Plotkin v. Ip Axess Inc.

• Decision Date: 21 April 2005
• Docket Number: No. 03-41380.,03-41380.
• Citation: 407 F.3d 690
• Parties: Andrew PLOTKIN, as Trustee for Zachary S. Plotkin Trust dated 12/17/95, Andrew Plotkin, as Trustee for Natalie R. Plotkin Trust dated 12/17/95, Robert Plotkin, as Beneficiary of Robert Plotkin IRA, Robert Plotkin IRA Rollover Dated 11/10/99, Robert Plotkin, Nancy Plotkin, Manuel Plotkin, Plaintiffs-Appellants, v. IP AXESS INC., etc., et al., Defendants, Michael A. McDonnell, James G. Scogin, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

407 F.3d 690

Andrew PLOTKIN, as Trustee for Zachary S. Plotkin Trust dated 12/17/95, Andrew Plotkin, as Trustee for Natalie R. Plotkin Trust dated 12/17/95, Robert Plotkin, as Beneficiary of Robert Plotkin IRA, Robert Plotkin IRA Rollover Dated 11/10/99, Robert Plotkin, Nancy Plotkin, Manuel Plotkin, Plaintiffs-Appellants, v. IP AXESS INC., etc., et al., Defendants, Michael A. McDonnell, James G. Scogin, Defendants-Appellees.

No. 03-41380.

United States Court of Appeals, Fifth Circuit.

April 21, 2005.

COPYRIGHT MATERIAL OMITTED

Stephen Cass Weiland, Robert Allen Hawkins, Patton Boggs, Dallas, TX, Robert Plotkin, Michael H. Curletti, The Robert Plotkin Law Firm, Chicago, IL, for Plaintiffs-Appellants.

Mark Tad Josephs, Christopher Andrew Thompson, Jackson Walker, Dallas, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Eastern District of Texas.

Before JONES, SMITH and STEWART, Circuit Judges.

EDITH H. JONES, Circuit Judge:

In this appeal, we review the district court's dismissal with prejudice of a securities fraud complaint filed by Robert Plotkin and members of his family (collectively "Plotkin") against IPaxess, Inc. ("IPaxess") and two of its officers, Michael A. McDonnell ("McDonnell") and James G. Scogin ("Scogin"). Plotkin's complaint alleges that the defendants committed securities fraud under federal and Illinois laws by making false or misleading statements in press releases, and that Plotkin purchased common stock in IPaxess based on these statements. The district court dismissed the complaint for failure to state a claim upon which relief can be granted. For the reasons stated below, we AFFIRM IN PART, REVERSE IN PART, and REMAND.

I. BACKGROUND

From the late 1990s to 2001, Data Race, Inc. d/b/a IPaxess, was a fledgling technology company with executive offices in Plano, Texas. The company's principal business was the design, manufacture and marketing of communication products enabling remote access to all elements of corporate communications networks, including the Internet and Intranet. IPaxess's lead product for purposes of this suit was the VocalWare IP remote access system. Throughout the relevant period, defendant McDonnell served as the Chief Operating Officer, President, Chief Executive Officer and Director of the company, while Scogin was its Controller, Senior Vice President-Finance, Chief Financial Officer, Secretary and Treasurer. Scogin also apparently served as the Company's Investor Relations Officer.

According to Plotkin's Second Amended Complaint (the "Complaint"), IPaxess struggled financially before the events in question: Revenues decreased from approximately $1.9 million in its 1998 fiscal year to approximately $800,000 in 1999 and only $316,000 for 2000. The Complaint goes on to allege that, during much of 2000, the defendants carried out a campaign to attract new investors in the company's common stock and to persuade existing investors to increase their holdings. The campaign allegedly proceeded with the issuance of several false and misleading press releases that induced Plotkin to purchase considerable amounts of IPaxess stock. He bought stock for himself and family members following two press releases issued on May 25, 2000, and one on August 18, 2000.¹ This case centers around the three press releases.

1. May 25 Releases

In the May 25 press releases, IPaxess announced a letter of intent and a purchase order involving IPaxess, Associated Global Partners ("AGPI"), and Lynxus, Inc. ("Lynxus"). The first press release stated, in relevant part:

IPaxess, formerly DATA RACE, Inc. (Nasdaq: RACE) today announced a letter of intent to enter into a strategic partnership with Associated Global Partners/Lynxus, Inc. (AGPI/Lynxus).

* * *

Under terms of the agreement AGPI and Lynxus Inc. will be granted exclusive international marketing rights for IPaxess products for all business associated with the IP education solution opportunities in any country in which they are actively engaged in business partnerships. The agreement calls for an annual commitment of $25 million of net purchases from IPaxess.

"Going forward, this strategic relationship with AGPI/Lynxus represents an important component of IPaxess's worldwide distribution strategy, and will enable us to expand our market opportunity by delivering the VocalWare IP technology to a broader range of customers," stated IPaxess President and CEO, Michael McDonnell. "AGPI/Lynxus's decision to market VocalWare IP as a best-of-breed solution confirms that IPaxess is on the way to becoming a recognized leader in remote communications technology."

In the second May 25 press release, IPaxess announced that it had received a multimillion dollar purchase order from AGPI/Lynxus:

IPaxess, formerly DATA RACE, Inc. (Nasdaq: RACE) today announced receipt of a $6.5 million purchase order for the VocalWare IP remote work technology from AGPI/Lynxus, Inc., an application service provider which supplies internet access solutions to businesses, schools, churches and homes.

The releases also described the operations of IPaxess's new customers and announced the companies' contributions to the planned joint undertakings:

With current or developing operations in Latin America, Africa, Asia and the Middle East, AGPI is rapidly becoming a leading provider of telecommunications transport services, with networks designed to complement existing global carrier networks. Lynxus, Inc. (www.lynxus.com) is one of North America's fastest growing enhanced application service providers. Their Education Business Unit is currently deploying a safe, reliable, affordable internet access solution to schools in Atlanta, Georgia funded through the FCC's Universal Services Fund program.

* * *

AGPI has designed and is implementing a fiber optic network in South America, the Caribbean, and Africa, which will provide carriers with high quality transmission and advanced network capabilities. As a technology partner, Lynxus (www.lynxus.com) will provide strong infrastructure support, offering a full array of Internet solutions.

IPaxess, AGPI and Lynxus Inc. will work together to provide advanced, integrated IP remote access solutions for a number of global opportunities currently under development. AGPI will provide independent transport services. Lynxus will provide innovative applications services, and IPaxess will implement their patented VocalWare(TM) IP remote access solution.

Each press release concluded with a boilerplate cautionary statement:

This press release contains various "forward-looking statements" which represent the Company's expectations or beliefs concerning future events, including its belief regarding the impact on the Company of the new technology. These forward-looking statements involve numerous risks, uncertainties and assumptions, and actual results could differ materially from anticipated results. There can be no assurance as to the amount or timing of revenue from the new technology.

The deals described in these press releases failed quickly and spectacularly. Public statements by IPaxess trace the turn of events. The company shipped approximately $700,000 of Vocalware products and user licenses to Lynxus within three to four months of the May 25 announcements. While the company booked the revenue at the time of shipment, as was its custom, its auditors KPMG disputed this action, evidently because they were unpersuaded of Lynxus's ability to pay. On November 21, 2000, the company announced that it had acquiesced in KPMG's advice and withdrew the $700,000 from its revenue statement for the first quarter of 2001. Nevertheless, KPMG resigned from auditing IPaxess.

Having failed to receive even a dollar of the promised $25 million annual purchases from the AGPI/Lynxus association, or a dollar of the announced $6.5 million equipment purchase, or even a dollar of the $700,000 shipment (the products were eventually returned to IPaxess), the company publicly admitted the deals' collapse in February 2001. The company stated that it had "been able to maintain its connection to the Caribbean project," for which the products had been shipped. In a shareholder "letter" published on the company website about that time, McDonnell asserted that Lynxus had been unable to pay because one of its customers had delayed paying Lynxus. No mention was made that Lynxus had filed bankruptcy three weeks earlier.

2. August 18 Press Release

The August 18, 2000, press release announced, in a bold face subheading, that "Agreements Are in Place with Major Customers for Commercial Shipments in September 2000." In this release, IPaxess named several major companies including Time Warner Cable-San Antonio and Continental Airlines. The August 18 press release states as follows:

IP AXESS(TM) Announces Closure of VocalWare(TM) IP Integrated Server Beta Program.

Agreements in Place With Major Customers for Commercial Shipments In September, 2000.

IP AXESS, formerly DATA RACE (Nasdaq: RACE), today announced that it has closed participation in the VocalWare IP integrated server beta program. Customers participating in the beta trial include Time Warner Cable of San Antonio, Continental Airlines, Associated Global Partners/Lynxus, Inc., as well as a global carrier and an agency of the federal government. These first installations position IP AXESS to ship commercially available product in September 2000.

"The Enterprise Access Compact PCI Server is unparalleled in the scale, scope and flexibility of its design," said Michael McDonnell, IP AXESS's president and chief executive officer. "These organizations have established themselves as leaders in the application of remote access solutions and pioneers in the use of IP protocols to effectively converge voice and data connectivity. We are excited about our beta partners' remote access application plans and commencement of shipment of the Enterprise Access Server (2G) to...