In re Initial Public Offering Securities Lit.

• Decision Date: 19 February 2003
• Docket Number: No. 21 MC 92(SAS).,21 MC 92(SAS).
• Citation: 241 F.Supp.2d 281
• Parties: In re: INITIAL PUBLIC OFFERING SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of New York

241 F.Supp.2d 281

In re: INITIAL PUBLIC OFFERING SECURITIES LITIGATION

No. 21 MC 92(SAS).

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

February 19, 2003.

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Melvyn I. Weiss, Robert Wallner, Ariana J. Tadler, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Stanley Bernstein, Robert Berg, Bernstein Liebhard & Lifshitz, LLP, New York, NY, for Plaintiffs.

Gandolfo V. DiBlasi, Penny Shane, Sullivan & Cromwell, New York, NY, for Defendants (Underwriters).

Jack C. Auspitz, Matthew M. D'Amore, Morrison & Foerster LLP, New York, NY, for Defendants (Issuers).

Nina F. Locker, Wilson Sonsini Goodrich & Rosati PC, Palo Alto, CA, for Certain Issuer Defendants.

OPINION AND ORDER

SCHEINDLIN, District Judge.

This Document Relates To: All Cases

                 TABLE OF CONTENTS†
                 INTRODUCTORY MATERIAL
                I. INTRODUCTION.......................................293
                II. SYNOPSIS OF HOLDINGS..............................295
                III. SECURITIES LAW, HOT ISSUES MARK AND TIE-IN
                 AGREEMENTS.....................................298
                

                A. General Background on the Securities Act and Exchange Act............298
                B. Hot Issues Markets, Market Manipulation and Tie-in Agreements .......299
                 1. Hot Issues Market of 1959-1962 ....................................300
                 2. Hot Issues Market of 1967-1971 ....................................302
                 3. Hot Issues Market of 1979-1983.....................................305
                 4. Hot Issues Market of 1998-2000.....................................306
                IV. THE COMPLAINTS .....................................................308
                A. Individual Complaints................................................308
                 1. Factual Allegations and Allegation of Market Manipulation.........308
                 2. The Registration Statement's Misleading Statements and
                 Omissions ......................................................310
                 3. Claims ...........................................................314
                B. Part I of Master Allegations.........................................314
                 1. Tie-in Allegations and Undisclosed Compensation...................314
                 2. Statistical Analysis..............................................318
                 3. Matrix Illustrating Various Relationships Among Underwriters......319
                 4. Analyst Allegations...............................................319
                 5. Motivations of the Underwriters, Issuers and Individual
                 Defendants.....................................................320
                C. Part II and Part III of the Master Allegations.......................320
                GOVERNING LEGAL PRINCIPLES
                V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE..................321
                 A. Rule 8(a).........................................................322
                 B. Rule 9(b).........................................................324
                 1. Why Rule 9(b) Requires Particularity............................325
                 2. How Particularity Deters Claims of Fraud .......................326
                 3. Rule 9(b) Must Be Read in Harmony with Rule 8...................326
                VI. PLEADING SECURITIES FRAUD...........................................328
                 A. Pleading Securities Fraud Before 1995............................329
                 B. Pleading Securities Fraud After the PSLRA........................329
                 1. Paragraph (b)(1)...............................................329
                 2. Paragraph (b)(2)...............................................330
                VII. PRELIMINARY ISSUES.................................................331
                 A. Standard of Review..............................................331
                 1. The Court Must Take the Pleadings as True and Draw All
                 Inferences In Plaintiffs'..................................331
                 2. Both Defendants and the Court Must Accept the Complaints As
                 Pled........................................................332
                 3. Clarity of Pleadings Is Not a Factor in Dismissal ............333
                 B. The Pleading Standards for Some of the Claims Are Governed by
                 the PSLRA; Others are Governed by Both the PSLRA and the
                 Federal Rules...................................................333
                 1. The Differences Between the Scope of the PSLRA's Pleading
                 Requirements and Rule 9(b)...................................333
                 2. The Federal Rules Still Apply to Certain Types of Securities
                 Fraud Claim..................................................334
                 3. Summary........................................................335
                 APPLICATION OF LEGAL PRINCIPLES
                VIII. SECTION 11 CLAIMS..................................................336
                 A. The Section 11 Claims Have Been Properly Pled...................336
                 1. The PSLRA's Pleading Standards Do Not Apply to Claims
                 Brought Under the Securities Act............................337
                

                 2. Rule 8(a) Applies to Sectition11..............................338
                 3. Plaintiffs Need Not Plead Reliance in Order to State Certain of
                 Their Section 11 Claim......................................342
                 4. Plaintiffs Need Not Plead that the Issuers and Individual
                 Defendants Had Knowledge in Order to State Section 11
                 Claims Against Those Defendant...............................342
                 B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief
                 May Be Granted....................................................344
                 1. Plaintiffs Have Standing..........................................344
                 2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent
                 With Their Claim..............................................344
                 3. Those Plaintiffs Who Sold Securities Above the Offering Price
                 Have No Damages and Therefore No Claim Upon Which
                 Relief Can Be Granted..........................................347
                IX. SECTION 15 CLAIMS....................................................351
                X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND
                 OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND
                 INDIVIDUAL DEFENDANTS...............................................353
                 A. The Rule 10b-5 Claims for Material Misstatements Have Been
                 Properly Pl......................................................353
                 1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of
                 the PSLRA—Particular......................................353
                 a. Paragraph (b)(1)'s First Two Requirements Have Been
                 Satisfied...................................................353
                 b. Paragraph (b)(1)'s Last Requirement Has Been Satisfied........354
                 2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of
                 the PSLRA—Scienter...........................................359
                 a. Allocating Underwriters........................................360
                 b. Non-Allocating Underwriters....................................361
                 c. Individual Defendants..........................................362
                 i. The Motive Allegations Are Sufficient as to Sixty-Four
                 Defendants.....................................................366
                 ii. The Motive Allegations Are Insufficient as to 161
                 Defendants................................................366
                 d. Issuers .......................................................368
                 i. The Motive Allegations Are Sufficient as to 185 Issuers........370
                 ii. The Motive Allegations Are Insufficient as to 116
                 Issuers........................................................370
                 e. Summary........................................................371
                3. The Material Misstatement Claims Adequately Plead the
                 Remaining Elements of a Rule 10b-5 Claim: Transaction
                 Causation, Loss Causation, Reliance and Damages.....................372
                 a. Transaction Causation............................................375
                 b. Loss Causation and Damages.......................................377
                 B. Plaintiffs Have Stated Rule 10b-5 Claims For Material Misstatements
                 and Omissions Upon Which Relief May Be Granted....................378
                 1. The Misstatements and Omissions Are Material.....................379
                 2. All Defendants Had a Duty to Disclose............................380
                XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST
                 THE ALLOCATING UNDERWRITERS..........................................384
                 A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the
                 PSLRA—Scienter.............................................384
                 B. The Market Manipulation Claims Adequately State Claims Upon
                 Which Relief May Be Granted........................................385
                 1. Plaintiffs Adequately Plead "Deceptive or Manipulative
                 Conduct"......................................................387
                

                 2. College Bound II Is Not the Law 390
                XII. SECTION 20 CLAIMS..................................................392
                 CONCLUDING MATERIAL
                XIII. LEAVE TO REPLEAD....................................................397
                XIV. CONCLUSION...........................................................399
                 TABLE OF AUTHORITIES
                 APPENDICES
                 A1. LIST OF CONSOLIDATED CASES ...................................416
                 A2. SECTION 11....................................................421
                 A3. SECTION 15....................................................422
                 A4. RULE 10b-5 CLAIMS AGAINST INDIVIDUAL DEFENDANTS...............422
                 A5. RULE 10b-5 CLAIMS AGAINST ISSUERS ............................426
                 A6. SECTION 20....................................................432
                

INTRODUCTORY MATERIAL

These cases allege a vast scheme to defraud the investing public. The scheme—characterized by Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, and concealed by misrepresentations and omissions—was aimed at fraudulently driving up the price of stock in hundreds of companies in the immediate aftermarket of their initial public offerings ("IPOs"). Plaintiffs allege that investment banks routinely required substantial investors to participate in the scheme in order to receive allotments of these valuable IPOs. The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell...