The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
This Document Relates To: All Actions
In this consolidated putative class action, Lead Plaintiff Iron Workers Local No. 25 Pension Fund ("Plaintiff"), asserts claims arising under the Securities Exchange Act of 1934 ("Exchange Act") Section 20(a), 15 U.S.C. § 78t-1 ("Section 20(a)"), Section 10(b), 15 U.S.C. § 78j(b) ("Section 10(b)"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5 "), as well as the Securities Act of 1933 ("Securities Act") Section 11, 15 U.S.C. § 77k ("Section 11 "), Section 12(a)(2), 15 U.S.C. § 77l(a)(2) ("Section 12(a)(2)"), and Section 15, 15 U.S.C. § 77o ("Section 15 "), against defendants Focus Media Holding Limited ("Focus Media" or the "Company"); Jason Nanchun Jiang, Zhi Tan, Daniel Mingdong Wu, and Donald Puglisi, who were all officers and/or directors of the Company during the relevant period ("Individual Defendants"); and Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., and Merrill Lynch & Co., Inc. ("Underwriter Defendants") (collectively, "Defendants"). The Court has jurisdiction of the action pursuant to 28 U.S.C. § 1331.
Plaintiff's claims are based upon purchases of Focus Media's American Depositary Shares ("FMCN Shares") during Focus Media's November 2007 public secondary offering (the "Secondary Offering") and purchases of FMCN Shares in the marketplace for the period beginning on September 27, 2007, and ending on November 19, 2007. The principal factual predicate for the claims is the decline in the Company's share price following the Company's November 19, 2007, announcement of its financial results for its most recently concluded quarter, including an allegedly disappointing gross margin figure. Defendants move to dismiss the consolidated amended class action complaint ("Complaint" or "CAC") pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4("PSLRA"). The Court has considered thoroughly the parties' submissions. For the following reasons, Defendants' motion to dismiss the Complaint is granted in its entirety and Plaintiff's request for leave further to amend the Complaint is denied as futile.
Focus Media is a public company that is incorporated in the Cayman Islands and maintains its principal offices in Shanghai, the People's Republic of China. Focus Media's American Depositary Shares trade on the NASDAQ stock exchange. Focus Media provides advertising and marketing solutions to its clients in China through various platforms. (CAC ¶ 30.) Focus Media's business has three principal segments: the Digital Out-of-Home Advertising Network, the Mobile Handset Advertising Network, and the Internet Advertising Services Network. (Id. ¶ 31.) In fiscal year 2006, Focus Media earned $83,197,000 of net income on $211,905,000 of total net revenues. When reporting its quarterly financial performance, Focus Media disclosed, among other information, its gross margins, which are a measure of the company's profitability.*fn2 (Id. ¶ 37.)
On September 27, 2007, Focus Media issued a press release (the "September 27 Press Release") announcing its financial results for the second quarter of 2007 ("2Q07"), a period that ended on June 30, 2007. (Id. ¶ 48.) Along with the financial results for 2Q07, the September 27 Press Release contained earnings guidance for the third quarter of 2007 ("3Q07"), which would end three days later on September 30, 2007. (Id. ¶ 56.) As part of this guidance, Focus Media estimated it would report total revenue between $132 million and $135 million and earn non- GAAP income*fn3 between $52 million and $54 million in 3Q07. (Id. ¶ 56; Cattell Aff. Ex. D at 4.) The 3Q07 guidance did not include any specific estimates with respect to anticipated gross margins. Focus Media did not provide any further guidance for 3Q07 until it disclosed its actual 3Q07 results on November 19, 2007. (CAC ¶ 58.)
Focus Media hosted a conference call with analysts contemporaneously with the September 27 Press Release (the "September 27 Conference Call"). (CAC ¶ 49.) During the September 27 Conference Call, defendant Chief Financial Officer Wu specifically addressed the Company's declining gross margin by stating that "[f]or the Company as a whole, the blended gross margin for the Company in the second quarter was 54.6% compared to 56.9% in the second quarter of 2006, lower primarily due to the addition of the lower-margin Internet advertising business to our revenue mix." (Cattell Aff., Ex. F at 3.) In response to a question about the future prospects for the gross margin of the Company's internet advertising business, and the impact on that gross margin of the March 2007 acquisition of Allyes, an Internet advertising agency and service technology business (CAC ¶ 66), Wu responded as follows: "90% of our Internet advertising business still is digital media service, which is interactive agency business, itself a lower margin... Those margins can continue to improve as the revenue base becomes larger, revenue growth becomes larger, and also due to the larger media buying power of our Internet advertising business... it's going to be a gradual improvement... Going forward, we see  two areas for the margin improvement... But those will be gradual processes." (CAC ¶ 129; Cattell Aff. Ex. F at 8.) In both the September 27 Press Release (Cattell Aff., Ex. D at 6) and the September 27 Conference Call (Cattell Aff., Ex. F at 2), the Company referred investors to the Company's SEC filings, including the Company's Form F-1 Registration Statement, which, in its discussion of gross margin, cautioned that "[i]n the future, our gross margin may fluctuate depending on the respective financial performance and stage of development of each of our networks as well as the relative contribution to our revenues and costs of each network." (Cattell Aff., Ex. L at 83.)
On or about November 1, 2007, Focus Media filed a Form F-1/A Registration Statement ("Registration Statement") with the Securities and Exchange Commission as a step toward executing the Secondary Offering. (CAC ¶ 60.) On or about November 7, 2007, the prospectus ("Prospectus") with respect to the Secondary Offering became effective. (Id. ¶ 61.) The Prospectus' discussion of the Company's gross margin also warned that "our gross margin may fluctuate depending on the respective financial performance and stage of development of each of our networks as well as the relative contribution to our revenues and costs of each network." (Cattell Aff., Ex. C at 78.) The Prospectus did not include Focus Media's 3Q07 results nor provide any guidance for that quarter other than by reference to the September 27 Press Release.
During the Secondary Offering, Focus Media sold approximately 13.5 million shares at $64.75 per share. (Id. ¶ 61.) The Underwriter Defendants served as underwriters for the Secondary Offering and purchased FMCN Shares from Focus Media, which they re-sold to the investing public. (CAC ¶ 62.) The Individual Defendants each signed the Registration Statement. (Id. ¶ 103.) The putative class includes two groups of purchasers of FMCN Shares: those who purchased shares in the Secondary Offering and those who purchased shares in the open market during the period beginning on September 27, 2007 (when Focus Media released its earnings guidance for 3Q07), and ending on November 19, 2007 (when Focus Media released the actual 3Q07 results). (Id. ¶ 24.)
After the close of the market on November 19, 2007, Focus Media announced its results for the quarter ending on September 30, 2007. The release of the 3Q07 results revealed that, although Focus Media's revenue and non-GAAP income were higher than estimated in the September 27 Press Release, the company's gross margin had fallen to 50.9%.*fn4 (Id. ¶ 63.) The gross margins for the previous four quarters had been 54.6% for the second quarter of 2Q07 ("2Q07"), 58.0% for the first quarter of 2007 ("1Q07"), 68.5% for the fourth quarter of 2006 ("4Q06"), and 65.3% for the third quarter of 2006 ("3Q06"). (Id. ¶¶ 38, 40, 48, 63.) The reasons for Focus Media's declining gross margin included a decline of the gross margin for its In-Store division, whose 3Q07 gross margin of 17.7% represented a 10.7% decrease from the previous quarter and an 18.5.% decline from the same quarter of the previous year (id. ¶¶ 64, 69); a decline of the gross margin for its Internet advertising division, whose gross margin of 23% represented a 4.1% decline from the same quarter of the previous year (id. ¶ 76); and acquisition of various competitor businesses, including the previously undisclosed acquisition of a billboard business whose assets where chiefly in traditional billboards that would not be able to be converted for some time to the digital LED billboards that were the core of FM's outdoor advertising business. The profit margins on traditional billboards were lower than those on LED billboards. (Id. ¶ 67).
Focus Media's share price reacted negatively to the announcement of the 3Q07 results. After closing at $57.15 on November 19, 2007, the price fell to $52.00 at the close of trading on November 20, 2007, and continued to decline the next day, closing at $50.35.*fn5 (Id. ¶ 95.) Various financial news media and equity research publications attributed the share price decline to the lower-than-expected gross margin figure. (Id. ¶¶ 96-97.) This action was initiated on November 27, 2007, and was consolidated with another putative class action on April 24, 2008.
In adjudicating a motion to dismiss a complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court accepts the factual allegations in the complaint as true and draws all reasonable inferences in the plaintiff's favor.*fn6 See Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007). Nevertheless, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, ...