INTRODUCTION
In this securities-fraud suit, the class-action complaint alleges that defendants made false and misleading statements concerning NorthPoint Communications
STATEMENT
NorthPoint Communications Group, Inc., was a provider of digital-subscriber-line (DSL) technology services. Through DSL technology, data can be transported at high speeds over traditional telephone wires. As a DSL “wholesaler,” North-Point owned digital-communications equipment, which was installed in telephone-company offices. It also leased copper telephone lines to connect this equipment with end users. It marketed its DSL services to customers including telephone companies, Internet service providers (ISPs) and data-service providers (collectively, “network service providers”), who in turn would sell DSL services to end users. If a user signed up through one of North-Point’s customers, NorthPoint would arrange for the installation of a DSL connection. NorthPoint would bill its customers for the installation (a one-time charge) as well as a monthly service fee for the use of the line.
The complaint attacks statements made between August and November 2000. These statements, primarily press releases, related to NorthPoint’s revenues, subscriber lines, accounting policies, general business condition, and a planned merger with Verizon Communications. The principal charge is that defendants were knowingly or with deliberate recklessness reporting revenue NorthPoint was not reasonably assured of collecting and leading investors to believe that NorthPoint’s merger with Verizon would still take place notwithstanding a possible abort by Verizon.
On August 7, 2000, NorthPoint agreed to combine its DSL business with that of Verizon’s. This would have created a new company, Verizon Ventures I, Inc., to which Verizon was to contribute $800 million аnd certain DSL assets in exchange for majority ownership. The merger agreement, disclosed in a 8-K report filed August 14, 2000, allowed Verizon to back out if a “Material Adverse Effect” occurred upon NorthPoint’s business (Def. Exh. G at 69). The agreement defined a Material Adverse Effect as (id. at 77):
[I]n the case of NorthPoint or Parent, any fact, event, change or effect having, or which will have, a material adverse effect on the business, operations, properties (including intangible properties), financial condition, assets or liabilities of NorthPoint or Parent, as the case may be, and its Subsidiaries taken as a whole, but shall not include facts, events, changes or effects that are generally applicable to (A) the data industry, (B) the United States economy or (C) the United States securities markets generally ... 1
Relying on secret disclosures from eight “confidential witnesses” as well as other alleged facts, plaintiff claims that the second-quarter financial announcement was false and misleading. At that time, it is alleged, NorthPoint’s customers were in such financial disarray and NorthPoint was so delinquent in providing services that much of the company’s revenue was not reasonably аssured of collectibility. In turn, the undisclosed matters purportedly posed a time bomb for the Verizon merger.
For similar reasons, the complaint also characterizes as misleading two press releases issued in September and a statement by defendant Liz Fetter, North-Point’s CEO, in an October media article. All concerned the merger. The first press release, issued on September 6, 2000, quoted Fetter as saying, ‘Verizon’s equity investment and debt financing will help NorthPoint maintain strong momentum as we move toward the close of our merger agreement,” and, “We will use our greater financial strength to expand our network, scale our business and enhance the broadband customer experience. We look forward to the completion of the merger and to delivering its many benefits to American consumers and businesses” (ComplJ34). The second release, issued September 20, 2000, said thаt “the deal accelerates NorthPoint’s ability to scale and innovate, and makes NorthPoint a more formidable competitor against cable service providers” (Comply 36). The September 20 release also quoted Fetter as saying, “Our agreement with Verizon enables NorthPoint, already one of the most nationwide of all DSL service providers, to double its network and dramatically expands the availability of fast, reliable and affordable connections to the Internet” (ibid). Then, on October 20, 2000, a media article quoted Fetter as saying, “The road is littered with companies that have been unsuccessful at raising capital.... That’s a worry off the table” (ComplA 38).
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The main issue concerns 3Q 2000. In a press release issued on October 26, 2000, NorthPoint announced its 3Q 2000 financial results. Third-quarter revenues were reported to be $30.1 million, with an EBITDA loss of minus $79.2 million
NorthPoint has consistently applied what it believes is a conservative revenue recognition policy. During the past several months there has been a considerable change in the financing environment and it may be that a few of North-Point’s customers will have difficulty raising the capital required to continue to grow their businesses.
Given the consistent application of its revenue recognition policies and the financing challenges faced by a few of its customers, NorthPoint has chosen to recognize revenue for lines installed for these few customers only when the customers’ financial outlook improves or when cash is received by NorthPoint.
The press release did not say how much revenue NorthPoint did not recоgnize in the results released October 26. In a conference call with industry analysts held on or about that day, however, it was revealed that the company excluded $2.8 million in revenue for the quarter (Comply 42). In other words, given the downward spiral of the Internet industry at that time, a revenue allowance of $2.8 million was taken to more realistically state revenue.
NorthPoint’s October 26 press release also reported that the company had 87,300 installed lines as of September 30, 2000. It additionally included several statements pertaining to the Verizon merger, including quoting Fetter as saying, “We continue to be on track with our prior expectation of closing the transaction in the first half of 2001” (ComplV 40(d)).
On or about the same day, NorthPoint officers held a conference call with industry analysts, as stated. Pursuant to the call, one analyst then reported that “the company has indicated that it is comfortable with revenue estimates for the fourth quarter and full year 2000” (Comply 42). A few weeks later, on November 13, 2000, Fetter was quoted in a NorthPoint press release as saying, “NorthPoint ... continues to be successful among the most formidable names in leading companies this century,” and that the company was nearing the end of a “landmark year” (CompLf 45). Then, on November 15, 2000, on a form NT-10-Q filed with the SEC, NorthPoint remarked on its “rapid growth since September 30,1999” (ComplV 52).
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On November 20, 2000, NorthPoint announced that it was revising its 3Q 2000 revenues. The press release said that NorthPoint had received “additional facts after the October 26, 2000, third-quarter press release that indicated some of its privately-held, consumer focused network service provider customers did not have sufficient long-term financial resources to assure the Company that they would be able to make timely paymеnt for the Company’s services” (Def.Exh. M). Revenues were revised downward from $30 million to $24 million. The release also quoted Fetter as saying, “These recent events confirm the validity of our decision to find a strategic partner like Verizon,” and “We continue to be on track with our prior expectation of closing the Verizon transaction in the first half of 2001” (Comply 56).
Nine days later, Verizon backed out of the merger agreement, saying that a Material Adverse Effect had occurred. The proposed class period would close on this date, November 29, 2000. On that day, NorthPoint’s shares traded at well less than $1, more than 90% less than the class period high. A month-and-a-half later, NorthPoint filed for bankruptcy. Its stock has since been delisted from the NASDAQ stock market. Substantially all of its assets have been sold to AT & T in a bank-
ANALYSIS
The complaint alleges that NorthPoint and several of its officers are liable for securities fraud. It alleges that purchasers of stock between August 8, 2000, and November 29, 2000, were injured by defendants’ statements. The individual defendants have moved to dismiss the complaint pursuant to FRCP 12(b)(6) and 9(b). They argue, inter alia, that the complaint fails to satisfy the rigorous pleading standards imposed by the Private Securities Litigation Reform Act.
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Under FRCP 12(b)(6), a motion to dismiss should not be granted unless it appears beyond a doubt that the plaintiff “can prove no set of facts in support of his claim which would entitle him to relief.”
Conley v. Gibson,
Securities-fraud suits, meanwhile, are subject to unique pleading requirements. In 1995, Congress enacted the PSLRA in order to curb what was perceived as a raft of abusive practices in securities-fraud litigation. In raising the bar for securities-fraud suits, the PSLRA toughened the already-stringent requirements for pleading fraud under FRCP 9(b).
Cf., In re Glen-Fed, Inc. Sec. Litig.,
Significantly, with respect to each act or omission alleged, the complaint must also state with particularity facts giving rise to a “strong inference” that the defendant acted with the required stаte of mind. 15 U.S.C. § 78u-4(b)(2). In the Ninth Circuit, the required state of mind is actual knowledge or “deliberate recklessness,” or where the challenged statement is forward-looking, “actual knowledge ... that the statement was false or misleading.” 15 U.S.C. § 78u-5(c)(1);
Ronconi v. Larkin,
A plaintiff may rely on circumstantial evidence to prove scienter, so long as that evidence meets the “strong inference” standard.
See Silicon Graphics,
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Defendants argue that the complaint should be dismissed outright as an impenetrable “puzzle-style” pleading. Although the complaint is most difficult to follow in places and assumes a shotgun / hodgepodge style in large part, this order declines to take such a drastic step. Instead, this order does its best to glean the complaint, focusing on those statements highlighted in bold therein as the main basis of plaintiffs claim. Even dоing so, however, the Court agrees with defendants that the complaint is so structurally unsound with regard to one class of allegations that its specific claims cannot be salvaged, or even adequately discerned. This will be discussed later in the order.
1. Revenue.
The principal charge in the complaint is that defendants recorded and announced revenue for the second and third quarters of 2000 that they knew was not reasonably assured of collectibility or acted with deliberate recklessness in recording such insecure revenue. 2 This claim is leveled against both the announcement of second-quarter earnings made on August 8, 2000, and the release of third-quarter earnings made on October 26, 2000. The more serious charge goes to the October 26 announcement. The discussion below, therefore, primarily focuses on whether the complaint adequately states a well-plеd claim as to this announcement. It concludes that it does not, since plaintiff has failed to plead facts giving rise to a “strong inference” that defendants acted with, at a minimum, deliberate recklessness.
The revision of the third-quarter results shows that as originally announced, these results were incorrect.
3
With accounting fraud, however, the necessary scienter is in general not established merely by the publication of inaccurate accounting figures, or failure to follow generally accepted accounting principles. More is needed.
In re Worlds of Wonder Sec. Litig.,
In alleging scienter the complaint also relies heavily on the following: (1) statements issued by a competitor during the class period; (2) disclosures by eight confidential witnesses, all alleged to be North-Point employees during or throughout the class period; (3) the allegedly serious financial troubles of several NorthPoint сustomers, (4) certain marketing practices NorthPoint employed during the class period; (5) the fact, size and timing of the November 20 revision of the figures announced October 26; (6) stock sales made by three of the individual defendants during the class period; (7) NorthPoint’s in
Significantly, the PSLRA was intended to put an end to cases of “fraud by hindsight.”
In re Silicon Graphics,
(a) Covad.
First, the complaint alleges that statements made by Covad, Inc., a NorthPoint competitor, constitute evidence of scienter by NorthPoint. In a 3Q 2000 earnings release, issued October 17, 2000, Covad announced that it would not recognize an undisclosed amount of revenue from some “slow-paying” ISPs in the third quarter (Comply 41(c)(ii)). In its 3Q 2000 report to the SEC, filed November 14, 2000, Co-vad specified that it did not recognize $11.4 million in revenue in its earlier announcement. Covad’s report also said that subsequent to its October 17 release, FlashCom, a customer with whom Covad had worked out a payment plan, defaulted on said plan. In light of this late-developing event, Co-vad announced that it also would not recognize $7.5 million from FlashCom (Comply 41(c)(i)). The point allеged is that NorthPoint must have known of these reported events.
The timing of Covad’s announcements shows that NorthPoint’s main competitor came to similar realizations about its customers at almost exactly the same time as NorthPoint did. According to the complaint, Covad announced on October 17, 2000, that it was not recognizing revenue in 3Q 2000 from certain customers — not including FlashCom. On October 26, 2000, NorthPoint made substantially the same announcement, saying it would not recognize $2.8 million in revenue from certain unstable customers. Then, in its 10-Q for the third quarter, filed on November 14, 2000, Covad announced that it was restating its third-quarter revenue to subtract out $7.5 million attributable to FlashCom. The reason given was FlashCom’s failure to meet its payment schedule. Six days later, NorthPoint made an almost identical announcement, also subtracting out revenues related to FlashCom. To hold up Covad as a model of whаt NorthPoint should have done is, more or less, to concede that NorthPoint did nothing wrong in the first place.
(b) Confidential-Witness Disclosures.
The confidential-witness statements, the backbone of the complaint, also shed little light on whether defendants acted with the necessary scienter. Even if accepted with
The eight witnesses are identified as an “Account Manager” (CW1); a “Sales Consultant” (CW2); a “Regional Sales Operations Manager” (CW3); an “Account Support Director” (CW4); a “Business Development Director” (CW5); an “Account Support Manager” (CW6); a “Major Account Coordinator” (CW7); and an “Account Supervisor” (CW8). Significantly, the complaint does not discuss what the specific duties of these individuals were, or how they came to learn of the information they provide in the complaint. These witnesses mostly describe internal reports regarding, interactions with, and conversations about delinquent customers. The PSLRA requires that these allegations be pled with substantial specificity. When relying on the existence of internal reports, for example, a proper complaint must “contain at least some specifics from those reports as well as such facts as may indicate their reliability.”
Silicon Graphics,
The confidential-witness allegations going to defendants’ alleged knowledge that revenues from two ISP customers (PSN and FlashCom) were not reasonably assured of collectibility are particularly key. These are the customers specifically alleged to be “involved in ... improper sales” elsewhere in the complaint (Comply 97). The allegations going to these customers (as well as all others), however, are vague, inconclusive and occasionally contradictory. Take, for example, the allegation that “PSN constantly stalled and disputed their bills and refused to pay” (Comply 33(b)(v)). But at what time did they refuse? Which bills did they refuse to pay? How does the witness know? This witness also appears to admit that PSN paid at least some of its bills, since “NorthPoint employees went to PSN’s headquarters in Phoenix, Arizona around August of 2000 to try to get them to pay their bills that were overdue ” (emphasis added) (ibid). The point is clarified only slightly by another allegation attributed to the witness, which confusingly provides that “PSN was delinquent throughout 2000” and “PSN began to become seriously delinquent on their bills to NorthPoint from May or June 2000” (ibid). What is the difference between “delinquent” and “seriously delinquent”? Did this difference bear any weight within NorthPoint? The witness never says. These alleged facts lead toward a sense of cоnfusion more than toward a strong inference of scienter.
The confidential-witness disclosures are only slightly more clear where FlashCom is concerned. One confidential witness says, “There were also phone calls between defendant Glinsky and FlashCom’s CEO regarding FlashCom’s serious delinquency” (Comply 33(b)(ix)). But the complaint never says when these phone calls occurred, or what was specifically discussed. Likewise, another witness says, “There were frequent conference calls between NorthPoint and FlashCom where the delinquent payments were discussed,” without providing any detail as to when these calls were made or who were involved in them (Comply 33(b)(vii)).
According to one confidential witness, an account supervisor for NorthPoint, Flash-Com owed NorthPoint approximately $5 million and was more than 120 days delinquent on payments as of March 2000 (ComplJ 33(b)(ix)). The witness does not sаy that FlashCom was 120 days delinquent as to all $5 million, or just a portion thereof. At that point, “a meeting tran
Another secret witness reports that in Octobеr 2000, he / she “received an e-mail that defendant Liz Fetter also received” (Comply 33(b)(v)). That e-mail “detailed which customers were past due and how must they owed” (ibid). The complaint is not clear as to what the e-mail said, when it was received (before or after the October 26 announcement), or how the confidential witness knew Fetter received it. The alleged message may have said (the complaint is unclear) that FlashCom owed approximately $4 million, and two other customers (Zyan and PSN) owed $2 to $2.5 million each. The allegation concerning the e-mail does not, however, provide how late any of these customers were in paying their bills at that time. It is plain from the face of the complaint that FlashCom, at least, had made some payments since March 2000. Even assuming that the email exists and was received by Fetter before the October 26 date (three significant leaps of faith, given the lack of detail the complaint provides about the message), it does not give rise to a strong inference that Fetter (or anyone else) was deliberately reckless in not recognizing as revenue a greater amount than $2.8 million. The foregoing are among the more specific allegations attributed to the confidential witnesses.
Other assertions are more vague; such as “NorthPoint had serious difficulties in the installation of DSL lines” (Comply 33(b)(viii)) and “NorthPoint was having serious difficulty collecting funds from its ISP customers” (Comply 33(b)(ii)). Still others speak to business problems only tangentially related to the issue of whether NorthPoint falsely reported revenues. Some just emphasize that unnamed ISP customers were behind in paying their bills, without addressing whether NorthPoint accounted for these customers in the actions it took on October 26, 2000. Finally, none of the allegations ever refer to defendants Blue-stein and Malaga. As to them, the complaint relies on its boilerplate assertion that knowledge can be attributed to these executives “[bjeeause of their positions and access to material non-public information available to them and not to the public” (Compl.f 19).
All in all, the gaps within and across the confidential-witness disclosures are just too great. Even taken together with all inferences drawn in their favor (and added to details in NorthPoint’s public filings concerning lengthening delays in ISP customer payments) at most they show that NorthPoint and its ISP customers made some bad business decisions and had some operational shortfalls, which in turn led NorthPoint to allow for more uncollectibility as the year progressed. The allegations do not raise a “strong inference” that defendants acted with at least deliberate recklessness in failing to do more sooner.
(c) Customer Risks.
The complaint also makes allegations concerning the “serious financial troubles” of FlashCom and several of NorthPoint’s
Where the allegations are fresh, they too fail to raise a strong inference of scienter. For instance, the complaint emphasizes that FlashCom never had its initial public offering. In a registration statement it issued for the IPO on May 12, 2000, Flash-Com had said, “we believe that the net proceeds from this offering, together with our existing cash balances, will be sufficient to fund our operating losses, capital expenditures, lease payments and working capital requirements for at least the next 12 months” (Comply 71). When the IPO fizzled, the complaint alleges that the registration statement should have put the world on notice that FlashCom could not pay. This reading benefits greatly from hindsight, and knowledge therefrom of the burst in the Internet bubble. Significantly, the complaint does not allege facts showing that NorthPoint knew of Flash-Corn’s alleged internal problems, outside of its delinquency in paying its NorthPoint bills.
Challenged too is NorthPoint’s alleged practice of providing FlashCom with market development funds. At the time, such promotional funds may have seemed like a good idea. They proved to be wasted on FlashCom. That, however, does not mean that financials were reported fraudulently.
(d) Insider Stock Sales.
The individual defendants’ stock sales here are not particularly powerful evidence of fraud. Unusual or suspicious stock sales by corporate insiders may constitute circumstantial evidence of scienter. Insider trading is suspicious, however, only when it is “dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.”
In re Silicon Graphics Sec. Litig.,
Here, the stock sales made by Blue-stein, Fetter and Malaga are not particularly suspicious. Malaga sold 200,000 NorthPoint shares during the class period; Fetter, 100,000; Bluestein, 30,000; and Glinsky, none. In sum, defendants sold 330,000 shares for a total of $3,805,919 (Comply 113). SEC filings referenced in but not attached tо the complaint establish that these sales represented 2.8 percent of Malaga’s total holdings and 9.5 percent of Bluestein’s holdings (Def.Exh. I, J, K).
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It is true that Malaga and Fetter sold shares on three of the same days (August 29-31, 2000). Perfectly synchronized sales can contribute toward an inference of scienter. But Malaga had begun to sell his shares several days earlier (August 25), weakening this inference. Finally, defendants’ sales are not significantly out of
(e)Timing and Size of the Financial Revision.
The complaint also points to the timing and proportion of the November 20 revision of the financial figures as proof of scienter. First, the timing of the revision is seen as suspicious because it was made so close to challenged statements issued on November 13 and 15. But as discussed below, the November 13 and 15 statements were so vague that they probably could have been made (and not be actionable) even after the November 20 revision. The size of the one-time revision was indeed large but that alone does not raise a strong inference that the October 26 revenue allowance was set too low with deliberate recklessness.
In the decision plaintiff relies on,
Gelfer v. Pegasystems, Inc.,
(f) Verizon.
To be sure, preserving the Verizon merger provided an incentive to feign success. There is no fact pled, however, indicating that this incentive translated into fraud. The complaint never provides any real detail as to what Verizon said it would or would not consider a Material Adverse Effect. In fact, the merger agreement’s “carve-out” for problems that were generally applicable to the data industry would seem to have afforded NorthPoint the security to issue financial announcements fully responsive to ISP customer delinquencies, particularly in light of Covаd’s similar problems with its customers. 6
(g) Admissions by NorthPoint.
The “silver bullet” announced by plaintiffs counsel at the hearing has proven less lethal. After the merger collapsed, North-Point sued Verizon. In that complaint (excerpted at ¶ 33(f) of the complaint in this case), NorthPoint alleged that “in connection with its execution of the Merger Agreement, representatives of Verizon also represented that events similar to those which Verizon has raised as the purported basis for terminating the Merger Agreement would not constitute a Material Adverse Effect.” Plaintiff contends that this statement is an outright admission that NorthPoint knew, as of August 2000, that something on the order of six million dollars in revenue revision was likely. This is not, however, the most plausible reading. Rather it refers to the “carve-out,”
i.e.,
to representations made regard
Finally, the complaint also characterizes as an admission NorthPoint’s statement in its 2Q 2000 10-Q that “implementation of SAB 101 has been delayed by the Securities and Exchange Commission until the fourth quarter of the fiscal year.... Accordingly, the Company will continue to evaluate the impact of SAB 101 on its financial statements and related disclosures” (Comply 33(a)(vi)(a)). The complaint portrays this as an admission that defendants knew they were not following GAAP. This is a strained reading of this statement. NorthPoint could have been adhering to GAAP while also evaluating whether SAB 101 provided useful additional direction. The purpose of SAB 101 was to respond to certain questions regarding revenue recognition. It offered specific examplеs going to how and when revenue should be recognized. NorthPoint’s statement that it would “evaluate the impact” of these lessons falls well short of an outright admission that it had previously not complied with GAAP.
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Those are plaintiffs allegations. Taken together, they are consistent with an honest effort by NorthPoint to address customer delinquencies by increasing the allowance for bad debt and revenue exclusion. With hindsight, plaintiff says NorthPoint should have set aside more. NorthPoint erred, no doubt, but no strong inference of actual knowledge of falsity or deliberate recklessness exists. As Ronconi put it, “The statement, ‘the storm is passing and it will be sunny tomorrow,’ when it in fact continues to snow the next day, may be bad forecasting, but it is not necessarily a lie.” Id. at 433. The record shows no more than a failure by defendants to fully anticipate the difficult times that would befall the Internet industry in late 2000. On this record, the Court cannot cоnclude that their lack of foresight is actionable as securities fraud, even as to the October 26 financial statements (including the related allegation in the October 26 release that NorthPoint adhered to “conservative” accounting principles). And since the evidence proferred is in many respects cumulative over time, the attack on the second-quarter financial announcement, made months before, also fails.
2. Installed Lines.
The complaint also characterizes as false and / or misleading statements made in the August 8 and October 26 releases regarding NorthPoint’s total number of installed lines. In the August 8 release, NorthPoint said that it had 62,000 “subscribers”; on October 26, that it had 87,300 “installed” lines. On November 20, 2000, NorthPoint announced that 26,700 of the lines announced on October 26 were associated with delinquent customers. All this is admitted. The complaint never takes the necessary nеxt step of alleging any facts showing that either of these figures was in any way false. The confidential witnesses allege only that NorthPoint had “serious problems” installing DSL lines (ComplJ 33(b)(i)). The existence of such problems does not necessarily make the subscriber figures false, however. The complaint never states that the particular lines noted in the August 8 and October 26 releases were never installed. The November 20 release was just an admission that installed lines were associated with delinquent customers, not that the lines recognized on October 26 had not been installed.
The next major category of allegedly fraudulent statements challenged in the complaint concerns NorthPoint’s planned merger with Verizon. These statements anticipated the Verizon merger and spoke to its perceived benefits. Plaintiff says they were made with deliberate recklessness because the Verizon merger was known to be doomed. (Above the merger was relevant to show possible incentive to overstate revenue; here it is relevant to whether statements made about the merger itself were misleading.) As with the allegations concerning revenues and earnings, however, plaintiff has failed to plead facts giving rise to a strong inference of deliberate recklessness as to these statements.
First, the complaint indiscriminately carries on with almost ten pages’ worth of material that NorthPoint allegedly should have disclosed. This information, however, includes future developments that NorthPoint obviously could not have disclosed at the time the allegedly misleading statements were made (between August 8 and November 20): e.g., the fact that Verizon would later back out of the agreement; the fact that NorthPoint would then sue Verizon, etc. The complaint also appears to assert that NorthPoint should have revealed “facts” like “plaintiffs believe that NorthPoint could no longer hide its revenue recognition,” a comment in paragraph 33(c) of the complaint. The reader is left to hunt for those statements NorthPoint really should have made in order to make the statements pertaining to the merger not misleading. Pains have been taken to fully grasp the complaint, notwithstanding defendants’ blanket charge that it is a puzzle-style pleading. The charges related to Verizon are one area in which defendants’ argument has real merit. The presentation of these allegations is contrary to both the PSLRA and the general standards for pleading fraud.
In addition, the complaint never alleges facts giving rise to a “strong inference” of scienter as to these statements. As acknowledged in the complaint, the merger agreement between NorthPoint and Verizon only “allowed” Verizon to terminate the contemplated deal if NorthPoint suffered a material adverse effect (Comply 26). There is absolutely nothing in the complaint to the effect that North-Point knew or deliberately ignored signs that Verizon would abort. Instead of alleging concrete facts, such as communications between Verizon and NorthPoint on this matter, the complaint pursues an extended chain of inferences: The defendants must have known or suspected that Verizon would regard the revenue revision or customer delinquencies as a material adverse effect, and that Verizon would, therefore, cancel the merger — notwithstanding the merger agreement’s “carve-out” for matters generally applicable to the data industry, and Verizon’s failure to give NorthPoint any specific warnings. The PSLRA clearly establishes a preference for facts over such inferentiаl leaps. There is just no evidence that the decision not to engage in mealy-mouthed speculation concerning the merger was a deliberate or reckless omission, even taking all of plaintiffs allegations into account.
4. “Formidable Names”; “Rapid Growth”
Several other statements challenged by the complaint are also not actionable, for various reasons. First, vague and amorphous statements do not give rise to liability for securities fraud, since reasonable investors do not consider such puffery material when making an investment decision.
Raab v. General Physics Corp.,
Next, the complaint fails to show how certain challenged statements were false. On October 26, 2000, after a conference call with NorthPoint officers an analyst report provided that “the company has indicated that it is comfortable with revenue estimates for the fourth quarter and full year 2000” (Comply 42). The complaint never goes on to say what those estimates were, nor that they were not met. On November 15, 2000, NorthPoint said that it had “experienced rapid growth since September 30, 1999” (Comply 52). With or without its revenues restated, this was true; the company
had
experienced rapid growth over the past year. The consolidated complaint says that these statements were nevertheless actionable because they gave investors a “misleading impression” of corporate health. Failure to caveat bland stаtements such as these, however, with a company’s every trouble is a weak basis for a fraud claim.
Cf., Ronconi,
CONCLUSION
For the reasons stated above, this order finds that the consolidated complaint fails meet the PSLRA-Silicon Graphics standard for pleading scienter as to any statement. The complaint is DISMISSED. Plaintiffs request for leave to amend is GRANTED. Any amended consolidated complaint must be filed no later than January 24, 2002. No supplemental discovery will occur before a hearing on a motion to dismiss the amended complaint, if any.
IT IS SO ORDERED.
Notes
. This order takes judicial notiсe of the merger agreement. Defendants requested judicial
. The complaint’s allegations that NorthPoint was recognizing revenue upon billing, rather than installation of a line, are (to put it mildly) speculative in the extreme and do not merit extended consideration.
. No such revision has ever taken place as to the second-quarter results announced on August 8, 2000. The complaint alleges that these results were false too because, in contravention of SEC Staff Accounting Bulletin 101, the collectibility of revenue claimed therein was not reasonably assured and / or NorthPoint had not rendered the services for which revenue was credited. Therefore, the complaint alleges, the financial statements did not conform with GAAP and are presumed inaccurate. See 17 CFR § 210.4—01(a)(1).
. The Court requested supplemental briefing on whether the record, or public records in this case, mentioned the bad-debt allowance as of October 26, 2000, referenced at hearing. Both parties made timely submissions. The document containing this figure, however, is inappropriate for notice at this stage. This order therefore attaches no weight to the supplemental submission, or to the October 26 bad-debt allowance figure discussed at hearing.
. Judicial notice of these totals, derived from SEC filings, is proper.
In re Silicon Graphics,
. As previously and subsequently discussed, the merger agreement excluded from the definition of a Material Adverse Effect "facts, events, changes or effects that are generally applicable to (A) the data industry, (B) the United States economy or (C) the United States securities markets generally” (Def. Exh. G at 77).