MEMORANDUM AND ORDER ON DEFENDANTS’ MOTION TO DISMISS
Introduction and Procedural History
This case has been brought as a class action on behalf of all persons or entities who purchased securities of Cambridge Technology Partners, Inc. (“Cambridge” or “CTP”) between November 25, 1998 and March 18, 1999. 1 The three lead plaintiffs are W.R. Carney, James R. Thompson, and Ishiug J. Wu. The essence of the plaintiffs’ claim is that the defendants, CTP and two of its officers, issued false or misleading statements during the Class Period in order to inflate artificially the market price of CTP’s securities; that the plaintiffs purchased CTP securities at the artificially inflated price prevailing during the Class Period; and that the plaintiffs were damaged when the market price of the securities decreased after the Class Period. The plaintiffs also allege insider trading: specifically, they charge that the two individual defendants profited from the alleged fraudulent scheme by selling their own stock in CTP at the artificially inflated price during the Class Period.
Facts Alleged in the Complaint
The following facts are derived from the complaint. On a motion to dismiss, all factual allegations in the complaint are taken as true.
Aulson v. Blanchard,
CTP is a company that “provides information technology and consulting and software development services for companies seeking to shift to direct/server networks from older mainframe computers.” Complaint at ¶ 8. CTP also “provides strategic information solutions and consulting services in the Enterprise Resource Planning (“ERP”) services market,” which includes “enterprise-wide management applications for human resources, finance, and manufacturing.” Id. at ¶ 25. The defendant James K. Sims (“Sims”), at all times relevant to the complaint, was president, chief executive officer and a director of CTP. The defendant Arthur M. Toscanini (“Toscanini”), at all times relevant to the complaint, was chief financial officer, executive vice president of finance and treasurer of CTP.
On August 31, 1998, CTP acquired Ex-cell Data Corporation (“Excell”). Among other consideration for the acquisition, Ex-cell’s shareholders received CTP common stock. On September 3, 1998, CTP told securities analysts that its “revenues were under pressure” and its “prospects going forward were uncertain.” Id. at ¶ 27. On September 4,' 1998, one securities analyst, Mark D’Annolfo, of the firm Adams, Harkness, Inc., downgraded his recommendation for CTP’s stock from “buy” to “attractive,” and Toscanini confirmed with analysts generally that CTP would be lowering its revenue projections for the second half of 1998 and for 1999. Id. at ¶¶ 28-29. By the end of that day, the value of CTP stock had declined by 22%.
On October 14, 1998, CTP announced that its results for the third quarter of 1998 (the quarter that had ended September 30, 1998) were lower than had been projected on September 4. The value of CTP’s stock then declined an additional 22%. On November 16, 1998, another securities analyst, Kani Klinstead of the firm of Lehman Brothers, Inc., downgraded his recommendation for CTP from “buy” to “neutral,” stating, “there is a fundamental risk of further earnings costs here.”
Id.
at ¶ 31. On November 19, 1999, the former Excell shareholders brought suit against CTP before another judge in this federal district.
See Pacheco v. Cambridge Technology Partners (Massachusetts), Inc.,
During the Class Period, eight allegedly false or misleading statements were made. These statements include: one newspaper article quoting Sims; one securities analyst report quoting Sims; three securities analysts’ reports not quoting Sims or any other CTP officer; two CTP press releases; and representations made at a securities analysts’ conference. According to the plaintiffs, these statements were made in reaction to the
Pacheco Litigation
and as part of a “concerted scheme to stem the slide of [CTP’s] common stock and misdirect the market’s analysis of [its] problems by misrepresenting that the problems arose from internal ‘organizational mis
the truth was that [CTP] was unsuccessfully implementing its purported reorga-nizational program, failing to accrue meaningful benefits from the process, and defendants knew that the putative reorganization was a failure. [CTP], in actuality, was experiencing consistently slower sales growth throughout the Class Period and a decrease in demand for ERP software license, all of which defendants knew reflected the failure of their reorganization effort and would cause Cambridge to fall woefully short of its earnings estimates.
Id. at ¶36. Each of the.eight statements will be discussed in detail below.
During the Class Period, Sims sold 125,000 of the approximately 2 .3 million shares of CTP common stock he owned and earned profits exceeding $3.8 million; Toscanini also sold “substantial amounts” of the common stock he owned in CTP— approximately 75,000 shares- — and realized “substantial profits” — approximately $2.4 million — during the Class Period. Id. at ¶¶ 9-10, 81. Although the lead plaintiffs are alleged to have purchased CTP common stock during the Class Period, the complaint is silent as to the dates and amounts of the stock purchases made either by them or by the remaining plaintiffs.
After the market closed on March 18, 1999, the ending date of the Class Period, CTP issued a press release in Business Wire indicating that the preliminary results for its first quarter (ending March 31, 1999) would be “well below analysts’ estimates.” The press release stated:
[CTP] reported that the benefits of the North American reorganization initiatives undertaken during the fourth quarter of 1998 did not matérialize as quickly as anticipated and, as a result, sales growth for the first quarter was lower than expected. In addition, a decrease in market demand for ERP software licenses negatively affected demand for the Company’s ERS package implementation offerings.
Id. at ¶ 51.
Following this release, the price of CTP stock fell by “more than 40%,” and the price “has not meaningfully recovered.” Id. at ¶ 53. Securities analysts “immediately downgraded” CTP, “citing the Company’s misleading information concerning its purported reorganization, highly suspicious pre-release and insider sales, and seemingly unjustified positive statements and earnings guidance during the February analysts’ meeting.” Id. at ¶ 54. 2
Discussion
I. The Plaintiffs’ Claims.
The plaintiffs allege violations of sections 10(b), 20(a) and 20(A) of the Securities Exchange Act (the “Exchange Act”) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated by the Securities and Exchange Commission. Section 10(b), 15 U.S.C. § 78j(b), makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Rule 10b-5 is an implementing regulation under Section 10(b). Section 20(a), 15 U.S.C.
Count I alleges that, during the Class Period, the defendants carried out a plan to “(i) deceive the investing public, including plaintiffs ...; (ii) artificially inflate and maintain the market price of the company’s common stock; and (iii) cause plaintiffs ... to purchase or otherwise acquire the Company’s common stock at artificially inflated prices.” Id. at ¶ 65. Specifically, Count I alleges that the defendants made “materially false and misleading statements about the Company’s financial condition and operations” and concealed “adverse material information” about CTP. Id. at ¶ 66.
Count II alleges that the individual defendants, Sims and Toscanini, acted as controlling persons of CTP “by virtue of their high-level positions in the company.” Id. at ¶ 76. The complaint states: “the individual defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is [sic] presumed to have the power to control or influence the particular transactions giving rise to the securities violations as alleged herein.” Id.
Count III alleges that Sims and Toscanini sold shares in CTP “while in the possession of material adverse non-public information” in violation of Section 20A. Id. at ¶¶ 81-2.
II. The Relevant Pleading Standards.
A. Claims under Section 10(b) and Rule 10b-5.
The plaintiffs’ claims are subject to the pleading requirements of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The enactment of the PSLRA was “a bipartisan effort to curb abuse in private securities lawsuits, particularly the filing of strike suits.”
Greebel,
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in which the plaintiff alleges that the defendant—
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the fight of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
(2). Required state of mind
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
15 U.S.C. § 78u — 4(b)(1)—(2). The First Circuit’s recent decision in Greebel made a number of observations regarding the pleading standards under the PSLRA:
1. The PSLRA imposes requirements for pleading with particularity that are consistent with this circuit’s pri- or rigorous requirements for pleading fraud with particularity under Fed.R.Civ.P. 9(b).
2. The PSLRA mandates neither the adoption nor the rejection of particular patterns of evidence to prove fraud and scienter, and thus does not alter this circuit’s prior law on these points.
3. The PSLRA does, significantly, impose a requirement that pleadings raise a “strong” inference of scienter rather than a merely “reasonable” inference of scienter.
4. The PSLRA does not alter the previous definition of scienter, one that in this circuit includes a narrowly defined concept of recklessness which does not include ordinary negligence, but is closer to being a lesser form of intent.
As the
Greebel
decision made plain, then, “the PSLRA’s pleading standard is congruent and consistent with the preexisting [Rule 9(b)] standards of this circuit,” a circuit which “has been notably strict and rigorous in applying the Rule 9(b) standard in securities fraud actions.”
Id.
at 193. As for the reasons for the traditionally strict and rigorous pleading standards, the First Circuit stated in
Suna v. Bailey Corporation,
“[w]e have repeatedly emphasized Rule 9(b)’s heightened pleading requirements because of our concern that plaintiffs will bring baseless strike suits against securities defendants in order to increase settlement amounts or to engage in a fishing expedition for evidence on which to base their claims.”
First, this court had already required a fraud plaintiff to specify each allegedly misleading statement or omission.... Second, this court has required a securities fraud plaintiff to explain why the challenged statement or omission is misleading by requiring that “the complaint ... provide some factual support for the allegations of fraud.” (citation omitted) This means that the plaintiff must not only allege the time, place, and content of the alleged misrepresentations withspecificity, but also the “factual allegations that would support a reasonable inference that adverse circumstances existed at the time of the offering, and were known and deliberately or recklessly disregarded by defendants.” (citation omitted) Finally, this court has required plaintiffs who bring their claims on information and belief to “set forth the source of the information and the reasons for the belief.” (citations omitted)
In addition to the foregoing, a plaintiff, in a securities fraud action, must also plead materiality. Misrepresentations are actionable only if the misstated or omitted fact was “material,” that is, “only if a reasonable investor would have viewed the misrepresentation or omission as ‘having significantly altered the total mix of information made available.’” Gross
v. Summa Four, Inc.,
However, “a corporation does not commit securities fraud merely by failing to disclose all nonpublic material in its possession. The corporation must first have a, duty to disclose the nonpublic material information.”
Id.
(citing
Roeder v. Alpha Indus. Inc.,
Greebel
also discussed the PSLRA’s scienter requirement, emphasizing that “inferences of scienter survive a motion to dismiss only if they are both reasonable and ‘strong’ inferences.”
Specifically, the court noted that, as to “motive and opportunity” pleading, “catchall allegations that defendants stood to benefit from wrongdoing and had the opportunity to implement a fraudulent scheme are [not] sufficient.”
Id.
at 197 (quoting
In re Advanta Corp. Securities Litigation,
The court in (Jreebel also articulated its view that “recklessness,” as narrowly defined by the Seventh Circuit, may be offered as proof of scienter. That definition is as follows:
[R]eckless conduct may be defined as a . highly unreasonable omission, involving not merely simple, or even inexcusable, negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.
Id.
at 198 (quoting
Sundstrand Corp. v. Sun Chemical Corp.,
B. Claims under Sections 20(a) and 20(A).
To state a claim under both Section 20(a) and Section 20A, the plaintiffs first must adequately plead a predicate violation of the Exchange Act or its rules and regulations.
See Greebel,
III. Application of the Pleading Standards to the Present Section 10(b) Claims.
The plaintiffs argue that in determining whether the plaintiffs have adequately pleaded securities fraud, all the challenged statements should be considered together and in context. In this circuit, however, securities fraud cases are “decided by a statement-by-statement. analysis in which the inquiry made is restricted to the immediate context of each statement — namely, the balance of what was said on the particular occasion, and the immediate circumstances in which the particular statement was made.”
Boston Technology, 8
F.Supp.2d at 55.
See also, In re Peritus Software Services, Inc. Securities Litigation,
A. The Wall Street Journal Article: November 25, 1998.
On November 25, 1998, the Wall Street Journal published an article that discussed CTP and quoted Sims. The article stated:
James Sims, Cambridge’s chief executive, acknowledges that the company faces tighter computer-consulting budgets at major corporations next year. But he says the third-quarter stumble reflects the company’s own organizational missteps more than the economic environment.
The Company had a decentralized approach, with managers in 53 offices worldwide making their own decisions. Far flung executives were slow to spot changes in information spending, so Cambridge lost business to smaller companies and Big Five accounting firms, Mr. Sims says. Now he says the company is restructuring to focus more on service lines. He says that will help Cambridge shift quickly to win accounts in the fastest growing markets, including Internet and data-storage projects. So, he is confident that earnings can grow at 30% a year. And he is surprised at how Wall Street turned on his company.
“It’s unbelievable,” he says. “With the stock at $57, everyone was calling it a ‘strong buy.’ Now, at $18 or $19, they’re downgrading the stock. The only thing I can say about analysts isthat they’re always wrong. Listen to them and you’ll never make money. Now is the time to make money on Cambridge stock.’’
Complaint at ¶ 37 (emphasis in complaint).
1. The complaint does not explain why the statements in the November 25, 1998, Wall Street Journal Article are misleading.
The plaintiffs are required to provide some factual support for their allegations of fraud; that is, that they must point to facts that would support the inference that the defendants knew of and deliberately or recklessly disregarded adverse circumstances that existed at the time the statements were made.
Greebel,
None of the reasons given in the complaint (¶¶ 48-50, reproduced in section III.E below) as to why the defendants’ statements generally were misleading relates to the Wall Street Journal article of November 25, 1998. Paragraph 48 relates specifically to statements Sims made on February 4, 1999. Paragraphs 49 and 50 explain that the defendants’ statements were false or misleading in light of knowledge that the defendants allegedly acquired “through the Class Period.” (emphasis added). Thus, by their terms, these two paragraphs do not relate to statements in the Wall Street Journal article, which was published on the first day of the Class Period.
The only reason given by the plaintiffs that relates specifically to the question of why statements made in the Wall Street Journal article were false or misleading is that the statements caused the price of CTP’s stock to rise because the market reacted to “Sims’ recommendations that investors ignore securities analysts’ evaluation of Cambridge, which [Sims’] statement plainly contended were [sic] incorrect,” and the market “belie[ved] that defendant Sims had a superior knowledge of Cambridge, and' its prospects.” . Complaint at ¶ 38. This purported reason, however, does not satisfy the pleading standards of the PSLRA and Rule 9(b).
First, and most important, there is no indication that the statements made by Sims were false or misleading at the time that he made them. The plaintiffs have alleged no facts indicating that undisclosed, adverse circumstances belying Sims’ statements existed on November 25, 1998 much less that Sims knew of and deliberately or recklessly disregarded such circumstances when he made the statements. Sims’ statements to the
Wall Street Journal
were made during the fourth quarter of 1998. He indicated his belief that the company would recover from its “third quarter stumble.” And indeed, as the complaint itself recognizes, CTP’s fourth quarter and fiscal year 1998 results were in line with analysts’ estimates. The February 4, 1999 press release (discussed below in section III.E) states that CTP’s revenue in 1998 represented a 40% increase over its revenue in 1997.
3
Thus, the facts alleged in the corn-
Second, courts in the First Circuit generally have declined to impose liability for so-called “forward looking statements”— that is, broad statements that express optimism about a company’s future — because these courts regard such statements as unlikely, as a matter of law, to be material to a reasonable investor. “[E]xaggerated, vague, or loosely optimistic statements are not actionable.... The rule covers loose optimism about both an issuer’s current state of affairs and its future prospects.”
Boston Technology, 8
F.Supp.2d at 54.
See also Colby,
In this instance, the idea that reasonable investors would ignore the advice and cautions of independent securities analysts based solely on the optimistic opinions of Sims, the company’s president, is at odds with common sense. In their consideration of whether broad, optimistic statements about a company’s future can be a predicate for liability under the securities laws, courts have recognized that corporate executives often make vague, optimistic statements about their firms’ outlook. Thus courts generally have declined to impose liability for such statements.
See Shaw, 82
F.3d at 1217 (“courts have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace — loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available”). Sims’ expression of confidence in his company and his exhortation to ignore the advice of securities analysts are typical of the kind of “self directed corporate puffery” and sales talk that courts in this circuit have shielded from liability.
Shaw, 82
F.3d at 1218. As the court stated in
Colby,
“[a] reasonably well informed investor could not reasonably have considered [the defendant’s] bare ... comment to be so significant as to alter the mix of information bearing on investment. The ‘forecast’ is not material as a matter of law.”
As to Sims’ prediction of 30% growth, although one court in this district has stated that optimistic projections “accompanied by specific qualifications of projected results implying certainty” can be the basis of liability, id., in this case, the issue is moot. That is because Sims’ prediction in fact was not off the mark. As noted above, the complaint acknowledges that CTP in 1998 enjoyed a 40% increase in earnings over 1997.
Sims’ remaining statements — his description of CTP’s restructuring plan and his expressed confidence about the plan’s effect on CTP’s future earnings — are non-actionable forward-looking statements. Perhaps “[h]ad [the plaintiffs] presented facts known by [the defendants], and con
Moreover, there is no basis in the complaint to support an allegation that Sims’ statement on November 25, 1998 omitted any material fact. In the first sentence of the article, Sims reportedly “acknowledges that the company faces tighter computer-consulting budgets at major corporations next year.” This acknowledgment put Sims’ other, more optimistic statements in a tempering context for potential investors. Furthermore, the complaint does not “offer factual indications” that Sims “violated a duty to make further disclosure,” or that his “forecasts were not reasonably based or were not made in good faith.”
Colby,
2. The allegations regarding the November 25, 1998, Wall Street Journal article are brought upon information and belief, but the complaint does not set forth the source of the plaintiffs’ information and the rear sons for their belief
The complaint states at the outset that the plaintiffs’ allegations primarily are “based upon the investigation of their counsel.”
4
By so pleading, the plaintiffs apparently seek to avoid the particularity requirement for allegations made on “information and belief.”
Lirette v. Shiva Corp., (“Lirette I”),
however, suggests that, under the PSLRA, basing allegations on the investigation of counsel may not be “an acceptable approach to pleading.”
The cited decisions, in my view, faithfully implement one of the purposes of the PSLRA, namely to ensure that “investors ... — not their lawyers — exercise primary control over private securities litigation.”
In Re Galileo Corp. Shareholders Litigation,
In the ease of the November 25, 1998 Wall Street Journal article, the allegation that the defendants were engaged in fraud, as uncovered through the investigation of the plaintiffs’ counsel, is insufficient because the complaint does not set forth with particularity the basis on which the plaintiffs formed a belief that the statements in the article were false or misleading. The plaintiffs advert to an investigation of their counsel that included “(i) an analysis of publicly-available news articles and reports; (ii) review and analysis of public filings including, but not limited, to the corporate defendants’ annual and fiscal quarterly reports; (iii) press releases issued by defendants; and (v)[sic] other matters of public record.” With the possible exception of the CTP’s annual and fiscal quarterly reports, the plaintiffs do not identify with specificity the material reviewed and analyzed by their counsel. And even as to the annual and quarterly fiscal reports, the plaintiffs fail to state which reports were examined. Furthermore, as to all the sources of information alleged to have been the subject of inquiry by the plaintiffs’ counsel, the plaintiffs fail to set out with particularity what information counsel discovered in their inquiry, where that information was discovered, and how the information led to the belief that the defendants had engaged in fraudulent conduct. Laden with these deficiencies, the allegations concerning the statements made in the November 25, 1998 Wall Street Journal article do not meet the particularity requirement of the PSLRA and Rule 9(b) for allegations made on information and belief. 5
B. The Tucker Anthony & R.L. Day, Inc. Research Report: November SO, 1998.
On November 30, 1998, the financial services company, Tucker Anthony & R.L. Day, Inc., issued a research report on CTP (“the Tucker Anthony report”). The Tucker Anthony report stated that: (1) CTP’s common stock should trade above $25; (2) while CTP was not growing as quickly as it had in the past, the slower growth was already incorporated into the stock price; (3) CTP’s internal reorganization would be successful and would exceed , management’s goal of 34% annual financial growth once the reorganization began to
It does not appear from the Tucker Anthony report that the defendants themselves wrote or issued the report; nor does the Tucker Anthony report quote any of the defendants. Furthermore, the complaint does not allege specifically that the defendants provided any of the information contained in the Tucker Anthony report or how and when they provided information.
6
Under these circumstances, the allegations regarding the Tucker Anthony report cannot but fail to meet the pleading requirements of the PSLRA and Rule 9(b).
See
Suna,
C. The Mark D’Annolfo Recommendation: January 25, 1999.
On January 25, 1999, securities analyst Mark D’Annolfo raised his rating of CTP’s stock to “strong buy.” The complaint alleges that this event was an example of “[CPT’s] efforts to resuscitate its common stock through influencing securities industry analysts.” Complaint at ¶ 41.
It does not appear from the complaint that the defendants made or issued the Mark D’Annolfo recommendation. Nor is there any specific allegation that the defendants provided D’Annolfo with information on which he based his recommendation. Thus the allegations of fraud relating to the January 25, 1999 D’An-nolfo recommendation, like those relating to the Tucker Anthony report, fail to meet the pleading requirements of the PSLRA and Rule 9(b).
D. The BancBoston Robertson Stephens, Inc. Statement: February S, 1999.
On February 3, 1999, BancBoston Robertson Stephens, Inc. (“BancBoston”) also issued a “buy” rating for CTP.
Id.
at 42.
As with the Tucker Anthony report and the January 25, 1999 Mark D’Annolfo recommendation, the complaint does not allege that the defendants made or issued the BaneBoston statement. Neither does it allege a specific communication between the defendants and the authors of the statement in which the defendants provided the information on which the statement was based. Thus again, the allegations fall short of the requirements of the PSLRA and Rule 9(b).
E. The CTP Press Release (Business Wire): February J, 1999.
On February 4, 1999, CTP reported its results for the fourth quarter of 1998, the quarter ending on December 31. CTP also issued a press release in Business Wire that stated:
James K. Sims, President and CEO commented on Cambridge’s performance. “Cambridge provided solid revenue and earnings growth for the full year 1998.” During 1998, Cambridge served over 700 global clients across all of our service lines. Our top ten clients represented approximately 20% of 1998 revenues. Further, in 1998, our International and North American revenues continue to grow rapidly, increasing 48% and 36%, respectively. At year-end, approximately 50% of our projects worldwide contained an Internet or interactive component. In addition, we announced major alliances with key partners during the year, including: Cisco Systems, BroadVision, and Microsoft. In addition, we expanded our existing partnership with Sun Microsystems. These alliances continue to support our fixed-time/fixed-price rapid methodologies as
well as serve as an additional business development channel.
* * H* * *
Mr. Sims continued, “International revenues represented 34% of total revenues in the fourth quarter, with 41% growth over 1997. North American revenues represented 66% of total revenues in the fourth quarter with 17% growth over 1997. Additionally, 49% of our total engagements worldwide were derived from existing clients.”
During the fourth quarter, Cambridge began the process of reorganizing its North American Business Unit from a geographic model to a national service lines model. This reorganization was initiated to better serve Cambridge’s clients by providing integrated best-in-class service offerings. Also during the quarter, Cambridge’s proposal [sic] activity for potential engagements across all service lines, representing advancements in the new business development engine. In particular, in North America, the proposal activity increased over the third quarter adding an number of new Fortune 1000 companies to the client roster ranging from the telecommunications, utility, home entertainment, financial services, insurance and pharmaceutical industries.
* * * * * *
1999 Outlook
In the first half of 1999, Cambridge reported it will invest in the service line infrastructure to support the Company’s next level of growth. Investments in sales and technical training, the new managing partner (client relationships) and alliance organizations, field marketing, and project delivery methodologies will be made.
Mr. Sims concluded, “Our outlook for 1999 remains upbeat. Growth in the fullyear of 1999 will be driven by client demand in three key areas: information technology strategy, architecture and infrastructure for solving complex business challenges; effective management of operational change; and the creation of competitive advantages through electronic commerce solutions.
“Demand for these solutions will be delivered globally through our high-growth service lines including, but not limited to: Cambridge Management Consulting (change/process management); Customer Management Solutions (sales force automation; call center; Web-enablement); Interactive Solutions (business to business/business to consumer); and Enterprise Resource Solutions (Web-en-ablement of packaged applications; supply chain management; e-procurement and middle market applications).”
Complaint at ¶ 43.
The complaint alleges the following as reasons the statements were false or misleading:
48.Defendants [sic] statements, employed to bolster and regenerate its stock price, were false and misleading for the following reasons. First, Sims’ statements of February 4, 1999, were false because the Company was continuing to experience slow demand for its products, especially its ERP software and the Company’s highly touted reorganization was not remedying the fundamental problems with the Company’s business. Specifically, though defendants blamed the Company’s problems on “missteps,” they were the product of significant contract deferrals, cancellations, and pipeline/distribution issues that did not comport with Mr. Sims’ pri- or statements that there had been an increase in the number of contracts the Company was bidding on or that were “in the works.”
49. Second, defendants knew that the decline in business was the result of a continuing decrease in demand for ERP software licenses through the Class Period and defendants knew this could not be resolved by “reorganizing” management and correcting “missteps.” These problems reflected a fundamental decline in demand for the Company’s products and services and could not be solved via a “reorganization.”
50. Finally, the highly touted reorganization was not progressing as defendants had planned, nor resulting in the positive results defendants led the market to believe would flow from the reorganization and, consequently, defendants knew, or should have known but for their reckless disregard of the facts known to them throughout the Class Peiiod, that the Company would experience reduced revenues and earnings for the first quarter of 1999, regardless of Statements to the contrary.
Complaint at ¶¶ 48-50.
As noted above, the plaintiffs are required to provide factual support for their claim that the challenged statements are false or misleading, including factual support for the inference that the defendants knew of and disregarded adverse circumstances existing at the time the statements or omissions were made.
See Greebel,
First, much of the press release in question merely reports historical information about the 1998 fiscal year, particularly the fourth quarter of 1998. The plaintiffs do
Second, as to the portion of the press release entitled “1999 Outlook,” Sims’ statements are not actionable. His statement that “[o]ur outlook for 1999 remains upbeat” is a forward-looking and vague expression of optimism.
See Colby,
Third, the plaintiffs have alleged no specific facts indicating that undisclosed adverse circumstances existed on February 4, 1999, which were known and deliberately or recklessly disregarded by CTP and Sims when Sims made the statements in the February 4, 1999 press release. The plaintiffs merely state broadly that CTP’s business was declining because of slow demand for its products and services. No specific facts are alleged to show that, at the time of the February 4, 1999 press release, there was, in fact, a decline in CTP’s business due to decreased demand for CTP’s products and services. Furthermore, the plaintiffs do not allege facts sufficient to support an inference that CTP and Sims were aware of any demand-related decline in CTP’s business. To satisfy the requirement of showing that a defendant making a statement challenged as false or misleading, successful plaintiffs “typically identify internal reports, memoranda or the like, and allege both the contents of those documents and defendants’ possession of them at the relevant time.”
Id.
at 57. The plaintiffs here have provided no such information; nor have they alleged other specific facts indicating “a contrast between what company officials were hearing internally ... and what the company was telling the public at the same time.”
Serabian,
Instead, the plaintiffs essentially have stated no more than that the defendants “must have known” that CTP’s business was declining, because viewed in hindsight, that business in fact was declining. The First Circuit has “consistently held that a securities plaintiff does not satisfy the requirements of Rule 9(b) [and thus now the requirements of the PSLRA] merely by pleading ‘fraud by hindsight.’ ”
Gross,
The plaintiffs allegations about the February 4, 1999 press release, although cast as allegations about fraud, are actually allegations about poor management. There is no liability for securities fraud, however, if what is complained of is poor management. “Only fraud, not poor management or even gross mismanagement is actionable under the securities laws.”
Colby,
F. The Dow Jones Report: February I, 1999.
A February 4, 1999, Dow Jones report quoted and attributed statements to Sims as follows:
“We’ve been through a very complex year,” Sims told Dow Jones in an interview. Last year was a transition year for the company, he noted, but the company’s new focus is “dead on right,” he said. “The structure we put together is going to allow us to be competitive in the marketplace,” he said.
Sims said he is comfortable with analysts’ 1999 consensus estimate of $1.12 a share and 1999 revenue growth of 30%. In 1998, the company reported earnings of 92 cents a share on 40% revende growth to $612 million.
Complaint at ¶ 44. (emphasis in complaint) The Dow Jones report included additional information:
During its fourth quarter, Cambridge Technology changed its operating structure to one that was service-line focused as opposed to its former geographic-region emphasis. The changes affect the company’s North American business unit.
The new framework provides better coordination for Cambridge Technology’s salespeople to sell services on a national basis, according to a company spokeswoman.
During its fourth quarter, Cambridge’s North American business unit represented 66% of the $160.2 million total and increased 17% over 1997. The company’s international unit, or the balance, boosted its revenue to 41% growth.
This year, Cambridge Technology Chief Executive Sims said he expects that international revenue will continue to grow faster than domestic revenue since it’s a lower base.
The company is comfortable with analysts’ estimates of 30% revenue growth this year, Sims said. “My guidance is for steady improvement, ” he said.
Over the past three months, there’s been a pickup in the amount of services contracts that the company is bidding on or has in the works, Sims said. Furthermore, customers’ spending plans for computer services in general seem to be roughly at the same growth rate as last year. The question is one of emphasizing areas where spending is expected to increase, Sims said.
Cambridge Technology is accentuating higher growth services such as electronic commerce, sales force automation, supply-chain management, and enhancing customers’ software to take advantage of the Internet.
Complaint at ¶45. (emphasis in the complaint)
Presumably, paragraphs 48-60 of the complaint, set forth earlier in this memorandum and order, form the entire basis for the plaintiffs’ allegation that the February 4, 1999 Dow Jones report was false or misleading. I therefore review the Dow Jones report in the context of those allegations.
As an initial matter, some of what is in the Dow Jones report concerns historical information about the fourth quarter of 1998. The plaintiffs do not allege that this historical information is inaccurate. As noted earlier, an accurate report of historical information cannot be the basis for a securities fraud claim.
See e.g., Boston Technology,
Second, the remaining statements in the report are immaterial corporate puffery or forward-looking statements. Sims’ statements that the “company’s new focus is ‘dead on right,’ ” and that CTP will be “competitive in the marketplace,” are similar to statements found not to be actionable in other cases in this circuit.
See, e.g., Shaw,
Third, as discussed earlier, the plaintiffs have presented no specific facts indicating that undisclosed adverse circumstances existed on February 4, 1999, or that CTP
■ G. The Securities Analyst Conference: Mid-February, 1999.
According to the complaint, “[i]n mid-February, defendants held a securities analyst conference ... at which defendants reiterated their previously expressed guidance for first quarter 1999 revenues of between $163 million and $170 million and earnings of between $.21 and $.24 per share.” Complaint at ¶ 46.
The complaint does not allege the time, place or content of each alleged misrepresentation concerning the conference; nor does the complaint identify which of the defendants made allegedly fraudulent statements. For these reasons, the complaint as to the securities analyst conference fails.
See, e.g., Boston Technology,
H. Scienter
Because I have determined that all of the statements claimed by the plaintiffs to constitute misrepresentations fail for lack of the specificity required by the PSLRA and Rule 9(b), it is not necessary that I discuss the plaintiffs’ allegations concerning scienter. As noted in the conclusion to this memorandum and order, however, I am dismissing the complaint with prejudice. That decision was informed, in part, by my analysis of the plaintiffs’ allegations concerning scienter. It is appropriate, therefore, that I set out that analysis here.
As noted in Part II of the discussion • section of this memorandum and order, the PSLRA requires that a plaintiff in a securities fraud action state with particularity the facts that give rise to a strong inference that, in making statements alleged to be false or misleading, a defendant acted with intent to deceive, manipulate or defraud or, at the least, acted recklessly.
See Gh'eebel,
1. the individual defendants, Sims and Toscanini, by virtue of their senior positions with CTP, knew or should have known the operating and financial circumstances of CTP and its prospects for the future when the challenged statements were made;
2. Sims and Toscanini made substantial sales of their personal stock in CTP during the Class Period; and
3. all of the defendants were motivated to issue false or misleading statements to increase the company stock in light of the pendency of the Pacheco Litigation.
I will discuss, in turn, each of these assertions regarding scienter. My analysis of the assertions applies with equal force to all of the statements alleged by the plaintiffs to have been false or misleading.
First, the plaintiffs allege broadly
had access to adverse, undisclosed information about [CTP’s] business operations, business practices, finances, present and future business prospects via internal corporate documents, including the company’s operating plans, budgets and forecasts and reports of actual operations compared thereto, conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them.
Complaint at ¶ 12.
Thus the allegation is of knowledge derived by Sims and Toscanini from unspecified plans, budgets, forecasts, reports, conversations, connections, meetings and “other” information to which these defendants had access because of their positions with CTP. No strong inference of scienter can arise from allegations about sources of information, like those alleged here, that are so vague and general as to invite questions as to the extent to which these sources exist at all. The allegations presuppose a certain corporate regularity and an efficient internal reporting system, working effectively so as fully to inform the defendants of CTP’s financial and operating circumstances at times relevant to the issuance of the statements in question. Nothing is said specifically in the complaint about how well CTP’s corporate machinery actually worked, about the internal flow of information, or about what reports were generated, when they were generated and what the reports contained. Nothing is said about who at CTP talked to whom, when those talks occurred or what was said. Nothing is said about who met with whom, when those meetings occurred and what happened at those meetings. This kind of pleading, attributing knowledge to a defendant merely because of the defendant’s status in a corporation, generally fails as a method of meeting the rigorous requirements for pleading scienter. “Attempts to plead scienter by general allusions to unspecified internal corporate information are insufficient to withstand a motion to dismiss.”
Lirette v. Shiva Corporation,
The plaintiffs also allege that a strong inference of scienter arises from the fact that both Sims and Toscanini sold shares of stock during February, 1999. But as the court said in
Greebel,
to show scienter on the basis of stock trading, the plaintiffs must show that the defendants’ trading was “unusual, well beyond the normal patterns of trading by those defendants.”
Finally, the plaintiffs claim that the defendants made false or misleading statements to increase the price of CTP’s stock in order to weaken the damages claim in the
Pacheco Litigation.
This allegation, together with the allegations that the defendants were suitably placed to know about and make false or misleading statements concerning CTP’s present and future financial and operating circumstances because of their positions with CTP, amount to an allegation that scienter may be inferred from the motive of the individual defendants to influence the
Pacheco Litigation
and their opportunity to do so with authoritative statements about CTP’s financial and operating conditions. There may be circumstances in which the pleading of motive and opportunity suffices to create a strong inference of scienter, but “[m]erely pleading motive and opportunity, regardless of the strength of the inferences to be drawn of scienter, is not enough.”
Galileo Corp.,
For the foregoing reasons, I rule that none of the allegations of scienter are sufficient to meet the pleading requirements of the PSLRA and Rule 9(b).
IV. Application of the Standards to the Sections 20(a) and 20A Claims.
Because the plaintiffs have not adequately pleaded a predicate violation of the Securities Exchange Act of 1934, they do not state a claim under either Section 20(a) or Section 20A.
“Section 20(a) of the Exchange Act ... provides for derivative liability of persons who ‘control’ others found to be primarily liable under the Exchange Act.... Because plaintiffs’ complaint does not adequately allege an underlying violation of the securities laws,” dismissal of the Section 20(a) claim is appropriate.
Greebel,
B. Section 20A.
To state a claim for insider trading, the plaintiffs must have adequately alleged a violation of the Exchange Act.
See, e.g., Advanta Corp.,
Conclusion
For the reasons stated above, defendants’ motion to dismiss is GRANTED. The plaintiffs’ request for leave to amend their complaint further, contained in a footnote in their memorandum in opposition to the motion to dismiss, is denied. Here, as in
Colby,
the plaintiffs have “pled [their] case with determined imagination, but little factual substance. Considerations of fairness, judicial economy, and congressional purpose in enacting the Securities Laws all point to a denial of discovery and to dismissal of this complaint with prejudice.”
So ordered.
Notes
. Although the class has not been certified, for ease of reference, the interim between November 25, 1998 and March 18, 1999 will be referred to in this memorandum and order as the “Class Period.”
See Greebel v. FTP Software, Inc.,
. I understand the adjectives used to describe the defendants’ statements, reorganization efforts, and sales to be the words of the plaintiffs, not those of "securities analysts.”
. While the plaintiffs omitted this portion of the press release from the complaint, the defendants included a full copy of the press release in the appendix to their motion to dismiss. Neither the inclusion of this exhibit nor my consideration of it transforms the present motion into one for summary judgment. "[A] court may properly consider the relevant entirety of a document integral or explicitly relied upon in the complaint, even though not attached to the complaint, without converting the motion into one for summary judgment.”
Shaw,
. All of the plaintiffs' claims, based as they are on "investigation of their counsel,” are subject to the analysis that follows.
. As noted in the preceding footnote, the same problem exists for each of the other statements alleged by the plaintiffs to be false or misleading. The pervasiveness of the problem is enough itself to justify the granting of defendants’ motion to dismiss.
. The complaint alleges that the Tucker Anthony report was "premised” on the November 25, 1998 Wall Street Journal article. See Complaint at ¶ 39. The plaintiffs, however, do not say how they arrived at the conclusion that the Tucker Anthony report was so premised.
. The First Circuit has not yet ruled definitively on whether it is possible for a company to be held liable for statements about its stock made by outside analysts. The court has made clear, however, that in order to raise such an issue, a complaint must sufficiently plead "entanglement,” between the company or its officers and the issuance of the report.
Suna,
. The plaintiffs’ failure to allege specific facts supporting the allegation that CTP's business was declining because of decreasing demand for its products and services, includes their failure to provide any quantification of CTP’s alleged business demand. A similar failure in another securities fraud case resulted in the complaint being "dead on arrival,” where the defendant was alleged to have known of mounting losses from a particular product and published a report noting increased product costs, but did not quantify the scale of the defendant’s losses or its declining production.
Colby,
. The complaint makes no claim that any statement at issue was made directly by Toscanini. However, the complaint imputes knowledge to Toscanini by virtue of his position as CTP's chief financial officer. In light of my disposition of this case, it is not necessary that I address the appropriateness of the claims against Toscanini individually.
. The plaintiffs’ claim also fails for an independent reason: the complaint does not allege when the lead plaintiffs’ stock purchases were made. To state a claim under Section 20A, insider trading must be “contemporaneous” with a plaintiff's own trading. Case law in this circuit holds that an interval of just two days between a plaintiff’s purchase and sales by insiders is sufficient to deny the plaintiff standing as a contemporaneous trader.
See Backman v. Polaroid Corp.,