Demaria v. Andersen

• Decision Date: 28 January 2003
• Docket Number: Docket No. 01-7505.
• Citation: 318 F.3d 170
• Parties: Brian DEMARIA, Individually and on behalf of all others similarly situated, Robert Brisken, Individually and on behalf of all others similarly situated, Edward Sisco, Individually and on behalf of all others similarly situated, Terry C. Whorton, Individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. William P. ANDERSEN, III, Peter W. Minford, Bruns H. Grayson, Peter C. Morse, Randall E. Poliner, ING Baring Furman Selz, LLC, Warburg Dillon Read, LLC, ILife.com, Inc., Defendants-Appellees, KPMG, LLP, Defendant.
• Court: U.S. Court of Appeals — Second Circuit

318 F.3d 170

Brian DEMARIA, Individually and on behalf of all others similarly situated, Robert Brisken, Individually and on behalf of all others similarly situated, Edward Sisco, Individually and on behalf of all others similarly situated, Terry C. Whorton, Individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. William P. ANDERSEN, III, Peter W. Minford, Bruns H. Grayson, Peter C. Morse, Randall E. Poliner, ING Baring Furman Selz, LLC, Warburg Dillon Read, LLC, ILife.com, Inc., Defendants-Appellees KPMG, LLP, Defendant.

Docket No. 01-7505.

United States Court of Appeals, Second Circuit.

Argued January 11, 2002.

Decided January 28, 2003.

I. Stephen Rabin, Rabin & Peckel LLP (Brian Murray, Rabin & Peckel LLP, Leo W. Desmond, Law Office of Leo W. Desmond, West Palm Beach, FL, on the brief), New York, NY, for Plaintiffs-Appellants.

Martin I. Kaminsky, Pollack & Kaminsky (Edward T. McDermott, Justin Y.K. Chu, on the brief), New York, NY, for Defendants-Appellees ILife.com, Andersen, Minford, Grayson, Morse, and Poliner.

Jay B. Kasner, Skadden, Arps, Slate, Meagher & Flom LLP (Darren E. Bernstein, on the brief), New York, NY, for Defendants-Appellees ING Baring Furman Selz, LLC and Warburg Dillon Read, LLC.

David M. Becker, General Counsel, Securities and Exchange Commission (Meyer Eisenberg, Deputy General Counsel, Eric Summergrad, Deputy Solicitor, Allan A. Capute, Special Counsel to the Solicitor, on the brief), Washington, DC, as amicus curiae.

Before: JOHN M. WALKER, Jr., Chief Judge, F.I. PARKER and SOTOMAYOR, Circuit Judges.

JOHN M. WALKER, Jr., Chief Judge.

Plaintiffs-appellants appeal from a judgment of the United States District Court for the Southern District of New York (William H. Pauley, III, District Judge), dismissing plaintiffs' securities class action complaint pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiffs' claims arise out of a May 1999 initial public offering ("IPO") for shares of ILife.com, Inc. ("ILife"),¹ an internet start-up company. Finding that plaintiffs had failed to state a claim upon which relief could be granted, the district court dismissed plaintiffs' class action complaint. See DeMaria v. Andersen, 153 F.Supp.2d 300, 314 (S.D.N.Y.2001). Finding no error in the district court's judgment, we affirm.

BACKGROUND

Defendant ILife produces, syndicates, and publishes personal finance information over the internet. Plaintiffs' securities class action arises from an initial public offering ("IPO") conducted by ILife in May 1999. In their amended complaint, plaintiffs allege, inter alia, that the prospectus ILife filed with the Securities and Exchange Commission ("SEC") contained inaccurate information. As a consequence, plaintiffs assert, the securities sold in the IPO were unregistered, in violation of Sections 12(a)(1) and 5 of the Securities Act of 1933 (the "1933 Act"). In addition, plaintiffs claim that ILife's failure to disclose certain financial information rendered the registration statement false and misleading in violation of Section 11 of the 1933 Act. Plaintiffs' complaint named ILife and five of its officers/directors who signed the registration statement. Id. at 303. Plaintiffs also named the two lead underwriters of the IPO, ING Baring Furman Selz, LLC and Warburg Dillon Read, LLC (collectively, the "underwriter defendants").

In March 1999, in anticipation of the IPO, ILife electronically filed with the SEC a registration statement together with the prospectus now being challenged, via the SEC's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), as required by SEC regulation. See 17 C.F.R. §§ 232.101, 232.102.² The SEC declared the registration statement effective for an IPO of 3,500,000 shares of ILife stock at $13 per share.

In addition to filing the prospectus electronically (the "EDGAR Prospectus"), ILife distributed a printed version to the public (the "Printed Prospectus"). Due to an unexplained and seemingly inadvertent error, the EDGAR Prospectus inaccurately summarized a bar graph that appeared in the Printed Prospectus. The bar graph in the Printed Prospectus reported both on-line publishing revenue and net losses, whereas the EDGAR Prospectus contained a table that incorrectly identified ILife's on-line publishing net losses as publishing revenue and made no mention of net losses. See DeMaria, 153 F.Supp.2d at 303-04.

On May 18, 1999, three days after the registration statement became effective, ILife's stock closed at $10.50 per share, down from the $13 offering price. On May 24, eleven days after the IPO, ILife announced its first quarter results for 1999, indicating that it had suffered a $6 million loss on revenue of $2.2 million (including on-line publishing revenue of $1.369 million). Plaintiffs assert that immediately following this announcement, ILife's stock slipped to $10 per share, that the stock was down to $8.19 by May 27, and that the stock was trading at approximately $0.67 per share by August 1999, the time this appeal was briefed.

The discrepancy between the EDGAR Prospectus and the Printed Prospectus forms the basis of plaintiffs' first claim: they contend that the shares issued in the IPO were unregistered securities sold in violation of the 1933 Act because they were sold pursuant to the Printed Prospectus, not the version of the prospectus filed with the SEC. As mentioned above, plaintiffs also claim that the registration statement was materially false and misleading, in violation of Section 11 of the 1933 Act, due to ILife's failure to include financial information for the quarter ending March 31, 1999.

The district court rejected plaintiffs' claim that the securities were unregistered and concluded that the registration statement was not materially false and misleading. DeMaria, 153 F.Supp.2d at 308, 311-12. Consequently, the district court dismissed all of plaintiffs' claims under Rule 12(b)(6) for failure to state a claim upon which relief could be granted. Id. at 314. This appeal followed.

Because of the novelty and importance of the issues raised in this appeal, we requested and received briefing from the SEC as amicus curiae on a number of discrete questions after oral argument.

DISCUSSION

We review de novo the district court's dismissal of a complaint for failure to state a claim. Abramson v. Pataki, 278 F.3d 93, 99 (2d Cir.2002). In doing so, "[w]e must accept as true the allegations contained in the complaint, and all reasonable inferences must be drawn in favor of the nonmovant." Bd. of Educ. of the Pawling Cent. Sch. Dist. v. Schutz, 290 F.3d 476, 479 (2d Cir.2002).

On appeal, plaintiffs argue that the district court erred (1) in dismissing their Section 12(a)(1) claim; (2) in ruling that ILife's prospectus was not materially false and misleading; and (3) by denying plaintiffs leave to amend in order to add another defendant, Morgan Stanley, one of the underwriters of the IPO. We address each of these arguments in turn.

I. Section 12 Claim

Section 12 of the 1933 Act provides that "[a]ny person who ... (1) offers or sells a security in violation of [Section 5 of the 1933 Act] ... shall be liable ... to the person purchasing such security from him." 15 U.S.C. § 771(a) (" § 12(a)(1)"). Section 5, in turn, states that "[u]nless a registration statement is in effect as to a security, it shall be unlawful" to sell or carry such security through interstate commerce or the mails. Id. § 77e(a) ("§ 5").³

In this case, plaintiffs' § 12(a)(1) claim is based on the theory that due to the error in the EDGAR Prospectus, the shares sold in the ILife IPO were unregistered, in violation of § 5. As noted earlier, ILife's Printed Prospectus contained a bar graph that provided historical financial information, while the EDGAR Prospectus contained a table that summarized the bar graph inaccurately. Plaintiffs contend that "[t]here is no compliance with Section 5 when the prospectus which is distributed to the public is not the same prospectus which has been declared effective by the SEC." Arguing that the shares sold in the ILife IPO were sold pursuant to the Printed Prospectus, rather than the EDGAR Prospectus declared effective by the SEC, plaintiffs claim a violation of § 5 and seek rescission damages under § 12(a)(1).

We reject plaintiffs' argument because it rests on an erroneous interpretation of the regulations pertaining to SEC filings. Title 17 C.F.R. § 232.304 ("Rule 304") provides the rules and regulations for preparing EDGAR filings that include graphic, image or audio material as follows:

(a) If a filer includes graphic, image or audio material in a document delivered to investors and others that cannot be reproduced in an electronic filing, the electronically filed version of that document shall include a fair and accurate narrative description, tabular representation or transcript of the omitted material....

(b)(1) The graphic, image and audio material in the version of a document delivered to investors and others shall be deemed part of the electronic filing and subject to the liability and anti-fraud provisions of the federal securities laws.

(2) Narrative descriptions, tabular representations or transcripts of graphic, image and audio material included in an electronic filing or appendix thereto also shall be deemed part of the filing. However, to the extent such descriptions, representations or transcripts represent a good faith effort to fairly and accurately describe omitted graphic, image or audio material, they shall not be subject to the liability and anti-fraud provisions of the federal securities laws.

17 C.F.R. § 232.304.

Applying Rule 304, the district court rejected plaintiffs' argument that the EDGAR Prospectus and Printed Prospectus are materially different on the ground that the graphic material included in the Printed Prospectus is "deemed part of the Registration Statement filed with, and declared effective by, the SEC." DeMaria, 153...