In re: INITIAL PUBLIC OFFERING SECURITIES LITIGATION
This document relates to: Amy Liu, Robert Tenney, Robert Tate, Mary Gorton, Carla Kelly, Henry Ciesielski, Ed Grier, Frank Turk, Jennie Papuzza, Stanley Warren, Ellen Dulberger, Craig Mason, and Sharon Brewer, Plaintiffs,
v.
Credit Suisse First Boston Corp., Credit Suisse First Boston (USA), Inc., Credit Suisse First Boston, Credit Suisse Group, Efficient Networks, Inc., eMachines, Inc., Lightspan Partnership, Inc., Tanning Technology Corp., and Tumbleweed Communications Corp., Defendants.
United States District Court, S.D. New York.
*299 John G. Watts, Yearout & Traylor, P.C., Birmingham, AL, for Plaintiffs.
Kristin Linsey Myles, Robert L. Dell Angelo, Munger, Tolles & Olson LLP, San Francisco, CA, Michael L. Hirschfeld, John A. Boyle, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, Randall J. Clement, Sheppard, Mullin, Richter & Hampton LLP, Costa Mesa, CA, Mitchell E. Herr, Holland & Knight LLP, Miami, FL, for Issuer Defendants.
Peter K. Vigeland, Robert W. Trenchard, Wilmer, Cutler & Pickering, New York, NY, for CSFB Defendants.
OPINION AND ORDER
SCHEINDLIN, District Judge.
I. INTRODUCTION
In an Opinion and Order dated April 1, 2005, this Court dismissed plaintiffs' claims *300 in this action, No. 04 Civ. 3757, in their entirety.[1] Plaintiffs moved for reconsideration. On May 13, 2005, I granted plaintiffs' motion in part, but reaffirmed the dismissal of plaintiffs' claims because plaintiffs had failed to plead loss causation.[2] Plaintiffs now move for reconsideration of the May 13 Opinion.[3]
II. LEGAL STANDARD
A motion for reconsideration is governed by Local Rule 6.3 and is appropriate where a court overlooks "controlling decisions or factual matters that were put before it on the underlying motion . . . and which, had they been considered, might have reasonably altered the result before the court."[4] Alternatively, a motion for reconsideration may be granted to "correct a clear error or prevent manifest injustice."[5] Reconsideration is an "extraordinary remedy to be employed sparingly in the interests of finality and conservation of scarce judicial resources."[6]
Local Rule 6.3 should be "narrowly construed and strictly applied" to avoid repetitive arguments on issues that have been considered fully by the Court.[7] A motion for reconsideration "is not a substitute for appeal;"[8] nor is it "a `second bite at the apple' for a party dissatisfied with a court's ruling."[9] Courts have repeatedly been forced to warn counsel that such motions should not be made reflexively, "to reargue those issues already considered when a party does not like the way the original motion was resolved."[10] A motion under Local Rule 6.3 "shall be served within ten (10) days after the entry of the court's order determining the original motion."[11]
On April 19, 2005, in Dura Pharmaceuticals, Inc. v. Broudo,[12] the Supreme Court rejected the Ninth Circuit's permissive *301 pleading standard for loss causation, which required only that a plaintiff allege that she had bought a security at an artificially inflated price.[13] The Court noted that "it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind. At the same time, allowing a plaintiff to forgo giving any indication of the economic loss and proximate cause that the plaintiff has in mind would bring about harm of the very sort the statutes seek to avoid."[14]Dura did not establish what would be a sufficient loss causation pleading standard; it merely established what was not. However, Dura cited the stricter standards of the Second, Third, Seventh and Eleventh Circuits' standards as those with whom "the Ninth Circuit's views about loss causation differ."[15] The Court did not explicitly modify the stricter standards of those Circuits when it rejected the Ninth Circuit's lenient standard; accordingly, Dura did not disturb Second Circuit precedent regarding loss causation.
III. PLAINTIFFS' ARGUMENT
Plaintiffs' second motion for reconsideration focuses on the Court's May 13 decision that plaintiffs had not adequately pled loss causation.[16] Essentially, plaintiffs contend that the Court misconstrued the relevant legal standard for loss causation, as articulated in the Second Circuit's decision in Lentell v. Merrill Lynch & Co., Inc.[17] In the May 13 Order, I noted that:
in material misstatement and omission cases, a court cannot presume dissipation of the inflationary effect; a plaintiff must explicitly allege a disclosure or some other corrective event. Moreover, to establish loss causation, a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.[18]
Plaintiffs contend that Lentell simply requires "that the Plaintiffs' Complaint alleges facts to support that the misstatements or omissions were the `proximate cause' ... of the investment loss."[19] Plaintiffs contend that, under Lentell, "`proximate cause' is construed broadly, except that it logically requires that the subject of the fraudulent statement or omission was the cause of the actual loss suffered."[20] Plaintiffs argue that the corrective disclosure requirement of Lentell was in fact just one of several possible ways for plaintiffs to allege loss causation, and that plaintiffs' *302 failure to allege any corrective disclosures has no effect on any of the other methods by which plaintiffs may adequately plead loss causation.[21]
Plaintiffs' confusion is understandable. As the Second Circuit noted in Suez Equity Investors, L.P. v. Toronto-Dominion Bank, the Circuit has produced "somewhat inconsistent precedents on loss causation."[22] Indeed, although the Circuit has issued several opinions dealing with loss causation in the last few years, the standard remains ambiguous.[23]
IV. DISCUSSION
A. Reconciling the Second Circuit's Loss Causation Standard
The Circuit's most recent decision on loss causation, Lentell v. Merrill Lynch, notes that "we follow the holdings of [three earlier Second Circuit cases,] Emergent Capital, Castellano and Suez Equity.[24]Lentell's loss causation standard, though, is difficult to parse. To begin, Lentell holds that:
Thus to establish loss causation, "a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered," i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security. Otherwise, the loss in question was not foreseeable.[25]
But Lentell's full discussion of loss causation spans several pages, at times asserting different formulations of the loss causation standard. For example, the Lentell decision later posits that "[t]his Court's casespost-Suez and pre-Suezrequire both that the loss be foreseeable and that the loss be caused by the materialization of the concealed risk."[26] On the next page of the decision, the court continues to reformulate its standard, noting that "our precedents make clear that loss causation has to do with the relationship between the plaintiffs investment loss and the information misstated or concealed by the defendant. If that relationship is sufficiently direct, loss causation is established...."[27] Finally, Lentell also states the loss causation standard in the negative: is not enough to allege that a defendant's misrepresentations and omissions induced a purchase-time value disparity between the price paid for a security and its true investment quality."[28]
*303 Thus, over time, the Second Circuit has advanced several different standards for pleading loss causation, including "direct causation,"[29] "materialization of risk,"[30] and "corrective disclosure,"[31] all of which are referenced in Lentell. However, a close look at the recent discussion of loss causation by the Second Circuit reveals that the loss causation pleading standard, although murky, is not internally inconsistent.
Part of the problem lies in the continued expansion of the definition of "securities fraud." Some unlawful activities, such as "jaywalking," have clearly defined limits and comprise a limited range of human behavior. Securities fraud, by contrast, encompasses many distinct types of fraudulent activities, each of which causes harm in different ways. For example, a broker may "churn" a client's investmentsi.e., make excessive trades to generate broker commissionsand harm the client by generating large commissions.[32] A broker may assure a client that the broker will only make "safe" investments, and then spend the client's money on extremely risky securities, which lose value; in such cases, the client is harmed when the concealed riskthe volatility of the actual investmentslowers the value of her portfolio.[33] A manipulative potential partner may fraudulently persuade a sole proprietor to issue shares in a closely held company, and then dismantle the company or force out the original owner, causing the owner to lose money as the company's profits diminish.[34] A corporation with a right of first refusal on its preferred stock might assure a shareholder seeking to cash in his preferred shares that "nothing [seriously affecting share value] is going to change in the near future" when in fact the corporation knows that a recapitalization likely to enhance share prices is imminent; in such a case, the loss is caused when the ting *304 employee misses out on a surge in stock prices after the recapitalization occurs.[35]
All of these examples of securities fraud cause a loss to the injured party. The mechanisms for such losses vary widely. However, the common thread is that, in each situation, "the loss be foreseeable and H the loss be caused by the materialization of the concealed risk."[36] This is true even of the "somewhat inconsistent" precedents the Circuit attempted to reconcile in Suez Equity, which resulted in a legal standard that itself has required numerous clarifications.[37]
In Suez Equity, the Second Circuit offered the following as an explanation of its holding:
The standard that we have employed in this opinion attempts to reconcile what we view as our somewhat inconsistent precedents on loss causation. See, e.g., First Nationwide Bank v. Gelt Funding Co.,27 F.3d 763 , 769-70 (2d Cir.1994) (recognizing "foreseeability" approach, but relying on "direct causation" analysis for loss causation); Weiss v. Wittcoff,966 F.2d 109 , 111 (2d Cir.1992) (per curiam) (following "foreseeability" approach); Mfrs. Hanover Trust Co. v. Drysdale Secs. Corp.,801 F.2d 13 , 22 (2d Cir.1986) (finding loss causation where "investment quality" of securities was misrepresented). Were we unconstrained by our own precedents, we might propose a different standard. We note that the approach of the Seventh Circuitinquiring whether the loss at issue was caused by the materialization of a risk that was not disclosed because of the defendant's fraudappears to be both principled and predictable. See Bastian v. Petren Res. Corp.,892 F.2d 680 , 685-86 (7th Cir.1990); see also Caremark, Inc. v. Coram Healthcare Corp.,113 F.3d 645 , 648 (7th Cir.1997) ("To plead loss causation, the plaintiff must allege that it was the very facts about which the defendant lied which caused its injuries."). But, we are not writing on a blank slate, and believe that the approach here articulated best reconciles our precedents to date.[38]
Upon closer examination, however, the purportedly "inconsistent precedents" are more consistent than they might initially appear to be. That closer examination is warranted in light of the apparent confusion that reigns with respect to the element of loss causation. A chronological review may be the best approach to the required close examination.
In 1986, the Circuit decided Manufacturers Hanover Trust, in which the court established the "investment quality" standard for material misrepresentation cases.[39] In that case, the court held that the defendant had misrepresented the risks associated with an investment in a company whose assets were extremely unstable. Eventually, the very instability that defendant had concealed caused the collapse of the company, resulting in the *305 loss of the investment. Thus the misrepresentation went to the investment quality of plaintiff's investment, because plaintiff "would not have contracted with [defendant] . . . [to invest] had [plaintiff] known of the misrepresentation . . . particularly given that the [ ] statements were in part a response to the financial community's concern regarding [defendant's] stability."[40]
In 1992, the Circuit decided the Weiss case, in which defendants persuaded plaintiff to sell them half his company in return for defendants' promise to provide necessary supplies.[41] But defendants did not disclose that they had no intention of keeping their promise but rather intended to take over plaintiffs business and force the plaintiff out. The court held that "it was quite foreseeable that the consummation of defendants' secret intention not to perform their promises would cause Weiss to suffer a loss."[42]
In both Manufacturers Hanover Trust and Weiss, the court held that loss causation could be pled by alleging that (1) defendants concealed a foreseeable risk associated with a securities transaction between plaintiffs and defendants; and (2) the foreseeable risk occurred causing plaintiffs' loss. The difference between the two cases is that one involved an investor (hence the phrase "investment quality"), and the other involved an issuer of securities (hence the term "foreseeability"). But both cases involved a concealment of negative information which caused the plaintiffs loss when the concealed information eventually caused the transaction to fail.
In 1994, the Circuit decided the third loss causation case cited in Suez Equity, which allegedly established a "direct causation" requirement.[43] But First Nationwide Bank did no such thing, for the following reasons. First, it was not a securities case at all, but a RICO case, involving allegations that a lender was fraudulently induced to make nonrecourse loans for purchases of real estate whose value was materially misstated. The case addressed "proximate cause" rather than "loss causation," which the Lentell court later described as an "imperfect" analogy.[44]Second, the court found that several factors prevented plaintiffs from pleading proximate cause: (1) plaintiff offered no valid methodology for calculating the magnitude of the misrepresentation regarding the value of the real estate; (2) five years had elapsed between the time of the misrepresentation and the time of the loss; and (3) a massive market-wide downturn in real estate prices had occurred during the interim.[45] Nonetheless, in articulating its standard, First Nationwide Bank offered the following summary of the law of *306 proximate cause: "in addition to showing that but for the defendant's misrepresentations the transaction would not have come about, the [plaintiff] must show that the misstatements were the reason the transaction turned out to be a losing one."[46] Although First Nationwide Bank is a RICO case, addressing "butfor" causation and "proximate cause," rather than the securities law concepts of transaction causation and loss causation, it articulates requirements similar to those of Weiss and Manufacturers Hanover Trust. A plaintiff must allege a material misstatement (i.e., concealment of a risk), and that misstatement must be the cause of the plaintiff's loss (i.e., the risk must materialize).
Thus, on closer examination, all three cases involve the concealment of a risk and the materialization of that risk. Unfortunately, however, the court in Suez Equity resolved the conflict in terminology by sticking with the term "investment quality." "[P]laintiffs may allege ... loss causation by averring [ ] that ... the defendants' misrepresentations induced a disparity between the transaction price and the true investment quality of the securities at the time of the transaction."[47]
In Emergent Capital, decided only two years later, the court essentially conceded that the legal standard stated in Suez Equity was incomplete. "Plaintiff's allegation of a purchase-time value disparity, standing alone, cannot satisfy the loss causation pleading requirement."[48] Rather, the Emergent Capital court noted that the Suez Equity plaintiffs "specifically asserted a causal connection between the concealed informationi.e., the executive's [bad financial] history [and incompetence]and the ultimate failure of the venture."[49] Thus, the Emergent Capital court applied the earlier standard of concealment of a risk and materialization of that risk without an explicit acknowledgment.[50]
Finally, in Lentell, the court paid lip service to Suez Equity[51] but held that the Second Circuit "require[s] both that the *307 loss be foreseeable and that the loss be caused by the materialization of the concealed risk."[52] It is thus beyond cavil that Lentell requires more than the bare "proximate cause" standard asserted by plaintiffs here.[53]
B. Application to Liu v. CSFB
It is vital to understand the nature of the risks that plaintiffs in the instant action allege were concealed. There are two kinds of risk. One risk is that the market could simply discover that the earnings estimates had been tainted by fraud, and that confidence in the securities would diminish, causing their prices to fall. The other risk is more central to plaintiffs' alleged scheme. Plaintiffs have alleged that defendants' scheme lowballed earnings estimates, warned the public that those estimates might be too low, and then reported earnings that exceeded those estimates. As a result, defendants induced the public to overvalue the securities. But when the investors eventually learned that the earnings did not always exceed expectations, their confidence collapsed, as did the price of the stock, causing their loss.
1. Disclosure of Falsity
The first type of "concealed risk" at issue herei.e., that the public might learn that the earnings estimates were fraudulent when madecould support a claim for securities fraud if plaintiffs had pled a disclosing event. Lentell teaches, however, that such a concealment can only cause losses after it is disclosed:
plaintiffs have argued (affirmatively) on this appeal that the falsity of Merrill's recommendations was made public no earlier than April 2002, when the NYAG's affidavit "described the inner workings of Merrill's Internet Group," and that until then plaintiffs (and presumably the market at large) therefore lacked knowledge of the fraud. The complaints withstand the statute of limitations on the strength of that argument. By the same token, however, Merrill's concealed opinions regarding 24/7 Media and Interliant stock could not have caused a decrease in the value of those companies before the concealment was made public.[54]
The reasoning is simple. Where the alleged misstatement conceals a condition or event which then occurs and causes the plaintiffs loss, it is the materialization of the undisclosed condition or event that causes the loss.[55] By contrast, where the alleged misstatement is an intentionally false opinion, the market will not respond to the truth until the falsity is revealed i.e. a corrective disclosure.[56]
*308 Plaintiffs have not alleged that defendants' fraudulent concealment of their true opinions was ever disclosed, and plaintiffs have made no attempt to tie such a disclosure to their alleged losses. Under Lentell, plaintiffs' failure to allege a corrective disclosure of the falsity of defendants' opinions precludes any claim that such falsity caused their losses.[57]
The circumstances of Lentell are strikingly similar to those alleged in the instant case. In both cases, plaintiffs argued that the fraud was not disclosed, if ever, until years after their losses were realized, in successful efforts to withstand dismissal based on the statute of limitations.[58] Both cases allege that plaintiffs' losses were caused when negative market events (i.e., a downgrading of "buy" recommendations or a failure to meet earnings forecasts) were followed by a decline in securities prices. In Lentell, though, the court held that the fraudulent nature of the analysts' conduct was not revealed until "the inner workings of the [analyst] Group" were disclosed; the downgrading of "buy" recommendations did not disclose that the analysts' reports had been tainted.[59] In this case, the gulf between what was alleged to have been the concealed risk and the events that materialized is even more apparent: what was concealed was the analysts' belief that revenue would exceed forecasts, and what materialized was exactly the opposite. Accordingly, plaintiffs have never alleged any disclosure of the falsity of defendants' opinions.
2. The Market Conditioning Theory
With respect to the other allegedly concealed riskthat a complicated scheme misled the public as to the true value of *309 the stockthe loss can only be caused when the true value of the securities is revealed to the public. This theory depends on the supposition that the investing public would disregard the available objective evidence of a company's performance (e.g., its past verified earnings statements, its stature in the marketplace, and its posture in mergers and acquisitions) and instead overvalue the company by relying on the fraudulently nurtured belief that the company would continue to exceed earnings estimates indefinitely.
Lentell acknowledges that "systematically overly optimistic" analysts' reports (and, by analogy, the systematically pessimistic earnings forecasts alleged here), might sometimes support a claim of securities fraud.[60] However, "where H substantial indicia of the risk that materialized are unambiguously apparent on the face of the disclosures alleged to conceal the very same risk," Lentell imposes a heavy burden on plaintiffs to plead their losses specifically.[61] As in Lentell, the hundreds of statements that accompanied defendants' earnings forecasts warned that defendants' estimates were unreliable and could be beaten.[62] In such cases, "a plaintiff must allege (i) facts sufficient to support an inference that it was defendant's fraud rather than other salient factorsthat proximately caused plaintiff's loss; or (ii) facts sufficient to apportion the losses between the disclosed and undisclosed portions of the risk that ultimately destroyed an investment."[63]
Plaintiffs have failed to allege facts sufficient to do either. Rather, they have alleged that the concealed risks materialized when one of three "Disclosing Events" occurred: (1) reported revenue failed to meet or exceed earnings forecasts; (2) a company announced such a shortfall before reporting revenues; or (3) analysts revised their estimates downward.[64] As I noted in my June 8, 2004 Opinion granting plaintiffs' motion for leave to amend their complaint, "each Disclosing Event was the unfortunate but commonplace event of a publicly traded company failing to meet its revenue forecast, coupled with a concomitant and predictable immediate drop in share prices."[65] Plaintiffs have made no effort to allege that it was the defendants' fraud that caused their losses. Nor have plaintiffs alleged "facts sufficient to apportion the losses" between that predictable immediate drop in share prices and any loss that might be attributable to investors abandoning their belief that earnings would exceed estimates forever.[66]
*310 Accordingly, plaintiffs have failed to allege loss causation.
V. CONCLUSION
For the foregoing reasons, plaintiffs' second motion for reconsideration is denied in its entirety. The Clerk is directed to close this motion and this case.
SO ORDERED:
NOTES
Notes
[1] See In re Initial Public Offering Sec. Litig. ("In re IPO"),
[2] See In re IPO,
[3] See Plaintiffs' Memorandum in Support of the Rule 59(e) Motion to Alter, Amend, or Vacate the Order of May 13, 2005, Dismissing the Plaintiffs' Complaint ("2d Reconsideration Mem."). As they did in their first motion for reconsideration, plaintiffs have styled their motion under 59(e) rather than Local Rule 6.3. As I noted in my May 13 Opinion, there is no difference between the two. See Liu Reconsideration,
[4] Range Road Music, Inc. v. Music Sales Corp.,
[5] Doe v. New York City Dep't of Soc. Servs.,
[6] In re Health Mgmt. Sys., Inc. Sec. Litig.,
[7] Greenes v. Vijax Fuel Corp., No. 02 Civ. 450,
[8] RMED Int'l, Inc. v. Sloan's Supermarkets, Inc.,
[9] Pannonia Farms, Inc. v. USA Cable, No. 03 Civ. 7841,
[10] Houbigant, Inc. v. ACB Mercantile,
[11] S.D.N.Y. Local Rule 6.3. See also Fed. R.Civ.P. 59(e) (same).
[12] ___ U.S. ___,
[13] See Broudo v. Dura Pharms., Inc.,
[14] Dura,
[15] Id. at 1630 (citing Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc.,
[16] Plaintiffs also quibble with the Court's description of the alleged scheme, devoting four pages to the proposition that "the artificial inflation occurred before the actual results were announced to have beaten the preexisting estimates." 2d Reconsideration Mem. at 8. Because plaintiffs have not sufficiently alleged that the alleged scheme caused their losses, the exact timing of the alleged artificial inflation is irrelevant. Moreover, to the extent that plaintiffs now raise questions of transaction causation that were addressed in my April 1, 2005 Order, the ten-day deadline for reconsideration motions has expired. See S.D.N.Y. Local Rule 6.3; Fed.R.Civ.P. 59(e).
[17]
[18] Liu Reconsideration,
[19] 2d Reconsideration Mem. at 5.
[20] Id.
[21] See id. at 5-6 (summarizing plaintiffs' apprehension of the Lentell test as follows: "[I] was the subject of those `misstatements and omissions' the cause of the decline in stock values that Plaintiffs claim as their loss? or [2] was there any corrective disclosure regarding the falsity of those `misstatements and omissions' so as to cause [ ] the decline in stock values that Plaintiffs claim as their loss?[ ] or [3] have Plaintiffs alleged that the Defendants concealed or misstated any risks associated with an investment in those securities, some of which presumably caused Plaintiffs' losses?") (bracketed numbers in original).
[22]
[23] See Castellano v. Young & Rubicam, Inc.,
[24] Lentell,
[25] Id. at 173 (quoting Suez Equity,
[26] Lentell,
[27] Id. at 174 (citations omitted).
[28] Id. (quotation marks and citations omitted).
[29] See id. at 174 ("If that relationship [between `the plaintiff's investment loss and the information misstated'] is sufficiently direct, loss causation is established...."). See also Suez Equity,
[30] See Lentell,
[31] See Lentell,
[32] See, e.g., Caiola v. Citibank, N.A.,
[33] See, e.g., Louros v. Kreicas,
[34] See, e.g., Weiss v. Wittcoff,
[35] Castellano,
[36] Lentell,
[37] Suez Equity,
[38] Id. (quoting the entirety of footnote one of the Suez Equity opinion).
[39] Manufacturers Hanover Trust,
[40] Id.
[41] See Weiss,
[42] Id. at 112.
[43] See First Nationwide Bank,
[44] Lentell,
[45] See First Nationwide Bank,
[46] First Nationwide Bank,
[47] Suez Equity,
[48] Emergent Capital,
[49] Id.
[50] Indeed, even if Emergent Capital had explicitly reaffirmed the standard of Suez Equity, which calls only for a disparity between price and investment quality at the time of purchasei.e., artificial inflationthe standard would no longer be valid. In Dura,
[51] See Lentell,
[52] Id. (beginning of second full paragraph; beginning of third full paragraph) (emphasis in original). Curiously, the exact same language, including the emphasis, appears twice on the same page of the Lentell decision.
[53] 2d Reconsideration Mem. at 3.
[54] Lentell,
[55] See, e.g., Suez Equity (concealed incompetence led to company's collapse); Castellano,
[56] See Lentell,
[57] See id. at 175 n. 4.
[58] Specifically, the concealment in Lentell was alleged to have been disclosed when the New York Attorney General's office issued an affidavit describing the analysts' behavior. See id. In the instant case, no such disclosure has been alleged.
[59] Id. In Lentell, the "inner workings" of the analysts' group showed that the analysts ignored warnings that certain companies might fail. However, the analysts never lied about those specific defects; rather, their alleged fraud was to be unfailingly upbeat and to inflate share prices through repetitive positive reviews of the securities at issue. See id. at 165-66 (summarizing the alleged fraud, which involved "bullish research reports," publication of "BUY or ACCUMULATE" recommendations, and "profoundly unrealistic price targets," issued pursuant to agreements to pump up share prices and share in the investment banking proceeds). Thus, what the analysts concealed was that they did not believe in their own statements, and the effect of their false praise dissipated only when their alleged fraud came to light. Compare id. with Fogarazzo v. Lehman Bros et al., No. 03 Civ. 5194 (Order of 2/10/05), in which I noted that plaintiffs had made the following allegations regarding concealment of specific investment risks:
On September 7, 1999 ... Lehman analysts resumed [Lehman's] 1-Buy rating and evaluated RSL's break-up value as exceeding $40 per share. Additionally, [an] analyst cited RSL's Delta 3 IPO as "pure upside to our valuation" of RSL. Documents reveal that RSL ... in fact, thought little about Delta 3's long-term prospects.
...
Morgan Stanley ... reiterated its Strong Buy rating and a $38.00 per share price target for RSL, even though ... RSL announced [three days earlier] that it had taken a massive $32 million restructuring charge. Incredibly, in the same [ ] report, Morgan Stanley characterized the $32 million charge to earnings as "a positive for RSL."
2/10/05 Order in Fogarazzo, No. 03 Civ. 5194, at 3-4.
[60] Lentell,
[61] Id. Lentell refers to the fact that the allegedly fraudulent analysts' recommendations in that case (i.e., "buy" or "accumulate") were invariably accompanied by cautionary language that the stock prices were volatile. In fact, the securities at issue in Lentell were rated in the "most risky" possible category on a four-point scale. Plaintiffs in Lentell alleged that defendants' analyst reports concealed the risk of volatility in share pricesi.e., the chance that the prices could plummet despite earlier "buy" recommendations. Thus, the "substantial indicia of the risk" were the warnings that the stock price was volatile, and they appeared "on the face" of the analyst reports. Put another way, Lentell establishes a standard for those situations in which allegedly misleading statements include cautionary language that the statements might be wrong or misleading. In such cases, plaintiffs must meet a heavy burden of alleging specific losses that are connected to the risks that were actually concealed, rather than those risks that were disclosed by defendants in their cautionary statements. See id.
[62] See Exs. D, E to Third Amended Complaint.
[63] Lentell,
[64] Third Amended Complaint ¶ 225.
[65] In re IPO ("Liu I"),
[66] Lentell,