In re Boston Technology Inc. Securities Litigation, 96-12567-MEL.
| Decision Date | 05 February 1998 |
| Docket Number | No. 96-12567-MEL.,96-12567-MEL. |
| Citation | 8 F.Supp.2d 43 |
| Parties | In re BOSTON TECHNOLOGY, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — District of Massachusetts |
Glen DeValerio, Jeffrey C Block, Berman, DeValerio & Pease, Boston, MA, Steven Schulman, Deborah Clark-Weintraub, Milberg, Weiss, Bershad Specthrie & Lerach, New York City, M. Richard Komins, Barrack, Rodos & Bacine, Philadelphia, PA, Richard H. Weiss, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Plaintiffs.
William H. Paine, Jeffrey B. Rudman, Michael G. Bongiorno, Hale & Dorr, Boston, MA, Jay A. Dubow, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, PA, for Defendants.
This is a securities fraud action against Boston Technology, Inc. ("BT") and six of its officers and directors.1 The Amended Consolidated Complaint was filed on behalf of all persons who purchased BT stock during the period from May 17, 1995, through November 15, 1995 (the proposed "class period"). The conduct at issue is said to have violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and the corresponding Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs allege that both before and during the proposed class period, defendants either made or were otherwise responsible for a number of statements, each of which artificially inflated the price of BT stock. The "fraud" is said to stem from defendants' not having disclosed publicly various facts which plaintiffs say were known to defendants and rendered the actual statements false and misleading.2 Defendants move, pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss the Complaint for failure to state a claim upon which relief can be granted and for failure to plead with the particularity required by Fed.R.Civ.P. 9(b). The Motion to Dismiss is granted in full, on both 9(b) and 12(b)(6) grounds.
BT is a Massachusetts-based corporation in the business of developing, manufacturing, marketing and providing support services for a comprehensive family of voice and information processing systems. The company's customers are primarily telecommunications service providers, including telephone companies and wireless service providers. The market served is domestic and international.
Plaintiffs allege that before and during the class period, defendants disseminated — either directly or through industry analysts — a stream of positive statements concerning new products, contracts, and relationships with customers. The Complaint characterizes defendants' having done so as culpably "represent[ing] that [BT] was well-positioned to compete in the voice processing industry and that it would continue to experience substantial sales of its products and profit growth."
The 20 statements raised by plaintiffs are said to have been "false3 and misleading" by virtue of defendants' failure to inform the public of certain facts. Plaintiffs claim that defendants thereby bore a duty to disclose those facts.4 While some additional, more particularized allegations of omission appear throughout the Complaint, plaintiffs focus their case on nondisclosure of the following four facts: (1) BT was losing its most important customer (Bell Atlantic); (2) BT's new product line had technological problems which would prevent its commercial acceptance; (3) as BT's foreign sales increased as a percentage of total sales, the factors characteristic of international business, such as a longer sales cycle, extended payment terms, and the installation of smaller systems with lower margins, would have a material negative impact on future revenues and earnings; and (4) there existed a general weakness in demand for BT's products.5
According to plaintiffs, the "truth ... began to emerge on November 15, 1995," when the company announced that it "would report a $0.14 per share loss in the third fiscal quarter ...", and "was experiencing a significant shortfall due to an inability to close `on certain key orders' and long-term weakness of demand for its products from its most important customers." The Complaint further alleges that "[a]s a result of [these] disclosures, the price of [BT] stock plunged and eventually closed down $2.8125 per share (an intra-day decline of over 20%), closing at $11.0625 per share on November 15 on extremely high volume of over 5 million shares."6
Finally, the Complaint alleges that the individual defendants concealed the omitted information for personal financial gain. It alleges in particular that during the class period, these defendants cumulatively sold 318,000 shares of BT stock for over $5 million.
Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful:
To use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 provides in relevant part:
It shall be unlawful for any person, directly or indirectly, ... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading....
17 C.F.R. § 240.10b-5.
To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege that: (1) in connection with the purchase or sale of securities, (2) the defendant made a false statement or omitted a material fact, (3) with the requisite scienter, and that (4) plaintiff relied on the statement or omission, (5) with resultant injury. Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216-17 (1st Cir.1996).
A misrepresentation or omission is material and thereby actionable only if a reasonable investor would have viewed it as "having significantly altered the total mix of information made available." Basic, Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Gross, 93 F.3d at 992. An omission is material if "a reasonable investor might have considered [it] important in the making of [the investment] decision." Roeder v. Alpha Indus., Inc., 814 F.2d 22, 25 (1st Cir.1987) (quotation omitted). As to scienter, a plaintiff must plead "a mental state embracing [an] intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).
The 10b-5 plaintiff must also meet the requirements of Fed.R.Civ.P. 9(b), which provides that "[i]n all averments of fraud ..., the circumstances constituting the fraud ... shall be stated with particularity." The particularity requirement is regarded by the Court of Appeals for this Circuit as being of fundamental importance. Noting that it was "especially strict in demanding adherence to Rule 9(b) in the securities context,"7 the Court in Gross reiterated that:
[G]eneral averments of defendants' knowledge of material falsity will not suffice. Consistent with [the Rule], the complaint must set forth specific facts that make it reasonable to believe that the defendant knew that a statement was materially false or misleading. The rule requires that the particular times, dates, places, or other details of the alleged fraudulent involvement of the actors be alleged.
93 F.3d at 991 (quotation omitted) (emphasis supplied).
A 10b-5 plaintiff cannot satisfy the requirements of Rule 9(b) merely by pleading "fraud by hindsight." Id. A general averment that defendants made a statement knowing at the time what later "turned out badly" does not suffice. Id. In Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 367 (1st Cir.1994), the Court reiterated the "well established" rule that there is no liability where a plaintiff's claim rests on the assumption that defendants "must have known of the severity of their problems earlier because conditions became so bad later on." Notably, the pleading requirement is as strictly construed even when "relat[ing] to matters peculiarly within the defendant's knowledge." Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991). Accordingly, the First Circuit looks cautiously upon plaintiffs alleging fraud purely on the basis of information and belief. When plaintiffs do so, either explicitly or implicitly, "the complaint must set forth the source of the information and the reasons for the belief." Id. In the end, to make a sufficient claim, a 10b-5 plaintiff must allege facts that give rise to a "strong" inference of fraudulent intent. Suna v. Bailey Corp., 107 F.3d 64, 68 (1st Cir.1997).
The mere failure of a corporation to disclose all non-public material information in its possession is not actionable fraud, as Rule 10b-5 does not create an affirmative duty to disclose. Gross, 93 F.3d at 992. For purposes of the instant case,8 a duty to disclose arises only when the issuer has made "a statement of material fact that is either false, inaccurate, incomplete, or misleading in light of the undisclosed information." Id. A statement is not rendered misleading by omission merely because the undisclosed fact bears some relation to the subject matter of the statement. For example, it is the law of this Circuit that:
[The duty rule] does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be so incomplete as to mislead.
Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir.1990) (en banc) (quotation...
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