In re Usec Securities Litigation

• Decision Date: 25 March 2002
• Docket Number: No. CIV.H-01-1858.,CIV.H-01-1858.
• Citation: 190 F.Supp.2d 808
• Parties: In re USEC SECURITIES LITIGATION
• Court: U.S. District Court — District of Maryland

190 F.Supp.2d 808

In re USEC SECURITIES LITIGATION

No. CIV.H-01-1858.

United States District Court, D. Maryland.

March 25, 2002.

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Paul D. Young and Milberg Weiss Bershad Hynes & Lerach, LLP, New York City and Barbara Podell and Berger and Montague, P.C., Philadelphia, PA and Charles J. Piven, Baltimore, MD, for plaintiffs.

Richard L. Brusca, Andy G. Rickman and Skadden, Arps, Slate, Meagher & Flom, LLP, Washington, DC, for defendants USEC, Inc., William H. Timbers, Jr. and Henry Z. Shelton, Jr.

Daniel Slifkin, James Canning and Cravath, Swaine & Moore, New York City and Andrew H. Marks, Bridget E. Calhoun and Crowell & Moring, LLP, Washington, DC, for defendants Morgan Stanley Dean Witter & Co., Merrill Lynch & Co.,Inc., Janney Montgomery Scott LLC, Lehman Brothers Inc., Prudential Securities, Inc., Salomon Smith Barney Inc. and M.R. Beal & Co.

HARVEY, Senior District Judge.

This is a securities class action which has been brought on behalf of shareholders who purchased common stock of USEC, Inc. ("USEC") between July 23, 1998 and December 2, 1999 (the "Class Period"). Besides USEC, the consolidated amended class action complaint (the "amended complaint") names as defendants two individuals¹ (the "individual defendants") and seven lead underwriters (the "underwriter defendants") of USEC's initial public offering ("IPO").² Claims have been asserted under §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"). 15 U.S.C. §§ 77k, 771 (a)(2) and 77o. Jurisdiction exists under 28 U.S.C. §§ 1331 and 1337.

Presently pending before the Court are two separate motions to dismiss the amended complaint. One motion has been filed by defendant USEC and the individual defendants. The second motion has been filed by the underwriter defendants. Extensive memoranda and exhibits in support of and in opposition to the pending motions have been submitted by the parties, and a hearing on the motions has been held in open court.

In their submissions, the parties have relied on facts established by documents which are not a part of the amended complaint. The Court will nevertheless treat the pending motions as motions to dismiss rather than as motions for summary judgment. In ruling on a motion to dismiss a securities fraud complaint, the Court is entitled to rely on public documents quoted by, relied upon, incorporated by reference in or otherwise integral to the complaint, and such reliance does not convert such a motion into one for summary judgment. In re E.Spire Communications, Inc. Sec. Litig., 127 F.Supp.2d 734, 737 (D.Md.2001). Reliance on documents of this sort is particularly appropriate where, as here, the parties do not challenge the authenticity of the documents. Phillips v. LCI Int'l, Inc., 190 F.3d 609, 618 (4th Cir.1999).

I Procedural History

On October 27, 2000, plaintiff Paul Spirgel filed the first of these ten securities class actions in the United States District Court for the Western District of Kentucky, Paducah Division. On June 14, 2001, defendants' motion to transfer venue of the ten cases to the District of Maryland pursuant to 28 U.S.C. § 1404(a) was granted, and the ten cases were thereafter docketed in this Court.³ Following a status conference with counsel, this Court entered an Order on August 10, 2001 consolidating the ten pending class actions for all purposes pursuant to Rule 42(a), F.R.Civ.P..

In its Memorandum Opinion of October 22, 2001, the Court ruled on a motion filed by class members for the appointment of lead plaintiffs and for the approval of their selection of lead counsel and also on two motions to strike class allegations filed by the defendants. In re USEC Sec. Litig., 168 F.Supp.2d 560 (D.Md.2001). For the reasons stated in its Opinion, the Court granted the motion of class members Harold Cohen and Myles Wren for appointment as lead plaintiffs and approved their selection of lead and liaison counsel. The Court also denied defendants' motion to strike class allegations. Id. at 569. Pursuant to the Court's Order of October 22, 2001, a consolidated amended class action complaint was thereafter filed.

Count I of this amended complaint asserts a claim against all defendants under § 11 of the Securities Act. Count II seeks a recovery against the underwriter defendants for alleged violations of § 12(a)(2) of the Securities Act. Count III asserts a claim against the individual defendants under § 15 of the Securities Act.

II Background Facts

Defendant USEC is a Delaware corporation which maintains its principal executive offices in Bethesda, Maryland. Prior to 1998, USEC was a wholly-owned government corporation which had been created in 1992. Its principal business was to provide uranium enrichment services to utility companies which used nuclear reactors to produce electricity. USEC produced enriched uranium at two gaseous diffusion plants ("GDPs")⁴ owned by the United States Department of Energy ("DOE").

In 1992, USEC was appointed executive agent for an agreement between the United States and Russia. This agreement required USEC to buy from Russia at fixed prices uranium extracted from dismantled nuclear weapons. Under the agreement, Russia was required to dilute weapons grade highly enriched uranium ("HEU") to low enriched uranium and to sell the product to USEC which would in turn sell to nuclear power plants.

In April, 1996, Congress enacted the USEC Privatization Act, 42 U.S.C. § 2297h, the purpose of which was to transfer the federal government's interest in USEC to the private sector. The Act authorized the Board of Directors of USEC to privatize the corporation either through an IPO or by having a private corporation acquire it. Meetings of the Board were held in June of 1998 resulting in the Board's decision to adopt the IPO option.

On June 29, 1998, USEC filed with the Securities and Exchange Commission (the "SEC") a registration statement and prospectus which became effective on July 23, 1998. Pursuant to the registration statement and the prospectus, 100 million shares of USEC's common stock were sold at a price of $14.25 per share, raising approximately $1.4 billion.⁵ The registration statement was signed by the individual defendants.

It is alleged in the amended complaint that the prospectus was materially false and misleading in that it misrepresented that USEC had a viable core business model, the cornerstone of which was the deployment of a new enrichment technology called atomic vapor laser isotope separation ("AVLIS"). At the time of the IPO, USEC was producing enriched uranium at its GDPs by the gaseous diffusion method. AVLIS was laser-based and assertedly would enable the company to reduce its production costs and profitably compete in the global enriched uranium business. Plaintiffs allege that at the time of the IPO, USEC had no reasonable prospect or intention of deploying AVLIS.

It is alleged that the prospectus issued in connection with the IPO was materially false and misleading in numerous respects. According to the amended complaint, the prospectus misrepresented (1) USEC's ability to profitably produce enriched uranium by falsely stating that the company was close to employing AVLIS as a new technology when in fact the viability of AVLIS was unproven and defendants intended to abandon it after the IPO; (2) the costs associated with AVLIS; (3) the impact which the HEU contract with Russia had on USEC's profitability; (4) USEC's plans related to sales of natural uranium; (5) the ability of USEC to profitably produce enriched uranium at the GDPs; (6) USEC's competitive position in the enriched uranium market; and (7) USEC's intention to continue to operate both of its GDPs.

On June 9, 1999, USEC announced that it was abandoning the proposed AVLIS technology. On October 26, 2000, USEC common stock closed at $4.5625 per share. The first of these securities cases was docketed in the United States District Court for the Western District of Kentucky on October 27, 2000.

III Applicable Principles of Law

A motion to dismiss filed pursuant to Rule 12(b)(6), F.R.Civ.P. will 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). In considering motions like those filed in this case, the Court will consider the facts stated in the complaint, as well as the documents referred to in the complaint and relied upon by plaintiff in bringing the action. Recupito v. Prudential Sec., Inc., 112 F.Supp.2d 449, 453 (D.Md.2000). It is therefore appropriate for this Court in this case to consider the contents of the registration statement, including the prospectus and other public documents which the parties rely upon and the authenticity of which is not challenged. Phillips, 190 F.3d at 618; In re MicroStrategy, Inc. Sec. Litig., 115 F.Supp.2d 620, 623 n. 4 (E.D.Va.2000).

Section 11 of the Securities Act imposes liability if "any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, ..." 15 U.S.C. § 77k(a). Similarly, § 12(a)(2) of the Securities Act imposes liability upon any person who "offers or sells a security ... by means of a prospectus..., which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstance under which they were made, not misleading..." 15 U.S.C. § 77l (a)(2). Section 15 of the Securities Act imposes liability on controlling persons who are made liable jointly and severally with persons found liable under §§ 11 and 12(a)(2). 15 U.S.C. § 77o.

Under § 13 of the Securities Act, no action shall be...