In re Flag Telecom Holdings, Ltd. Securities Lit.

Decision Date12 January 2005
Docket NumberNo. 02 CIV. 3400(WCC).,02 CIV. 3400(WCC).
Citation352 F.Supp.2d 429
PartiesIn re FLAG TELECOM HOLDINGS, LTD. SECURITIES LITIGATION This Document Relates to: All Actions
CourtU.S. District Court — Southern District of New York

Milberg Weiss Bershad & Schulman, LLP, Lead Counsel for Plaintiff and the Class, Brad N. Friedman, Esq., Rachel S. Fleishman, Esq., Elizabeth A. Berney, Esq., Alisha C. Smith, Esq., Of Counsel, Kirkland & Ellis LLP, New York, NY, Matthew O. Solum, Esq., Of Counsel, Kirkland & Ellis LLP, Washington, D.C., Thomas D. Yannucci, P.C., James P. Gillespie, Esq., Craig S. Primis, Esq., Matthew E. Papez, Esq., John C. O'Quinn, Esq., Of Counsel, for Defendant Verizon Communications Inc.

Clifford Chance U.S. LLP, Attorneys for Defendant Citigroup Global Markets, Inc., New York, NY, James N. Benedict, Esq., Mark A. Kirsch, Esq., Robert G. Houck, Esq., Andrea Goldbarg, Esq., Michael D. Torpey, Esq., Stephen M. Knaster, Esq., M. Todd Scott, Esq., Of Counsel.

Shearman & Sterling, Attorneys for Defendant Flag Telecom Holdings, Ltd. and Individual Defendants Andres Bande, Larry Bautista, Andrew Evans, Lim Lek Suan, Edward McCormack, Edward McQuaid, Daniel Petri and Philip Seskin, New York, NY, Jerome S. Fortinsky, Esq., Tammy P. Bieber, Esq., Michael T. Rasnick, Esq., Panagiotis Katsambas, Esq., Of Counsel.

OPINION AND ORDER

WILLIAM C. CONNER, Senior District Judge.

Plaintiff Peter Loftin brings this proposed class action against defendants Flag Telecom Holding Group, Ltd. ("Flag"), Salomon Smith Barney, Inc. n/k/a Citigroup Global Markets, Inc. ("Citigroup" or the "underwriter"), Verizon Communications, Inc. ("Verizon") and nine individual defendants: Andres Bande, Edward McCormack, Andrew Evans, Larry Bautista, Stuart Rubin, Daniel Petri, Edward McQuaid, Philip Seskin and Dr. Lim Lek Suan (collectively referred to as the "individual defendants").1 Plaintiff purports to bring suit on behalf of those who purchased Flag's stock from February 16, 2000 through February 13, 2002 (the "class period"). On October 18, 2002, this Court consolidated several similar suits raising claims under the federal securities laws against defendants, named Loftin lead plaintiff and appointed Milberg Weiss Bershad Hynes & Lerach n/k/a Miberg Weiss Bershad & Schulman lead counsel. Plaintiff subsequently filed a Second Corrected Consolidated Amended Complaint ("2CCAC") and the individual defendants, Citigroup and Verizon moved to dismiss the 2CCAC.2 We dismissed the 2CCAC but granted plaintiff leave to replead his claims against all defendants named in the 2CCAC. In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F.Supp.2d 249, 274 (S.D.N.Y.2004) (Conner, J.) (hereinafter "Flag I").

In the Third Consolidated Amended Complaint ("3CAC") plaintiff alleges that Flag, Citigroup and the individual defendants are liable under § 11 and § 12(a)(2) of the Securities Act of 1933 (the "Securities Act"). Plaintiff also asserts claims against Verizon and the individual defendants under § 15 of the Securities Act. Additionally, plaintiff alleges that Flag, Bande, McCormack, Bautista and Evans violated § 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and that Verizon, Bande, McCormack, Bautista and Evans are liable under § 20(a) of the Exchange Act. The Flag defendants, Verizon and Citigroup move to dismiss pursuant to Rules 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act ("PSLRA") for failure to state a claim. For the reasons stated herein, we grant the motions of Flag, Evans and Verizon to dismiss the claims raised in the 3CAC against them. Defendant Bautista's motion to dismiss is granted in part and denied in part. Finally, the motions of defendants Bande, McCormack, Rubin, Petri, McQuaid, Seskin, Suan, and Citigroup to dismiss are denied in their entirety.3

BACKGROUND
I. Flag's Initial Public Offering (the "IPO")

Flag offered its shares to the general public in an IPO held on February 16, 2000. (3CAC ¶ 90.) The company's Prospectus (the "Prospectus") was incorporated into the Registration Statement (the "Registration Statement") filed in connection with the IPO.4 Bande, Flag's Chief Executive Officer ("CEO"), McCormack, Flag's Chief Financial Officer ("CFO"), and Rubin and Suan, both members of Flag's Board of Directors, signed the Registration Statement. (Registration Statement at II-7.) In addition, McQuaid and Seskin were also members of Flag's Board of Directors at the time of the IPO and signed the Registration Statement. (3CAC ¶¶ 59, 60.)

In the Prospectus, Flag stated that its goal was to become a leading "global carriers' carrier" and that it intended to achieve this goal through the expansion of its fiberoptic cable network. (3CAC ¶ 2; Registration Statement at 2.) At the time of the IPO, Flag's network consisted of: (1) the Flag Europe-Asia cable system ("FEA system") which linked to "communications networks in the United Kingdom, Spain, Italy, Egypt, Jordan, Saudi Arabia, the United Arab Emirates, India, Malaysia, Thailand, Hong Kong, China, Korea and Japan," (Registration Statement at 46); and (2) terrestrial connections linking a host of major European metropolitan areas. (Id. at 37.) Flag sold access to its network on a wholesale basis to international carriers, telecommunications companies and internet service providers. (3CAC ¶ 2.) Customers could purchase broadband telecommunications capacity on Flag's network pursuant to a Right of Use contract ("ROU") or an Indefeasible Right of Use agreement ("IRU"). (Registration Statement at 43.) Capacity on Flag's network was "portable." Thus, customers that acquired capacity on one segment of Flag's network could later obtain capacity on a different segment in response their changing needs. (Registration Statement at 43.)

Flag's Prospectus revealed that it was in the process of expanding its global network through the construction of the Flag-Atlantic 1 cable system (the "FA-1 system"). (3CAC ¶ 4.) The FA-1 system was a joint venture between Flag and GTS Transatlantic Holdings Ltd. ("GTS") to build two digital fiberoptic cables connecting Paris and London to New York. (Id.; Registration Statement at 37.) The two cables would create a "self-healing ring"; if one cable failed, Flag could re-route the traffic on that cable onto the other cable in order to avoid service interruptions. (Registration Statement at 37.) The Prospectus also indicated that Flag might expand its network further by constructing or acquiring digital fiberoptic cables in other areas of the world or by purchasing capacity from competitors where "rapid access to a market [was] required or where it [was] not economically feasible to" construct or acquire new systems. (Id. at 2.)

A. The Allegedly Misleading Statements or Omissions in the Prospectus Concerning Demand

Plaintiff alleges that Flag falsely stated in the Prospectus that market demand for broadband telecommunications capacity was strong at the time of the IPO and that demand was growing. Plaintiff points to the following statement in the Prospectus:

We developed and are enhancing the FLAG Telecom network and our product and service offerings to participate in the following important growth and strategic shifts in the international telecommunications markets: ...

RAPID GROWTH OF TELECOMMUNICATIONS TRAFFIC. According to an August 1999 research report published by Ovum Ltd., total world telecommunications traffic demand is expected to grow more than 50-fold between 1999 and 2005, with Internet and data traffic accounting for 98% of total traffic by 2005....

IMPACT OF GLOBAL DEREGULATION. The continued deregulation of the global telecommunications industry has resulted in a significant increase in the number of competitors, including traditional carriers, wireless operators, Internet service providers and new local exchange service providers. This change in the global competitive landscape is generating significant demand for broadband telecommunications capacity as carriers seek to secure sufficient capacity for their expansion plans.... Global deregulation has also resulted in increased demand for city-to-city services, as new entrants to the telecommunication industry seek to take advantage of the economic benefits of controlling facilities on an end-to-end basis.

(Registration Statement at 39.) Plaintiff contends that these statements were false when issued because as of February 11, 2000, the effective date of the Registration Statement, FLAG possessed information demonstrating that the supply of broadband telecommunications capacity had substantially outstripped the market demand for that capacity. (3CAC ¶ 81.)

B. Cautionary Language In the Prospectus

In a section of the Prospectus entitled "RISKS RELATED TO OUR INDUSTRY," Flag disclosed the following:

BECAUSE OUR PRODUCT OFFERINGS ARE EXPANDING AND THE TELECOMMUNICATIONS INDUSTRY IS CHANGING SIGNIFICANTLY, WE FACE COMPETITION AND PRICING PRESSURE FROM A WIDE VARIETY OF SOURCES.

Along the FLAG Europe-Asia cable route and the FLAG Atlantic-1 cable route, we face competition and pricing pressures from existing cables, planned cables, and satellite providers, including existing geosynchronous satellites and low-earth orbit systems now under construction....

Many of our competitors have, and some potential competitors are likely to enjoy, substantial competitive advantages, including the following:

— greater name recognition;

— greater financial, technical, marketing and other resources;

— larger installed bases of customers; and

— well established relationships with current and potential customers.

Significant new and potentially larger competitors could also enter our market as a result of regulatory changes or the establishment of cooperative relationships. In addition, recent technological advances may greatly expand the capacity of...

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