The opinion of the court was delivered by: John F. Keenan, United States District Judge
Defendant Lawrence Evans ("Evans") moves to dismiss the amended complaint of Plaintiffs 380544 Canada, Inc., Wayne Sim ("Sim"), and Salvador Clavé ("Clavé"). Plaintiffs bring this action against Aspen Technology, Inc. ("Aspen"), and former Aspen officers Evans, David McQuillin ("McQuillin"), and Lisa Zappala ("Zappala"), alleging fraud in connection with a securities purchase agreement (the "SPA") under which Plaintiffs purchased approximately $6.8 million of Aspen's stock. Evans is the only defendant to move to dismiss the amended complaint. For the reasons discussed below, the motion is denied in part and granted in part.
The Court assumes familiarity with its earlier opinion in this case, which provides detailed background on the parties and their claims. 380544 Canada, Inc. v. Aspen Tech., Inc., 544 F. Supp. 2d 199 (S.D.N.Y. 2008). Below, the Court discusses only those facts relevant to the instant motion.
A. Dismissal of the Initial Complaint
Plaintiffs filed their initial complaint on February 15, 2007, asserting the following claims against Evans: (1) violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, (2) violation of Section 20(a) of the Exchange Act, (3) common law fraud, (4) common law fraudulent inducement, and (5) conspiracy to commit and/or aiding and abetting common law fraud. Plaintiffs predicated their claims on four categories of allegedly fraudulent statements: (1) statements that Evans made at meetings leading up to the SPA (the "Pre-SPA Statements"), (2) the SPA itself, (3) Aspen's SEC filings, and (4) various Aspen press releases. The Court refers to these statements collectively as the "Fraudulent Statements."
In an order dated March 18, 2008, the Court, inter alia, granted Evans's motion to dismiss the federal securities claims with prejudice and the common law fraud claims with leave to replead. 380544 Canada, Inc., 544 F. Supp. 2d 199. The Court's analysis of Plaintiffs' common law fraud claim is relevant to the instant motion and thus bears close examination.
The Court framed the dispositive questions on Plaintiffs' common law fraud claims as follows: "(i) [whether] the Complaint adequately pleads that the false statements are attributable to [Evans] and (ii) [whether] the Complaint alleges facts that give rise to a sufficiently strong inference of scienter for [Evans]." Id. at 217. In answering the first question, the Court considered the four categories of Fraudulent Statements separately and found as follows: First, the initial complaint failed to plead the Pre-SPA Statements with sufficient particularity since it attributed the statements to Defendants as a group. "Clumping" Defendants together in this way violates the particularity standards of Rule 9(b) of the Federal Rules of Civil Procedure. Id. at 218. Second, the initial complaint sufficiently pled the statements in the SPA itself and Aspen's SEC filings, and these were attributable to Evans under the group pleading doctrine. Id. at 218-19. Third, the initial complaint sufficiently pled the statements in the press releases, and these were attributable to Evans as either direct quotes or, to the extent the releases summarized Aspen's finances, under the group pleading doctrine. Id. at 219. Notably, regarding the falsity of the press releases, the Court wrote,
To the extent that the Complaint alleges that the 'press releases issued during the [thirteen quarters] were false [because] they reported, discussed, or analyzed figures that subsequently were restated as well as any financial statistics derived from restated figures,' such statements are adequately pleaded to be false. Thus, Plaintiffs have adequately pleaded the falsity of statements in the press releases that report, discuss, or analyze Aspen's false financial results with respect to [Evans]. The Court need not determine, however, whether each of Evans's quoted remarks are actually false, because, as discussed below, the Complaint fails adequately to plead Evans's scienter.
The Court next turned to the second dispositive question, namely, whether Plaintiffs alleged facts giving rise to a strong inference of scienter for Evans. The initial complaint contained only one allegation that supported an inference that Evans consciously misbehaved or acted recklessly. Specifically, the initial complaint quoted a confidential informant who had worked at Aspen and who had heard "both defendants Evans and McQuillin euphemistically refer to [the] practice [of improperly accounting for Aspen's earnings] as keeping revenues 'in the freezer.'" Id. at 229. This lone allegation was insufficient to support a strong inference of scienter. Id. at 230.
For these reasons, the Court granted Evans's motion to dismiss the common law fraud claims, but gave Plaintiffs leave to replead.
On May 2, 2008, Plaintiffs filed an amended complaint reasserting against Evans claims for common law fraud, fraudulent inducement, conspiracy to commit common law fraud, and aiding and abetting common law fraud. The most relevant portions of the amended complaint to this motion are its allegations concerning (1) the Pre-SPA Statements, (2) statements contained in the SPA, (3) statements contained in Aspen's SEC filings, (4) statements Evans made in various Aspen press releases, and (5) Evans's scienter.
1. The Pre-SPA Statements
The amended complaint alleges that Evans made three fraudulent Pre-SPA Statements:
(1) "At the July 10, 2001 Boston meeting with Sim and Clavé, Evans misrepresented Aspen's financials, including its past and projected revenues and long term revenue commitments from customers." (Am. Comp. ¶ 26.)
(2) "At the March 21-22, 2002 Boston meeting with Sim and Clavé (Clavé was present for the March 21 meeting and Sim was present for both meetings), McQuillin and Evans confirmed again the misrepresentations that McQuillin made at the March 14 meeting [sic]." (Id. ¶ 29.)
(3) "At the April 8, 2002 Boston meeting with Sim, McQuillin, Evans and Zappala misrepresented the combined performance of Aspen and Hyprotech by relying on Aspen's recognized revenues for quarters later restated and relying on alleged long-term revenue commitments from customers that were in fact contingent." (Id. ¶ 30.)
The amended complaint alleges that the SPA contained three provisions that fraudulently misrepresented Aspen's compliance with generally accepted accounting principles ("GAAP"):
(1) SPA Article 3.1(n): "Internal Accounting Controls. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that... transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles." (Id. ¶ 33.)
(2) SPA Article 3.1(h): "[Aspen's SEC filings and financial statements were] prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved." (Id.)
(3) SPA Article 3.1(i): "Since the date of the latest audited financial statements included within the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business, (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP." (Id. ¶ 285.)
The amended complaint alleges that all of Aspen's SEC filings covering thirteen fiscal quarters -- from the fiscal fourth quarter of 1999 to the fiscal fourth quarter of 2002 -- were materially false and misleading. This includes Aspen's Form 10-Q quarterly reports and Form 10-K annual reports for these periods, as well as three registration statements and prospectuses that Aspen issued in connection with the public sale of its stock to fund the purchase of other companies. The amended complaint alleges that all of these filings incorporated Aspen's false financial statements.
The amended complaint alleges that direct quotes from Evans in numerous press releases fraudulently misrepresented Aspen's performance during certain fiscal periods. (Id. ¶¶ 67, 68, 88, 94, 121, 157, 163, 187, 195, 200, 203, 233, 252.) For example, an August 7, 2001, press release quoted Evans as stating, "During the [the fiscal quarter ended June 30, 2001]... we closed [a] significant multimillion dollar transaction with... Yukos, a large Russian oil company." (Id. ¶ 187.) The amended complaint alleges that the Yukos transaction was not actually closed until the following quarter and that Aspen prematurely recognized this revenue by backdating the agreement. A number of Evans's direct quotes are far less specific, such as his statement in an August 5, 1999, press release: "AspenTech achieved a number of important operational goals in the [fiscal fourth quarter ended June 30, 1999], along with improved execution and financial results in line with our expectations." (Id. ¶ 67.)
The amended complaint also alleges that these press releases falsely and inaccurately summarized Aspen's financial data in their introductory paragraphs and in financial tables at the end of each release.
The amended complaint alleges that Evans knew or should have known that the Fraudulent Statements were false since he was a direct participant in the fraud. (Id. ¶ 41.) The amended complaint bases this allegation on Evans's involvement in seven transactions: (a) the Lyondell-Equistar transaction, (b) the Union Carbide transaction, (c) the Logica UK, Ltd., transaction, (d) the first IBM transaction, (e) the Yukos transaction, (f) the second IBM transaction, and (g) the PSC transaction. Generally, the amended complaint alleges that, in each transaction, Evans was aware of practices, such as entering side agreements or backdating agreements, that made Aspen's accounting improper, thus creating a strong inference that he had the requisite scienter when he made the Fraudulent Statements. The details of each transaction as alleged in the amended complaint are discussed below.
a. Lyondell-Equistar Transaction
Aspen improperly recognized a total of $9.9 million of revenue in the fiscal quarters ended June 30 and September 30, 1999, that arose out of a transaction with Lyondell Chemical Company, Equistar Chemicals, and other Houston-based chemical companies (collectively, "Lyondell-Equistar"). (Id. ¶ 43.) The revenue was improperly recognized since Aspen had promised the companies, in a side agreement known as the Joint Development Agreement, that it would deliver an undetermined amount of software in the future at no additional cost. (Id.)
According to the amended complaint, a series of communications reveals that Evans was aware of the side agreement. On or about December 13, 1998, an Aspen salesperson involved in negotiations with the Lyondell-Equistar group sent an e-mail to Zappala with the subject line "Special Letter." The salesperson wrote,
I need to put together a letter from Larry [Evans] that says that as long as the customer stays on support that they will continue to get all of the AspenTech [software] products....
As we develop or buy new products it would go [to the customer].... [I]n lieu of putting this in the contract it will be a side letter.... Basically, this letter would give them the "all we ever will be commitment" in an acceptable communication from AspenTech. (Id. ¶ 44.) In an e-mail to Zappala dated February 12, 1999, that had the subject line "The Equistar Project is at a Highly Critical Stage --we Need Everybody's Support," Evans wrote,
[I]t is absolutely critical that we get our [software] implementation installed and running at [a Lyondell-Equistar site] by April 1[.] Failure is not an option here. We have to be successful. In many ways we have bet the company on the success of this pilot at [the LyondellEquistar site] and we have made important commitments to Equistar. Our honor is at stake.
You can imagine the field day our competitors would have if this doesn't work. (Id. ¶ 45.)
In June 1999, Aspen drafted an agreement known as the "Special Option Product Support Agreement" (the "Support Agreement") that, in an early version, would have compelled Aspen to supply Lyondell-Equistar with certain future products free of charge. On June 29, 1999, an in-house counsel at Aspen e-mailed the Support Agreement to Lyondell-Equistar. (Id. ¶ 47.) He also attached to the e-mail a draft letter from Evans to Lyondell-Equistar dated June 30, 1999, which read, in relevant part, "Please accept this letter as my commitment to you that, if we acquire or develop products in the product families which we license to our customers in our normal course of business, we will provide the new technology in addition to our existing technology." (Id. ¶ 49.) After reviewing the Support Agreement, however, Aspen's outside auditor, Arthur Andersen, objected to what it interpreted as the "promise of future products." (Id. ¶ 52.) This objectionable term was removed from the version of the Support Agreement that Aspen and Lyondell-Equistar ultimately executed.
On June 30, 1999, the day Aspen executed the main software license agreement and Support Agreement with Lyondell-Equistar, Evans sent a letter to Lyondell-Equistar. The letter was similar to the draft letter attached to the June 29, 1999, e-mail, except it no longer carried a promise of future products. (Id. ¶ 60.)
On or about July 2, 1999, after executing the agreements, Evans forwarded an e-mail to Zappala that he had sent to Aspen's board of directors and general counsel in which he had written, "I wanted to let you know that we made the quarter[.] We only need about $2-3 million of the Lyondell-Equistar deal to make this ...