The opinion of the court was delivered by: Katherine B. Forrest, District Judge:
Lead Plaintiff the City of Miami General Employees' and Sanitation Employees' Retirement Trust ("plaintiff" or "City of Miami") brings this putative class action against defendants SMART Technologies, Inc. ("SMART"), various of SMART's officers and directors, and SMART's co-founders (who, as minority shareholders prior to the initial public offering ("IPO"), appointed one member each to SMART's four-person pre-IPO board of directors)--i.e., Intel Corporation ("Intel") and Apax Partners L.P. with Apax Partners Europe Managers Ltd. (collectively, "Apax" or the "Apax Defendants"). Plaintiff alleges that the registration statement (the "Registration Statement") and prospectus (the "Prospectus" and collectively with the Registration Statement, the "Offering Documents") filed in connection with SMART's July 14, 2010 initial public offering contained materially false and misleading statements in violation of sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act").
Defendants have jointly moved to dismiss plaintiff's Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.
For the reasons that follow, defendants' motion is GRANTED IN PART and DENIED IN PART.
For purposes of ruling on the motion to dismiss, the Court accepts as true all well-pleaded allegations in the Amended Complaint and draws all reasonable inferences in plaintiff's favor. See Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001). The Court also considers the Securities and Exchange Commission ("SEC") filings that plaintiff references in the Amended Complaint--namely, SMART's Prospectus relating to the IPO, filed with the SEC on July 15, 2010. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
Lead Plaintiff City of Miami manages pension assets on behalf of Miami's municipal general and sanitation employees.
(Am. Compl. (Dkt. No. 81) ¶ 17.) City of Miami purchased SMART common stock in the IPO and in the post-IPO secondary market or traceable to the Offering Documents, over the period of time from July 14, 2010 through December 14, 2010. (Id.; see also id. Ex. A at 2.)
Defendant SMART is a Canadian corporation that designs, develops, and sells interactive technology products and solutions. (Am. Compl. ¶ 18.) See also SMART Techs. Inc., Prospectus (Form 424B4) at 1 (July 15, 2010) (hereinafter "Prosp.") (Decl. of Andrew Stern (Dkt. No. 102) Ex. A). SMART is best known for its interactive whiteboards--the "core" of SMART's interactive technology solutions. (Am. Compl. ¶ 18.) See also Prosp. at 1. By SMART's own account, interactive whiteboards, which SMART introduced in 1991, "combine the simplicity of a whiteboard and the power of a computer," and allow the user via touch to "control computer applications, access the Internet, write in digital ink and save and share work." Prosp. at 1.
The "Individual Defendants"--Nancy L. Knowlton, G.A. (Drew) Fitch, David A. Martin, Salim Nathoo, Arvind Sodhani, Michael J. Mueller, and Robert C. Hagerty--are SMART's current or former officers and directors. During the relevant time period, Knowlton was SMART's Chief Executive Officer; Fitch was SMART's Chief Financial Officer and principal financial and accounting officer; Martin was Chairman of SMART's Board of Directors; and Nathoo, Sodhani, Mueller, and Hagerty were directors on SMART's board. (Am. Compl. ¶¶ 19-25.) Each signed the Registration Statement, except for Mueller and Hagerty who were named therein with consent "as about to become  director[s]" of SMART. (Id. ¶¶ 19-25.)
The Apax Defendants advised or managed funds that held more than 56 million shares of SMART stock prior to the IPO, which amounted to approximately 47 percent of SMART's total voting power at the time of the IPO. (Am. Compl. ¶ 27.) Apax sold almost 20 million of its shares in the IPO. (Id.) Defendant Nathoo was one of Apax's partners. (Id.)
Intel owned more than 27 million shares of SMART's pre-IPO stock, which amounted to 23.5 percent of SMART's total pre-IPO voting power. (Id. ¶ 28.) Intel sold 10 million of its shares in the IPO. (Id.)
The third primary shareholder of SMART's pre-IPO stock was the wholly-owned company of SMART's co-founders, IFF Holdings Inc. ("IFF"), which held shares totaling just under 30 percent of SMART's total voting power. Prosp. at 100. IFF is not a party to this action.
On July 14, 2010, SMART announced that it would offer to the public 38.83 million shares of Class A Subordinate Voting Shares at $17.00 per share, with trading on the NASDAQ to begin the following day. (Am. Compl. ¶ 32.) SMART offered the shares pursuant to (a) the Registration Statement filed with the SEC on June 24, 2010, amended initially on June 28, 2010 and then again on July 12, 2010, and effective July 14, 2010; and (b) the July 14, 2010 Prospectus which was incorporated into the Registration Statement and filed with the SEC on July 15, 2010. (Id. ¶ 33.) SMART did not itself sell the shares to the public, but rather sold them to a syndicate of underwriters--Morgan Stanley & Co., Inc., Deutsche Bank Securities Inc., and RBC Dominion Securities Inc--who offered them to the public.*fn1 Prosp. at 129-30.
III. THE ALLEGED MISREPRESENTATIONS AND OMISSIONS
Plaintiff alleges that the Offering Documents contained material misstatements of fact or omitted material facts regarding four topics: (a) demand for SMART's "core" interactive whiteboards; (b) the demand for and benefits of SMART's then recently-acquired NextWindow business; (c) SMART's ability to sell its whiteboards to corporate or foreign clients; and (d) the status of SMART's internal enterprise resources planning system ("ERP"). Plaintiff's essential claim is that defendants were aware of specific facts regarding the four topics, but failed to disclose them in the Offering Documents, rendering the Offering Documents false and misleading.
A. Demand for Interactive Whiteboards
Plaintiff alleges that the Offering Documents contained positive statements regarding the growing demand for SMART whiteboards when, at the time of the IPO, defendants affirmatively knew that demand for whiteboards was already materially declining. (Am. Compl. ¶¶ 63-64.)
Specifically, plaintiff alleges that SMART benefitted from the American Recovery and Reinvestment Act of 2009 ("ARRA"),*fn2 which sought to "preserve and create jobs and promote economic recovery," among other things, by infusing public funds into the economy--most relevant here, financial aid for local school districts, including for Enhanced Education Through Technology Program. See Pub. L. 111-5, § 3(a)(1). (Am. Compl. ¶ 45.) According to plaintiff, although schools used government stimulus funds to purchase SMART's interactive whiteboards (usually only once) (Am. Compl. ¶¶ 45, 46, 65), the Prospectus allegedly failed to disclose the "known trend" (as of the IPO) of decreased educational spending as ARRA funding began to dry up. (Am. Compl. ¶¶ 37, 65.) See also Prosp. at 44, 50 ("demand for our core products has been increasing as a result of a general expansion of the market for interactive whiteboards and other complementary products") (emphasis added).
Plaintiff alleges, through four confidential witnesses ("CWs"), that as much as a year prior to the IPO and by at least March 2010--four months prior to the IPO--SMART was encountering a "'big slowdown'" in sales, which was confirmed by a "decrease in forecasted revenues from SMART'S training group in July 2010"--i.e., the month SMART made its public offering. (Am. Compl. ¶¶ 40, 46 (quoting CWs); see generally id. ¶¶ 40-46.) According to CW4, each school used ARRA funding to purchase interactive whiteboards once, and thus, as ARRA funding wound down prior to the IPO, SMART's sales already had decreased. (Id. ¶ 43.) On those grounds, as alleged through CW1, SMART "knew that the future of the [stimulus] program was uncertain," and thus, that the sales growth SMART had enjoyed prior to the IPO "wasn't going to continue." (Id. ¶ 46 (emphasis added).)
Immediately following the allegedly misleading "demand" language, the Prospectus discloses that "the education market, which represents an estimated 85% of our revenue base, has been aided by various government economic stimulus programs in fiscal 2010 as governments undertook spending initiatives . . . ." Prosp. at 50. SMART credits those initiatives with "support[ing] the growth in technology spending in education and the adoption of [its] technology in several markets." Id.; see also id. at 16.
SMART cautioned investors that a decrease in "technology spending in education" "may adversely impact [its] revenue." Prosp. at 16; see also id. at 4. SMART acknowledged that ARRA funding was limited, warning, "If state and local governments are unable to secure an alternative source of funds upon the depletion of the funds provided under the ARRA, we could experience a slowdown of revenue growth as a result of that lack of funding." Id. at 16.
Three months prior to the IPO, in April 2010, SMART acquired Next Holdings Limited ("NextWindow"), a company that "designs and manufactures interactive touch components to manufacturers of interactive displays and PCs," for $82 million. (Am. Compl. ¶ 54.) See also Prosp. at 4, 45. Plaintiff alleges that the acquisition was motivated by SMART's desire to resolve a patent dispute with NextWindow--a fact never disclosed in the Offering Documents. (Am. Compl. ¶¶ 54, 83.)
As of July 14, 2010, there were no touch applications for Windows 7--i.e., the program through which NextWindow's touch components are run. (Id. ¶ 55.) The Offering Documents, however, state that "the Microsoft Windows 7 operating system released in October 2009 supports touch capabilities for computer capabilities for computer displays." Prosp. at 69 (quoted in Am. Compl. ¶ 79).
Although the lack of Windows 7 touch applications allegedly weakened the "demand for NextWindow's touch-enabled products" "in the period leading up to the IPO" (Am. Compl. ¶ 55), it is alleged that SMART touted a "strong and growing demand for NextWindow products" in the Offering Documents (id. ¶ 78). Plaintiff purports that even though the lack of touch applications for Windows 7 in the period leading up to the IPO purportedly "was known in the industry," "was known to SMART," and was known to the public (i.e., citing a July 12, 2010 msnbc.com article) at the time of the IPO, defendants "had a duty to disclose" the impact of that fact on SMART's business. (Id. ¶¶ 55, 83; see also id. ¶¶ 84, 85.)
C. Ability to Sell to Corporate and/or Foreign Clients According to plaintiff, in reliance upon CWs, the Offering Documents contained misrepresentations and omissions related to SMART's ability to expand sales of its core products to corporate clients and into foreign markets. (See Am. Compl. ¶ 47.) SMART allegedly provided an overly optimistic view of its ability to expand into corporate and foreign markets when it knew that it was facing an uphill battle to do so, had not invested the necessary resources, or at least had faced setbacks that should not have allowed it to paint the rosy picture it did in the Offering Documents. (Id. ¶¶ 37, 50-53, 67, 71, 73, 75.) Plaintiff takes particular umbrage at the representation that SMART sold 100 interactive whiteboards to British Telecommunications plc ("BT") "for use by more than 3,000 developers," Prosp. at 77, but did not disclose that SMART originally had pitched a deal that would include BT's purchase of 1,500 SMART whiteboards for use by 100,000 users that eventually was negotiated down to the terms of the disclosed deal. (Am. Compl. ¶ 52; see also id. ¶ 74.)
The Prospectus contains risk disclosures in this regard. SMART forewarned potential investors that the U.S. and British market for interactive learning products was becoming "more saturated," which would lead to a decrease in the "growth rate of [SMART's] revenue," and thus, SMART would necessarily have to expand into additional foreign markets. Prosp. at 16. SMART disclosed that expansion into those new overseas markets could require development of additional "customized solutions," which (implicitly) had yet to be undertaken. See id. SMART further disclosed that it faced "lengthy and unpredictable sales cycles in foreign markets," including, in some instances, "indefinite deferrals of purchases or cancellations of requests for proposals." Id. SMART even acknowledged the questions about its ability to expand into foreign markets in its general risk disclosures about managing its overall growth, stating that "the difficulties and risks associated with our growth could be exacerbated by our expansion into foreign markets." Id. at 12.
With regard to developing its network in the corporate sector, SMART disclosed that such expansion would require "develop[ing] new distributor and dealer relationships," in which SMART "may not be successful." Id. at 21.
SMART's ERP system purportedly "integrate[s] the Company's finance and accounting department with its sales, manufacturing and service departments" in an effort "to provide a central repository of information that is shared among the various departments in order to smooth the flow of information across the organization." (Am. Compl. ¶ 57.) It is alleged that ERP "was materially deficient" from the time of its implementation in 2008 (id. ¶ 58), and any efforts to correct the issues were not rectified fully by the time of the IPO. (Id. ¶¶ 60-62.) As of July 2010, SMART allegedly "was using multiple sets of books to track operations and finances, and could not accurately assess its finances or shipments," such that SMART hired "Deloitte consultants" to "improve[e] information technology functions"--namely, ERP. (Id. ¶¶ 57, 59.)
The Prospectus included an ERP-related risk disclosure that is worth quoting in full:
On April 1, 2008, we commenced implementing a new enterprise resource planning, or ERP, system. We experienced significant difficulties with this implementation which resulted in severe disruptions to our operations and to our financial and accounting systems for a number of months. For example, we were unable to issue invoices or ship any products for a significant period of time during the first quarter of fiscal 2009. This resulted in our inability to complete reliable quarterly financial statements for fiscal 2009. In order to temporarily resolve the issues associated with the ERP system implementation, we adopted several manual processes and workarounds to perform functions that would typically be automated in a company of our size. By the end of the second quarter of fiscal 2009, we had shipped all the products that we were unable to ship in the first quarter of fiscal 2009, and as of December 31, 2009, we had substantially resolved all material issues associated with the portions of the ERP system that we had implemented as of that date.
We have not yet completed the implementation of the new ERP system and many manual processes for functions that should be automated remain. The existence of such manual processes allows the possibility for human error that could potentially result in material mistakes in our operations as well as our financial reporting. Such mistakes, if made, could have a mat er i al adver s e ef f ect on our business. In addition, we currently do not have, and until we complete the implementation of our ERP system, we will not have, the necessary systems in place to provide us with certain data that would normally be automatically collected in an organization of our size. For example, until the first quarter of fiscal 2010, our systems were unable to generate operating expense reports for our various business cost centers. Furthermore, we have identified, and are in the process of correcting, additional weaknesses in the ERP system that could potentially have a mat er i al adver s e ef f ect on our business. Specifically, the configuration of our ERP system lacks sufficient authority controls and many users are able to make changes to the system that may affect all users. If a user makes unauthorized changes to the system, our business could be harmed. These issues did not prevent us from obtaining unqualified audit reports on our annual financial statements.
In the first quarter of fiscal 2010, we continued to experience problems of a less material nature in the implementation of the ERP system. For example, on one occasion, a particular module of the system was not properly tested, and after implementing the module, we discovered that the system prevented the shipment of certain products and the issuance of invoices for certain shipments. While in that particular instance we were able to remediate the problem in time to prevent any significant issues, we cannot assure you that similar problems will not recur or that we will be able to remediate these problems on a timely basis. If additional problems arise in the implementation of additional modules of the ERP system, we could experience further disruptions to our business and operations that could have a mat er i al adver s e ef f ect on our business and could impair our ability to report our operating results on a timely and accurate basis. Prosp. at 20 (emphases added) (quoted in Am. Compl. ¶ 87 (different emphases supplied)).
E. Post-IPO "Corrective" Disclosures
On November 9, 2010, four months after the IPO, SMART issued a Form 6-K in which it reported its 2011 second quarter financial results. See SMART Techs. Inc., Report of Foreign Private Issuer (Form 6-K) (Nov. 9, 2010). SMART disclosed that SMART experienced "slower than anticipated sales in our recently acquired NextWindow business," reduced revenue guidance for the second half of SMART's 2011 fiscal year by nine percent, and reported that second quarter earnings fell 22 percent. Id. at Ex. 99.1. (See also Am. Compl. ¶ 91.) On a conference call that same day, defendant Knowlton confirmed that SMART "adjusted our fiscal 2011 revenue outlook lower by approximately $80 million due to lower-than-expected performance of our recently-acquired NextWindow business and the more conservative near-term growth estimates for the North American market." (Am. Compl. ¶ 92 (quoting conference call).) In that same call, Knowlton stated that the NextWindow sales could be attributed to "the limited number of touch applications developed for Windows 7," and that SMART expected stagnant sales of NextWindow products until the release of Windows 8 (expected in late 2012). (Id. ¶ 93.) The next day, SMART's stock dropped by 30 percent--from $13.07 at market close on November 9 to $8.91 on November 10. (Am. Compl. ¶ 95.)
On May 18, 2011, SMART issued its full-year and fourth quarter 2011 financial results in which allegedly revealed that it had missed its quarterly earnings target, with a decline of 28 percent, and earnings per share of $0.01, both of which were attributable to "significant increase in operating expenses"--namely, research and development for corporate development. (Am. Compl. ¶ 99.) See also SMART Techs. Inc., Report of Foreign Private Issuer (Form 6-K) ...