In re Salomon Analyst Metromedia Litigation

• Decision Date: 05 January 2005
• Docket Number: No. 02 Civ.7966 (GEL).,02 Civ.7966 (GEL).
• Citation: 373 F.Supp.2d 235
• Parties: In re SALOMON ANALYST METROMEDIA LITIGATION
• Court: U.S. District Court — Southern District of New York

373 F.Supp.2d 235

In re SALOMON ANALYST METROMEDIA LITIGATION

No. 02 Civ.7966 (GEL).

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

January 5, 2005.

Frederic S. Fox, Donald R. Hall, Kaplan Fox & Kilsheimer LLP, New York City, Richard A. Adams, George L. McWilliams, Patton, Haltom, Roberts, McWilliams & Greer, LLP, Texarkana, TX, Bradley E. Beckworth, Jeffrey Angelovich, Cary Patterson, Nix, Patterson & Roach, LLP, Daingerfield, TX, for Lead Plaintiffs Frank Russo, Jr., the Vicari Family, the Franco Family, Peter Carolan, and Techgains Corporation.

Robert B. McCaw, Peter K. Vigeland, Christopher J. Meade, Wilmer, Cutler & Pickering, New York City, for Defendants Citigroup Inc., Citigroup Global Markets Inc. (f/k/a Salomon Smith Barney Inc.), Citicorp USA, Inc., and Jack Grubman.

OPINION AND ORDER

LYNCH, District Judge.

This case concerns allegations that the defendant bank Citigroup, Inc. ("Citigroup") its divisions Citicorp USA and Salomon Smith Barney ("SSB"), and its research analyst Jack Grubman engaged in a scheme to defraud purchasers and sellers of stock in Metromedia Fiber Network, Inc. ("Metromedia") and to enrich themselves, by issuing and disseminating research analyst reports on Metromedia that were materially false and misleading. The purpose and motivation for the allegedly false and misleading reports was to garner lucrative investment banking business for the investment banking division of SSB, which would then increase Grubman's personal compensation. Defendants have moved to dismiss the Complaint for failure to state a claim on which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b), and, as to certain claims, for lack of standing. As discussed below, the motion will be granted in part and denied in part.

In addition to its voluminous factual allegations about SSB and Grubman and their research coverage of Metromedia, the Complaint describes a proposed class of all purchasers of Metromedia securities from November 25, 1997, through July 25, 2001, and brings the following claims: (1) against all defendants for violations of section 10(b) and Rule 10b-5; (2) against SSB, Citicorp USA, and Citigroup for violations of section 20(a) as "control persons" of Grubman; and (3) three additional counts brought on behalf of a sub-class of persons who purchased Metromedia securities through SSB's Guided Portfolio Management ("GPM") accounts. In their motion to dismiss, defendants argue that all of these claims must fail because plaintiffs have failed to allege with particularity that the Metromedia research reports were false or misleading (D.Mem.14-25), the projections and recommendations in the Metromedia reports are protected by the "bespeaks caution" doctrine (D.Mem.26-29), plaintiffs have failed to allege loss causation with respect to what defendants call the "conflicts omissions" (D.Mem.29-32), most of plaintiffs' claims are time-barred (D.Mem.32-43), and plaintiffs lack standing to bring claims on behalf of bond purchasers or GPM accountholders (D.Mem.44-46).

This case is substantially similar to the cases brought as In re Salomon Analyst Level 3 Litigation, In re Salomon Analyst XO Litigation, and In re Salomon Analyst Williams Litigation, which the Court dismissed in part in an Opinion and Order dated December 2, 2004. See In re Salomon Analyst Level 3 Litigation, 02 Civ. 6919(GEL), 2004 WL 2757397 (S.D.N.Y. Dec. 2, 2004). The plaintiffs bring substantially the same claims as the plaintiffs in those cases, and defendants raise substantially the same arguments in support of their motion to dismiss. Accordingly, the full exposition of the common factual allegations and the legal standards governing defendants' arguments for dismissal will not be repeated here; the reader is referred to the Level 3 opinion for a complete treatment of these issues. 350 F.Supp.2d at 481-83, 487-97. This opinion will simply address in summary form the critical issues governing this case.

First, defendants are correct that these plaintiffs lack standing to bring claims on behalf of purchasers of Metromedia debt securities (as opposed to equity securities), and to bring Counts III, IV, and V on behalf of a sub-class of GPM accountholders, because the Complaint identifies no named plaintiff with standing to bring these claims. Id. at 495-97. Standing is not "dispensed in gross," even through the class action vehicle, Lewis v. Casey, 518 U.S. 343, 358 n. 6, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996), and the hypothetical alleged injury to Metromedia bondholders, as well as the wholly different claims and legal theories alleged for GPM accountholders, are sufficiently dissimilar to the claims of the named plaintiffs to warrant dismissal for lack of standing.

Second, as with the pre-April 18, 2001, reports on Level 3, XO, and Williams, any securities fraud claims based on the Metromedia reports issued prior to March 8, 2001, must be dismissed for failure to plead fraud with particularity. See 350 F.Supp.2d at 490-92. Each of these reports is clearly labeled "Speculative," and each reveals Grubman's consistent view that Metromedia, like other similarly situated telecom companies, was poised for explosive growth and profitability as the money invested in fiber-optic infrastructure fueled a parallel expansion of demand for broadband communications. (E.g. Vigeland Decl. Ex. 1) (Jan. 7, 1998 Metromedia Report); Ex. 15 (Aug. 2, 1999 Metromedia Report.) Although plainly very bullish on Metromedia, the reports also include discussion of the specific risks the company faced in executing its business plan — in particular, its heavy losses related to infrastructure costs and its need for continued access to additional funding to complete the planned build-out of its network. (See, e.g., Vigeland Decl. Ex. 11 (May 12, 1999 Metromedia Report).) As with other stocks he covered, Grubman supported his Metromedia recommendations, in part, with a discounted cash flow ("DCF") analysis. While plaintiffs assert that these models were false and misleading (e.g. Compl. ¶ 67(d)), the reports themselves clearly disclose the models used as well as the assumptions underlying their construction, including the estimated growth rate and discount rate. (See, e.g., Vigeland Decl. Ex. 4 (Aug. 11, 1998 Metromedia Report); Ex. 25 (Oct. 10, 2000 Metromedia Report).) Grubman also explained his reasons for employing these assumptions in the reports. These assumptions, while perhaps aggressive, are consistent with Grubman's general view as to the prospects and condition of both Metromedia and the telecom industry as a whole. In short, plaintiffs plead no specific facts or allegations, beyond conclusory assertions, that would indicate that Grubman's pre-March 8, 2001, Metromedia reports did not present his actual opinion as to the future prospects and investment quality of Metromedia equity securities.

As with the nearly verbatim allegations in the Level 3, XO, and Williams Complaints, plaintiffs' voluminous and repetitive cataloguing of the conflicts and institutional pressures at SSB related to the relationship between investment banking and research cannot save their inadequately pleaded allegations about Grubman's pre-March 8, 2001, Metromedia reports. See 350 F.Supp.2d at 492. While these allegations may suggest a motive for SSB's issuance of false or misleading reports on Metromedia, by themselves they are simply insufficient to state a claim for securities fraud. Id. (citing Podany v. Robertson Stephens, 318 F.Supp.2d 146, 156 (S.D.N.Y.2004); In re Merrill Lynch & Co. Research Reports Securities Litigation, 273 F.Supp.2d 351, 373 (S.D.N.Y.2003)).

The specific allegations in the Metromedia Complaint as to the relationship between SSB and Metromedia's CEO, Stephen Garofalo, do not alter this conclusion. Plaintiffs allege that, as part of a coordinated program to secure additional investment banking business from Metromedia, SSB extended millions of dollars in margin credit to Garofalo and also allocated shares in "hot" IPOs to Garofalo as part of a program that rewarded (or, in plaintiffs' words, "bribed") the officers and directors of companies that gave investment banking business to SSB.¹ (Compl.¶¶ 165-183.) Plaintiffs claim that these alleged facts should have been disclosed to investors by SSB (id. ¶ 183), but they make no effort to explain how the failure to disclose these alleged facts rendered Grubman's Metromedia reports false and misleading. Indeed, plaintiffs' theory, to the extent it can be teased out of the Complaint, does not make logical sense — if anything, the events and activities described would render...