In re Xm Satellite Radio Holdings Securities Lit.

• Decision Date: 28 March 2007
• Docket Number: Civil Action No. 06-0802 (ESH).
• Citation: 479 F.Supp.2d 165
• Parties: In re XM SATELLITE RADIO HOLDINGS SECURITIES LITIGATION.
• Court: U.S. District Court — District of Columbia

479 F.Supp.2d 165

In re XM SATELLITE RADIO HOLDINGS SECURITIES LITIGATION.

Civil Action No. 06-0802 (ESH).

United States District Court, District of Columbia.

March 28, 2007.

COPYRIGHT MATERIAL OMITTED

Steven J. Toll, Daniel S. Sommers, Cohen Milstein Hausfeld & Toll, PLLC, Nancy M. Juda, Learach Coughlin Stoia Geller Rudman & Robbins LLP, Burton John Fishman, Fortney & Scott, Gary Edward Mason, The Mason Law Firm, Donald J. Enright, Karen Jennifer Marcus, Finkelstein Thompson & Loughran, Washington, DC, Arthur L. Shingler, III, Scott & Scott LLC, San Diego, CA, for Plaintiffs.

Christopher J. Herrling, Ilmer Cutler & Pickering Hale & Dorr LLP, John A. Valentine, Charles Edward Davidow, Paul, Weiss, Rikfind, Wharton & Garrison LLP, Michael A. Mugmon, Wilmer Hale, Washington, DC, for Defendants.

MEMORANDUM OPINION

HUVELLE, District Judge.

Plaintiffs¹ seek recovery in this class action for their purchase of stock or stock options in XM Satellite Radio Holdings, ("XM" or "the company") between July 28, 2005 and February 16, 2006 (the "class period"). XM is a Delaware corporation with its principal place of business and chief operating offices located in Washington, D.C. According to plaintiffs' allegations, on February 16, 2006, XM disclosed that it had incurred significantly increased marketing expenses in its fourth quarter and subsequently XM's stock dropped by nearly 28.5 percent. Since XM had never reported profits, its value and the value of its stock were based on the number of subscribers it reported, as well as on metrics relating to the company's marketing expenditures per each new subscriber. The plaintiffs allege that XM's stated business model was to pursue "cost-effective" growth by consistently reducing marketing expenditures per new subscriber. During the class period, XM had stated it would be able to meet its goal of signing up six million subscribers by year-end 2005. As it tried to meet this target, plaintiffs allege, XM spent extraordinary amounts on marketing without disclosing these expenditures to the market. Plaintiffs contend that XM knew it would be incapable of meeting its target metrics because it had "abandoned" its business model of cost-effective growth, and that several key XM insiders liquidated their own shares of XM stock while in possession of this material, adverse non-public information. Plaintiffs therefore claim that the announcement on February 16, 2006, of the increase in XM's subscriber acquisition costs was foreseeable, and that the company materially misrepresented its financial outlook during the class period.

The consolidated complaint seeks recovery against XM and its Chief Executive Officer, Hugh Panero, for plaintiffs' losses under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. (Compl.¶ 107.) It also asserts a "controlling person" claim against Panero under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). (Compl.¶ 120.) Defendants have moved to dismiss the consolidated complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4, for failure to state a claim of securities fraud. As explained herein, because plaintiffs have failed to allege any actionable material misstatement or omission by XM or Panero, the Court grants defendants' motion to dismiss.

BACKGROUND

XM launched its satellite radio service in September 2001, and currently provides satellite radio service in the United States on over 150 digital channels to over six million subscribers. (Compl.¶¶ 12, 28, 75.) XM's subscribers include consumers who have purchased XM's satellite radios at retail electronics stores, as well as owners and lessors of automobiles manufactured with XM satellite radios which have been installed in the car. (Id. ¶ 2.) XM's stock is traded on the NASDAQ under ticker symbol "XMSR." (Id. ¶ 1.) During the class period, defendant Hugh Panero was CEO, President, and a director of XM. (Id. ¶ 16.) Satellite radio is a relatively new medium, and XM has only one primary competitor in the field-Sirius Satellite Radio Inc ("Sirius") — which launched its service in mid-2002. (Id. ¶¶ 4, 31.) Both XM and Sirius offer a variety of music and other audio programming. In October 2004, Sirius made news when it announced that it had signed a deal to broadcast, beginning around. January 1, 2006, the daily radio show of media personality Howard Stern, the number one national radio host among eighteen- to forty-nine-year old men. (Id. ¶ 33.) XM offers programming by well-known personalities such as Ellen DeGeneres. (See Valentine Decl. Ex. R. [Brian Steinberg, Advertising: XM Aims to Neutralize Sirius, Stern, WALL ST. J. (Nov. 14, 2005)] at B8.) XM, because it entered the market first, enjoyed an early lead over Sirius in market share, but plaintiffs allege that Sirius was steadily gaining ground on XM in the time leading up to the class period. (Compl.¶ 35.)

As a new company selling a new technology, XM has not yet, turned a profit. (Id. ¶ 36.) Plaintiff's complaint alleges that in lieu of profits, the market focuses on several "subscriber-related metrics" to gauge the health of the company. (Id.; Pl. Opp. at 4.) Most relevant for purposes of this action are subscriber acquisition costs ("SAC") and costs per gross addition ("CPGA"). SAC includes subsidies that XM offers on new radios as an enticement to potential subscribers, distribution expenses, and negative margins from direct sales of merchandise, divided by the number of new subscribers for the relevant period. (Compl. ¶ 41; Valentine Decl. Ex. G [Nov. 9, 2006 Form 10-Q] at 46.) In other words, XM often sells its radio units at a loss in order to gain subscribers, and SAC is an expression of that total loss divided by new subscribers acquired for a given period. CPGA includes the amounts included in SAC, as well as advertising and marketing expenses and ongoing "loyalty payments" to distribution partners, again divided by the number of new subscribers for the relevant period. (Compl. ¶ 41; Valentine Decl. Ex. G at 47.)

Plaintiffs contend that XM consistently "emphasized to the market" that it was achieving rapid subscriber growth in a "cost effective manner" and promoting a trend of "steadily declining" subscriber costs. (Compl.¶¶ 42, 46, 47). Indeed, immediately prior to the class period, XM reported quarter-after-quarter declines in SAC and CPGA. (Id. ¶ 46.) However, plaintiffs allege, because of increased competition from Sirius during the class period, XM abruptly decided to abandon its "cost effective growth" strategy for a "growth at any cost" approach, while letting the market believe that SAC and CPGA would continue to decline. (Id. ¶ 47.) In particular, XM launched a widespread marketing campaign called "Listen Large" in the third quarter of 2005, designed to counter heavy promotion by Sirius of its deal with Howard Stern. (Id. ¶ 48.) This campaign reportedly cost XM $25 million, but plaintiffs complaint alleges that XM actually spent between $100,000,000 and $150,000,000 on this advertising. (Id. ¶ 49.) In addition, the complaint alleges, XM drastically reduced the prices of its radios and offered other special promotions and rebates during the class period, in part to combat product supply shortages. (Id. ¶¶ 55-58.) The complaint also alleges that "a former SVP of Human Resources employed at XM during the Class Period commented that the major marketing and subscriber growth initiatives undertaken during the fourth quarter of 2005 (including Listen Large) had been fully budgeted well in advance because it was known as early as October 2004 that Howard Stern would begin broadcasting on Sirius in January 2006," and that the witness "said these costs could simply not be viewed as any kind of surprise or unanticipated event." (Id. ¶ 51.) These business decisions, which apparently generated fewer new subscribers than XM had forecast, caused SAC and CPGA numbers to increase substantially in the fourth quarter of 2005: SAC increased approximately 39% and CPGA increased approximately 36% compared to the fourth quarter of 2004. (Id. ¶¶ 75, 77.) Plaintiffs claim that XM's failure to disclose its "concealed change in business philosophy" to the market, which artificially inflated XM's stock price during the class period, is actionable under § 10(b) and Rule 10b-5. (See Pl. Opp. at 8; Compl. ¶ 107.)

Plaintiffs quote extensively from a number of statements made on five separate dates during the class period that they contend were materially false or misleading. (See Pl. Opp. at 6 n. 6). These statements are discussed below.

I. July 28 and August 2, 2005 Statements

On July 28, 2005, XM issued a press release announcing its financial results for the second quarter of 2005. (Compl.¶ 59.) The company's revenues had more than doubled over the second quarter of 2004, and it reported "Efficient Quarterly Subscriber Growth," with CPGA at $98, compared to $101 for the second quarter of 2004. (Id.) The press release also announced that XM had increased its 2005 subscriber guidance from five-and-a-half million to six million ending subscribers for 2005, based on their "first half performance and an even stronger outlook for the second half of the year." (Id.) That same day, XM hosted a conference call with investors and financial analysts to discuss its second quarter 2005 earnings and financial outlook. During the call, defendant Panero reiterated the increased subscriber guidance of six million year-end subscribers and also announced that SAC and CPGA had improved over the second quarter of 2004: SAC had dropped 12% from $57 compared to $50, and CPGA had dropped 3% from $101 to $98. (Id. ¶ 60.) He stated that the company was "achieving rapid growth with sound financial performance." (Id.) XM's Chief Financial Officer, Joe Euteneuer, added that XM's "efficient...