ:MDTL) announced that it has begun commercial sales of its 24/7 fuel cell Power Packs to Microsoft. The first shipment of Microsoft branded 24/7 Power Packs were made today. "This is an historic moment for our company," said Robert K. Lifton, Chairman and CEO of Medis Technologies. "It marks the first commercial sales of our 24/7 Power Pack product and indeed, the first commercial sales in quantities of any consumer fuel cell product. We are pleased to be able to serve Microsoft as our first customer." (AC ¶ 34 & Ex. 1.) The Amended Complaint alleges that this announcement regarding the Company's lead product caused Medis's stock to rise dramatically from a previous per share closing price of $18.29 to an intraday high of $24.10 on April 13, 2007. (AC ¶ 35.) Medis stock closed the day up $2.03 per share, or 11%, at $20.32 per share-on nearly 3.5 million shares traded. (AC ¶ 35.) On the previous day, April 12, 2007, only about 175,000 of the Company's shares traded hands. (AC ¶ 35.)
This sudden surge in the price of Medis stock prompted several market commentators to raise questions about the Company's announcement. (AC ¶ 36.) For instance, Herb Greenberg of Marketwatch noted in an internet column that the Medis Press Release contained no firm details about the size of the sale, its impact on profits, or Microsoft's intended use of the PowerPacks. (AC ¶ 36 & Ex. 2.) Another investment research website, Citron Research, asked Medis's Deputy Chairman/Chief Operating Officer/Treasurer Howard Weingrow about the size of the Microsoft sale and for a contact person at Medis. (AC ¶¶ 38-39 & Ex. 3.) According to Citron Research, Weingrow informed Citron that he did not have the purchase order in front of him and could not respond to such questions, despite this being the Company's "historic" first sale. (AC ¶ 39 & Ex. 3.) The Citron Research report also noted that the "two people we spoke to in Microsoft's corporate communications did not know about th[e] press release." (AC ¶ 39 & Ex. 3.) While Citron Research was "not fully ready to declare this a fraud yet," it explicitly questioned the veracity of the Press Release. (AC ¶ 39 & Ex. 3.)
Later that same day-and after the aforementioned skeptical analyst comments surfaced-Udis gave an exclusive interview to Dallas Kachan, the publisher and acting editor of the technology trade publication Inside Greentech. (AC ¶ 40 & Ex. 4.) The resulting Inside Greentech online article entitled "Microsoft to Sell Fuel Cells" provided in pertinent part as follows:
While the company wouldn't specify the quantity of the initial shipment, or of the contract's total volume, business development manager Andrew Udis told Inside Greentech the ultimate unit commitment was expected to be "in the millions."
A Microsoft spokesperson would only acknowledge that the company made "a small purchase" from Medis, but Udis confirmed Microsoft intends to offer the devices to the public. "They've branded the product and plan to sell these around the world."