The opinion of the court was delivered by: Lewis A. Kaplan, District Judge
This Paper Applies to: All Cases
This matter is before the Court on motions by defendants to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") on the ground that it fails to state a claim upon which relief may be granted and fails to allege fraud with the particularity required by Section 21D-4(b) of the Private Securities Litigation Reform Act (the "PSLRA")*fn1 and Fed. R. Civ. P. 9(b).*fn2
This is an action against Optionable, Inc. ("Optionable") and five individual defendants for alleged violations of Section 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 (the "Exchange Act")*fn3 and Rule 10b-5 thereunder.*fn4
The lead plaintiff is KLD Investment Management, LLC. It purports to represent a class of all individuals and entities who purchased Optionable securities between January 22, 2007, and May 14, 2007, (the "Class Period").
Optionable is a brokerage services provider specializing in energy derivatives. Defendant Mark Nordlicht a founder and its chairman from 2000 until April 2007.*fn5 Defendant Kevin Cassidy was Optionable's chief executive officer and vice chairman between March 2001 and March 2004 and again between October 2005 and his resignation in May 2007 and served as a consultant in the intervening period. He allegedly was convicted of credit card fraud in 1997 and tax evasion in 1993.*fn6 Plaintiffs suggest, but do not allege, that Cassidy served as a consultant for Optionable from April 2004 to September 2005 to avoid reporting these convictions in Optionable's IPO Registration Statement.*fn7
Defendant Edward J. O'Connor has been president of Optionable since March 2001.*fn8 Defendant Albert Helmig was a director of the company from September 2004 until November 2007. He served also on the board of Platinum Energy, a company founded and chaired by Nordlicht.*fn9
Defendant Marc-Andre Boisseau has been chief financial officer of Optionable since December 2004.*fn10
Plaintiffs allege that defendants Cassidy, O'Connor, and Nordlicht collectively controlled 50 percent of Optionable's common stock and held three of its four board seats. The fourth seat was held by defendant Helmig, who, according to the Complaint, was not independent because of his position at Platinum Energy.*fn11
Before turning to the allegedly false and misleading statements, it is useful to outline plaintiffs' claims of deception. The Complaint makes the following factual allegations.
Optionable offers over-the-counter ("OTC") natural gas and energy derivatives trading and brokerage services, energy futures derivatives services, and voice and floor brokerage services at the New York Mercantile Exchange ("NYMEX"). It charges commissions for these services and, if a transaction is executed through NYMEX, receives incentive payments from the exchange. Among its services, Optionable finds counterparties for energy trades -- matching buyers with sellers. In such transactions, it charges a commission to both parties to the trade.*fn12
In 2006, Optionable expanded its services by launching OPEX, an electronic trading platform to automate the trading of energy derivatives between counterparties.*fn13 Plaintiffs allege, however, that OPEX was not a "viable" platform*fn14 and that defendants Cassidy, Nordlicht, and O'Connor knew that OPEX "was a sham."*fn15
The Bank of Montreal ("BMO") was Optionable's biggest client during, and for some time prior to, the class period, during which it placed natural gas options trades through Optionable.*fn16 Plaintiffs allege that 80 percent or more of Optionable's first quarter 2007 revenues were derived from transactions involving BMO.*fn17 Plaintiffs allege further that Optionable collaborated with David Lee, a BMO natural gas trader, to misprice some of the transactions it executed for BMO.*fn18 According to the Complaint, defendant Cassidy had a "personal relationship" with Robert Moore, BMO's executive managing director of commodity products, and Lee.*fn19
Moore's son is said to have worked as a summer intern for Optionable and Capital Energy, a company owned by defendants Cassidy and O'Connor.*fn20 And Optionable is alleged to have made payments to Lee and Lee's sister.
On January 22, 2007, Optionable announced an agreement among itself, Nordlicht, Cassidy, O'Connor, and NYMEX. It provided that NYMEX would acquire a 19 percent stake in Optionable by purchasing stock for $2.69 per share from defendants Nordlicht, Cassidy, and O'Connor and, after the acquisition, would be entitled to designate one person to Optionable's board.*fn21
The deal closed on April 10, 2007.*fn22 Thereafter, Ben Chesir, NYMEX's VP of New Product Development, joined Optionable's board.*fn23 Plaintiffs allege that the defendants entered into the transaction to dilute plaintiffs' interest in Optionable and pocket over $29 million.*fn24
On April 27, 2007, BMO informed investors that it had sustained between C$350 and C$450 in losses from natural gas options trades.*fn25 Sometime later, BMO placed Lee and Moore on leave pending an investigation into the losses.*fn26 And on May 8, 2007, BMO announced that it was "suspending all of its business relationships" with Optionable.*fn27 Plaintiffs allege that BMO's loss generating trades were made through Optionable.*fn28
The next day, NYMEX announced that it would launch an electronic trading platform -- CME Globex -- in June 2007 that would compete with the OPEX platform.*fn29 A short time later, Chesir resigned form Optionable's board.*fn30
III. The Allegedly False and Misleading Statements
The Complaint alleges that the defendants made false and misleading statements on seven occasions during the class period.*fn31 Several of the allegedly false and misleading statements related to the quality of Optionable's brokerage services*fn32 and several discussed Optionable's revenue.*fn33
Plaintiffs contend that statements in Optionable's 2006 10-KSB were false and misleading, including statements that: (1) described Cassidy's background,*fn34 (2) described the OPEX platform,*fn35 (3) characterized Optionable's disclosure controls and procedures as "effective,"*fn36 and (4) ...