The opinion of the court was delivered by: Robert P. Patterson, Jr., U.S.D.J.
On the morning of October 16, 2007, Ericsson LLM ("Ericsson" or the "Company"), a Swedish corporation that provides communications networks, related services, and handset technology platforms for mobile and fixed network operators worldwide, issued a press release reporting lower than expected earnings for the third-quarter of 2007. (Plaintiff's 04/15/2008 Consolidated Complaint ("Compl.") ¶25.) The disappointing earnings were "due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix." (Compl. ¶62; Declaration of Andrew Goldstein, dated September 10, 2008, ("Goldstein Decl.") Ex. C [Ericsson's 2007 Third Quarter Report].) All other businesses "performed as expected." (Id.) After the announcement, the Company's stock declined 24% that day. (Compl. ¶6.)
On April 15, 2008, Plaintiff filed this securities class action lawsuit against Ericsson and its C.E.O., Carl-Henric Svanberg, and C.F.O., Henrick Sundstrom, alleging violations of Section § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) (2000) during the September 11, 2007 to October 15, 2007 Class Period ("the Class Period"). (Compl. ¶¶8, 14-15.) On June 13, 2008, Defendants moved to dismiss Plaintiff's Complaint, and on October 3, 2008, oral argument was held. For the following reasons, Defendants' motion is granted.
In 2007, Ericsson operated in over 140 countries around the world and had more than 74,000 employees. (Declaration of Joshua Kaye, dated June 13, 2008 ("Kaye Decl."), Ex. B at 4, 9 [2007 annual report, filed April 21, 2008.]) The Company operates through three segments, Mobile Networks, Fixed Networks, and Professional Services. (Compl. ¶¶13, 25.) The Mobile Networks segment provides mobile systems solutions to network operators, including radio base stations, base station and radio network controllers, mobile switching centers, and application nodes. (Compl. ¶25.) The Fixed Networks segment supplies broadband communications equipment and services to fixed network operators in Latin America and Europe. (Id.) The fixed network operators are moving from single-service networks toward broadband packet-switched multi-service networks that handle multiple services, such as voice, data, and images. (Id.) The Professional Services segment provides consulting, education, systems integration, and managed services, as well as customer support services to the telecommunications industry. (Id.)
As part of its core operations, Ericsson provides voice and data network solutions. And as part of its current package of services, the Company provides third generation ("3G") or advanced second generation Global System for Mobile Communications ("GSM"). (Compl. ¶25 fn. 1.) Ericsson also provides certain 3G network technology for enhanced data services including Universal Mobile Telecommunications System ("UMTS"), Wideband Code Division Multiple Access ("WCDMA") which uses the UTMS network system to provide high speed data transmission protocol, and High Speed Packet Access ("HSPA") which is used with WCDMA to extend and improve the performance of existing UMTS network technology. (Id.)
The only statements the Complaint alleges as being materially false and misleading during the Class Period were those made by the individual Defendants during a slide show at the outset of a September 11, 2007 Strategy and Technology Summit conference ("the Summit") in London, nineteen days before the end of third-quarter. (Compl. ¶¶39-46.)*fn1 A reading of the transcript of that conference provided by Defendants (see Kaye Decl., Ex. C) shows that the objective of the Summit was to explain the business strategy of the Company, which was to achieve long-term growth based on the interrelationships of the various technological products offered by the Company to operators of mobile networks and fixed network communication systems throughout the world. At that Summit, the Complaint alleges that Defendants Svanberg and Sundstrom made statements concerning the Company's projected third-quarter and annual financial prospects which, the Complaint claims, were materially false and misleading. (Id. ¶¶3, 65.) These statements, the Complaint charges, materially misstated the Company's "operating condition and future business prospects." (Id. ¶20.)
Specifically, the Complaint alleges that even while the Company's competitors were stating that the market was "tightening" and were "retreating from their original forecasts," Defendants Svanberg and Sundstrom falsely assured investors that Ericsson had "sustainable growth" and that the Company was projecting "mid-single digits growth" for 2007. (Compl. ¶3.) Indeed, the Complaint charges, Ericsson "falsely claimed to be profiting at its competitors' expense." (Id.) These alleged misrepresentations of the Company's "operating condition and future business prospects" were part of an intentional "scheme to deceive the market" in order to "artificially inflate the price of Ericsson's securities." (Id. ¶20.) Defendants allegedly "concealed their true results from the investing public" until October 16, 2007, when they pre-announced the Company's third-quarter results for 2007. (Id. ¶¶4, 68.)
Defendants have attached a full transcript of the September 11, 2007 Summit together with the accompanying slides used by Defendants Svanberg and Sundstrom during their presentations. (Kaye Decl., Ex. C [transcript of Sept. 11, 2007 Ericsson Strategy and Technology Summit], Ex. D [Slides accompanying Defendant Svanberg's presentation], Ex. E [Slides accompany Defendant Sundstrom's presentation].) Plaintiff does not contest the accuracy of those exhibits. A review of the transcript and accompanying slides does not support the allegation that Defendants projected either quarterly or annual results (earnings). Instead, Defendants' statements are almost entirely long-term trends and marketing strategy for each segment of the Company, as well as a regional analysis of the Company's world-wide operations.
The Complaint states two causes of action. In the first cause of action, the Complaint asserts that from September 11, 2007 to October 15, 2007, all Defendants violated Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §78j(b)), and Rule 10b-5 promulgated thereunder (17 C.F.R. 240, 10b-5), by engaging in a scheme of conduct that artificially inflated the price of Ericsson's stock. (Compl. ¶¶89-92.) The second cause of action asserts that the individual Defendants, as controlling persons, violated Section 20(a) of the Securities Exchange Act (15 U.S.C. § 78t(a)). (Compl. ¶¶93-97.)
In considering a motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted, a court must accept all of the allegations set forth in the complaint as true, and must draw all reasonable inferences in favor of the plaintiffs. Rombach v. Chang, 355 F.3d 164, 169 (2d Cir. 2004); Halperin v. eBanker USA.Com, Inc., 295 F.3d 352, 356 (2d Cir. 2002); Garber v. Legg Mason, 537 F. Supp. 2d 597, 609-10 (S.D.N.Y. 2008).
The complaint must provide "plausible grounds" for the allegations with "enough fact to raise a reasonable expectation that discovery will reveal evidence" to support them. Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007); ATSI Communs., Inc. v. Shaar Fund, 493 F.3d 87 (2d Cir. 2007) (applying Twombly to securities fraud case); Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) (Twombly "require[es] a flexible 'plausibility standard,' which obligates a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible.") A court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985).
In reviewing a Rule 12(b)(6) motion to dismiss, the court may consider: the complaint and documents attached to it or incorporated in it by reference, documents 'integral' to the complaint and relied upon it even if not attached or incorporated by reference, documents or information contained in a defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it framing the complaint, documents filed with the SEC, and matters subject to judicial notice. See Goplen v. 51job, Inc., 453 F. Supp.2d 759, 765 (S.D.N.Y. 2006); Prentice v. Apfel, 11 F. Supp. 2d 420, 424 (S.D.N.Y. 1998); see also Rombach, 355 F.3d at 169; Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991); Garber, 537 F. Supp. 2d at 610; Malin v. XL Capital Ltd., 499 F. Supp. 2d 117, 131 (D. Conn. 2007) (court may consider transcript on motion to dismiss where plaintiff has quoted from it in complaint).
ii. Section 10(b) and Rule 10b-5
To state a cause of action under Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, a plaintiff must allege that a defendant: 1) in connection with a purchase or sale of securities; 2) with scienter; 3) made a material false representation or omitted to disclose material information; 4) upon which plaintiff relied; 5) proximately causing damages to the plaintiff. Lentell v. Merrill Lynch, 396 F.3d 161, 172 (2d Cir. 2005); Garber, 537 F. Supp. 2d at 614.
Relatedly, to plead a claim under Section 20(a) of the Exchange Act, plaintiffs must allege 1) a primary violation of the Act by a controlled person, 2) direct or indirect control by the defendant of the primary violator, and 3) "culpable participation." See In re Adelphia Communications, 2007 U.S. Dist. LEXIS 66911, at *30-31 (S.D.N.Y. 2007); In re Globalstar Sec. Litig., 2003 U.S. Dist. LEXIS 22496, at *12 (S.D.N.Y. 2003) (to withstand motion to dismiss Section 20(a) claim, plaintiffs must "show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person").
iii. Pleading Requirements for Fraud: Fed. R. Civ. P. Rule 9(b) and the PSLRA
Securities fraud allegations under Section 10(b) and Rule 10b-5 are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA.*fn2 Rule 9(b) requires that, whenever a complaint contains allegations of fraud, the circumstances constituting fraud shall be stated with particularity. See Fed. R. Civ. P. 9(b); Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996). Thus, to survive a motion to dismiss, a complaint 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." Rombach, 355 F.3d at 170; Shields v. Citytrust Bancorp. Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
The PSLRA of 1995 requires securities fraud plaintiffs to "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). While the PSLRA does not require plaintiffs to plead "every single fact upon which their beliefs concerning false or misleading statements are based," it does require the facts alleged to be "sufficient to support a reasonable belief as to the misleading nature of the statement or omission." Novak v. Kasaks, 26 F.3d 300, 313-14 fn. 1 (2d Cir. 2000).
In this motion to dismiss, Defendants contend only that the Complaint does not plead sufficient facts to support a reasonable belief that Defendants made material false representations or acted with scienter.
B. Defendants' Allegedly Material Misstatements or Omissions at the Conference
Defendant Svanberg spoke first at the Conference. (Kaye Decl., Ex. C at 3-8). He addressed the efforts to increase Ericsson's business, and he discussed market enthusiasm for mobile broadband (HSPA) services and Ericsson's plans to roll out these systems, focusing on Latin America, Russia and India. (Id. at 4.) He then spoke of systems upgrades underway in South Africa, Sweden and Malaysia, and how the Company's business models might evolve as demand for data services increased. (Id. at 5.) He also discussed Ericsson's progress in increasing its market share and its plans to gain advantages of scale. (Id. at 5-7.) Next, Defendant Svanberg spoke of new start-up contracts signed by the Company, while cautioning that new contracts came with "initial costs." ...