305 U.S. App. D.C. 60, 16 F.3d 1271 (D.C. Cir. 1994), a case upon which both parties heavily rely, the district court and court of appeals examined the particularity of each allegation of fraud individually. Thus, this Memorandum does the same.
Plaintiffs also argue that Rule 9(b) merely requires "sufficient detail to put defendants on adequate notice of the claims being made against them." Opp. at 15. Defendants disagree, pointing out that if that were the case, "Rule 9(b) would clearly be superfluous if its only function were to insure that defendants are provided with the degree of notice which is already required by Rule 8(a)." Reply at 3. Kowal supports defendants' contention. Kowal restated the texts of Rules 8 and 9(b) and then stated: "Reading these two provisions in conjunction 'normally . . . means that the pleader must state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud.'" Kowal v. United States, 305 U.S. App. D.C. 60, 16 F.3d 1271, 1278 (D.C. Cir. 1994), citing United States v. Cannon, 206 U.S. App. D.C. 405, 642 F.2d 1373, 1385 (D.C. Cir. 1981).
Fed. R. Civ. P. 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud . . . shall be stated with particularity." Plaintiffs "must state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud." Kowal, 16 F.3d at 1278 (internal quotation marks and citation omitted). In addition, "where plaintiffs seek to base a claim of securities fraud on false and misleading projections or statements of optimism, their complaint must also plead sufficient facts that if true would substantiate the charge that the company lacked a reasonable basis for its projections or issued them in less than good faith." Id. A motion to dismiss should not be granted "unless plaintiffs can prove no set of facts in support of their claim which would entitle them to relief." Id. 16 F.3d at 1276. While plaintiffs are granted the benefit of all inferences that can be derived from the facts alleged, "the court need not accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint. Nor must the court accept legal conclusions cast in the form of factual allegations." Id.
The Second Amended Complaint includes allegations concerning: (i) security analysts; (ii) orders that did not ship; (iii) declining sales; and (iv) increased expenses. The following analyzes plaintiffs' allegations in these contexts to determine whether they are plead with the particularity required by Rule 9(b).
A. Allegations Concerning Security Analysts
Plaintiffs allege that numerous analyst reports evidence defendants' misrepresentations and material omissions intended to mislead the market. Newbridge I held that these allegations were deficient because (i) plaintiffs had not alleged "adoption" or "endorsement" of the analyst reports with sufficient particularity; and (ii) plaintiffs allegations were not sufficiently particular as to the "time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud." Kowal, 16 F.3d at 1278; see Newbridge I, 926 F. Supp. at 1171-72. The Second Amended Complaint attempts to remedy these deficiencies.
1. New Generic Adoption Allegations
Newbridge I held that "plaintiffs' conclusory allegation with respect to endorsement is inadequate under Rule 9(b)." Id. 926 F. Supp. at 1172. "A company may be liable for analysts' forecasts which it fostered and reviewed but failed to correct if it expressly or impliedly represented that the information was accurate or coincided with the company's views. . . . Allegations based on this theory of liability must legally support a conclusion that the company adopted, endorsed or sufficiently entangled itself with the forecasts to render them attributable to him." Newbridge I, 926 F. Supp. at 1173, citing In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1097 (N.D. Cal. 1994) aff'd, 95 F.3d 922 (9th Cir. 1996). Newbridge I also stated that "plaintiffs must also allege that defendants had some measure of control over the content of the final report or projection issued by the analysts. . . . Analysts might quote corporate spokespersons out of context or inaccurately interpret remarks made by corporate insiders." Newbridge I, 926 F. Supp. at 1171; see also Raab v. General Physics Corp., 4 F.3d 286, 288-89 (4th Cir. 1993) (dismissing complaint for failure to plead "how [defendant] could have controlled the content of the statement); In re Syntex Corp. Sec. Litig., 855 F. Supp. at 1097; In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1237 (N.D. Cal. 1994) (citations omitted).
Plaintiffs include the following three generic allegations in the Second Amended Complaint in an attempt to redress this deficiency. First, plaintiffs now allege that "defendants both endorsed the content of reports and projections issued [sic] analysts and exercised considerable control over their content because Newbridge was the principle [sic] source of information for such reports and projections." SAC P 27. Newbridge I rejected the sufficiency of such a "rather general allegation of endorsement," 926 F. Supp. at 1172, stating that "it is not sufficient to allege that defendants provided analysts with the information on which the analysts' reports were based." Id. at 1171, quoting In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1237 (N.D. Cal. 1994).
Second, plaintiffs now allege that analysts visited "Newbridge's headquarters in Kanata" at unspecified times. SAC P 30. This paragraph does not state what took place during the visits or when they occurred. See In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1097 (N.D. Cal. 1994) (citations omitted), aff'd, 95 F.3d 922 (9th Cir. 1996); Hammerman v. Peacock, 607 F. Supp. 911, 916 (D.D.C. 1985) (noting that a securities fraud plaintiff must specify "the time and place of each such statement").
Third, plaintiffs now allege that James Marshall, head of Newbridge's Investor Relations department, had various contacts with unspecified analysts who told him "their earnings projections." SAC P 31. In addition, Mr. Marshall allegedly "expressed a range of numbers," SAC P 31 in response to the projections. Plaintiffs do not specify the period or periods covered by those projections. Plaintiffs also do not specify the range Mr. Marshall expressed, or what the range represented. Similarly, plaintiffs now claim that "after the end of a quarter, Marshall would typically comment about the current consensus of analysts' earnings estimates and would indicate whether Newbridge was comfortable with that range." SAC P 32. Plaintiffs do not specify where, how, or by whom such a "current consensus" was reached; what its form may have been; or whether Mr. Marshall agreed with that "current consensus" on any particular date. Such allegations are inadequate for purposes of Rule 9(b).
2. New Specific Allegations About Securities Analysts.
The Second Amended Complaint includes allegations about analysts from the following companies: Gordon Capital Corporation, S.G. Warburg & Co. Inc., CS First Boston Corporation, Alex. Brown & Sons Incorporated, and Nutmeg Securities, Ltd.; and allegations about a story in Toronto's Financial Post. None of these new allegations satisfy the pleading standards prescribed by Newbridge I and Rule 9(b).
(a) Plaintiffs' new allegations about Gordon Capital analysts. Plaintiffs have added several allegations to the Second Amended Complaint about analyst reports from Gordon Capital Corporation ("Gordon Capital"). According to plaintiffs, an April 20, 1994 report prepared by an unspecified Gordon Capital analyst states that "'after discussion with management, we continue to believe in the fundamentals of the Company. We are forecasting EPS of US $ 0.41 to US $ 0.42 for Q4/94 . . . .'" SAC P 52(a). This allegation is insufficiently particular because it fails to (i) identify the name of the analyst or the names of the management; (ii) allege "adoption" by not specifying whether Gordon Capital disclosed this report to anyone at the Company, or whether anyone agreed with it.
Another April 20, 1994 report by an unspecified author at Gordon Capital allegedly states that "'our recent discussion with the Company indicates that business continues to be very strong . . . . We understand that Newbridge continues to win major contracts, particularly in Europe. The aggregate amount for European contracts is over $ 100 million . . . . We are reiterating our buy on Newbridge Networks.'" SAC P 52(a). This allegation fails because the "recent discussion" fails to specify the time, place, and content of the misrepresentation and does not include any indication of post-statement involvement between anyone at Newbridge and anyone at Gordon Capital about this report. Thus, the statement could have been "taken out of context, incorrectly quoted, or stripped of important qualifiers." Raab v. General Physics Corp., 4 F.3d 286, 288-89 (4th Cir. 1993).
In addition to these two April reports, plaintiffs allege that Lap Y. Lee of Gordon Capital reported on June 8, 1994:
Newbridge management is extremely impressed by the overwhelming interest in their ATM products. The company continues its strong efforts in ATM development. Management believes ATM will revolutionize communications over the next 10 years and become the common building block for all forms of telecommunications in the 1990s.