This Document Relates To: All Actions
MEMORANDUM OPINION AND ORDER
In this securities action, Plaintiffs, a putative class of investors who purchased the stock of Defendant Authentidate Holding Corporation ("Authentidate" or "the Company") between January 15, 2003, and May 27, 2005, allege that Authentidate and individual Defendants (collectively, "the Defendants") failed to make proper disclosures regarding performance metrics in an agreement ("the Agreement") the Company had with the United States Postal Service to serve as the preferred provider of the Postal Service's electronic postmark ("EPM"), thereby artificially inflating the price of Authentidate common stock in order to, inter alia, attract capital and avoid insolvency. Plaintiffs assert violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and of Section 20(a) of the Act. The Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1331.
Defendants move to dismiss, with prejudice, lead Plaintiffs' Consolidated Second Amended Securities Class Action Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act ("PSLRA.").
Familiarity with the factual background of the instant case, its procedural posture and the Court's prior decision is presumed. See In re Authentidate Holding Corp., No. 05 Civ. 5323 (LTS), 2006 WL 2034644 (S.D.N.Y. July 14, 2006). For the reasons that follow, Plaintiffs' claims are dismissed with prejudice.
In deciding a motion brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss a complaint for failure to state a claim, "the court must accept as true all of the well pleaded facts and consider those facts in the light most favorable to the plaintiff." Hudson Valley Black Press v. Internal Revenue Serv., 307 F. Supp. 2d 543, 545 (S.D.N.Y. 2004). "To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient 'to raise a right to relief above the speculative level.'" ATSI Commcn's, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)). A court may consider, in deciding a motion to dismiss, documents that are integral to the complaint or are incorporated by reference in the pleadings. See I. Meyer Pincus and Assocs. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991).
In order to state a claim for securities fraud under Section 10(b) and Rule 10b-5 promulgated by the SEC thereunder (collectively, "Section 10(b)"), a plaintiff must demonstrate 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). Section 10(b) claims are subject to the heightened pleading standards of Federal Rule of Civil Procedure 9(b), which requires that the pleadings "(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." ATSI Commcn's, 493 F.3d at 99 (citation omitted). The PSLRA, which also applies in this private securities law action, similarly requires in relevant part that, with respect to allegations of untrue statements of material facts or material omissions, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and [that], if an allegation regarding the statement or omission is made on information and belief, the complaint . . . state with particularity all facts on which that belief is formed." 15 U.S.C.A. § 78u-4(b)(1) (West 1997).
To state a claim under Section 20(a) of the Exchange Act, 15 U.S.C. § 78(t)(a) (for control person liability as to Section 10(b) claims), a plaintiff must allege (i) a primary violation by a controlled person, (ii) control by the defendant of the primary violator, and (iii) culpable participation.
Plaintiffs argue that Defendants had a duty to disclose the Company's low level of EPM sales and their continuing or likely failure to meet the revenue metrics. For purposes of Section 10(b), "[s]ilence, absent a duty to disclose, is not misleading," Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988), and an omission is actionable under the securities laws only when the Defendant was subject to a duty to disclose. See In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 267 (2d Cir. 1993) ("[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact."). Thus, "[t]he initial inquiry in each case is what duty of disclosure the law should impose upon the person being sued." Chris-Craft Indus. Inc. v. Piper Aircraft Corp., 480 F.2d 341, 363 (2d Cir. 1973). Courts in this Circuit have identified a number of circumstances in the securities context where a duty to disclose arises, including statutorily created disclosure duties, when disclosure is necessary to make prior statements not misleading, when it is necessary to update statements that may have become misleading as the result of intervening events or the passage of time, when an insider seeks to trade on the basis of information known only to her, and the presence of certain fiduciary relationships. See In re Initial Public Offering Securities Litigation, 241 F. Supp. 2d 281, 381 n.150 (S.D.N.Y. 2003) (collecting cases).
Plaintiffs argue that Defendants had a duty to disclose the Company's continuing failure to meet the revenue metrics based on: (1) Item 303 of SEC Regulation S-K (17 C.F.R. § 229.303); (2) the Company's February 2004 Offering and Authentidate's "insider" status; and (3) the obligation to make prior statements not misleading. The factual allegations in the complaint do not plausibly frame the existence of any of these duties to disclose, as the Court explains below.
Item 303 of Regulation S-K
Item 303 of SEC Regulation S-K, entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," requires, in relevant part, that a registrant "describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations." 17 C.F.R. § 229.303(a)(3)(ii). As the instructions to Paragraph 303(a) make clear, "[t]he discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition." See 17 C.F.R. § 229.303(a), Instruction 3 (emphasis added).
Plaintiffs argue that the virtually nonexistent EPM sales and the likely failure to meet upcoming revenue metrics were "known trends or uncertainties" that Defendants should have disclosed in their various filings. Plaintiffs fail, however, to put forth any particularized factual allegations making it plausible that these omissions caused any piece of existing "reported financial information" to misleadingly indicate a specific future result or financial condition. None of the reported financial information cited in the complaint could be read to predict a particular result, such as an impending boom in EPM sales, that was made unlikely by the actual, anemic level of EPM sales. Nor could any of the reported monthly revenues cited in the complaint be read to suggest that robust EPM sales constituted, or would continue to constitute, a significant percentage of the reported monthly revenues. See In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 71 (2d Cir. 2001) (Item 303 duty to disclose existed where the complaint alleged that defendants failed to disclose a decline in sales constituting a substantial portion of existing trade business). The complaint's repeated emphasis on the fact that Authentidate's total monthly revenues represented only a fraction of the monthly revenue required by the revenue metrics is irrelevant, because the actual revenue metrics were ...