In re Towne Services, Inc. Securities Litigation

• Decision Date: 04 June 2001
• Docket Number: Civ.A. No. 1:99-CV-2641-BBM.
• Citation: 184 F.Supp.2d 1308
• Parties: In re TOWNE SERVICES, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Northern District of Georgia

184 F.Supp.2d 1308

In re TOWNE SERVICES, INC. SECURITIES LITIGATION.

Civ.A. No. 1:99-CV-2641-BBM.

United States District Court, N.D. Georgia, Atlanta Division.

June 4, 2001.

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Daniel L. Berger, Steven B. Singer, Robert S. Gans, Gerald H. Silk, Javier Bleichmar, Bernstein, Litowitz, Berger & Grossmann, New York City, Martin D. Chitwood, Lauren S. Antonino, Christi A. Cannon, Neal S. Berinhout, Jeffrey H. Konis, Chitwood & Harley, Atlanta, GA, Bruce G. Murphy, Law Offices of Bruce G. Murphy, Vero Beach, FL, Jack Reise, Abraham Rappaport, Maya Saxena, Robert R. Adler, Milberg, Weiss, Bershad, Hynes & Lerach, Boca Raton, FL, Steven G. Schulman, Samuel H. Rudman, Russell J. Gunyan, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Thomas J. Golab, James E. Bolen, Stephen Crain and Joel C. Powers.

Sylvia K. Kochler, Scott Michael Ratchick, Shanon R. Jackson, Hunton & Williams, Lance Parks McMillian, Nelson, Mullins, Riley & Scarborough, Geoffrey Hammond Cedarholm, III, Denise Arenth Miller, Miller & Martin, Atlanta, GA, for Towne Services, Inc., Drew W. Edwards, Henry M. Baroco and Bruce F. Lowthers.

ORDER

MARTIN, District Judge.

This case comes before the court on the motions to dismiss brought by Defendants Towne Services, Inc. ("Towne"), Drew Edwards, Bruce Lowthers, and Henry Baroco [Doc. Nos. 32-35]. For the reasons that follow the motions are GRANTED in part and DENIED in part.

I. Background

This action alleges violation of Section 11 of the Securities Act of 1933 (codified as amended at 15 U.S.C.A. § 77k) and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated pursuant to Section 10(b) of the Securities Exchange Act of 1934 (codified at 15 U.S.C.A. § 78j). It concerns the content of representations about Towne, including a prospectus and registration statement filed in connection with a secondary public offering of Towne common stock, a press release and public filing concerning Towne's earnings, and statements to investment analysts. The plaintiffs' are individual shareholders of Towne who purport to bring this action on behalf of the class of persons who purchased Towne common stock between June 23, 1999, and October 13, 1999 (the "class period"), including a subclass of persons who purchased Towne common stock "pursuant to" the prospectus mentioned above. The defendants are Towne itself and Drew Edwards, Henry Baroco, and Bruce Lowthers, who were, respectively, Towne's Chief Executive Officer, President, and Chief Financial Officer during the alleged class period. This case was initially filed as two separate actions, styled Golab v. Towne Services, Inc. et al. (No. 99-CV-2641) and Bolen v. Towne Services, Inc. et al. (No. 99-CV-3067), which have been consolidated. The plaintiffs filed a consolidated amended complaint, and this motion to dismiss followed.

Towne provides electronic financial services to its customers, who are principally small businesses. The focus of the case is representations made during the second and third fiscal quarters of 1999. The central allegations are that: (1) when Towne's secondary public offering began on June 23, 1999, Towne failed to disclose disruptions to its data lines in early June and resulting customer losses; (2) when Towne announced its earnings for the second quarter of 1999, it failed to disclose that a significant proportion of its earnings were derived from a one-time software sale, allegedly outside the ordinary course of Towne's business; and (3) when Towne met with investment analysts in September 1999, it inaccurately represented to them that Towne was "on track" to meet third quarter earnings estimates. The plaintiffs maintain that these omissions and/ or misrepresentations amount to securities "fraud," or are otherwise actionable under federal securities law.

II. Discussion

A. Rule 12(b)(6) standard for dismissal

Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal for "failure to state a claim upon which relief can be granted." The standard for evaluating such motions is very generous towards the pleading party, and dismissal may not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). If matters outside the pleadings are presented, Rule 12(b) ordinarily requires that the motion be treated as one for summary judgment, which, in turn, will usually require that the plaintiff be permitted to conduct discovery before responding to the motion. This rule, however, is subject to certain exceptions, which have become somewhat involved in the context of securities litigation.

To begin with, the Eleventh Circuit has approved the practice of taking judicial notice of public filings with the United States Securities and Exchange Commission ("SEC") underlying allegations of securities fraud. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1275-81 (11th Cir.1999). The Bryant court grounded judicial notice of SEC filings in Federal Rule of Evidence 201(b), which authorizes courts to take judicial notice of a fact "not subject to reasonable dispute in that it is ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." See 187 F.3d at 1277. The Bryant court made clear, however, that such judicial notice is "for the purpose of determining what statements the documents contain and not to prove the truth of the documents' contents." Id. at 1278. In connection with their motion to dismiss, the defendants have submitted and rely upon the following documents filed by Towne with the SEC: (1) the prospectus and registration statement for Towne's secondary public offering ("SPO"), which became effective on June 23, 1999, and (2). Towne's Form 10-Q for the second quarter of 1999, which was filed on or around August 16, 1999. In their response, the plaintiffs also submit the following SEC filings: (1) the 1999 annual report (Form 10-K) for Towne Bancorp, Inc., filed on March 31, 2000; and (2) Towne's Form 10-Q for the first quarter of 1999, filed on May 7,1999. The court takes judicial notice of these SEC filings.

The defendants have also submitted and rely upon the following documents that were not filed with the SEC: (1) a September 1, 1999, article about Towne in the Wall Street Journal (sometimes referred to hereinafter as the WSJ article); (2) Towne's press release concerning its earnings for the second quarter of 1999, which was made available on August 9, 1999; (3) an August 17, 1999, article about Towne in the Atlanta Journal-Constitution; and (4) Towne's October 13, 1999, press release concerning an expected shortfall in estimated results for the third quarter of 1999. These documents are referred to or relied upon in the plaintiffs' complaint.¹ The Bryant court left open the issue of whether, or to what extent, such documents may be the subject of judicial notice on a motion to dismiss. See 187 F.3d at 1280 n. 16.

There is support in the case law, however, for considering evidence outside the pleadings in connection with a motion to dismiss if the evidence is specifically relied upon in the complaint and its contents are not in dispute. See Harris v. Ivax Corp., 182 F.3d 799, 802 n. 2 (11th Cir.1999) ("[A] document central to the complaint that the defense appends to its motion to dismiss is also properly considered, provided that its contents are not in dispute."); see also In re Theragenics Corp. Sec. Litig., 105 F.Supp.2d 1342, 1348 (N.D.Ga.2000). Moreover, with respect to the safe harbor exemption for "forward-looking statements" codified in 15 U.S.C.A. § 78u-5(c), Congress has specifically instructed the court to consider, on a motion to dismiss, any "statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dispute, cited by the defendant." Id. at (e). As the statutory language makes plain, this provision is not limited to statements in publicly-filed documents; any statement "not subject to material dispute" will do (for the purposes of evaluating the safe harbor).

Based on this authority, the court takes judicial notice of the non-SEC documents appended to the defendants' motion to dismiss. The plaintiffs have not raised any issue concerning the authenticity of these documents. As noted above, Bryant made clear that a court can take judicial notice of SEC filings on a motion to dismiss only to establish that particular statements were or were not made, not for the truth of any such statements, Cf. Harris, 182 F.3d at 802 n. 2 ("The usual rules for considering 12(b)(6) motions are thus bent to permit consideration of an allegedly fraudulent statement in its context."). The same limitation applies with equal (if not greater) force to judicially-noticed materials not filed with the SEC. Accordingly, the court takes judicial notice of these documents to the extent they establish the content of statements attributed to the defendants, but not for any other purpose.

B. Allegations of the Consolidated Amended Complaint

The allegations of the complaint, as amplified or clarified by the statements within the judicially-noticed documents, are as follows. Towne provides electronic services to its customers that allow them to automatically process payment and sales information through Towne's computer systems. Towne was founded in 1995 and became a public company in 1998. Its stock is traded on the NASDAQ. On June 23, 1999, seven days before the end of its 1999 second quarter, Towne made a secondary public offering ("SPO") of its common stock. In connection with this SPO, Towne filed a prospectus and registration statement (the "Prospectus") with the SEC.² Towne sold 4.5 million shares of common stock in the SPO, at a price of $7.125 per share, generating proceeds of more than $30...