In re Independent Energy Holdings Plc Securities

• Decision Date: 26 July 2001
• Docket Number: No. 00 CIV.6689 (SAS).,00 CIV.6689 (SAS).
• Citation: 154 F.Supp.2d 741
• Parties: In re: INDEPENDENT ENERGY HOLDINGS PLC SECURITIES LITIGATION This Document Relates To: All Cases
• Court: U.S. District Court — Southern District of New York

154 F.Supp.2d 741

In re: INDEPENDENT ENERGY HOLDINGS PLC SECURITIES LITIGATION This Document Relates To: All Cases

No. 00 CIV.6689 (SAS).

United States District Court, S.D. New York.

July 26, 2001.

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Jeffrey A. Klafter, Gerald H. Silk, Victoria O. Wilheim, Bernstein Litowitz Berger & Grossman LLP, New York, NY, for Lead Plaintiffs.

Lawrence Portnoy, Helen Harris, Davis Polk & Wardwell, New York, NY, for Donaldson, Lufkin & Jenrette Securities Corporation, Prudential Securities Incorporated, Johnson Rice & Company L.L.C., Donaldson, Lufkin & Jenrette International, and Donaldson, Lufkin & Jenrette, Inc.

Steven R. Schindler, Jonathan L. Hochman, Jeremy M. Weintraub, Schindler Cohen & Hochman LLP, New York, NY, for Jerry W. Jarrell, Robert E. Jones, Burt H. Keenan, Herbert L. Oakes, Ian Stewart, and John L. Sulley.

OPINION AND ORDER

SCHEINDLIN, District Judge.

This is a securities class action¹ brought on behalf of all persons, other than defendants, who purchased or otherwise acquired American Depository Shares ("ADSs") and Ordinary Shares of Independent Energy Holdings PLC ("Independent Energy" or "Company") in a March 28, 2000 secondary offering ("Secondary Offering") of 4.07 million ADSs and on the open market during the class period which extends from February 14, 2000 until September 8, 2000 ("Class Period"). Plaintiffs have sued the Company, the underwriters of its Secondary Offering ("Underwriter Defendants"), two companies related to one of the Underwriter Defendants (the "Related Defendants"), and several officers and directors of the Company ("Individual Defendants"), asserting claims arising under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 77l(a)(2), and 77o, and sections 10(b)(5) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Now pending are two separate motions to dismiss, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, filed by the Individual Defendants, and the Underwriter and Related Defendants.²

This case illustrates that motions to dismiss in securities fraud cases have become all too common where the procedural posture of the case renders most of the defendants' arguments futile. Many motions to dismiss ask the court to engage in judgment calls which are better made by the trier of fact. Cf. Gallagher v. Delaney, 139 F.3d 338, 342 (2d Cir.1998) (stating that the determination of whether "borderline situations" should be characterized as sexual harassment and retaliation is best left to a jury, not the court). While Congress has acted to discourage the filing of strike suits, nothing Congress has done suggests that the general principles of a motion to dismiss are no longer applicable in securities fraud cases. In affirming dismissals in securities fraud cases, the decisions of our Court of Appeals must not be mistaken for license to draw inferences which a district court is not permitted to draw on a motion to dismiss. Rather, in deciding a motion to dismiss, a court must be mindful that all reasonable inferences are to be drawn in the plaintiffs' favor. This general principle of law makes certain questions—such as whether alleged misstatements and omissions in a prospectus were material to a reasonable investor—difficult to resolve as a matter of law. See Klein v. PDG Remediation, Inc., 937 F.Supp. 323, 327 (S.D.N.Y.1996) ("[I]t is unlikely, as a matter of law, that a cause of action can be dismissed which requires a determination of materiality.").

I. LEGAL STANDARD

Dismissal of a complaint for failure to state a claim pursuant to Rule 12(b)(6) is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Harris v. City of New York, 186 F.3d 243, 247 (2d Cir.1999); see also Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998) ("The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.") (quotation marks and citation omitted). Nevertheless, "[a] complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir.1996) (quotation marks and citation omitted).

To properly rule on a 12(b)(6) motion, the Court must accept as true all material facts alleged in the complaint and draw all reasonable inferences therefrom in the nonmovant's favor. See Harris, 186 F.3d at 247. The Court must limit itself to facts stated in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference. See Dangler v. New York City Off Track Betting Corp., 193 F.3d 130, 138 (2d Cir.1999). However, the Court may also consider documents, while not explicitly incorporated into the complaint, that "plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 44 (2d Cir. 1991)).

II. BACKGROUND

A. The Parties

Independent Energy is the holding company for Independent Energy UK, its wholly owned subsidiary.³ See Second Consolidated Amended Class Action Complaint ("SAC") ¶ 22. Independent Energy was an electric company that had the right to supply electricity in the United Kingdom ("U.K.") pursuant to a license granted it under the Electricity Act of 1989. See id. ¶ 23.

Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities"), one of the Underwriter Defendants, is a national investment and merchant bank. See id. ¶ 35. DLJ Securities sold and distributed to the investing public Independent Energy ADSs pursuant to the Secondary Offering. See id.

DLJ Securities is a wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ Inc."), one of the Related Defendants. See id. DLJ Inc. is an integrated investment and merchant bank serving clients both in the United States and internationally. See id. ¶ 34.

Another of DLJ Inc.'s wholly owned subsidiaries is Donaldson, Lufkin & Jenrette International ("DLJ International"), also a Related Defendant in this action. DLJ International frequently served as a financial advisor to the Company. See id. ¶ 36.

The other two Underwriter Defendants are Prudential Securities Incorporated ("Prudential") and Johnson Rice & Company L.L.C., Inc. ("Johnson Rice"). Prudential is a fully-diversified securities firm which provides, among other things, underwriting services. See id. ¶ 37. Johnson Rice is a securities boutique specializing in energy and oil service companies. See id. ¶ 38. Both Prudential and Johnson sold and distributed to the investing public Independent Energy ADSs in connection with the Secondary Offering. See id.

The Individual Defendants are John L. Sulley, Burt H. Keenan, Herbert L. Oakes, Ian Stewart, Jerry W. Jarrell, Robert E. Jones, and David O. May.⁴ Each Individual Defendant was a Director of the Company's Board of Directors ("Board") and each signed the Company's March 28, 2000 registration statement and prospectus ("Prospectus"). See id. ¶¶ 26-32. In addition, Sulley was the Company's Chief Executive Officer ("CEO"); Jones was its Operations Executive; Stewart was Independent Energy's Finance Executive; and Oakes was a Non-Executive Chairman of the Board. See id. ¶¶ 26, 28-30. Most of the Individual Defendants also owned Ordinary Shares of Independent Energy. Sulley owned 420,000 Ordinary Shares, approximately 1.1% of the Company's Ordinary Shares issued and outstanding; Keenan, a founder of the Company, owned 1,164,125 Ordinary Shares (approximately 3.1%); Jones owned over 354,200 Ordinary Shares; Jarrell owned 235,100 Ordinary Shares; and May owned 130,000 Ordinary Shares. See id. ¶¶ 26-28, 31, 32.

B. The Company's Background

Founded in 1996, Independent Energy was formed to capitalize on the market opportunities created by the deregulation of the U.K. energy markets.⁵ See id. ¶ 77. The Company quickly grew to become the largest independent supplier of electricity in the U.K. See id. It operated primarily as a marketer of energy, purchasing electricity from the "Electricity Pool", which serves as a market place for buying and selling electricity in England and Wales, and then reselling electricity to its own customers. See id. ¶¶ 54, 79. In order to participate in the Electricity Pool as a purchaser of electricity, Independent Energy was required to post a letter of credit good for twenty-eight days of electricity trading. See id. ¶¶ 54, 55.

1. The Company's Billing Problems

In 1999, Independent Energy entered the market for small business and residential customers, generally known as the sub-100 kilowatt ("kW") market. See Prospectus at 6, 7.⁶ In October 1999, the Company began experiencing problems billing their customers in the sub-100 kW market. See SAC ¶ 92. The Company and Vertex Data Science Limited ("Vertex"), a third party service provider to which the Company had outsourced a large part of its billing and customer service operations, could not process and produce timely and accurate bills to the Company's customers. See id. ¶ 3. The seriousness of the Company's billing problems and the corresponding growing number of customers lodging complaints against the Company drew the attention of the Office of Gas & Electricity Markets ("OFGEM"), U.K.'s energy regulator. See id. ¶¶ 4, 97. From December 1999 through March 2000, OFGEM held weekly meetings with Sulley and other Company officials expressing serious concerns over the Company's billing and customer service...