In re Credit Suisse-Aol Securities Litigation

• Decision Date: 07 December 2006
• Docket Number: Civ. Action No. 02-12146-NG.
• Citation: 465 F.Supp.2d 34
• Parties: In re CREDIT SUISSE-AOL SECURITIES LITIGATION.
• Court: U.S. District Court — District of Massachusetts

465 F.Supp.2d 34

In re CREDIT SUISSE-AOL SECURITIES LITIGATION.

Civ. Action No. 02-12146-NG.

United States District Court, D. Massachusetts.

December 7, 2006.

COPYRIGHT MATERIAL OMITTED

Daniel S. Sommers, Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, Washington, DC, Donald R. Hall, Frederic S. Fox, Joel B. Strauss, Kaplan Fox & Kilsheimer LLP, Gregory Michael Egleston, Bernstein, Liebhard & Lifshitz, LLP, Menachem E. Lifshitz, New York, NY, Thomas G. Shapiro, Todd S. Heyman, Edward F. Haber, Theodore M. Hess-Mahan, Michelle H. Blauner, Shapiro Haber & Urmy LLP, Boston, MA, for Plaintiffs.

Avi S. Gesser, Lawrence Portnoy, Davis Polk & Wardwell, Michael W. Mitchell, Skadden Arps, Slate, Meagher & Flom LLP, Jeff E. Butler, Warren L. Feldman, Sean Murphy, Dean Kristy, Johanna Calabria, Clifford, Chance U.S. LLP, New York, NY, Gerald F. Rath, Robert A. Buhlman, Siobhan E. Mee, Jason D. Frank, Bingham McCutchen LLP, Jeffrey B. Rudman, Stephen A. Jonas, Jonathan A. Shapiro, Jared C. Miller, Wilmer Cutler Pickering Hale and Dorr LLP, Eben P. Colby, Michael M. Millett, Skadden, Arps, Slate, Meagher & Flom LLP, Boston, MA, Barbara A. Winters, Kenneth G. Hausman, Mark A. Sheft, Howard, Rice, Nemerovski, Canady, Falk Rabkin, San Francisco, CA, for Defendants.

Marc I. Gross, Stanley M. Grossman, Pomerantz, Haudek, Block Grossman & Gross, New York City, for interested party.

MEMORANDUM AND ORDER RE: DEFENDANTS' MOTIONS TO DISMISS

GERTNER, District Judge.

(This Memorandum replaces the one issued on November 30, 2006, in that substantive errors in the text have been corrected that alter the effect of the Order (see p. 59). Defendant Quattrone's motion to dismiss is DENIED, where it had been erroneously stated as GRANTED. There is no change as to the disposition of Defendant Rogers's motion to dismiss.)

I. INTRODUCTION

This is a consolidated securities class action in which the court-appointed lead plaintiff, the Bricklayers and Trowel Trades International Pension Fund ("Plaintiff), asserts claims on behalf of the class of individuals who purchased common stock of AOL Time Warner, Inc. ("AOL") from January 12, 2001, through July 24, 2002 (the "Class Period").

The defendants include Credit Suisse First Boston (USA), Inc. ("CSFB-USA"), an integrated investment bank; Credit Suisse First Boston, LLC ("CSFB"), a wholly-owned direct subsidiary of CSFBUSA; and four individuals who were employed by CSFB during all or part of the Class Period (collectively, "Defendants"). The individual defendants include James Kiggen and Laura Martin, former CSFB research analysts who had been responsible for investment research coverage of AOL during the Class Period. Kiggen and Martin reported to defendants Frank Quattrone, the former Senior Managing Director and Global Head of CSFB's Technology Group, and Elliot Rogers, who was the Managing Director and Global Director of Technology Research at CSFB during the Class Period.

The essence of the Plaintiffs claims is that during the Class Period, the Defendants issued thirty-five research reports in which they promoted AOL and encouraged investors to purchase its stock without revealing their knowledge of adverse information about AOL or their true beliefs about the company's precarious financial condition, beliefs and information which they intentionally withheld from the investing public. In fact, Plaintiff asserts that instead of providing unbiased, independent, research on AOL to investors, as they were supposed to do, the Defendants were motivated to issue reports containing false and misleading information by their eagerness to win AOL's lucrative investment banking work.

As a result of the dishonest and misleading analyst reports filed by CSFB, AOL's stock price was inflated at the beginning of the Class Period and then proceeded to lose value, as negative financial information finally reached the market from other sources and undermined CSFB's projections. At the end of the Class Period, revelations in the Washington Post about alleged accounting gimmickry and the disclosure of an SEC investigation of these accounting practices resulted in a second decline in the value of AOL's stock.

Defendants initially moved to dismiss Plaintiffs First Amended Consolidated Complaint in February 2004. The motions to dismiss were heard before Magistrate Judge Dein on July 14, 2004, who issued a Report and Recommendation recommending dismissal of the complaint on March 8, 2005.¹ Plaintiff objected to the R & R. A hearing was held to consider the objections. After the hearing, I endorsed the R & R and dismissed the complaint, but dismissal was deferred until Plaintiff had time to file a Second Amended Consolidated Complaint, which Plaintiff did on December 16, 2005.

The Second Amended Consolidated Class Action Complaint for Violations of the Federal Securities Laws ("Complaint") (docket entry # 92) contains two counts. In Count I, Plaintiff asserts that Defendants CSFB, Kiggen, and Martin made material misstatements and omissions in violation of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5(b) promulgated thereunder, 17 C.F.R § 240.10b-5. In Count II, Plaintiff asserts that CSFB, CSFB-USA, Quattrone and Rogers acted as "control persons" in violation of section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

The matter is presently before me on the Defendants' motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (Docket Nos. 94, 98, and 100). Defendants contend that even assuming that everything the Plaintiff alleges is true, and that the Defendants made actionable false and misleading statements, the Complaint should still be dismissed in its entirety because the Plaintiff has failed to allege that the Defendants' misconduct caused the Plaintiffs losses, referred to as "loss causation." Defendants also argue that Plaintiff has failed to plead reliance on the transaction, or "transaction causation," and that, in any event, Plaintiffs allegations regarding layoffs and an investigation at AOL, even if false, were not material. Defendants underscore the fact that this is an action against an analyst, not the company itself, and suggests that Plaintiffs claims should be viewed through a different lens than other 10b-5 actions.

The Defendants Quattrone and Rogers have also moved to dismiss Count II of the Complaint, which alleges control person liability.

II. STANDARD OF REVIEW OF REORD

A. Motion to Dismiss Standard of Review

"In ruling on a motion to dismiss, a court must `accept all well-pleaded facts of the complaint as true and draw all reasonable inferences in favor of the plaintiff.'" Moss v. Camp Pemigewassett, 312 F.3d 503, 506 (1st Cir.2002) (quoting Aybar v. Crispin-Reyes, 118 F.3d 10, 13 (1st Cir. 1997)). In doing so, "a court may properly consider the relevant entirety of a document integral to or explicitly relied upon in the complaint, even though not attached to the complaint, without converting the motion into one for summary judgment." Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.1996) (superseded by Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(1)-(2) (1997)). See also Watterson v. Page, 987 F.2d 1, 3-4 (1st Cir.1993) (court may consider on motion to dismiss "public record[s]," "document[s] central to plaintiffs' claim," and "document[s] sufficiently referred to in the complaint."). The court may grant dismissal "only if `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Roeder v. Alpha Indus., Inc., 814 F.2d 22, 25 (1st Cir.1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). However, the Court "need not credit a complaint's bald assertions or legal conclusions." Glassman v. Computervision Corp., 90 F.3d 617, 628 (1st Cir.1996) (internal quotations and citation omitted).

B. PSLRA Heightened Pleading Requirements

In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, which marked an effort to curb abuse in private securities lawsuits. See Greebel v. FTP Software, Inc., 194 F.3d 185, 191 (1st Cir. 1999). The PSLRA requires that a complaint claiming securities fraud based on misstatements or omissions set forth "each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Additionally, where a plaintiff may recover money damages "only on proof that a defendant acted with a particular state of mind," the PSLRA requires the complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). "The `required state of mind' for liability under section 10(b) [of the Exchange Act] and Rule 10b-5 is referred to as `scienter,' which the Supreme Court has defined as `a mental state embracing intent to deceive, manipulate, or defraud.'" Greebel, 194 F.3d at 194 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668)(1976). Therefore, under the PSLRA, the complaint must "state with particularity facts that give rise to a `strong inference' of scienter, rather than merely a reasonable inference." In re Cabletron Sys., Inc., 311 F.3d 11, 28 (1st Cir.2002).²

Although the pleading requirements in private securities fraud cases are strict, they obviously do not affect the standard of review for a motion to dismiss. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir.2002). Accordingly, the following facts are viewed in the light most favorable to the Plaintiff.

III. STATEMENT OF FACTS

A. CSFB's Coverage of AOL

On January 11, 2001, the merger of ...