OPINION
This matter is before the Court on Defendants’ motions (collectively “Motions”) to dismiss the Plaintiffs’ Third Amended Consolidated Class Action Complaint (“Complaint”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 (“Reform Act” or “PSLRA”), 15 U.S.C. §§ 78u-4, et seq. For the reasons discussed below, Defendants’ Motions are GRANTED, and Plaintiffs’ Complaint is DISMISSED WITH PREJUDICE.
TABLE OF CONTENTS
I. PROCEDURAL BACKGROUND...........................................271
II. FACTUAL BACKGROUND................................................272
III. JUDICIAL NOTICE.......................................................272
IV. PLEADING REQUIREMENTS OF A 10b-5 CLAIM.........................274
A. Elements of a 10b-5 Claim ............................................274
1. Elements Subject to Heightened Pleading Requirements.............275
*270 2. Elements Subject to Rule 8 Pleading Requirements..................277
B. Pleading a Class 10b-5 Claim..........................................279
C. Pleading a Derivative Claim Against Controlling Persons................280
V. PLEADING SPECIFIC ELEMENTS OF A 10b-5 CLAIM....................281
A. Pleading the “False and Misleading Statement” Element................281
1. Pleading an Affirmative Misrepresentation..........................281
2. Pleading Misrepresentation Based on Failure to Disclose............281
B. Pleading the “Scienter” Element ......................................282
1. Pleading Intentional or Recklessness State of Mind..................282
2. Pleading Scienter by Inference.....................................283
a. Inferring Scienter from Defendant’s “Motive and Opportunity” ...............................................283
b. Inferring Scienter from Circumstantial Evidence................285
i. Inferring Scienter from GAAP Violations...................285
ii. Inferring Scienter from SOX Certifications.................287
3. Pleading Scienter by Relying on Confidential Information ...........290
C. Pleading the “Materiality” Element....................................291
D. Pleading the “Reliance” Element......................................291
1. Two Methods to Plead Reliance....................................292
2. Pleading Reliance on Inferred Technical Facts......................293
E. Pleading the “Causation” Element.....................................295
VI. DISCUSSION.............................................................298
A. Transactional Causation..............................................298
1. Deficiencies Contained in Plaintiffs’ Second Complaint..............298
2. “Fraud-on-the-market” Allegations Based on Intelligroup’s Financials......................................................301
3. 2001 Period.......................................................302
4. 2004 Period.......................................................304
5. Periods Reflected in the Table .....................................305
a. Plaintiffs’ Allegations.........................................305
b. Legal Precedents Examining Financial Matters.................306
i. IPO Cases................................................306
ii. Basic v. Levinson.........................................309
iii. Other District Court Cases................................310
c. Financial Theories and Calculations............................311
6. Alternative Allegations of Reliance.................................316
B. Loss Causation.......................................................318
1. Relevant Facts....................................................319
a. Intelligroup’s Publications.....................................319
b. Chart of Intelligroup’s Stock Price .............................320
2. Deficiencies Contained in Plaintiffs’ Second Complaint..............321
3. Plaintiffs’ Instant Allegations......................................322
a. Interrelat ion-Among-the-Press-Release-Announcements
Claim......................................................322
b. Lack-of-Interrelation-Among-the-Announcements Claim........327
i. Marsden v. Select Med. Corp...............................327
ii. Other District Court Cases................................329
c. Miscellaneous Claims..........................................333
i. Contentions About Implied Disclosure......................334
ii. Contentions About the Post-Release Recovery..............337
C. Scienter..............................................................340
1. Motive and Opportunity...........................................340
2. Circumstantial Evidence...........................................342
a. Resignations as Evidence of Scienter ...........................343
i. Resignations of Defendants Valluri and Visco..............344
ii. Resignation of Intelligroup’s Auditor.......................348
b. Violations of GAAP as Evidence of Scienter.....................349
*271 c. SOX Certifications as Evidence of Scienter......................352
i. Impact of the Statements Made in the Restatement .........353
ii. The Fact of SOX Certifications............................355
iii. The Language of SOX Certifications.......................357
d. Undisclosed Witnesses.........................................358
i. UW-1....................................................359
ii. UW-2....................................................360
iii. UW-3....................................................361
iv. UW-4....................................................362
v. UW-5....................................................366
vi. UW-6....................................................367
e. Internet Posting by an Anonymous Witness .....................368
3. Totality of Evidence Analysis ......................................370
4. SeraNova Allegations..............................................373
a. Allegations Based on Intelligroup’s 10-K........................375
b. Allegations Based on the Fact of Non-collectability..............377
D. Derivative Liability of Visco and Valluri................................377
E. Leave to Amend......................................................378
1. General Rule.....................................................378
2. Entry of Binding Precedent Clarifying Applicable Pleading
Standard.......................................................379
3. Repeated Failure to Cure Deficiencies and Futility of
Amendment....................................................382
VII. CONCLUSION ...........................................................384
I. PROCEDURAL BACKGROUND
Plaintiffs, investors who purchased the common stock of Defendant Intelligroup (“Intelligroup” or “Company,” or “Issuer”) during forty months between May 1, 2001, through and including September 24, 2004 (“Class Period”), brought this securities fraud class action alleging that Defendants defrauded them by artificially inflating the value of the stock through false and misleading statements disseminated into the investing community. See Compl. (Docket Entry No. 53) at 1.
The litigation was initiated on October 12, 2004, see Docket Entry No. 1, when the first of six class action complaints was filed with the Court. On August 10, 2005, all six actions were consolidated into the instant action. See Docket Entry No. 24. On October 10, 2005, Plaintiffs filed their joint Amended Complaint (“Original Complaint”) against the Issuer and four former officers of the Issuer, two of whom were Defendants Valluripalli (“Valluri”) and Vis-co (“Visco”). See Docket Entry No. 31. On December 5, 2005, certain Defendants filed their motion to dismiss Plaintiffs’ Original Complaint. See Docket Entry No. 3. On February 10, 2006, Plaintiffs’ Second (Amended) Complaint (“Second Complaint”) was filed against the Issuer and Defendants Valluri and Visco, with all claims against the other two officers being dismissed. See Docket Entry No. 39. On March 27, 2006, Defendants filed their motions to dismiss the Second Complaint, see Docket Entries Nos. 40 and 42, and Plaintiffs filed their brief in Opposition to the Motions on May 11, 2006. See Docket Entry No. 43. On November 2, 2006, this matter was transferred to the undersigned. See Docket Entry No. 50.
On December 20, 2006, this Court issued an Order and accompanying Opinion (“December Opinion”) dismissing the Second Complaint without prejudice. See Docket Entries Nos. 51 and 52. On January 25, 2007, Plaintiffs filed the instant Third Amended Complaint. See Docket Entry No. 53. On March 5, 2007, Defendants filed their Motions to dismiss the Com *272 plaint. See Docket Entries Nos. 64 and 65. On April 13, 2007, Plaintiffs filed their Opposition to Defendants’ Motions (“Opposition”). See Docket Entry No. 68. On May 3, 2007, Defendants filed their replies to Plaintiffs’ Opposition (“Replies”), see Docket Entries Nos. 69 and 70, and supplemented the Replies by a letter filed on May 23, 2007 (“Letter”). See Docket Entry No. 71.
Except for the instant Motions, no other applications are currently pending in this action.
II. FACTUAL BACKGROUND
Intelligroup is a publicly traded company incorporated in the State of New Jersey with its principal office at 499 Thornall Street, Edison, New Jersey. See Compl. ¶ 28. “Intelligroup assists a variety of companies with setting up and maintaining various kinds of software for e-commerce.” Id. Much of Intelligroup’s work is sent offshore to the Company’s subsidiary in India. See id. Intelligroup’s stock was traded on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”). See Opposition at 13.
Defendant Valluri served as the Company’s CEO, President and Chairman of the Board during the Class Period, and Defendant Visco served as the Company’s CFO from November of 2000 to November of 2003. See Compl. ¶ 5.
On September 24, 2004, Intelligroup issued a press release (“Press Release”) announcing, inter alia, that Intelligroup was expecting to restate its financial statements issued and filed with the United States Securities and Exchange Commission (“SEC”) during 2001, 2002, 2003 and the first quarter of 2004 (“Statements”). See id. ¶ 5. In the same Press Release, the Company made two other announcements, one about Intelligroup’s anticipated private placement and another about Intelligroup’s default on — and potential loss of — revolving credit. See Opposition at 30-31. On September 27, 2004, the first day after the Press Release, the stock began falling and fell $0.52 per share. 1 See Compl. ¶ 4. The restatement of the Company’s financials (“Restatement”) was made on October 24, 2005, more than one year after the issuance of the Press Release. See id. ¶ 13.
Plaintiffs now assert that Defendants’ issuance of the Statements containing a host of accounting errors inflated the market value of Intelligroup securities and amounted to a violation of (a) Section 10(b) of the Securities Exchange Act of 1934 (“'34 Act”), 15 U.S.C. §§ 78a-78kk (1994 & Supp. IV 1998), and (b) Rule 10b-5 ensuing from the '34 Act. See id. ¶ 14. In addition, Plaintiffs maintain Defendants Valluri and Visco are liable for Plaintiffs’ injuries as controlling persons, since these Defendants knew about or recklessly disregarded the falsity of accounting data contained in Intelligroup’s Statements. Id. ¶ 129.
III. JUDICIAL NOTICE
Defendants’ Motions are accompanied by Defendants’ request for judicial notice of the following documents: (a) the Press Release; (b) Intelligroup’s Form 8-K dated January 28, 2005, filed which was with the SEC and announced that the SEC had commenced a formal investigation into the matters related to the Restatement (“SEC Investigation Notice”); (c) a letter from SEC Assistant Director to Intelli- *273 group’s counsel, dated January 31, 2006, notifying the counsel that the investigation by the SEC was terminated and no enforcement action was recommended by the SEC (“SEC No-action Letter”); (d) Plaintiffs’ Original and Second Complaints; (e) transcript of Intelligroup’s “Second Quarter 2004 Update” Conference Call of October 5, 2004 (“10/05/04 Transcript”); and (f) a financial stock chart published by Yahoo! Finance and showing the adjusted closing price of Intelligroup’s stock during the Class Period (“Stock Chart”). See Docket Entries Nos. 65-3 and 65-5 to 65-6-12. Although Plaintiffs’ Opposition to Defendants’ Motions is effectuated through a memorandum of law titled “Lead Plaintiffs’ Memorandum of Law in Opposition to Motions to Dismiss Third Amended Complaint and in Partial Opposition to Request for Judicial Notice,” see Docket Entry No. 68, neither the Table of Contents nor the body of the Opposition clearly identify or even suggest the nature of Plaintiffs’ partial opposition to Defendants’ request for judicial notice. See generally, id.
Rule 201(b), Federal Rules of Evidence permits a district court to take judicial notice of facts that are “not subject to reasonable dispute in that [they are] either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Rule 201(b). Under Rule 201(d), Federal Rules of Evidence, a district court must take judicial notice “if requested by a party and supplied with the necessary information.” Rule 201(d).
In re NAHC, Inc. Sec. Litig.,
IV. PLEADING REQUIREMENTS OF A 10b-5 CLAIM
A. Elements op a 10b-5 Claim
Congress passed the '34 Act, 15 U.S.C. §§ 78a-78kk, to assure the disclosure of full and fair information to the investing public.
See
H.R.Rep. No. 73-1383, at 1-2 (1934) (describing the legislation’s purposes). In relevant part, Section 10(b) of the '34 Act proscribed the “use or employ[ment], in connection with the purchase or sale of any security, ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). The ensuing Rule 10b-5, 17 C.F.R. § 240.10b-5, emerged in 1943.
See Blue Chip Stamps v. Manor Drug Stores,
1. Elements Subject to Heightened Pleading Requirements
The general standard of review triggered by a defendant’s motion to dismiss under Rule 12(b)(6) is well-settled, i.e., the court must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party.
See Scheuer v. Rhodes,
[although Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.”
Rockefeller Ctr. Props. Sec. Litig.,
Therefore, when stating “falsity,” i.e., “material misrepresentation” element of his/her 10b-5 claim, a securities fraud plaintiff must “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.” 15 U.S.C. § 78u-4(b)(Z), (2). Similarly, with respect to the scienter element of the plaintiffs 10b-5 claim, the
*276
Reform Act requires that “the complaint shall ... state with particularity [all] facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2);
Winer Family Trust v. Queen,
In its recent decision in
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
—— U.S. -,
2. Elements Subject to Rule 8 Pleading Requirements
It appears that the heightened pleading requirements of PSLRA are inapplicable to the remaining elements of a 10b-5 claim.
See Dura,
But, even so, the “short and plain statement” must provide the defendant with “fair notice of what the plaintiffs claim is and the grounds upon which it rests.” Conley v. Gibson,355 U.S. 41 , 47,78 S.Ct. 99 ,2 L.Ed.2d 80 (1957). [The Court recognizes] that ordinary pleading rules are not meant to impose a great burden upon a plaintiff. [See] Swierkiewicz v. Sorema N. A,534 U.S. 506 , 513-15,122 S.Ct. 992 , 152 L.Edüd 1 (2002). But it should not prove burdensome for a plaintiff ... to provide a defendant with some indication of the [facts] that the plaintiff has in mind.... [Allowing a plaintiff to forgo giving any indication of the [facts] that the plaintiff has in mind would bring about harm of the very sort the [Reform Act] seek[s] to avoid. Cf. H.R. Conf. Rep. No. 104-369, p. 31 (1995) (criticizing “abusive” practices including “the routine filing of lawsuits ... with only a faint hope that the discovery process might lead eventually to some plausible cause of action”). It would permit a plaintiff “with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence.” Blue Chip,421 U.S. at 741 ,95 S.Ct. 1917 . Such a rule would tend to transform a private securities action into a partial downside insurance policy. See H.R. Conf. Rep. No. 104-369, at 31; see also Basic,485 U.S. at 252 ,108 S.Ct. 978 ....
Dura,
Recently, the Supreme Court further elaborated on the requirements associated with the relaxed notice-pleading standard of Rule 8.
See Bell Atlantic Corp. v. Twombly,
— U.S. -,
Moreover, the Court, using a variety of phrases, indicated that more than notice of a claim is needed to allege a commercial violation. For example, the Court required “enough facts to raise a reasonable expectation that discovery will reveal evidence of [the alleged claim],” “facts that are suggestive enough to render [plaintiffs allegations] plausible,” “allegations plausibly suggesting (not merely consistent with) [plaintiffs allegations],” a “plain statement” with “enough heft” to show entitlement to relief, and “enough facts to state a claim to relief that is plausible on its face.”
Id.
at 1969-74. Finally, the Court refused to entertain a plaintiffs far-fetched flights of fancy by unambiguously stating that the line “between the factually neutral and the factually suggestive ... must be crossed [by allegations made in plaintiffs pleadings] to enter the realm of plausible liability,”
id.
at 1966 n. 5, and stated that no “reassurances of plaintiffs’ counsel” that discovery would soon flesh out plaintiffs claim, which is currently pled so that it is “just shy of a plausible entitlement,” can prevent Rule 12(b)(6) dismissal.
Id.
at 1967 n. 6 (referring to
id.
at 1975 (Stevens, J., dissenting)). In sum, while a securities plaintiff setting forth allegations of those 10b-5 elements that are subject to Rule 8 pleading requirements need not state with particularity all facts giving rise to a strong inference that the elements are present, plaintiffs complaint will survive dismissal only if it contains “enough [factual] heft” rather than plaintiffs conjecture and self-serving interpretations of actual events.
5
See Bell Atlantic,
127 S.Ct. at
*279
1965-69;
Dura,
B. Pleading a Class 10b-5 Claim
In order for Plaintiffs’ action to remain viable as a class action, Plaintiffs must continuously comply with the four prerequisites of Rule 23(a), that is, numer-osity, commonality, typicality and adequacy, and must also satisfy the requirements of Rule 23(b)(3).
6
See Baby Neal v. Casey,
C. Pleading a Derivative Claim Against Controlling Persons
Section 20(a) of the 1934 Act, 15 U.S.C. § 78a, states that “[e]very person who, directly or indirectly, controls any person liable [for securities fraud] shall also be liable jointly and severally with and to same extent as such controlled person.” 15 U.S.C. § 78t(a). Thus, for a controlling person to be liable, the person over whom control was exercised must have committed a primary violation of the securities laws.
See Merck & Co. Sec. Litig.,
V. PLEADING SPECIFIC ELEMENTS OF A 10b-5 CLAIM
A. Pleading the “False and Misleading Statement” Element
1. Pleading an Affirmative Misrepresentation
When a securities plaintiff challenges a statement made by a defendant, plaintiffs mere usage of catchwords or bold assertions that defendant’s statement was false or misleading because the defendant knew or must have known it to be false or misleading cannot lend support to plaintiffs claim.
See, e.g., GSC Partners CDO Fund v. Washington,
2. Pleading Misrepresentation Based on Failure to Disclose
“When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak [since a] duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.”
Chiarella v. United
*282
States,
“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic, 485 U.S. [at] 239 n. 17,108 S.Ct. 978 ...; see also Burlington,114 F.3d at 1432 (“Except for specific periodic reporting requirements ... there is no general duty on the part of a company to provide the public with all material information”). Such a duty to disclose may arise [only] when there is [an incident of] insider trading, [or presence of] a statute requiring disclosure, or [there was] an inaccurate, incomplete or misleading prior disclosure [requiring a corrective statement]. See Glazer v. Formica Corp.,964 F.2d 149 , 157 (2d Cir.1992); Bachman v. Polaroid Corp.,910 F.2d 10 , 12 (1st Cir.1990) (en banc); General Motors Class E Stock Buyout Sec. Litig.,694 F.Supp. 1119 , 1129 (D.Del.1988).
Oran v. Stafford,
this set of requirements preserves the healthy limits on a public corporation’s “duty to disclose all information ...” because corporations might otherwise “face potential second-guessing in a subsequent disclosure suit,” a regime that would threaten to “deluge investors with marginally useful information, and would damage corporations’ legitimate needs to keep some information non-public.”
City of Monroe Emples. Ret. Sys. v. Bridgestone Corp.,
B. Pleading the “Scienter” Element
1. Pleading Intentional or Recklessness State of Mind
The term “scienter” means “a mental state [of] intent to deceive, manipulate or defraud.” (quoting
Ernst,
“highly unreasonable (conduct), involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, ... which presents a danger of misleading [the parties to the transaction] that is either known to the defendant or is so obvious that the actor must have been aware of it.”
Id.
(quoting
Ernst,
“recklessness is a lesser form of intent rather than a greater degree of negligence ____Reckless 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.”
Hollinger v. Titan Capital Corp.,
2. Pleading Scienter by Inference
Since scienter is based on the defendant’s state of mind and, as such, may be difficult to prove with direct evidence, courts are willing to permit an inference that the defendant acted with the requisite scienter.
See, e.g., Fine v. Am. Solar King Corp.,
A plaintiff may establish the requisite strong inference of fraudulent intent in one of two ways: (1) by alleging facts “establishing a motive and an opportunity to commit fraud”; or (2) “by setting forth facts that constitute circumstantial evidence of either recklessness or conscious behavior.”
Advanta,
a. Inferring Scienter from Defendant’s “Motive and Opportunity”
If the plaintiff desires to employ the “motive and opportunity” method,
*284
the plaintiff should demonstrate a logical connection between the alleged fraud and motive in order to establish a reasonable inference of fraud: plaintiffs’ allegations as to defendants’ motive to defraud investors with respect to a certain matter cannot be matched with plaintiffs’ facts that defendants committed fraud with respect to another matter.
See Glickman v. Alexander & Alexander Servs.,
Under this pleading standard, a plaintiff may not rely on facts indicating that the defendant had certain goals or aspirations (or sought to engage in the industry practices) common to the law-abiding business community, since such goals or practices cannot amount to a valid motive for the purposes of showing scienter.
See GSC,
*285 b. Inferring Scienter from Circumstantial Evidence
If the plaintiffs choose to use the other method of establishing scienter, that is, by-asserting circumstantial evidence of intent or recklessness, “the strength of the circumstantial allegations must be [even] greater.”
Kalnit,
i. Inferring Scienter from GAAP Violations
The seminal case addressing the issue of inferring scienter from violations of Generally Accepted Accounting Principles (“GAAP”) is the Third Circuit’s decision examining so-called “positive portrayals,” that is, public statements that were alleged to have been inaccurate.
See Advanta,
To explain its rationale, the Third Circuit distinguished Advanta from a district court case,
Ancor Communs., Inc. Sec. Litig.,
The differences between Advanta and Ancor illustrate an important point about the substantive meaning of recklessness in the securities fraud context, namely, that — in a case involving inaccurate public statements — simply alleging that defendants “knew or should have known” is not enough and, “where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.”
Novak,
Since cases involving allegations that defendants violated GAAP present nothing but a sub group of the inaccurate public statement category of securities cases, the courts have uniformly held that allegations of scienter based on GAAP violations do not create the requisite strong inference of scienter unless plaintiffs’ complaint alleges “more.”
See Wyser-Pratte Mgt. Co. v. Telxon Corp.,
Although the decisions which held that GAAP violations or restated financials, without more, do not create the requisite strong inference of scienter do not provide an exhaustive list of the “more” that satis-
*287
fíes the pleading requirements (and have left the matter to be assessed on a case-by-case basis), it appears that the
“more”
envisioned by the courts consists of the panoply of such facts which could sufficiently indicate that defendants had clear reasons to doubt the validity of the issuer’s financials but, nonetheless, kept turning a blind eye to all such factual “red flags.”
See Rothman,
ii. Inferring Scienter from SOX Certifications
Section 302 of the Sarbanes-Oxley Act (“SOX”) required the SEC to implement rules under which principal executive and financial officers of public companies certify to the general truthfulness of the company’s quarterly and annual reports.
See
15 U.S.C. § 78m, 78o(d); 17 C.F.R. § 240.13a-14(b)(2). The certification requirement obligates officers to state that, based on their knowledge, the report does not contain any material misrepresentations or omit any material fact otherwise necessary to make the other disclosures not misleading.
See
However, since neither Section 302 nor its implementing regulations make any reference to the creation of a private cause of action or indicate an intent to modify securities fraud pleading requirements under the PSLRA, including the requirement to plead strong inference of scienter,
see Kogan v. Robinson,
In
WatchGuard,
plaintiffs brought their 10b-5 claim in the wake of WatchGuard’s financial restatement, which: (a) implicitly admitted errors in applying GAAP; (b) expressly admitted errors in income classification, revenue recognition and calculation of liabilities ensuing from customer-rebate obligations; and (c) revealed the falsity of all Sarbanes-Oxley certifications containing assurances that the stated financial results were adequate, and that the certifying officers had designed adequate financial controls, evaluated those controls, and disclosed any material weaknesses.
See WatchGuard II,
[plaintiffs must show that the Sar-banes-Oxley certifications accompanying [the erroneous] results were culpably false.... The court assumes for present purposes that better “controls” would have revealed the ground-level problems at issue. This assumption is not without controversy. Although WatchGuard admitted to material weaknesses in its controls when it issued the ... restatement, it did not reveal which controls were inadequate. Under these circumstances, it is not obvious what “controls” would have ameliorated the problems that [plaintiffs identify. It appears that [defendants should have had better awareness of the sales practices and returns processing practices at issue, but there is no indication that “controls” would have provided that awareness. The court shelves those concerns, however, and assumes that better controls would have, at the very least, led Watch-Guard to discover these problems sooner.
Even under the assumption that WatchGuard’s misstated earnings are the result of shoddy controls, the court finds no strong inference of scienter as to [defendants’ inaccurate Sarbanes-Oxley certifications. For many of the reasons that the court has already discussed [in its previous opinion], there are no allegations that create a strong inference that [defendants knew Watch-Guard’s controls were inadequate, or were deliberately reckless regarding those controls. Plaintiffs’ allegations suggest that WatchGuard took steps to assess its controls during the class period, and acted to improve its controls when it discovered those problems. They do not raise a strong inference *289 that any [defendant acted culpably in designing those controls, assessing them, or certifying them under the Sar-banes-Oxley Act. That the controls were inadequate is perhaps an indication of incompetence, but incompetence, even gross incompetence, is no basis for a securities fraud claim.
Id.
at
The court in InVision reached the same conclusion. In
Invision,
plaintiffs challenged InVision’s merger announcement stating that “acquisition [was] subject to normal closing conditions including customary regulatory approval,” even though InVision was undergoing investigations by the United States Department of Justice and the SEC with respect to InVision’s possible violations of the Foreign Corrupt Practices Act.
See Invision,
Notably, both the WatchGuard and In-Vision courts contrasted the facts of their cases with the case where plaintiffs properly alleged SOX violation together with “more” evidence, i.e., that defendants improperly changed accounting journal entries in order to artificially inflate revenue and then executed a SOX certification while being well aware of the impropriety of the change.
See WatchGuard II,
In sum, while the issue of what impact a Sarbanes-Oxley certification has on a 10b-5 claim is a relatively novel question, the above-discussed holdings indicate that — as with allegations that defendants violated GAAP — allegations based on defendants’ *290 erroneous SOX certification cannot establish the requisite strong inference of scien-ter unless the complaint asserts facts indicating that, at the time of certification, defendants knew or consciously avoided any meaningful exposure to the information that was rendering their SOX certification erroneous. 10
3. Pleading Scienter by Relying on Confidential Information
Even though all allegations relating to the falsity of a defendant’s statement must be pled with particularity,
see
15 U.S.C. § 78u-4(b)(Z) and (2), a plaintiff in securities fraud actions can support a complaint by reliance on information attributed to confidential sources.
See Novak,
Elaborating on the latter scenario, the Court of Appeals explained that the complaint must disclose: (1) the time period that the confidential source worked at the defendant-company, (2) the dates on which the relevant information was acquired, and (3) the facts detailing how the source obtained access to the information.
See Cal. Pub. Emples’. Ret. Sys. v. Chubb Corp.,
C. Pleading the “Materiality” Element
The test of materiality depends not upon the literal truth of statements but upon the ability of reasonable investors to become accurately informed.
See McMahan & Co. v. Wherehouse Entertainment, Inc.,
Since materiality is determined in context, a purchaser or seller of securities is not necessarily entitled to all information relating to each of the circumstances surrounding the transaction.
See Acito v. IMCERA Group,
D. Pleading the “Reliance” Element
A securities plaintiff must plead both “transactional” and “loss causation,” where the former is an assertion that the plaintiff relied on defendant’s false or misleading statement to purchase the stock in question.
See Emergent Capital Inv. Mgmt. v. Stonepath Group, Inc.,
1. Two Methods to Plead Reliance
“In face-to-face transactions, [an] inquiry into an investor’s reliance ... is [the inquiry] into the subjective pricing ... by that investor.”
Basic,
For face-to-face transactions, the reliance requirement serves to ensure that the plaintiffs who would not have acted differently if the true information were known cannot recover. The requirement guarantees, in other words, that information that does not affect a buyer’s or seller’s view of the merits of a transaction cannot form the basis of a cause of action.
Id.
(citations omitted). Therefore, a securities plaintiff asserting individualized, that is, direct actual reliance is required to plead that the plaintiff was
actually aware of
and misled by an alleged misrepresentation.
See Semerenko,
Since proving reliance could be hard in view of the nature of modern securities markets, federal courts fashioned a “fraud-on-the-market” presumption for proving reliance based on the Efficient Capital Market Hypothesis, i.e., the premise that, if the market is efficient, the information disclosed by issuers, issuers’ agents and analysts is both available to and swiftly absorbed by the market.
See Basic,
The fraud on the market theory of reliance is, in essence, a theory of indirect actual reliance under which a plaintiff is entitled to three separate presumptions in attempting to establish the element of direct reliance. See Zlotnick v. TIE Communications,836 F.2d 818 , 822 (3d Cir.1988). Under the fraud on the market theory of reliance, the court presumes (1) that the market price of the security actually incorporated the alleged misrepresentations, (2) that the plaintiff actually relied on the market price of the security as an indicator of its value, and (3) that the plaintiff acted reasonably in relying on the market price of the security. See id.
Semerenko,
In
Cammer v. Bloom,
2. Pleading Reliance on Inferred Technical Facts
While it is correct that setting forth allegations of fraud-on-the market reliance provides a securities plaintiff with a presumption that there is a causal link between the misrepresentation and plaintiffs entry into the transaction,
12
see Basic,
Generally, a securities plaintiff cannot plead an element of plaintiffs claim in terms of plaintiffs hope to prevail in a battle of technical experts,
see
H.R. Conf. Rep. 104-369, at 37, rather, the plaintiff must plead actual facts.
Accord Burlington,
E. Pleading the “Causation” Element
The requirement of “loss causation,” also known as the “causation” element, refers to plaintiffs burden to plead a “causal link between the disclosure of alleged fraud and the economic harm ultimately suffered by the plaintiff.”
14
Emergent Capital,
This proposition was expressly upheld by the Supreme Court in Dura.
See Dura,
In Dura, investors that purchased Dura Pharmaceuticals (“Dura”) securities during the ten months of class period (“Dura Period”) filed a suit alleging that Dura made misleading statements that fraudulently inflated the market value of Dura securities purchased by plaintiffs during the Dura Period.
See Dura,
[A]n inflated purchase price [does] not ... constitute or proximately cause the relevant economic loss.
[T]he logical link between the inflated share purchase price and any later economic loss is not invariably strong. Shares are normally purchased with an eye toward a later sale. [So,] if ... the purchaser sells the shares ... before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. [Moreover, if] the purchaser sells ... after the truth makes its way into the market place, an initially inflated purchase price might mean a later loss. But that is far from inevitably so [since] that lower price [at the time of sale] may reflect not [the result of truth leaking out about] the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price.... Other things being equal, the longer the time between purchase and sale, the more likely that this is so, i.e., the more likely that other factors caused the loss.
Given the tangle of factors affecting price, ... the higher purchase price ... may prove to be a necessary condition of [an economic] loss, ... but, even if ... so, it is [not sufficient in and by itself since it is] not [the] cause [of the economic] loss. [T]he Ninth Circuit’s approach overlooks an important securities law objective. The securities statute [ ] ... make[s private] actions available not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause.... The statute ... permit[s] ... recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss. [Where] plaintiffs’ lengthy corn- *297 plaint contains only one statement that ... can [be] fairly read as describing the loss [and that] statement says that the plaintiffs “paid artificially inflated prices for [the issuer’s] securities” and suffered “damages,” [the] complaint contains nothing that suggests [either a loss causation or an actual economic loss].
Dura,
Hence, the holding of Dura makes it clear that, in order “[t]o 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, lohen disclosed, negatively affected the value of the
security.”
18
Winstar Communs.,
If the price of a security declines after the purchase for reasons unrelated to the fraud, or if the circumstances of the decline are such that the investor’s economic loss is bound to be speculative, the investor has no right to recovery.
See
H.R. Conf. Rep. No. 104-369, at 31 (1995) (noting that plaintiffs failure to trace a measurable loss to defendant’s wrongful conduct should allow the defendant to obtain dismissal of claims that rest on speculative theories);
Dura, 544
U.S. at 346,
VI. DISCUSSION
Although Plaintiffs re-shuffled some of their previous statements, the instant Complaint differs from its predecessors in form but not in substance, since it effectively recites the very same
facts
that had been set forth in Plaintiffs’ Second Complaint; the difference between these two pleadings is limited to Plaintiffs’ legal or financial conclusions.
19
See
Docket Entry No. 65-12 to 65-15 (Brief, Ex. A, redlining the language of Plaintiffs’ instant Complaint against that of the Second Complaint). However, in view of the consequences to Plaintiffs ensuing from the granting of the Motions, this Court will: (1) re-examine each of Plaintiffs’ factual allegations; and (2) consider all Plaintiffs’ legal conclusions
de novo. See Young,
A. Transactional Causation
I. Deficiencies Contained in Plaintiffs’ Second Complaint
In order to plead transactional causation, Plaintiffs have to assert facts indicating that they purchased Intelligroup securities at inflated prices.
See Dura,
The table indicated that, in seven out of the twelve Statements reflected in the table, Intelligroup
understated
its net income, that is, depicted the profitability of its business operation less favorably than it actually was, sometimes painting the picture more than sixty five times worse than the reality.
See id.
at 8;
see
also December Opinion at 21-22
(Intelligroup,
Evaluating Plaintiffs’ factual allegations in the Second Complaint, this Court concluded in its December Opinion that the facts set forth by Plaintiffs did not lend support to Plaintiffs’ claim that Intelli-group stock kept invariably trading at inflated prices, that is, throughout the Class Period.
See id.
at 29-30 (Intelligroup,
(1)Plaintiffs’ claims with respect to overstatements or understatements of In-telligroup’s revenues were not useful in assessing Intelligroup’s business success without Plaintiffs setting forth detailed allegations about Intelligroup’s costs, since profitability of a business operation is defined as the difference between the revenues and the costs involved in the evaluated operation, and such difference cannot be determined if the list of variables included only the minuend, that is, the revenue, but omitted the subtrahend, i.e., the costs, because lower revenues could, nonetheless, indicate higher profitability, if such lower revenues are accompanied by even lower costs. That is why the net income is the best indicator of business profitability.
See id.
at 21 n. 15 (Intelligroup,
(2) Plaintiffs’ claims with respect to Intel-ligroup’s misstatements of accumulated deficit could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced since the facts alleged by Plaintiffs in support of such claim: (a) revealed that eight of Intelligroup’s Statements were erroneously indicating an accumulated deficit while, in reality, Intelligroup was either enjoying budget surplus or experiencing a notably less burdensome deficit, i.e., actually had business prospects better than those depicted to the stock market by these eight Statements; and (b) contained errors apparent from the face of the Complaint and rendering Plaintiffs’ allegations unreliable.
See id.
at 22 n. 16 (Intelligroup,
(3) There are two key models employed by the financial community for assessing the value of a stock.
See id.
at 23 (Intelligroup,
a.Plaintiffs’ claims with respect to In-telligroup’s overstatements of assets and understatements of liabilities could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced by the stock market since the deviations in assets and liabilities were: (i) too slight to be material; and (ii) either had no bearing on assessment of Intelligroup’s profitability under the Dividend Model or presented Intelli-group’s ability to generate net profit per each dollar of actual assets less favorably than Intelligroup’s actual ability, potentially giving the market a reason to underprice, rather than overprice, Intelligroup’s stock.
See id.
at 25, n. 19
(Intelligroup,
b. Under the Dividend Model, Plaintiffs’ claims with respect to Intelli-group’s misstated net income could lend support to Plaintiffs’ claim that Intelligroup’s securities were overpriced only if the Statements presented Intelligroup’s earnings more favorably than the reality warranted. Since Intelligroup’s net income was understated, rather than overstated, in seven Statements, the market was likely to underprice In-telligroup’s securities during the periods affected by these seven Statements, hence availing Plaintiffs of a bargain during substantial parts of the Class Period.
See id.
at 26-29
(Intelligroup,
c. Intelligroup’s understatements of net income during the periods other than those affected by these seven Statements could not be used to lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced, since: (i) the working of the Efficient Market Hypothesis precludes factoring any “residual effect” into stock pricing, and (ii) even if the Efficient Market Hypothesis did not so preclude, the cumulative residual effect of all In-telligroup’s net income misstatements (be it calculated directly or through a regressive analysis) indicated that Plaintiffs kept purchasing Intelligroup stock at a bargain at least throughout two-thirds of the Class Period.
See id.
at 22, n. 23
(Intelligroup,
d. Under the Dividend Model, Plaintiffs’ claims with respect to Intelli-group’s misstatements of shareholders’ equity could be related to profitability of Intelligroup’s business and, thus, lend support to
*301
Plaintiffs’ claim that Intelligroup’s securities were overpriced, only if the analysis reflects on the future profitability of the business, e.g., if ROE analysis factoring in the actual shareholders’ equity indicates that Intelligroup’s business operations were less profitable than what was reported in the Statements.
See id.
at 27-28, nn. 21 and 22 (Intelligroup,
e. Under the Dividend Model, Plaintiffs’ claims with respect to Intelligroup’s misstatements that are not directly related to profitability of Intelligroup’s business could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced.
See id.
at 29, n. 23 (Intelligroup,
In view of these shortcomings, the Court dismissed Plaintiffs’ Second Complaint for failure to plead transactional causation.
See id.
at 29-30
(Intelligroup,
2. “Fraud-on-the-market” Allegations Based on Intelligroup’s Fi-nancials
The factual assertions in Plaintiffs’ instant Complaint are reduced to a table (“Table”) similar to that presented by Plaintiffs in their Second Complaint. Compare Compl. at 11 to Second Compl. at 8. The Table differs from its predecessor in three respects: (a) it is executed in not-exaetly-reader-friendly “Point-5” font; (b) it has twenty six financial figures previously designated as negatives transformed into positives, equal to the original ones in their absolute value; 20 and (c) it substitutes a few previously stated ealculative figures with “n/a” entries. 21 See id. Just as its predecessor, the Table: (a) is silent as to what errors were contained in Intelli-group’s Statements during each fiscal quarter of 2001; and (b) verifies that Intel-ligroup did not file any financial statements after its first quarterly Statement in 2004 (“1Q04”), hence providing no information for two spans of time included in the Class Period, with one span running from May 1, 2001, to March 29, 2002, that is, the *302 date of first filing reflected in the Table (“2001 Period”), and another span running from May 17, 2004, that is, the date of filing of 1Q04 (“2004 Period”), to September 24, 2004. See Compl. at 11 and ¶ 70 (providing the dates of Intelligroup’s filings). The sum of these two spans of time totals a bit over fifteen months (out of the forty months comprising the entire Class Period) hence, leaving this Court without any financial data with respect to almost a third of Plaintiffs’ transactional causation claim.
3. 2001 Period
Lack of financial data notwithstanding, Plaintiffs suggest that the Complaint adequately alleges Plaintiffs’ transactional causation with respect to the Unaccounted Periods. With respect to the 2001 Period, Plaintiffs prompt this Court to presume that Intelligroup’s stock was invariably traded at inflated prices because (a) the Press Release issued in 2004 — as well as Intelligroup’s Restatement filed in 2005— included the phrase that Intelligroup’s financial Statements “for the quarterly periods beginning January 1, 2001, ... should no longer be relied upon,” Compl. ¶¶ 7, 13; Opposition at 25, Press Release at 1; and (b) the Restatement of Intelligroup’s financials reflecting the company’s position at the end of the year 2001 indicates overstatement of assets, shareholders’ equity and net income.
See
Compl. ¶ 15; Opposition at 25. Plaintiffs assert that lack of actual information about Intelligroup’s financial position is irrelevant to the Court’s inquiry about Plaintiffs’ reliance so long as Intelligroup “conceded the falsity of prior financials.”
See
Opposition at 25-27 (citing
Aldridge v. A.T. Cross Corp.,
While recognizing the general rule that an issuer’s statement to the effect that the issuer’s previous financials should not be relied upon should not be treated lightly, the Court cannot ignore the unique peculiarity of the facts presented by the instant case, namely, the fact that Intelligroup’s financials were habitually misstated in a way that likely caused underpricing of Intelligroup’s securities more often than overpricing. Indeed, as the Restatement revealed, Intelligroup’s notice that Intelli-group’s financial Statements “should no longer be relied upon” did not necessarily mean bad news for all investors who purchased Intelligroup’s stock relying on the “unreliable” Statements, since Intelli-group’s actual financial position was frequently better, in some key respects, than that actually reported, and the investors probably obtained a bargain. Granted In-telligroup’s sporadic “good-news-bad-news” record, this Court has no reason to believe that the phrase “financial Statements ‘should no longer be relied upon’ ” necessarily indicates that Intelligroup’s actual financial position during each quarter of 2001 was worse than that reported: it could have been better during some quarters and worse during the others, thus supplying transactional causation to some investors but not to others.
For this very reason, Plaintiffs’ argument based on Intelligroup’s restated filing for the year 2001 fares no better. For instance, Intelligroup’s restated net income for the year 2001 was 28.4% less than originally reported. See Compl. at 11, Opposition at 25. However, the Restatement of Intelligroup’s financial for the four periods of 2002 indicates that the actual net income was understated first by 3,390.9%, then understated by $9,473,000 (or by *303 1,106.5% in comparative difference), and then overstated by $1,779,000 (or by 13,-685%), and finally overstated by $970,000 (or 1,796%). See Compl. at 11. Being presented with Plaintiffs’ pleadings unambiguously indicating that Intelligroup managed to twice understate and twice overstate its key financial figure by thousands of times while filing merely four reports, and did it within the fiscal year that immediately followed Intelligroup’s 2001 yearly filing, this Court has no reason to conclude that Intelligroup did not make a single understatement of its income — or another misrepresentation painting a financial picture more favorable than the reality — during the year 2001. Indeed, read in light of Plaintiffs’ entire Table, the fact that Intel-ligroup’s yearly net income for the year 2001 was overstated by 28.4% does not preclude this Court from hypothesizing that Intelligroup’s net income was overstated during the first quarter of 2001 by 50% (imposing an overcharge on the investors), then understated during the second quarter by 21.6% (providing the investors with a bargain), and even that Intelligroup, accidently, got the correct figures during the third and forth quarters (not affecting investors either positively or negatively). 22
*304
In sum, Plaintiffs’ pleadings based on the overstatements contained in Intelligroup’s 2001 end-of-year report and the phrase “financial Statements ‘should no longer be relied upon’ ” cannot suffice as factual allegations supporting Plaintiffs’ claim that Intelligroup’s stock was invariably overpriced during each quarter of 2001.
See Bell Atlantic,
4. 2004 Period
It appears that both Plaintiffs and Defendants misread the observation the Court made in its December Opinion with respect to insufficiency of Plaintiffs’ pleadings made in the Second Complaint for the purpose of establishing market reliance of those investors who purchased Intelli-group’s stock during the end of the Class Period, namely, the second and third quarter of 2004.
See
Docket Entry No. 65 (Intelligroup’s Brief) (referring to this observation);
accord
Opposition at 28 (an “assertion that there can be no artificial inflation in the second and third quarters of 2004 because Intelligroup did not report its financials for those quarters ... ignores Plaintiffs’ core claim ... that it was Intelligroup’s false and misleading statement [released to the market] that ... inflated the price of Intelligroup’s stock”). However, this observation as to what Plaintiffs
did not
plead, i.e., that “Plaintiffs expressly acknowledge that Intelligroup’s financial statements for the second and third quarter of 2004 (the last two quarters of the Class Period) were not filed — or otherwise disseminated into the market— during the Class Period,” December Opinion at 20
(Intelligroup,
The last Statement filed by Defendants during the Class Period was [first quarterly report of 2004. That Statement] provided grounds for underpricing [of Intelligroup’s securities, since that Statement understated Intelligroup’s earnings by 35.5%, and these underpricing] tendencies lasted from the date of [the] filing [of that Statement] and throughout the remainder of the Class Period.
December Opinion at 29
(Intelligroup,
Indeed, the sole reason why Intelli-group’s failure to file financial statements
*305
during the second and third quarter of 2004 is pertinent is because Intelligroup’s %o%-dissemination of any financial information into the market could not serve as an intervening event capable of altering the market’s pricing tendencies.
See id.
The Court agrees with Plaintiffs that, in all other respects, the fact of Intelligroup’s lack of filings during the last two quarters of the Class Period is largely irrelevant.
Accord
Opposition at 28. Consequently, if the last Statement that Intelligroup publicized during the Class Period provided the market with grounds to underprice Intelli-group’s securities, and Intelligroup did not later disseminate any intervening information that could alter the market tendency to underprice Intelligroup’s securities, the underpricing would continue throughout the remainder of the Class Period.
See
December Opinion at 29 (Intelligroup,
5. Periods Reflected in the Table
a. Plaintiffs’ Allegations
Intelligroup’s financial position during the parts of the Class Period other than the 2001 and 2004 Periods discussed
supra
are reflected in Plaintiffs’ Table.
See
Compl. at 11. Relying on the information in the Table, Plaintiffs — in a fashion similar to that they employed in their Second Complaint — -allege that they purchased Intelligroup stock at inflated prices throughout the Table period because Intelligroup’s (a) “accumulated deficit [was] materially overstated in all [fiscal] quarters,” (b) “assets [were] materially overstated in all [fiscal] quarters,” (c) “liabilities [were] materially overstated in all [fiscal] quarters,” (d) “shareholder^’] equity [was] materially overstated in all [fiscal] quarters,” and (e) “net income [was] materially misstated in all [fiscal] quarters.” Opposition at 20. Apparently taking issue with this Court’s finding that Intelligroup’s stock could have been overpriced by the market only during the periods that followed Intelligroup’s filing of financial Statements overstating Intelligroup’s net income,
See
Opposition at 21 (referring to December Opinion at 21
(Intelligroup,
b. Legal Precedents Examining Financial Matters
The nature of Plaintiffs’ claim that the Court’s focus on understatements of Intel-ligroup’s net income (for the purpose of determining whether Plaintiffs disadvantageously relied on the market’s price of Intelligroup’s securities) was “simply ... contrary to the law” resembles a motion for reconsideration. 24 The law, however, has never devised any formulas to assess the market’s pricing of a security, leaving this issue to the area of finance. The legal decisions relied upon by Plaintiffs do not contain any statements altering this conclusion.
i. IPO Cases
The sole case extensively discussed by Plaintiffs is
Sirva,
In Sirva, Plaintiffs were a class of investors who purchased SIRVA stock between November 25, 2003, and January 31, 2005. See Sirva, 04-7644, Docket Entry No. 39 (“Sirva Compl.”) ¶ 1. The Sirva Defendants consisted of SIRVA (an issuer), the issuer’s underwriters and the issuer’s executives. See id. ¶¶ 13-14, 18-19, 30, 91-92. SIRVA, organized by its eventual underwriter in 1998, see id. at 31, sold its common shares to investors in an initial public offering (“IPO”) on November 25, 2003, and in a second public offering (“SPO”) on June 10, 2004. 25 See id. ¶¶ 34-35. The Sirva plaintiffs alleged that they were defrauded by the statements made by the issuer and underwriters in SIRVA’s IPO and SPO prospectuses disseminated in 2003 and 2004 because the prospectuses: (a) omitted discussion of the problems experienced by SIRVA’s European divisions, (b) offered knowingly false projections with respect to SIRVA’s net income in 2004, (c) understated the insurance reserves needed to conduct SIRVA’s future operations, and (d) provided false information about SIRVA’s pre-IPO (and, obviously, pre-SPO) net-income. See generally, id.
The Sirva defendants moved for dismissal of the Sirva Complaint arguing, inter alia, that contention (d), supra, made by the Sirva plaintiffs was without merit because overstatements of SIRVA’s net income during 2001 could not have affected the market’s assessment of SIRVA’s part performance in view of the fact that SIR-VA understated its net income in 2002, and the cumulative effect of both 2001 overstatement and 2002 understatement was a positive figure, which should have prompted — rather than dissuaded — the investors to purchase the stock during both the IPO and SPO. See Sirva, 04-7644, Docket Entry No. 105, at 28-29. The Sirva court disagreed explaining that:
[t]he [underwriters’ argument assumes that cumulative net income is the only *308 figure an investor would find important in making the decision to invest. Whether that is true is a factual question that cannot be resolved on a motion to dismiss. Moreover, the increase in cumulative net income notwithstanding, the impact of the [errors in] SIRVA’s financials was not wholly positive. Though the [errors] effected [an] increase in SIRVA’s net income for 2002, [they] effected a [higher] loss ... in 2001.
SIRVA,
In view of the foregoing, Plaintiffs’ reliance on Sirva is wholly misplaced. It appears obvious that the
SIRVA
court: (a) recognized that the valuation conducted by the stock market at the IPO stage involves analysis qualitatively different from that applicable to securities traded on a secondary market; (b) concluded that the market’s valuation of an IPO calls, inter alia, for an examination of the issuer’s entire history (since there is no secondary market in existence to provide the investors with on-going assessment), including the issue of stability of business performance; and (c) refused to ignore SIRVA’s business history in the name of positive
cumulative
net income.
27
In sum, the inquiry by the Sirva’s court into the history of the issuer’s performance for the purposes of determining the market’s pricing of the issuer’s IPO is inapposite to the pricing analysis of a security traded on a secondary market and assessable under the Efficient Capital Market Hypothesis.
See Gruber v. Price Waterhouse,
Plaintiffs make the same error by relying on two other IPO case,
Unicapital,
In sum, Plaintiffs’ reliance on Sirva, Unicapital and Craftmatic for the purpose of alleging that this Court should focus on Intelligroup’s misstatements of assets and liabilities rather than net income for the purpose of determining whether Plaintiffs sufficiently pled reliance under the “fraud-on-the-market” theory is wholly misplaced, since IPO cases fall outside the presumption of reliance enunciated in
Basic v. Levinson. See Gruber,
ii. Basic v. Levinson
In
Basic v. Levinson,
In view of the foregoing, the Court notes that, while Plaintiffs cite Basic for the proposition that “a statement is material if there is a ‘substantial likelihood’ that a ‘reasonable investor’ would view it as significantly altering ‘the total mix of information made available,’ ” Opposition at 23 (citing
Basic,
iii. Other District Court Cases
The other district court cases relied upon by Plaintiffs similarly offer no support to Plaintiffs’ proposition that, “under the law,” this Court should find that Intelligroup’s securities were traded at inflated prices during the periods when Intelligroup’s liabilities were slightly understated, assets were slightly overstated, and net income was understated dramatically. For instance, Plaintiffs cite Parmalat,
In sum, Plaintiffs cited no case (and this Court is aware of none) where the court examining a security traded on secondary market focused on issuer’s misstatements of assets and liabilities while sliding issuer’s misstatements of net income to the periphery of its attention. While the courts in Parmalat and Ala, and other courts, took notice of misstatements of items other than net income, it appears that all these courts were presented with a typical scenario where all financial entries were misstated coherently, i.e., in a way sending same type of signal to the stock market because both assets and net income were invariably overstated, while liabilities were invariably understated. Neither the court in Parmalat nor that in Ala, nor any other tribunal of which this Court is aware, faced the situation where a purchaser buys a security at a distorted price after an issuer’s financials sent opposite signals of dramatically different importance to the stock market. Since this very issue is presented by the case at bar, the Court is not persuaded by Plaintiffs’ argument that concentration on dramatically misstated financial figures mainly used by the stock market to determine the price of a security is “simply contrary to the law.”
c. Financial Theories and Calculations
As noted above, the Court’s December Opinion: (a) employed the Dividend Model for the purpose of determining whether Intelligroup’s stock was likely to be overpriced throughout the Class Period in its entirety; and (b) reached the conclusion that frequent understatements of Intelli-group’s net income that, most likely, provided the stock market with information causing frequent underpricing of Intelli-group’s securities, which availed Plaintiffs of a bargain and eliminated factual support from Plaintiffs’ reliance claim based on the “fraud-on-the-market” theory enunciated in
Basic v. Levinson. See
December Opinion at 19-30
(Intelligroup,
The term “asset” means an economic benefit; examples of assets include cash, equipment, buildings and land. See Charles Horngren, Gary Sundem, John Elliott, Introduction to Financial Accounting (“Introduction”) 50-51 (9th ed.2002). A “liability” is an obligation which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future; examples of liabilities include wages, taxes, accounts pay-ables, accrued pensions and warranties, as well as obligations ensuing from issued bonds, signed notes and leases. See id. at 382-439. The so-called “accounting equation” creates the mathematical structure of the balance sheet and relates corporate assets, liabilities and shareholders’ equity as follows: shareholders’ equity equals the difference between total assets and total liabilities. 31 See id. at 51-53. Therefore, a misstatement of any liability item, by definition, results in a misstatement of total liabilities which, in turn, results in a misstatement of shareholders’ equity (same as any misstatement of corporate assets produces erroneous shareholders’ equity). In other words, a single accounting error by an issuer, by definition: (a) causes the issuer to misstate a multitude of other accounting items related to the original error through the mathematics governing the balance sheet, and (b) ensures that, in the event of issuer’s restatement of finan-cials, a multitude of lines, if not “virtually every line of [the issuer’s] financial statements, [would have to be restated to correct the original] false” entry. Consequently, this Court will examine Plaintiffs’ arguments based on Intelligroup’s assets, accumulated deficit, liabilities and shareholders’ equity by referring to shareholders’ equity since, as the foregoing illustrates, an error in shareholders’ equity reflects cumulative impact of errors made with respect to assets, liabilities and accumulated deficit.
Elaborating on their assertion that this Court erred in focusing on understatements of Intelligroup’s net income rather than on overstatements of Intelligroup’s shareholders’ equity, Plaintiffs allege that “markets rely on assortment of factors to determine the price of a public company’s shares.” Plaintiffs do not provide the Court with any specific financial theory correlating corporate assets to the market’s price of a stock, so the Court could consider an alternative to the Dividend Model, which correlates the price of a stock to corporate earnings, i.e., net income, through assessment of the future stream of dividends. Rather, Plaintiffs: (a) enter their own generic observation that “a variety of factors, including a company’s assets, capital structure, possible and profitable changes in volume, price and costs, company’s management and reputation and other factors are all considered by the market when establishing the price of a company’s shares”; and (b) to support this proposition by citing to Benjamin Graham, David L. Dodd, Sidney Cot-tle, Security Analysis-Principles and Techniques 42-43 (4th ed., 1962) (“Securities Analysis”).
*313 Almost seventy years old' — -and having its forth edition (relied upon by Plaintiffs) published more than twenty-five years before the issuance of Basic v. Levinson, which enunciated the transactional causation theory that Plaintiffs aim to employ— Security Analysis still enjoys the status of a classic conservative treatise on finance and valuation. 32 In Security Analysis, Graham and Dodd divided stockholders into two types. On one side of the spectrum, they placed those who “play” on the market by looking for quick upsides; Graham and Dodd named such players “speculators.” 33 They contrasted speculators with “true investors” who look for safe income streams, and pointed out that investors do not operate on behavioral biases but rather rely on the intrinsic soundness of the investment. Elaborating on how a prudent investor — and the market comprised of such investors-should determine the intrinsic value of a stock, Graham and Dodd explained:
The most important single factor determining a stock’s value is now held to be the indicated average future earning power [of the stock], i.e., the estimated average earnings for a future span of years [in other words, the stream of future dividends]. Intrinsic value would then be found by first forecasting this earning power [of the stock] and then multiplying that prediction by an appropriate “capitalization factor” [that is, the financial formula enabling an investor to determine the present value of a known future capital.] 34
Security Analysis at 28 (emphasis supplied).
Since this Court, in its December Opinion, relied on the Dividend Model basing such reliance upon the observation that “[t]he corporate finance theory unvaryingly holds that the ... stock price reflects the market’s estimation of the future stream of dividends, discounted back to its present value,” December Opinion at 23
(.Intelligroup,
The Court cannot accept pleadings based on Plaintiffs’ self-serving conjecture in view of the Supreme Court’s guidance in Bell Atlantic and Dura. Since Plaintiffs should plead “enough facts to raise a reasonable expectation that discovery will reveal evidence of [the alleged claim]” and set forth factual “allegations plausibly suggesting (not merely consistent with)” Plaintiffs’ claims,
Bell Atlantic,
During certain parts of the Class Period, Intelligroup stock was overpriced by the market. By way of an example, during the last fiscal quarter of 2002, Intelligroup simultaneously overstated its shareholders’ equity by 53% and its net income by 1,796%.
See
Compl. at 11. Both of these overstatements sent coherent signals to the stock market depicting Intelligroup’s financial position more favorably than it was in actuality, hence causing an unwarranted inflation of Intelligroup’s securities.
Accord
December Opinion at 30
(Intelli-group,
6. Alternative Allegations of Reliance
Although barely fleshed out, Plaintiffs make two other reliance-type allegations that appear to differ from Plaintiffs’ core reliance claim, which is based directly on misstatements in Intelligroup’s financial data and the “fraud-on-the-market” presumption.
The first of these assertions is reduced to Plaintiffs’ statement that “Defendants’ materially false and misleading statements regarding such financial information as, inter alia, assets, liabilities and accumulated deficit ... caused ... Plaintiffs ... to purchase Intelligroup ... stock ... at artificially inflated prices.” Compl. ¶ 113. Since this statement does not refer in any way to the market’s assessment of Intelli-group’s stock but rather concentrates on the information that Plaintiffs themselves seemingly considered pertinent to their decision to purchase Intelligroup’s stock, the Court entertains this statement as Plaintiffs’ attempt to plead individualized reliance.
As the Court pointed out
supra,
reliance may be established in either of two ways: by showing individualized reliance (sometimes referred to as “actual” or common law reliance) on the material in question, or by showing facts which justify the presumption of reliance. To prove actual reliance, a securities plaintiff must assert facts showing that the disclosure materials the plaintiff read contained a material misrepresentation or failed to disclose a material fact upon which they relied.
See, e.g., List,
The other reliance allegation could be gleaned from Plaintiffs’ argument based on certifications of Intelligroup’s executives with respect to Intelligroup’s measures of internal reporting and control. (Being sporadically articulated by Plaintiffs, the nature of these allegations is not entirely clear in view of the fact that the claim is well developed by Plaintiffs with respect to their allegations of the scienter and loss causation elements but is entirely omitted from those paragraphs in the Complaint, and corresponding arguments in Plaintiffs’ Opposition, which address the issue of transactional causation, i.e., the reliance element.) The allegation ensues from the language of certifications entered by Intel-ligroup’s executives into the Statements, pursuant to the SOX requirement for such a certification. See Compl. ¶¶ 77-82; Opposition at 46. The language employed in these certifications was either
[t]he information contained in the [Statement] fairly presents, in all material respects, the financial condition and results of operations of [Intelligroup,]
Compl. ¶¶ 77-79 (certifications issued on August 14, 2002; November 12, 2002; March 28, 2003; May 15, 2003; August 14, 2003; and November 14, 2003; March 30, 2004, and May 17, 2004), or
[Intelligroup’s executives] are responsible for establishing and maintaining disclosure controls and procedures ... and internal controls over financial reporting ... for [Intelligroup,] and [they] have ... designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under [their] supervision, to provide reasonable assurance regarding the reliability of financial [Statements for [general public] in accordance with [GAAP, and] evaluated the effectiveness of [Intelligroup’s] disclosure control and procedures.
Compl. ¶ 80; Opposition at 46 (emphasis removed) (certifications issued on March 30, 2004, and May 14, 2004).
Plaintiffs appear to allege that the investors purchased Intelligroup’s securities because the investors were relying on these certifications as assurances.
See
Compl. ¶ (“[executives] of the company ... misled the investing public that the company’s financial statements were accurate and ... the company had adequate internal control”); Opposition at 2-4 (quoting the language of certifications and concluding that “[p]ublic investors, ... relying on the illusory nature of Intelligroup’s financial results, purchased Intelligroup stock”). However, since Plaintiffs may establish transactional causation only by asserting that they purchased Intelligroup stock at inflated prices, the sole fact of misstatement is insufficient to plead reliance.
See Dura,
Moreover, this Court finds any assertion that SOX certifications were the component which provided Intelligroup’s Statements with an aura of reliability counterproductive to Plaintiffs’ cause since, taken to its logical conclusion, such assertion suggests that the Statements unaccompanied by SOX certifications were likely to be perceived by the public as unreliable. Consequently, for the purposes of establishing the reliance element of 10b-5, Plaintiffs’ emphasis on SOX certifications read as an indication that Plaintiffs had less reasons — or no reason whatsoever — to rely on Intelligroup’s Statements during the initial fifteen and a half months, since the Class Period selected by Plaintiffs began to run on May 1, 2001, but the first Intelligroup’s Statement accompanied by SOX certification was issued only on August 14, 2002. See Compl. ¶ 77.
In sum, neither the facts provided by Plaintiffs in support of their core reliance allegation nor other forms of reliance arguments that this Court could fathom on the basis of the facts set forth in Plaintiffs’ Complaint indicate that Intelligroup stock was invariably traded at inflated prices throughout the entire Class Period. Since the Complaint does not contain “enough [factual] heft” to amount to “allegations plausibly suggesting (not merely consistent with)” Plaintiffs’ conclusions with respect to the reliance element,
Bell Atlantic,
B. Loss Causation
While, as discussed
supra,
Plaintiffs’ Complaint is deficient in view of Plaintiffs’ failure to sufficiently plead transactional causation and, in spite of this Court’s detailed guidance to the same effect with respect to Plaintiffs’ Second Complaint, Plaintiffs elected not to amend their pleading so to exclude the parts of the Class Period during which Intelligroup stock was likely to be a bargain, the Court cannot ignore the possibility that Plaintiffs still may piece together a 1 Ob-5 claim supported by sufficient facts to satisfy the reliance requirement, e.g., by moving for (a) re-certification of subclasses of plaintiffs who purchased Intefligroup’s securities during those parts of the Class Period when Intelligroup stock price was inflated, and (b) re-designation of corresponding lead plaintiffs. Therefore — as with respect to Plaintiffs’ Second Complaint — the Court does not limit its inquiry to the matters of transactional causation but rather proceeds with examination of Plaintiffs’ pleading to determine whether Plaintiffs sufficiently plead the element of loss causation to support their claim.
Accord
December Opinion at 31
(Intelligroup,
1. Relevant Facts
There are two groups of facts that appear to be pertinent to the inquiry into the sufficiency of Plaintiffs’ pleading of loss causation. One group of facts involves the publications made by Intelligroup, while another group consists of data reflecting the pricing of Intelligroup’s securities.
a. Intelligroup’s Publications
Clearly, the most relevant publication is the Press Release that, on September 24, 2004, disseminated the information which, allegedly, caused Plaintiffs’ losses. The Press Release included, inter alia, the following three announcements:
[Intelligroup] has been undertaking a comprehensive review of its 2004 second quarter results [which] resulted in a number of accounting adjustments to prior period[s and the] financial statements [issued during 2001, 2002 and 2003].... Adjustments identified to date are expected to reduce ... net income by approximately $0.9 million (or $0.05 per share) for the year ended December 31, 2003. In addition, there are certain historical intercompany adjustments totaling approximately $1.2 million that affect periods prior to 2001. The impact of these historical adjustments are expected to increase the accumulated deficit account for the years ... 2003, 2002 and 2001. There is also a remaining unreconciled difference of approximately $0.6 million in [Intelligroup’s] intercom-pany accounting records that has yet to be fully investigated, which may result in additional adjustments.... Reconciliation of this difference [is] the primary reason for the ... delay in filing [financial report for the second fiscal quarter of 2004]. (“First Announcement”)
[Intelligroup] entered into a definitive agreement pursuant to which [two entities] will purchase [Intelligroup’s] common stock in a private placement ... for a total purchase price of $15,000,000.... [Intelligroup’s] determined, after evaluating alternatives that this transaction was necessary because [Intelligroup’s] cash position and relative cash availability under its $15 million revolving credit facility had become inadequate to fund ongoing operations.... The transaction will violate [the stock market’s] listing rules [since it is being undertaken without shareholders approval required by the stock market’s rules,] and, as a result, [Intelligroup] might be delisted from the ... Stock Market. (“Second Announcement”)
In addition, [Intelligroup] is in default under its revolving credit facility as a result of the failure to file its [financial report for the second fiscal quarter of 2004].... [Intelligroup] is working ... to obtain waivers of such defaults [but, if Intelligroup] cannot obtain such waivers, the indebtedness ... under [the] revolving credit ..'. could be accelerated. (“Third Announcement”)
Press Release.
In addition, Intelligroup made two other publications. One publication was made on May 4, 2004, slightly more than five and a half months prior to Intelligroup’s publication of the Press Release, and advised the investing community about Intelli-group’s “earning shortfall” (“Earnings Announcement”). See Compl. ¶ 5. The other publication was made a month and a half prior to Intelligroup’s publication of the *320 Press Release 40 and notified the investors that Intelligroup’s external auditing firm resigned (“Auditor Announcement”). 41 See id. ¶ 6.
b. Chart of Intelligroup’s Stock Price
Defendants’ Exhibit G sets forth the actual prices at which Intelligroup’s securities were traded during the period from March 1, 2004, to December 31, 2004. See Stock Chart (Docket Entry No. 65-12). 42 The data in the Stock Chart depicts the following twenty spans of the chart-line:
(1) The stock price was at its highest on March 1, 2004, when the stock traded at $9.95 per share.
(2) From this point on, the price declined, first modestly, then sharply, over two weeks, until it fell to $6.82 per share on March 16, 2004, losing $3.17 per share (“First Drop”).
(3) Over the next three weeks, the price slowly rose to $8.64 per share, which was reached on April 7, 2004, gaining back $1.82 per share (“First Recovery”).
(4) After that, the price steadily dropped and, on May 3, 2004, fell to $5.79 per share, thus losing $2.85 per share (“Second Drop”).
(5) On May 4, 2004, the day of the Earnings Announcement, the price plummeted from $5.79 to $3.90, losing $1.81 per share (“Earnings Drop”).
(6) For two weeks after the day of the Earnings Announcement, the price kept slowly sliding down until, on May 18, 2004, it reached $3.18 per share, thus losing another $0.72 per share (“Post-Earnings Drop”).
(7) After that dip, the price began to climb and did so rather steadily for about seven weeks, reaching $5.30 per share on July 2, 2004, thus gaining $2.12 per share (“Second Recovery”).
(8) Over the next five weeks, the price declined again and, by August 10, 2004, dropped to $2.78 per share, i.e., losing $2.52 per share (“Post-Second Recovery Drop”).
(9) On August 11, 2004, that is, the day of the first part of the Auditor Announcement, the price fell to $2.10 per share, thus, losing another sixty-eight-cents-per-share (“Auditor Drop”).
(10) The price continued falling and, on August 16, 2004, went down another dime to $2.00 per share.
(11) On August 17, the day of the second part of the Auditor Announcement, the price went down another three cents to $1.97 per share.
(12) Over the next ten days, the price kept fluctuating up and down, but finally dropped to $1.67 per share on August 27, 2004, losing another thirty-cents-per-share(“Post-Auditor Drop”).
*321 (13) From this point on, the price began a slow climb up and, on September 13, 2004, reached $2.32 per share, i.e., gaining $1.35 per share (“Posh-Auditor Recovery”).
(14) The next ten days were marked by a steady decline and, on September 24, the day which ended with Intelli-group’s airing of the Press Release, fell to $1.65 per share, that is, suffering another sixty-seven-cents-per-share decline (“Pre-Release Drop”).
(15) On September 27, the first trading day after the Press Release, the price dropped to $1.13 per share, losing another fifty-two-cents-per-share (“Press Release Drop”).
(16) During the following week, the price began climbing and, on October 4, 2004, reached $1.79 per share, gaining back sixty-six-eents-per-share (“Posh-Release Recovery”).
(17) Over the next three weeks, the price dropped and reached its lowest point on October 26, 2004, landing at $0.95 per share (“Post-Release Drop”).
(18) From that lowest point, the price began to rise and, two weeks later, reached $1.49 per share on November 9, 2004, thus, achieving the gain of fifty-four-cents-per-share (“Second Post-Release Recovery”).
(19) For the next eight weeks, the price declined while going through a relatively small up-and-down fluctuation and, on December 30, 2004, dropped to $1.15 per share, i.e., losing thirty-six-cents-per-share (“Final Drop”).
(20)The year 2004 ended with a minor rise to $1.20 per share, that is, a five-cents-per-share gain.
Thus, the image of the chart-line resulting from the data set forth in the Stock Chart could be reduced to the following see-saw-like sequence: First Drop — First Recovery — Second Drop — Earnings Drop — Post-Earnings Drop — Second Recovery — Post-Second Recovery Drop— Auditor Drop — Posh-Auditor Drop — Post-Auditor Recovery — Pre-Release Drop— Press Release Drop — Post-Release Recovery — Post-Release Drop — Second Post-Release Recovery — Final Drop.
2. Deficiencies Contained in Plaintiffs’ Second Complaint
In their Second Complaint, Plaintiffs alleged, inter alia, that the Press-Release Drop and all followings drops (but not recoveries) were a direct result of the First Announcement, which — according to Plaintiffs — disclosed to the investing public “the false ... nature of Defendants’ [Statements.” 43 See Second Complaint ¶¶ 105-08. In support of this assertion, Plaintiffs: (a) relied on the temporal proximity between the Press Release and Press-Release Drop, (b) read the information disclosed by Intelligroup in its Restatement into the language of the First Announcement, and (c) alleged that the Post-Release Recovery should be ignored as a mere market “fluke.” See id. In addition, Plaintiffs contended that, although the Second and Third Announcement did not cause the Press Release Drop, the very fact that Intelligroup made the Second and Third Announcements should be perceived as supporting Plain *322 tiffs’ assertion that the Press Release Drop was caused by the First Announcement, since the “material weakness in [In-telligroup’s] control environment” yielded certain business hardships which, in turn, prompted Intelligroup to plan certain actions, some of which were itemized in the First Announcement, and the remaining ones were itemized in the Second and Third Announcements. See Docket Entry No. 68 (Plaintiffs’ Opposition to Defendants’ Motion to Dismiss Second Complaint), at 55-60.
Examining these allegations, the Court discussed certain misconceptions, which apparently affected Plaintiffs’ pleadings. The key points of the Court’s explanation were as follows:
(1) Since the concept of loss causation is analogized to the tort law concept of proximate cause, a securities plaintiff must plead facts indicating that it was the disclosure of defendant’s misrepresentation of true facts — rather than existence of other forces or defendant’s misrepresentation of the information which, ab initio, was false — was the force that actually and — if not fully, then at least quantifiably — caused the decline in the price of defendant’s securities.
See
December Opinion at 31-34
(Intelligroup,
(2) Plaintiffs improperly relied on the temporal proximity between the First Announcement and Press-Release Drop, because the temporal proximity appeared to be a result of pre-existing forces, which initiated a series of drops in stock price long before the Press Release was aired.
See
December Opinion at 35-37 (Intelligroup,
(3) The facts alleged by Plaintiffs indicated that, even if the pre-existing forces are factored out, the Press-Release Drop was most likely a result of disclosure of the information contained in the Second and Third Announcement, as well as of disclosure of the erroneous — rather than true — information contained in the First Announcement, and Plaintiffs erred in supplementing the true information in the First Announcement by that not included in the Press Release but rather disclosed in the Restatement more than a year after the Press Release was aired.
See
December Opinion at 37-38
(Intelli-
group,
(4)Plaintiffs unduly conflated the Press-Release Drop with all other declines that followed the Press-Release Drop into a single aftermath of the First Announcement since the post-Press Release price history of Intelligroup stock included intervening recoveries, which — under the Efficient Market Hypotheses — Plaintiffs should not discount by merely treating them as “market flukes.”
See
December Opinion at 40-48
(Intelligroup,
3. Plaintiffs’ Instant Allegations
While providing factual information largely the same as that set forth in the Second Complaint, Plaintiffs now set forth three theories, each of which somewhat resembles but still differ, in certain respects, from the allegations articulated by Plaintiffs in the Second Complaint.
a. Interrelation-Among-the-Press-Release-Announcements Claim
The first theory appears to be related to the Court’s previous observation that Plaintiffs’ pleadings in the Second Complaint depict a scenario where the Press-Release Drop was a result of disclosure of the information contained in the Second and Third Announcement. See Opposition *323 at 30-35 (Part (a) of the arguments). Plaintiffs now argue that the First Announcement (dealing with the issue of accounting errors) must be read as a statement directly connected to the Second and Third Announcements (dealing, respectively, with the private placement and default on revolving credit) and maintain that, since the content of (a) the Second and Third Announcement disclosed the errors in the Statements to the market, and (b) the Second and Third Announcements were related to the First Announcement, the disclosure of the First Announcement must be deemed as a cause of Plaintiffs’ loss. See id. The Court finds this line of argument without merit for two reasons.
The Court disagrees.
The Second Announcement appears to be related to either Intelligroup’s financial hardships or to its interest in maintaining fast-growing operations, or both, but does not seem to have anything in common with the content of either the First or the Third Announcements. Describing the “interrelation” between the Second Announcement and the First and Third ones, Plaintiffs make three erroneous statements. Specifically, Plaintiffs assert that each of the First, Second and Third Announcements revealed Intelligroup’s
need to restate more than three years’ worth of financials, which in turn caused a default in [Intelligroup’s] credit facility, which in turn caused the need for a private placement [to provide Intelli-group with] cash availability. [It is improper, therefore, to] ignore these [chain-reaction-depicting aspects of the First, Second and Third Announcements] and instead focus on [the fact] that income was overstated for 2003.
Opposition at 34.
However, overstatements of Intelli-group’s net income would not support but would detract from Plaintiffs’ transactional and loss causation claims.
Second, even if Plaintiffs had asserted that “income was understated for 2003,” this allegation would be factually incorrect because Plaintiffs’ table indicates that In-telligroup’s income was understated thrice in 2002, thrice in 2003, and even the single Intelligroup’s Statement filed in 2004 also contained an understatement of income. 44 See Compl. at 11.
Third, Plaintiffs’ chain-of-events allegations factually contradict the language of the Press Release. The Third and Second Announcement stated
[Intelligroup] entered into a definitive agreement [to execute] in a private placement ... for ... $15,000,000 ... because [Intelligroup’s] cash availability under its $15 million revolving credit facility had become inadequate to fund ongoing operations.... [Although Intel-ligroup] is in default under its revolving credit facility ... [Intelligroup] is working ... to obtain waivers of such default []....
Press Release.
Therefore, at the time of the Press Release, Intelligroup did not know whether it would retain or lose its credit, but had already entered into the private placement agreement. Thus, Intelligroup’s credit problems could not have caused Intelli-group’s private placement. Revolving credit: (a) can be automatically renewed without additional negotiation with the *324 bank; (b) is available up to a specified amount which remains constant during a given period of time; (c) obligated the borrower to pay a commitment fee for the unused amount of the credit facility (usually around 0.5%), in addition to the interest rate charges on the borrowed funds; (d) imposes a strict schedule of repayment; and, (e) expires within a maximum period of three years. See James J Mikesell, Are revolving loan funds a better way to finance development? (U.S. Dept, of Agrie., 1996). Consequently, revolving credit is poorly suited for any long-term business development projects. See id. By contrast, private placement funds are equity, see 17 C.F.R. § 230.506, which need not be repaid and, thus, are well suited for long-term investment into a developing business operation.
In sum, the Court concludes that the plain language of the Second Announcement does not contain any indication that the Intelligroup’s decision to execute a private placement was a direct or even indirect result of any accounting errors in the Statements. 45
The second reason for the Court’s disagreement with Plaintiffs’ conclusion that the Second Announcement caused Plaintiffs’ losses ensues from the lack of direct relationship between Plaintiffs’ transactional causation and loss causation claims. While the Court agrees with Plaintiffs that there was an interrelation between the First and the Third Announcement, that is, a connection in the sense that both Announcements made reference to Intelli-group’s delay in filing its financial report
*325
for the second fiscal quarter of 2004,
see
Opposition at 30 (holding out the language of the Third Announcement related to the filing delay), the Court disagrees with Plaintiffs’ conclusion that the sole fact of such connection lends any support to Plaintiffs’ claim. It appears that Plaintiffs now employ the same erroneous reasoning with respect to the Third Announcement as they did in their Second Complaint with respect to the First Announcement. Examining the content of the First Amendment, the Court concluded that it was unlikely to cause Plaintiffs’ losses, since it did not disclose any negative information which was both true
and
relevant to Plaintiffs’ claim based on the errors in Intelli-group’s Statements.
46
See
December Opinion at 40-46 (Intelligroup,
[Intelligroup] is in default under its revolving credit facility as a result of the failure to file its [financial report for the second fiscal quarter of 2004].... [Intel-ligroup] is working ... to obtain waivers of such defaults [but, if Intelligroup] cannot obtain such waivers, the indebtedness ... under [the] revolving credit ... could be accelerated.
Third Announcement, Press Release.
The language of the First Announcement clarified that “[r]econciliation of th[e] difference^ detected in intercompany fi-nancials and corrections of errors committed before commencement of the Class Period was] the primary reason for [Intel-ligroup’s] delay in filing [its financial report for the second fiscal quarter of 2004].” First Announcement, Press Release. Read in light of such clarification, the language of the Third Announcement could be subdivided into two distinct messages: (1) an express notice to the market that Intel-ligroup was in default under its revolving credit facility and might not only lose the credit but, in addition, face acceleration of the entire payment due (“Message One”); and (2) an implied recitation of the fact disclosed in the First Announcement, namely, that Intelligroup’s intercompany accounts and financial statements executed prior to the Class Period contained accounting errors (“Message Two”). 47
*326
However, the sole fact that “a” disclosure was made does not establish loss causation. Only the disclosure of information, the concealment of which caused inflation of stock price at the time of buyer’s purchase, i.e., the disclosure of the very misstatement that initially supplied the element of transactional causation, provides the basis for loss causation in the event that the stock price falls upon this specific disclosure.
See Winstar Communs.,
Message One (that Intelligroup was in default under its revolving credit facility and might lose the credit and face acceleration of the entire payment) in no way indicated that the errors in the Statements presented Intelligroup to the market in a light more favorable than what the reality warranted. Indeed, while potentially having a very substantial effect on the market’s valuation of Intelligroup’s future profitability,
see
December Opinion at 47 n. 35
(Intelligroup,
b. Lack-of-Interrela tion-Among-the-Press-Release-Announcements Claim
In their second theory, Plaintiffs allege, in alternative to their claim based on “interrelation” of the First, Second and Third Announcements, that
even if all the [Announcements ... were not [interrelated, ... [Pjlaintiffs need not plead that disclosure of the fraud was the sole cause of the decline in the value of their investment.
Opposition at 31 (Part (b) of the arguments).
So alleging, Plaintiffs omit to enlighten this Court as to which particular part of the Press Release alerted the market to the fact that the market was overpricing Intelligroup stock on the basis of the errors contained in the Statements and, having found that the contents of neither First nor Second, nor Third Announcement directly alerted the market about the Statements-based reasons to overprice Intelli-group’s securities, the Court is confined to interpret Plaintiffs’ above-quoted allegation as a request to ignore the key reasons for the Press-Release Drop (i.e., erroneous prediction that the determination of actual net income would produce a result lower than that provided in the Statements, dramatic dilution of stock ensuing from the private placement and potential loss of credit which might lead to higher cost of capital,
see
December Opinion at 40-47
(Intelligroup,
i. Marsden v. Select Med. Corp.
Plaintiffs cite
Marsden v. Select Med. Corp. (‘Marsden
I”),
Plaintiffs allege both that [defendants artificially boosted stock prices by omitting or misstating material information and that the revelation of the “truth”— that [the issuer’s] outlook was far from rosy because many of its most profitable practices would be forbidden — caused a dramatic drop in stock prices. Defendants argue that [pjlaintiffs do not sufficiently connect the allegations of improper revenue and inadequate controls with the resulting drop in stock prices. Dura, Defendants argue, held that merely alleging that a particular act or omission “touches upon” a later loss is insufficient.... Defendants suggest that [pjlaintiffs have not articulated a sufficient connection between the alleged inadequate controls ... and either the losses allegedly suffered or the discovery of the truth.... That other factors may contribute to a price drop should not, however, preclude plaintiffs from pursuing claims based on those other factors.
Marsden I,
Plaintiffs in the instant case quote the italicized statement in support of their claim that this Court should read the claimed association that Plaintiffs assert between Intelligroup’s Statements and the Press-Release Drop and the following declines as a sufficient factual allegation of loss causation. See Opposition at 31-32. The decisions of the Marsden court, however, suggests the opposite.
Ten months after issuing Marsden I, the court concluded that its Marsden I opinion contained a clear error of law and sua sponte reconsidered its Marsden I decision.
See Marsden II,
ii. Other District Court Cases
The Court now turns to
GeoPharma, Inc. Sec. Litig.,
In
GeoPharma,
the investors alleged that (a) defendants issued a deliberately misleading press release that caused investors to believe that the Food and Drug Administration (“FDA”) had granted the company approval for a new lucrative drug, when in fact the FDA merely approved a much less lucrative medical device; and (b) the press release caused artificial inflation of the company stock.
See GeoPharma,
Another case relied upon by Plaintiffs,
eSpeed, Inc. Sec. Litig.,
[t]he truth may be revealed to the investing public through means other than defendant’s corrective disclosure. See Dura,544 U.S. at 343 ,125 S.Ct. 1627 (speaking in terms of “truth leaking out”). For instance, in addition to formal disclosure by a defendant, “the market may learn of possible fraud [from] a number of sources: e.g., from whisteb-lowers, analysts questioning financial results, resignation of CFOs or auditors, announcements by the company of changes in accounting treatment going forward, newspapers and journals, etc.” Enron,2005 WL 3504860 , at *4-5,2005 U.S. Dist. LEXIS 41240 , at *16 (citation omitted); Electronic Data Sys. Corp. Sec. & “ERISA” Litig.,298 F.Supp.2d 544 , 560-61 (E.D.Tx.2004)....
See
December Opinion at 18 n. 11
(Intelli-group,
Thus, the eSpeed decision, like Geophar-ma, indicates that allegations of actual disclosure of misrepresented truth are necessary to plead the element of loss causation.
The last opinion relied upon by Plaintiffs in support of their claim that this Court should ignore lack of actual disclosure of misrepresented truth that caused artificial inflation of Intelligroup stock is
Sekuk Global Enters. v. KVH Indus.,
*332 argue[d] that the press release and the resulting drop in the price of ... common stock fail[ed] to establish loss causation because the press release [did] not [expressly] attribute the declining revenue to the sales of the A5. [Although the statements made in the press release by one executive expressly] assigned a portion of the blame for the drop in revenue to the lower than expected sales of ... satellite [products], defendants claim[ed] that [the statements made in the press release by another executive] limited the scope of those lower sales [of satellite products] to [the corporation’s] major RV customers.... [Although recognizing that] A5 was a ... satellite [product], defendants note[d that A5] was designed for use in automobiles, not RVs [and, therefore, reading the statements of both executives together,] defendants’ proposed [an] interpretation [of] the press release [suggesting that the press release] could not have revealed any misrepresentations regarding the A5 ... sales.
Id.
at
Rejecting defendants’ claim that the Se-kuk plaintiffs failed to plead facts of loss causation, the Sekuk court noted that, even if the defendants’ reading of the press release is adopted, i.e., if the press release were to be read as disclosing lower than expected sales of satellite products to major RV customers, the press release did disclose to the market the fact that the sales of A5s would be lower than initially promised because the Sekuk plaintiffs duly alleged that the corporation was marketing and selling A5 to its major RV customers.
See id.
at
Consequently, the holding of Sekuk appears to stand for the proposition that, once publicized to the market, the information disclosed cannot be taken back by the issuer under the claim that the issuer intended to make a narrower disclosure than that actually made. The finding of the Sekuk court, however, in no way disturbs the premise that allegations of an actual disclosure of the very misrepresentation that cause original inflation of stock price are required in order to plead the loss causation element.
Accord Semerenko,
c. Miscellaneous Claims
Plaintiffs’ third theory consists of a mix of statements, see Opposition at 35-37 (Part (c) of Plaintiffs’ loss causation argument) (“Part C”). 51 Although it is hard to *334 distill clear allegations from Plaintiffs’ statements set forth in Part C, it appears that Plaintiffs aim to set forth two contentions-.Cl) that the airing of the Press Release amounted to an indirect disclosure of the Statements’ errors because the Press Release implied that Intelligroup “lack[ed] ... any effective internal and financial control” and such lack of internal control must have been the cause of those errors in the Statements that resulted in artificial inflation of Intelligroup’s stock price, see id. at 34-36; and (2) that the PoslARelease Recovery should not be read as an indication that the disclosure of the information contained in the Press Release was not the cause of all Intelligroup’s stock price declines that took place after the Press Release was publicized. See id. at 36-37.
i. Contentions About Implied Disclosure
Vaguely articulated, Plaintiffs’ first contention appears to suggest that, although the Press Release did not disclose to the market any specific true information about those errors in Intelligroup’s Statements that caused inflation of Intelligroup’s stock price, the Press Release put the market on notice that Intelligroup’s internal control system was weak, and the disclosure of that news caused the decline in Intelli-group’s stock price. See Opposition at 34-36.
If Plaintiffs’ Part C intends to so assert, that contention has no merit for a multitude of reasons. First, Plaintiffs fail to observe that, in order to be correctively disclosed — and, thus, provide the basis for the loss causation element — the information needs to be initially misrepresented in order to provide the basis for the transactional causation element.
See Dura,
The second — and more important — reason is that, under the guidance of Bell Atlantic, Plaintiffs are obligated to plead the facts suggesting, rather than merely
*335
consistent with, Plaintiffs’ allegations.
See Bell Atlantic,
In the case at bar, the Press Release provided the market with the following information:
the expected [Restatement is based on preliminary results of an ongoing review conducted by [Intelligroup] management. ... As a result of recent implementation of an upgraded financial system, and the recent turnover in key positions in [Intelligroup’s] finance department, [Intelligroup] has been undertaking a comprehensive review of its 2004 second quarter results, [as well as prior financial Statements and detected past errors, some depicting Intelli-group’s financial position better than reported before, and some depicting the position worse than reported].
Press Release.
Plaintiffs appear to suggest that this language must necessarily indicate that Intelligroup’s internal control was weak during the Class Period.
See
Opposition at 34-36. The Court disagrees. If one is to focus on the plain meaning of the Press Release language, i.e., employ the very approach expressly advocated by Plaintiffs,
see id.
at 30, the Press Release language must be read as stating no more and no less than what it actually states, namely, that, after upgrading its financial systems, hiring fresh talent and conducting additional internal audits, Intelligroup detected a series of past financial mistakes. It is obvious that each upgrading of financial systems and each hire of new talented and diligent employees and auditors offers a business entity better levels of internal and financial control. However, it would be anomalous to legally transform any corporate announcement about upgrading its financial system, new hire or detection of a past error into an automatic admission that the corporation’s previous control systems were either “weak” or “inadequate,” since such legal transformation: (a) would, by definition, take any incentive from both technological upgrading of and putting any effort into determining and correcting previous mistakes; and, most importantly (b) would reduce the loss causation requirement emphasized by the Supreme Court in Dura to a check-mark automatically satisfied by a securities plaintiffs pleading a “catch-all” claim consisting of mere three buzz words “insufficient internal control.” Indeed, a principle under which a corporate announcement that the corporation obtained better facilities and improved its previous methods could be automatically transformed into an actionable statement that the previous facilities and methods were necessarily inadequate is contrary to the Supreme Court and Court of Appeals’ guidance that, in order to plead that a corporation’s statement disclosed to the market a previously misrepresented fact that the corporation’s systems of internal or financial control were inadequate, a securities plaintiff should point to the fact of actual disclosure rather than to the corporation’s neutral language, which the plaintiff baldly interprets as a disclosure serving the plaintiffs legal goal.
See Bell Atlantic,
The third reason for rejecting Plaintiffs’ claim based on Intelligroup’s implied disclosure of its internal control weakness ensues from Plaintiffs’ arguments with re *336 spect to the fluctuation of Intelligroup’s stock price.
As noted supra, during the period from March 1, 2004, to December 31, 2004, In-telligroup’s stock price suffered numerous declines, i.e., First Drop, Second Drop, Earnings Drop, Post>-Earnings Drop, Post-Second Recovery Drop, Auditor Drop, Posh-Auditor Drop, Pre-Release Drop, Press Release Drop, Post-Release Drop and Final Drop, as well as a few recoveries, i.e., First Recovery, Second Recovery, Posh-Auditor Recovery, Post-Release Recovery and Second Post-Release Recovery. See Stock Chart. In a word, Intelligroup’s stock price was fluctuating, while keeping a distinct and, unfortunately, quite stable downward direction. See id. Since the Press Release of September 24, 2004, was publicized after the seven-tenth of the period encompassing these downward price movements, the Court concluded that the other market forces that preexisted Intelligroup’s airing of the Press Release and drove the stock price down for seven months starting March 1, 2004, were also responsible for the three months of declines that took place after the swift Post-Release Recovery (which occurred within one week after the Press Release and brought the stock price up to $0.15 above the level where the stock was before the Press Release), especially in view of the fact that the pace of the three-months-long decline that followed the PosL-Re-lease Recovery was strikingly similar to that of the declines suffered by the stock during the first seven months of the period. 52
Apparently responding to the Court’s observation about the fluctuation and the general downward tendencies of Intelli-group’s stock price during the Stock Chart period, Plaintiffs alleged as follows:
Prior to the Press Release, two negative disclosures caused Intelligroup shares to fall. First, on May 4, 2004, Intelligroup announced an earnings shortfall, resulting in a decline of $1.89 per share (or 33%) [i.e., the Earnings Drop. Plaintiffs] allege [ ] that the earning shortfall was directly related to and caused by the lack of any effective internal and financial controls at [Intelligroup].... Second, on August 11, 2004, Intelligroup’s independent auditor Deloitte resigned as a result of the growing accounting scandal [presumably, also directly related to and caused by the lack of any effective internal and financial controls at Intelli-group]. Deloitte’s resignation resulted in a decline of $0.68 per share (or 24%) [i.e., the Auditor Drop],
Opposition at 36 (quotation marks and citations to the Complaint omitted).
In view of the above-quoted Plaintiffs’ allegations, Plaintiffs’ claim that Intelli-group’s Press Release “implied” to the market the fact of Intelligroup’s “lack of any effective internal and financial controls” makes little sense. The Court of Appeals expressly guided that the inflation associated with an alleged misrepresentation will be incorporated into the value of a security until the actual truth is disclosed.
See Semerenko,
To summarize, it appears that Plaintiffs’ allegations based on “implied” disclosure indicate that the Press Release Drop of $0.52 per share was a result of Intelli-group’s publication of new facts, correct and erroneous, i.e., the statements that Intelligroup was about to dilute its equity, that it was in default, could lose its credit and become de-listed, and that its net income for the previous fiscal year was almost $1 million less than that previously reported. However, as the Court pointed out time and again, Plaintiffs’ allegations fail to tie these disclosures to the facts which Plaintiffs assert as the basis for their transactional causation element.
ii. Contentions About the Post-Release Recovery
While elaborating on the causes of the Earnings, Auditor and Post-Release Drops, Plaintiffs do not enlighten the Court as to the causes of the other nine Drops, leaving the nature of all downward forces that pre-existed and followed Intelli-group’s airing of the Press Release to this Court’s imagination. See generally, Compl., Opposition. Moreover, Plaintiffs’ submissions are equally silent as to the causes for Second Post-Release Recovery, even though Plaintiffs attempt to tie the Press Release to all losses that followed the airing of the Press Release.
Plaintiffs, however, do provide the Court with Plaintiffs’ opinion as to the causes for the first Post-Release Recovery. See Opposition at 37. Responding, apparently, to this Court’s observation that the Post-Release Recovery cannot be discounted to a mere market fluke, 54 Plaintiffs came up *338 with the following explanation for the Post-Release Recovery:
[The PosNRelease Recovery was a result of] the completion of [the private placement that] provided at least some comfort to investors that [Intelligroup] would retain sufficient cas[h] to remain a going concern [i.e., stay in business rather than go bankrupt].
Opposition at 37.
Plaintiffs’ explanation, however, contradicts Plaintiffs’ own claims. Just a few pages prior to making the statement quoted above, Plaintiffs assert that their losses ensued from Intelligroup’s airing of the Press Release because “[t]he Press Release revealed the following true negative information about [Intelligroup]: ... [In-telligroup] would seek to privately place $15,000,000 in Intelligroup stock.... ” Id. at 32-33 (emphasis supplied). Moreover, Plaintiffs’ elaborate on the negativity of the private placement news by alleging that this statement was “part and parcel of the revelation of Intelligroup’s concealed financial condition [because] the need for a private placement [ensued from] the lack of cash availability and liquidity” Id. at 34. Basing their conclusion on the foregoing allegations, Plaintiffs deduce that they “adequately allege[d that] the disclosure of true negative information” caused decline of Intelligroup’s stock price and resulted in Plaintiffs’ losses. Id. Yet, just three pages later, Plaintiffs assert that the fact of In-telligroup’s private placement “provided [so much] comfort to investors” as to cause the stock price to rise $0.14 above the level it was at on the day prior to the Press Release. See Opposition at 37; accord Stock Chart.
Plaintiffs’ allegations depict the market vastly different from that envisioned by the Supreme Court in
Basic,
In sum, Plaintiffs’ factual allegations suggest that the Press-Release Drop and the following declines were caused by a combination of (a) pre-existing forces, (b) the Press Release disclosure of such factors as upcoming dilution of corporate equity, potential delisting, possible dire credit hardships and the erroneous prediction that Intelligroup’s net income for the year preceding the Press Release was notably lower than what was originally reported (that is, the factors unrelated to the actual errors in the Statements, which could have caused artificial inflation of Intelligroup’s stock price during certain parts of the Class Period); and (c) Intelligroup’s later financial hardships, e.g., materialization of Intelligroup’s fears as to delisting from the stock market.
Accord Ray v. Citigroup Global Mkts., Inc.,
C. Scienter
Even if Plaintiffs’ Complaint did not suffer from the deficiencies discussed above, the Complaint would still have to be dismissed for Plaintiffs’ failure to properly plead the scienter element. Although the issue of scienter took the bulk of the parties’ efforts during the Court’s assessment of Plaintiffs’ First and Second Complaints, this Court did not address the issue in its December Opinion in view of Plaintiffs’ insufficient pleadings of both transactional and loss causation elements.
See
December Opinion at 56-57
(Intelligroup,
As the Court noted
supra,
a plaintiff may establish the requisite strong inference of fraudulent intent in one of two ways: (1) by alleging facts “establishing a motive and an opportunity to commit fraud,” or (2) “by setting forth facts that constitute circumstantial evidence of either recklessness or conscious behavior.”
56
Ad-vanta,
1. Motive and Opportunity
Plaintiffs allege that
“in this case, [Defendants’ opportunity to commit fraud is clear; each [Defendant was a senior corporate officer who controlled public dissemination of information about the company.” Accordingly, the only question is whether Plaintiffs have identified a compelling motive for Defendants’ fraud.
Opposition at 66 (quoting
Unisys Corp. Sec. Litig.,
The Court agrees. Therefore, the Court will limit its “motive-and-opportunity” examination of Plaintiffs’ pleading to the inquiry whether Plaintiffs sufficiently pled Defendants’ motive to commit fraud by alleging facts showing that Defendants “benefitted in a concrete and personal way from the purported fraud.”
See Wilson,
In the case at bar, Plaintiffs allege that Defendants were motivated by their desire to avoid writing off a substantial promissory note (executed in favor of Intelligroup) which eventually proved to be uncollectible and was written off in its entirety. 57 See Compl. ¶¶ 40-42; opposition at 66. Plaintiffs clarify that Defendants: (a) were aware of the unlikely collectability of the note but kept misrepresenting the issue by not writing the note off (that is, presumably, by adding the stated value of the note to Intelligroup’s assets reported in the Statements); and (b) kept misrepresenting the issue in fear that the write-off might trigger the “material adverse effect” clause in the loan agreement existing between Intelligroup and one of Intelli-group’s main lenders, thus trying to assure that the lender would not demand that Intelligroup repay the loan fully and immediately on the basis of the clause. See id.
Since it is well established that the fact of a defendant having certain goals or aspirations common to the law-abiding business community cannot amount to a valid motive for the purposes of showing scienter,
see GSC,
2. Circumstantial Evidence
As explained
supra,
the courts have uniformly held that a securities plaintiff may sufficiently plead inference of scienter from a defendant’s GAAP violations or SOX certifications only if these facts are employed as a “supplement” to other facts indicating that the defendants had known about the invalidity of company’s financials (or had reasons to doubt the validity of the financials but kept turning a blind eye to all “red flags”).
See Advanta,
Plaintiffs subdivided their circumstantial evidence allegations into four group based on: (1) the fact of Intelligroup’s issuance of the Restatement and the GAAP violations in the Statements; (2) Defendants’ SOX certifications; (3) statements from confidential sources; and (4) the fact that Plaintiffs designate as “additional” and dedicate to discussion of Defendants’ resignations from Intelligroup. See Opposition 41-68. This Court, therefore, will: (a) *343 start with an examination of Plaintiffs’ pleadings provided in the last, i.e., “additional,” group in order to determine whether the facts stated in that group per se meet the pleading requirement or, if not, what degree of supplement these facts could offer to those set forth in each of the first three groups, and (b) in the latter scenario, will proceed with an examination of the first three groups of allegations in order to establish whether the facts set forth therein — read in conjunction with those stated in the last group — meet the pleading requirement or, with respect to the allegations based on the statements of undisclosed witnesses, whether these facts meet the pleading requirement on their own.
a. Resignations as Evidence of Scienter
Plaintiffs’ entire argument based on the resignations of the named Defendants is summarized by Plaintiffs as follows:
The Complaint ... pleads additional specific facts which support a strong inference that Defendants either knew or recklessly disregarded that Intelli-group’s financial [Statements were false and misleading when issued. For example, the ... eventual removal of Defendant Valluri [ ] from his position as CEO contribute^ to a strong inference of the Defendants’ knowledge of fraud, or at a minimum, their severe recklessness. The most logical and plausible inference to be drawn from [this] “resignation [ ]” is that Valluri [and another officer] were committing ... the massive internal control deficiency and were therefore terminated.... Indeed, the fact that [Intelligroup’s] board and new auditor investigated the fraud and ... Valluri [ ] then resigned (or lost) [his] job speaks volumes. 59
*344 Opposition at 63-64 (legal citations omitted). Plaintiffs’ Complaint, and even Plaintiffs Opposition, are entirely void of any allegations referring to the state of mind of the other named Defendant, Visco, who was Intelligroup’s Vice President. See generally, Compl., Opposition.
i. Resignations of Defendants Valluri and Visco
While Plaintiffs neither explain why resignations of Valluri and Visco “speak volumes” nor clarify why the most logical and plausible inference to be drawn from these resignations is that these officers were terminated because they were deemed committing massive fraud,
see
Opposition at 63-64,
see
generally CompL, the two cases cited by Plaintiffs appear to suggest that Plaintiffs’ conclusion is based on what Plaintiffs perceive as temporal proximity between Intelligroup’s airing of the Press Release and the resignations of Visco and Valluri.
60
See
Opposition at 64. Neither
*345
one of these two cases, however, offers support to Plaintiffs’ claim. The first case relied upon by Plaintiffs is
Adaptive Broadband Sec. Litig.,
As [the corporation’s] financial difficulties were coming to light, three of the named individual defendants either left the company or were moved, to new positions. [Specifically, two] defendants ... resigned [within two months prior to the corporation’s public admission that it actual gross earnings was $4 million less than previously stated. Less than a month after this announcement, the third] defendant ... was replaced as CFO and reassigned. In addition, [within two months after the announcement], severance payments to defendants [who resigned] were suspended. Plaintiffs suggest that these changes provide further support for an inference of scienter. As with the restatement of [the corporation’s] financials, these [employment] changes, taken alone, would not support scienter. But because the changes occurred as [the corporation’s] financials were being restated and as [the corporation] was conducting its own internal investigation ..., they add one more piece to the scienter puzzle. [T]he fact that the CFO was moved and [the resigned] executives’ severance payments were discontinued is highly suspicious ....
Adaptive,
Ignoring the Adaptive court’s unambiguous conclusion that (a) resignations in Adaptive were suspicious because they took place during internal investigation and were accompanied by such extraordinary corporate measures as re-assignment of the company’s CEO and denials of severance payments, and (b) such suspiciousness added “one more piece to the scienter puzzle,”
id.,
Plaintiffs transform the holding of Adaptive into a proposition that “resignation or demotion of three of the named individual defendants while the company’s financial difficulties were coming to light support [ ] a strong inference of scienter,” Opposition at 64, even though the Adaptive court said nothing of the kind. Moreover, Plaintiffs cite another case,
McKesson HBOC, Inc. Secs. Litig.,
Plaintiffs’ misreading of the McKesson decision seems to be even more substantial than Plaintiffs’ misgivings about the holding of Adaptive. It appears that, while familiarizing themselves with the opinion of the Adaptive court, Plaintiffs’ did not take notice of the following observation:
In ... McKesson, ... the court inferred that the corporation had a factual basis for firing employees for cause because they “knew or should have known” of accounting improprieties. [The circumstances in Adaptive] do not rise to such *346 a level [of strong scienter evidence, since] no one was publicly fired....
Adaptive,
The distinction underscored by the Adaptive court was well-warranted since the circumstances in McKesson were indeed quite unique in view of the fact that
[the McKesson] plaintiffs ... allége[d] ... direct [rather than circumstantial ] evidence of scienter. According to the Wall Street Journal excerpts provided in the complaint, [the company’s internal] investigators concluded that [fired] executives intentionally overstated revenue. The complaint also detailed] the facts that led [the] investigators to this conclusion, such as the segregation of [the] letters [containing true information] from [the auditors executing due diligence for the merger challenged in McKesson] and the deletion of critical computer files. [After the firing, the corporation] issued harsh statements about the executives, [specifically]:
— [The corporation] announced in a press release that it had removed [its] Chairman of the Board and that he had been “dismissed as an employee”;
— [Four executives were publieally] “dismissed immediately for cause.” [The corporation] later revealed that these four were barred from the company’s premises;
— [All] terminated executives were [publieally] criticized by the company’s new chairman for their “participation ... in such improprieties ”;
— The new chairman stated that the perpetrators of the scheme had processed [fictitious] shipments “to generate the appearance of revenue.” The company’s spokesperson told an industry publication: “One must assume that the intent of this entire episode was to inflate revenues. The responsible individuals have been fired for cause ....”
— The Company’s CEO stated that the four officials [were] fired “for cause.”
Finally, the complaint also provides several allegations of “red flags” being waved [in front of individual defendants] by others in the company about the improper accounting practices.... These allegations fall squarely within the class period, and are powerful evidence [of scienter],
McKesson,
In fact, the circumstances in McKesson were so unique, that the very court that issued the McKesson decision, i.e., the District Court for the Northern District of California, habitually refers to the McKes-son decision in order to distinguish the facts of McKesson from those presented by typical 10b-5 cases addressing the issue of resignation.
See, e.g., Cornerstone Propane Partners, L.P. Sec. Litig.,
Read jointly, the holdings of Adaptive and McKesson appear to provide the following guidance: (a) a strong inference of a defendant’s scienter could be made from the employee’s public and immediate firing for such cause as intentional ignorance of “red flags” about undergoing wrongdoings, and if such firing is accompanied by an astonishing corporate protective measure, e.g., banishment of the defendant from corporate premises,
see McKesson,
[Plaintiffs do not allege] that there has [ ] ever been any announcement [by In-telligroup or its present or past officials] suggesting any] deliberate wrongdoing [by either Defendant Visco or Defendant Valluri. Plaintiffs’ acknowledge that] Defendant Visco resigned ... nearly a year prior to [the airing of the Press Release, while] Defendant Valluri [ ] did not leave Intelligroup until a year and a half after [Defendant] Visco and seven months after [the Press Release was published. Moreover,] there are no allegations [by Plaintiffs suggesting] that Intelligroup [imposed upon Defendants Visco or Valluri any corporate punishment or other extraordinary measure, such as revoking] any Defendants’ severance packages.
Reply at 16 (citing information stated in Compl. 11.29 and addressing Plaintiffs’ Complaint in toto).
In sum, Plaintiffs’ allegations are limited to the sole facts that Defendants Visco and Valluri did actually resign many months— or a year — before or after the airing of the Press Release, and clearly in the fashion that cannot possibly suggest a “joint resignation.” The sole fact of Defendants Visco and Valluri resignations is indeed insufficient to provide a strong inference of scienter. Moreover, such bare allegations
*348
cannot operate even as a meaningful piece of additional evidence, i.e., a piece to the scienter puzzle, for the purposes of this Court’s overall assessment of scienter-re-lated evidence.
61
In view of the foregoing, the Court may assign, at best, de minimis weight to Plaintiffs’ allegations based on resignations of Defendants Visco and Val-luri.
Accord The Great Atl. & Pac. Tea Co., Inc. Sec. Litig.,
ii. Resignation of Intelligroup’s Auditor
Plaintiffs also maintain that “[t]he sudden resignation of [Intelligroup’s] auditor [] Deloitte & Touche, also contributes to an inference of scienter with respect to Defendants.” Opposition at 65. Plaintiffs, however, do not explain how resignation of Deloitte after Intelligroup’s airing of the Press Release (or Deloitte’s initial- and-later-reconsidered decision to resign after preparing one round of financials of which Deloitte notified Intelligroup shortly prior to the Press Release) sheds any light of Defendants’ mental state during the period that began to run about three and a half years prior to Deloitte’s decision and ended on May 17, 2004, that is, the day when Intelligroup published its last financial Statement that contained accounting errors.
62
See
Compl. ¶ 70. Instead, Plaintiffs limit their entire discussion of this issue to a single citation,
Gelfer v. Pegasystems, Inc.,
b. Violations of GAAP as Evidence of Scienter
Plaintiffs’ allegations with respect to inference of Defendants’ scienter from GAAP violations (and Intelligroup’s Restatement that cured the errors) present a sporadic see-saw of arguments. See Opposition at 41-45. Initially, Plaintiffs’ assert that “[m]any courts have held that pervasive and repeated GAAP violations, as well as large-scale restatements, [do actually] give rise to an inference of scienter.” Id. at 41. However, attempting to show case law support to this proposition, Plaintiffs quote the language of five case, three of which made the following observations:
P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F.Supp.2d 589, 608 (D.N.J.2001) (“when combined with other circumstances suggesting fraudulent intent, allegations of improper accounting may support a strong inference of scienter”); ... Carley Capital Group v. Deloitte & Touche, L.L.P.,27 F.Supp.2d 1324 , 1339-40 (N.D.Ga.1998) (“[w]hile alleging a misapplication of [GAAP] standing alone is insufficient, such allegation when combined with a drastic overstatement of financial results can give rise to a strong inference of scienter [and] the totality and magnitude of accounting violations constitute strong circumstantial evidence of reek- *350 less or conscious misbehavior”); Lewin v. Lipper Convertibles, L.P.,2004 WL 1077930 ,2004 U.S. Dist. LEXIS 8484 (S.D.N.Y. May 12, 2004) (“While mere allegations of a failure to proceed in accordance with GAAP ... are not sufficient to allege scienter, here, the accounting violations alleged are on such a repeated and pervasive scale that, if proven, they could provide strong circumstantial evidence of recklessness”).
Opposition at 41-42 (emphasis supplied).
These observations appear to be: (a) in perfect accord with the general rule noted by the Court
supra,
i.e., that allegations of scienter based on GAAP violations do not create the requisite strong inference of scienter unless plaintiffs’ complaint alleges “more,” but (b) lend no support to Plaintiffs’ initial assertion that “more violations” of GAAP create the requisite strong inference.
65
Cf. Chubb,
It appears that Plaintiffs’ confusion ensues from their misreading of two other cases,
MicroStrategy Inc. Secs. Litig.,
The court in Baan started its analysis by noting the general rule that “[a] violation of GAAP, combined with other circumstances suggesting fraud, may create a strong inference of scienter.” Baan, 103 F.Supp.2d at 21 (citations omitted, emphasis supplied). Moreover, the court noted that (a) “if the violation [is a result of the issuer’s] failure to detect an inaccuracy,” the evidentiary value of issuer’s GAAP violation is very low; but (b) if the violation is such that it offends basic common sense of any businessperson, for instance, if the “violations involv[e] premature ... recognition of revenue [e.g., designating the seller’s potential proceeds from sales that did not yet take place or that were revoked, or could be revoked by the purchaser, these type of violations] suggest a conscious choice to [act] in a manner alleged to be improper, and may therefore support a stronger inference of scienter,” especially if it is committed time and again on a great scale Id. (citations omitted).
Turning to the facts of Baan, the court analogized the case before it to the case where
the defendants ... recognized revenue [from the proceeds of a sale of the defendants’ product] that they knew [to be] not compatible with the buyer’s components, and [were on notice that the] buyer could return the products [because] it was impossible [for the buyer] to integrate the [defendants’ product and the buyer’s other components]. The court found that this alleged GAAP violation showed the defendants’ scienter, and relied on a strong inference that a company and its key officers would be aware of facts critical to important transactions.
Id.
(discussing
Ancor,
After drawing such analogy, the Baan court: (a) concluded that the issuer’s recognition of proceeds from “contingent” sales, i.e., potential sales that the Baan defendants actually knew might never materialize, was such an error that, numerously repeated, provided a separate and additional piece to the scienter puzzle; and (b) entered the observation quoted by Plaintiffs that “the magnitude of the [GAAP] error can play a role” in a court’s scienter inquiry. See id. at 21-23.
The court in
MicroStrategy,
“while alleging a misapplication of [GAAP] standing alone is insufficient, such allegation when combined with a drastic overstatement of financial results can give rise to a strong inference of scienter .... [and] the totality and magnitude of the ... accounting violations [may] constitute strong circumstantial evidence of reckless or conscious misbehavior.” Carley, 27 F.Supp.2d [at] 1339-40; 66 see also, e.g., Baan, 103 *352 F.Supp.2d [at] 21 (“The magnitude of the [GAAP] error can play a role” in inferring scienter).... [In sum,] while a misapplication of GAAP may only support a weak inference of scienter ..., it cannot be said that a misapplication of GAAP ... supports no inference of scienter whatever.
MicroStrategy,
in essence, [the defendants violated] the simple principle that “revenue cannot be recognized for unexecuted contracts and/or where there are significant obligations and/or contingencies relating to such contracts.”
Id. Thus, the holdings of both MicroStrate-gy and Baan decisions indicate that, in cases examining alleged wrongs by an issuer rather than an accountant, GAAP violations might be given additional significance only where the provisions of GAAP so coincide with conclusions obvious to any business person and present recitals of knowledge so common to the business— rather than accounting — community, that a violation of this type of GAAP provision equates to a self-evident business nonsen-sicality which cannot be made by a defendant with a non-culpable state of mind. The matter at bar, however, is not one of those cases. While Plaintiffs’ submissions offer a long list of GAAP violations in Intelligroup’s Statements, Plaintiffs’ pleadings are void of any allegations that the violations involved errors so obvious to a business — rather than accounting — mind that Defendants must have been aware of the wrongs. While acknowledging that the Statements contain a multitude of GAAP violations, the Court allocates de minimis significance to this fact for the purposes of this inquiry into whether Defendants committed the misrepresentations with the requisite scienter and finds Plaintiffs’ allegations that the errors were multiple and infested all Statements non-indicative of Defendants’ state of mind, since the errors in the Statements were not of the kind that transform accounting errors into a separate fact affecting the inquiry.
c. SOX Certifications as Evidence of Scienter
Plaintiffs revisit the issue of Defendants’ SOX certifications alleging that “Defendants’ [SOX] certifications ... strongly suggest that Intelligroup’s financials were knowingly or recklessly misstated” by individual Defendants. Opposition at 46. It appears that Plaintiffs pursue three interrelated lines of argument in support of their conclusion: (1) by alleging that the statements made by Intelligroup in its Restatement issued more than a year after the Press Release (and a similar Intelli-group statement made one week after the Press Release and four and a half months after Intelligroup’s filing of its last erroneous Statement) indicate Defendants’ scien-ter; and (2) and (3) by maintaining that the mere fact of Defendants’ SOX certification or, alternatively, the language employed in these SOX certifications, should provide a strong inference of Defendants’ culpable state of mind. See id. at 46-51. *353 The Court examines all three Plaintiffs’ allegations in turn.
i. Impact of the Statements Made in the Restatement
It seems that the conclusion of Plaintiffs’ first line of argument is as follows:
[In view of the statements made in the Restatement,] one of two things happened: (1) either the [i]ndividual Defendants undertook the design and evaluation of [Intelligroup’s] control, as they certified, in which case they were well-aware of the severe control deficiencies enumerated in the [R]estatement; or (2) they did not design and evaluate the internal controls as they [certified] they did, in which case they were severely reckless as to the reliability of [Intelli-group’s] financials.
Opposition at 49.
However, there is a third alternative, namely, that Defendants undertook the design and evaluation of Intelligroup’s control, as they certified, and designed the system which, at the point of design and implementation, appeared to be adequate but, eventually, proved to be insufficient. Since Plaintiffs’ above-quoted argument implies that Defendants, being either “well-aware of the severe control deficiencies” or “severely reckless” about these deficiencies, acted with scienter when they affixed their signatures under SOX certifications, id. at 47, it follows that the certifications cannot be indicative of Defendants’ scienter if the facts alleged by Plaintiffs fail to point to the reasons for Defendants’ knowledge about — or ignorance of “red flags” with respect to — the defects of then-design.
All of Plaintiffs’ facts are derived from Intelligroup’s Restatement. The Restatement disclosed that, during the Class Period, Intelligroup was: (a) suffering from “deficiencies in [accounting] analysis,” “ineffective control over [financial] reporting,” “inadequate documentation regarding ... application of [GAAP],” “insufficient training of its finance and accounting personnel,” and “inadequate record retention policies,” and (b) “inadequately staffed [and, therefore, had an insufficient] internal audit department,” “insufficient resources to perform the accounting and financial reporting functions.” Compl. ¶ 57. When Intelligroup began implementing a new financial software,
[t]he combination of the new financial system, new finance team, and insufficient training ... led to a rapid deterioration in [Intelligroup’s] control environment and [diminution of] reliability of the financial systems.
[A]s of the end of the [Class Period, Intelligroup’s] disclosure controls and procedures were not effective to ensure that information required to be disclosed in the [Statements] was recorded, processed, summarized, and reported within the time periods [allocated by law].
[After the airing of the Press Release, Intelligroup] began to centralize and reorganize its finance organization ...., redesign [ ] and more fully document its business processes ..., strengthen [ ] senior level oversight [over] financial reporting ..., re allocate [ ] resources and add [] personnel to [its] finance and accounting staff ...
Compl. ¶¶ 58, 66-67 (quoting the Restatement) (emphasis supplied).
These statements perfectly correspond to the information disclosed in the Press Release, which indicated that, as a result of
recent ... upgrading of] financial system, and the recent turnover in key positions in its finance department, [In- *354 telligroup] has been undertaking a comprehensive review [which] resulted in ... September 22, 2004, [internal] Audit Committee[’s] ... conclusion that the financial [Statements and the related independent audit reports for the [Class Period contained accounting errors].
Press Release.
Reading these facts against the language of Defendants’ SOX certification stating that Defendants were “responsible for establishing and maintaining disclosure controls and procedures,” “designed such internal control over financial reporting ... to provide reasonable assurance regarding the reliability of [Intelligroup’s] financial [Statements” and “evaluated the effectiveness of [such] disclosure controls and procedures,” Plaintiffs conclude that Defendants were somehow aware, at the time of Statements being filed, that the controls they designed and evaluated were ineffective or, at the very least, recklessly ignored signs of such ineffectiveness. Opposition at 46. However, nothing in the facts provided in the Restatement or Press Release indicate that Defendants were either aware of the deficiencies of their design or evaluated their design ignoring the “red flags” then existing. To the contrary, the language of the Restatement indicates that certain controls were indeed designed, implemented and evaluated, since the Restatement discusses “deficiencies,” “inadequateness” and “insuffi-ciencies” of Intelligroup’s controls during the Class Period, rather than complete want or total lack of functionality of such controls, and notifies the market about reorganizational, strengthening and supplemental control measures, rather than about discarding the previous controls or creating them from scratch. See Compl. ¶¶ 57, 67. Moreover, both the Restatement and Press Release make it obvious that any “red flags” that could have been interpreted as signals of shortcomings of the then-existing control systems were discovered shortly prior to the issuance of the Press Release and after the last erroneous Statement was filed. See id. ¶ 66; Press Release. Therefore, none of the facts provided in the Restatement indicates that Defendants misrepresented the fact that they created a control system. See generally, Restatement. Rather, it appears that Defendants designed a system which was insufficient to meet Intelli-group’s needs. See id.; Press Release.
Plaintiffs seem to suggest that Defendants could not, in good faith, evaluate the controls they designed and certify that the controls were effective. See Opposition at 46-47. However, the two facts that Plaintiffs offer in support of their conclusion are: (1) a repeat of the fact that the Restatement disclosed that the controls were ineffective; and (2) Plaintiffs’ observation that the features which eventually proved to be insufficient were “absolutely crucial to [Intelligroup’s] ability to report timely and accurate financial information.” Id. at 47 (emphasis in the Opposition). However, Plaintiffs offer no legal support to their apparent claim that a person could not, in good faith, be mistaken about a “really-really important” feature, and this Court is aware of no decision so stating.
As to Plaintiffs’ continuous reference to the language of the Restatement indicating that the controls existing during the Class Period were eventually deemed insufficient, such reference offers no support to their claim that during the period when the Statements were filed, i.e., from May 14, 2001, to May 17, 2004, Defendants were either aware about the deficiencies of the controls they designed or ignored any “red flags” indicating such deficiencies. Plaintiffs’ argument is nothing more than the impermissible “pleading by hindsight” uni
*355
formly rejected by the courts.
See, e.g., GSC,
ii. The Fact of SOX Certiftcations
As the Court noted
supra,
a plaintiffs allegations based on defendants’ erroneous SOX certification cannot establish the requisite strong inference of scienter unless the complaint asserts facts indicating that, at the time of certification, defendants knew or consciously avoided any meaningful exposure to the information that was rendering their SOX certification erroneous.
See WatchGuard II,
The [SOX] certifications, in combination with plaintiffs’ allegations of regular finance meetings, extensive access to databases, periodic reports and special reports, and the allegations that they were micromanagers, are sufficient to create a strong inference of actual knowledge or of deliberate recklessness.
Lattice,
Not surprisingly, the courts that addressed the Lattice decision concluded that, without aggravating circumstances of actual knowledge about the misrepresentation, a SOX certification gives no inference of scienter.
See Hypercom Corp. Sec. Litig.,
The other case relied upon by Plaintiffs,
SEC v. Penthouse Int’l, Inc.,
[The “abetting defendant”] fil[ed] the false and misleading [financial statement accompanied by another person’s SOX] certification.... The complaint ... alleged that [this defendant] acted with the requisite scienter [because he] rendered “substantial assistance” in accomplishing [the issuer’s] reporting violations .... [Since the abetting defendant affixed the unauthorized electronic signature of the other official wider the SOX certification at issue, the Penthouse court found that the] aiding and abetting allegations [were] adequately alleged.
Id.
While the applicability of the Penthouse decision to the case at bar is uncertain in view of substantial differences between the inquiry conducted by the Penthouse court and the one currently at bar, this Court: (a) sees certain analogies between the facts of Penthouse and those addressed in Lattice, and (b) concludes that both cases provide nothing more and nothing less than two examples illustrating the general rule that allegations based on SOX certifications can establish the requisite strong inference of scienter only if the complaint asserts facts indicating that, at the time of certification, defendants actually knew — or, at the very least, turned a “blind eye” to the information indicating — that their SOX certification was erroneous. However, neither one of these cases stands for the proposition that a SOX certification automatically supplies the requisite degree of scienter, and the body of law thus far accumulated with respect to this issue invariably indicates the same.
See, e.g., Garfield v. NDC Health Corp.,
iii. The Language of SOX Certifications
Finally, Plaintiffs’ allege that the specific language employed in Intelligroup’s SOX certifications “strongly suggests the [individual Defendants’] scienter.” See Opposition at 51. Plaintiffs derive this conclusion from Plaintiffs’ belief that “Defendants did not merely sign SEC filing containing ‘boilerplate’ — they certified [Intelligroup’s] financials with personal endorsement.” Id. at 51. This Plaintiffs’ sentence appears to be entered in response to the following observation made in Interpool:
Plaintiffs ... contend that the individual [defendants were, at the very least, acting with severe recklessness, given that each of them signed [a financial statement filed with the SEC]. However, as the [Court of Appeals] recognized in ... The Great Atl. & Pac. Tea,103 Fed.Appx. 465 , the fact that [defendants signed financial disclosures ... does not imply that they made misstatements with scienter. Specifically, the [Court of Appeals] found that each of [defendant’s] financial disclosures contained boilerplate language [offering assurances to the market as to accounting practices employed. H]owever, this language does not show that [defendant] knew that its procedures violated [general accounting practices] prior to [the issuance of] its restatement.
Interpool,
Plaintiffs assert that “the Interpool decision merely stands for the unremarkable proposition that the signing of an SEC filing containing misleading disclosures does not in itself rise to an inference of scienter.” Opposition at 51. In addition, Plaintiffs maintain that Interpool “is distinguishable on its facts” because “[c]ertifi-cation pursuant to [SOX Section] 302, as opposed to § 906, [was] not at issue in Interpool.” Id. at 50-51. This Court disagrees.
While the issue of whether a “non-boilerplate” certification could create an inference of scienter has not been significantly addressed by the courts, the principle sketched out in The Great Atl. & Pac. Tea appears to be both logical and applicable to all forms of certifications. The Court of Appeals guided the district courts that, if the complaint merely alleges that the issuer knew that certain accounting entries
*358
were recorded in a specific manner, such allegations should not be read as allegations that the issuer knew that the procedures used violated the general accounting principles, even if each of the issuer’s financial disclosures contained boilerplate language that the procedures used in the reports conformed with the principles, because a securities plaintiffs cannot merely point to a boilerplate language as proof that the issuer’s officers acted with fraudulent intent.
See The Great Atl. & Pac. Tea,
This guidance does not appear to be based on the fact that the issue examined in The Great Atl. & Pac. Tea was that of GAAP violation. Rather, the Court of Appeals made a distinction between a boilerplate language signed on the basis of generalized perceptions held by corporate officials and a “personal endorsement,” the entry of which could be made only as a result of a special scrutiny by the officer, i.e., such scrutiny which would bestow upon the officer not only personal but also sufficiently detailed knowledge about data (or the correctness or incorrectness of data) discussed through the means of that specific language. See id.; accord Opposition at 51 (making a similar distinction between a boilerplate language and personal endorsement). Since the term “boilerplate” means “standardized text” or “formulaic or hackneyed language,” see < <http://www.m-w.com/dictionary/ boilerplate >> (Merriam-Webster’s Online Dictionary), the inquiry should logically focus on the uniqueness, or lack thereof, of the language used. In the case at bar, Plaintiffs assert that all Defendants’ SOX certifications were either “identical in all material respects” or “substantially similar.” See Compl. ¶¶ 78-81. If so, and if this Court is to assume that the rule sketched out by the Court of Appeals in The Great Atl. & Pac. Tea applies to SOX certifications, Plaintiffs’ facts indicate that Intelligroup’s certifications were, qualitatively, boilerplate statements not indicative of Defendants’ personal knowledge about the errors in the Statement and, thus, of Defendants’ scienter.
In view of the foregoing, the Court takes notice of Defendants’ filings of their Statement bearing SOX certifications (during the period from August 14, 2002, to May 17, 2004,
see
Compl. ¶ 77), but — for the purposes of the Court’s inquiry as to whether Defendants acted with the requisite scienter while the Intelligroup compiled and filed the Statements during the aforesaid period — allocates de minimis weight to these certifications.
67
See WatchGuard II,
d. Undisclosed Witnesses
This Court’s evaluation of Plaintiffs’ pleadings with respect to Plaintiffs’ confidential, i.e., undisclosed witnesses (“UW”) is twofold, since statements from undisclosed witnesses can be used in two situations: (1) as supplemental evidence,
see Novak,
In support of their contentions, Plaintiffs offer statements obtained the following six UWs:
(1) UW-1, who “was [Intelligroup’s] Vice-President of Sales ... from November 2001 until November 2002,” Compl. ¶ 31.
(2) UW-2, who “was a Vice President of the SAP Practice 68 from December 1997 until August 2003,” id. ¶ 32,
(3) UW-3, who “was a financial consultant for the Company from January 2002 until May 2004, and was an investor in SeraNova, Intelligroup’s [subsidiary] spun-off in 2000,” id. ¶ 33,
(4) UW-4, who “was [Intelligroup’s] Senior Manager for Business Development ... from October 2002 until August 2004,” id. ¶ 34,
(5) UW-5, who “was [Intelligroup’s] Vice-President of Sales and Marketing ... from April 2002 until April 2004,” id. ¶ 35,
(6)UW-6, who “was the managing director of Intelligroup’s Asia Pacific operations until March 2001.” Id. ¶ 36. 69
i. UW-1
According to Plaintiffs,
[UW-1] ... knew Intelligroup was running into problems with certain financial transactions, stating that [Defendant] “Visco seemed to be over his head in dealing with a company the size of Intel-ligroup.” ... UW-1 characterized Val-luri as a “tyrant.”... [UW-1] added that Valluri [ ] “managed the India operations himself [and] wouldn’t let anybody touch it, [so,] nobody really had a window into that.” “He was a pretty ruthless guy with the employees. He would threaten to send them back to India. He was very autocratic. I was at meetings where he would throw things at me.”
Compl. ¶¶ 52, 62, 65 (quotation marks in original) (this last statement is also repeated by Plaintiffs in a less preclusive form, i.e., “few employees other than Val-luri [ ] knew what was going on in India”).
Plaintiffs maintain that these statements “directly relate to the utter lack of internal controls and its impact on the inaccuracy of the financial statement.” Opposition at 55, n. 31. The Court disagrees. These statement cannot amount to a piece of evidence sufficient to meet the pleading burden on its own, since the statements lack any dates on which the relevant information was acquired, there are no facts detailing how UW-1 obtained access to the information that “Intelligroup was running into problems with certain financial trans
*360
action.”
See
Chubb,
Moreover, UW-l’s personal opinions about Defendant Visco being “over his head” or about Defendant Valluri having an autocratic approach and very poor social skills, even if true, add nothing to indicate that either Defendant either intentionally caused errors in the Statements (or intentionally created a business environment that was necessarily bound to produce such errors) or turned a “blind eye” to “red flags” to obvious signs indicating that the errors were being made. Conversely, UW-l’s allegations about Defendant Valluri’s “autocratic” managerial style is likely to indicate that Defendant Valluri was likely to enforce the then-existing control systems upon Intelligroup, although perhaps through means uncommon in the modern management. Finally, a generic observation that “Intelligroup was running into problems with certain financial transactions” provides this Court neither with facts nor with even a remote indication that Defendants operated with the requisite strong scienter. Consequently, UW-l’s statements have no bearing upon this Court’s analysis at hand.
Accord Career Educ. Corp. Secs. Litig. (“Career Educ.
7”),
ii. UW-2
Plaintiffs assert that “[UW-2] reported that it was common knowledge within [In-telligroup] that ‘the guys in India were cooking the books’ and that Valluri [ ] was always playing fast and loose with the numbers and that Visco kept his job only by being willing to ‘play along.’ ” Compl. ¶ 53. However, this allegation lacks any imprimatur of reliability, since UW-2 did not explain what statements or events made these conclusions “common knowledge,” how such knowledge was disseminated and by whom, as well as the exact means through which UW-2 acquired such “common knowledge.” In sum, the statement made by UW-2 are nothing but rumor that cannot amount to either direct or supplemental evidence and, therefore, is of no value for the purposes of the Court’s
*361
inquiry.
Accord Career Educ. Corp. Secs. Litig. (“Career Educ. II”),
iii. UW-3
Plaintiffs also allege that
[UW-3] ... confirmed ... skepticism regarding Intelligroup’s representations about its Indian subsidiary. [UW-3] described transactions regarding the Indian subsidiary as a “big black box,” further confirming the absence of internal financial controls over Intelligroup’s Indian subsidiary. Describing Intelli-group’s business, [UW-3] added “there was outright fraud and there was outright incompetence.” ... [UW-3] added that during Defendant Visco’s entire tenure at Intelligroup, [Defendant] Visco had only made one visit to the Indian offices, and described Intelligroup’s Indian operation as “one big black box.”
Compl. ¶¶ 51, 63.
Statements made by UW-3 fair no better than those attributed to UW-1 and UW-2. It is apparent from the language quoted by Plaintiffs that UW-3, who operated in such terms as “skepticism,” was not providing firsthand information; at best, UW-3 was repeating the definition of Intelligroup’s Indian operation that UW-3 heard from Defendant Visco. Moreover, even if UW-3 actually quoted Defendant Visco’s language, Defendant Visco’s reference to a “big black box” conveyed, at most, his lack of clarity as to the structure of Intelligroup’s operations in India, see American Heritage Dictionary Online, < <http:// www.ask.com/reference/ dictionary/ahdid/58243/black+box> > (defining “black box” as “[a] device or theoretical construct with known or specified performance characteristics but unknown or unspecified constituents and means of operation” or “something that is mysterious, especially as to function”), but in no way indicates either a culpable state of mind on the part of Defendants Visco or Valluri.
Moreover, UW-3’s allegation that Defendant Visco visited Intelligroup’s operation in India only once is not indicative of either scienter or even a managerial laxness, since vice-presidents (or other senior managers) of global enterprises could be extremely diligent and effective without visiting every — or even any — locale. Finally (a) UW-3’s statement that “there was outright fraud and there was outright incompetence” appears to be just a bald declaration (of UW-3’s personal belief that Intelligroup’s affairs were executed in a wrongful fashion) void of any factual basic, since the statement fails to identify the specific nature of the alleged “outright fraud,” or connect it to Defendants’ gener
*362
al activities, moreover to Defendants’ scienter as to the content of Intelligroup’s Statements,
70
accord Zack v. Allied Waste Indus.,
iv. UW-4
Plaintiffs’ reliance on UW-4 appears to be the most extensive, since Plaintiffs’ quotations of UW-4’s statements exceed Plaintiffs’ references to all other (identifiable) confidential sources. It appears that UW-4’s statements addressed three subjects: (1) Intelligroup’s billing practices; (2) Intelligroup’s earning projections; and (3) the degree of automation in Intelli-group’s accounting system. With respect to the first subject, Plaintiffs maintain that
[UW-4] ... stated that [UW-4] had doubts about [Intelligroup’s] accounting operation, noting that Intelligroup went through “three or four CFO’s” in a short amount of time, making [UW-4] unsure “they had consistency or ongoing continuity in their accounting practices.” [UW-4] further explained that some of Intelligroup’s clients “had issues with billing problems.” One example was BearingPoint, which [UW-4] stated had subcontracted consulting work to Intelligroup. [UW-4] stated that on one occasion, an invoice intended for BearingPoint was sent by mistake to BearingPoint’s client, which allowed BearingPoint’s client to determine how much mark-up BearingPoint was making on the work. [UW-4] explained “that happened in more than one case” and that, accordingly, “there were a lot of receivables that were difficult to collect.” Describing Valluri [ ] as a “hands-on” CEO, [UW-4] further confirmed that Defendants knew about these billing problems because the problems “were highly embarrassing for the Company and were widely broadcast across the sales floors.”
Compl. ¶¶ 44-45.
Clearly, UW-4’s personal “doubts” or UW’s feeling “unsure” cannot amount to factual evidence and, therefore, are not
*363
useful for the purposes of the Court’s inquiry.
71
See Career Educ. I,
In Suprema-Appellate, the business of the issuer “was divided between two product lines: ‘hard cheese,’ which included imported and domestically produced [cheeses], and ‘soft-cheese,’ which included domestically produced [cheeses].” Id. at 264. The issuer’s business progressed as follows:
[since] in 2000 and 2001, [the issuer] reported dramatic growth in sales and receivables [i.e.,] 400% growth in revenue [while the] industry-wide growth ... was only approximately 9% ... FORBES MAGAZINE ranked it as the twenty-second best small company, [and the issuer’s] average share price more than doubled. State and federal investigations subsequently revealed that [the issuer’s] explosive growth was ... the product of a fraudulent scheme.... [In reality, the issuer remained a very small enterprise] where a very small senior management team ... boasted [about the team’s] “hands-on” relationship with key accounts and customers, [who, eventually] pled guilty to fraud charges in connection [the issuer’s] scheme.... [The operation was so small, that the *364 issuer’s Vice-President, who was also its CEO, as well as its Chairman of the Board, together with the issuer’s CFO, who was also its Secretary, as well as a member of the Board, personally] signed millions of dollars in company checks during the class period, payable [to the clients who were co-conspirators in the scheme]. Moreover, [the CFO/Secretary/member of the Board actually] controlled all ... bookkeeping connected with [co-conspirator’s] accounts and he and [the Vice-President/CEO/Chairman expressly] prevented [the issuer’s] accounting staff from having any contact with [these] accounts [specifically] instructing other] employees not to be involved in the ... portion of the business [affected by the fraud] and ... prevented [the] employees from having contact with [the issuer’s auditor with respect to the matters] concerning the[se] accounts.
Id. at 278-79.
Evaluating the Suprema-Appellate plaintiffs’ pleading of the aforesaid business circumstances, the Court of Appeals “conclude[d] that plaintiffs’ allegations against the [Vice-President/CEO/Chairman and CFO/Secretary/member of the Board were] detailed” enough to indicate the Suprema-Appellate defendants’ knowledge of all business aspects of the issuer and refused to entertain the defendants’ claim that they were not “hands-on” managers.
Id.
at 279. The circumstances of the case at bar stand in stark contrast to those presented in Suprema-Appellate. Intelligroup was and is a business entity enjoying global presence.
See
Compl. ¶ 3. It has its headquarters in the United States, its biggest subsidiary in India, plus a number of other subsidiaries and overseas operations.
72
See
Compl. ¶¶ 3, 28, 33, 36 (discussing Intelligroup’s Asia-Pacific operations and sale of the SeraNova subsidiary); Opposition at 54, n. 30 (noting that “Intelligroup’s ‘key' subsidiary ... still is [in] India”). The sheer volume of Intelligroup’s operation distinguishes it from the issuer depicted in Suprema-Appellate. Moreover, Plaintiffs’ Complaint and the statements of UW-4 are void of any facts indicating that Defendants personally processed any accounts, signed Intelligroup’s checks or usurped any financial or accounting functions. In view of the foregoing, the Court concludes that UW-4’s designation of Valluri as “hand-on” CEO is not indicative of Valluri’s knowledge about Intelligroup’s accounting glitches which reached the “sales floor” through the corporate grapevine. Therefore, the above-quoted part of UW-4’s statements neither provides direct evidence of scienter nor adds to this Court’s evaluation of circumstantial evidence of Defendants’ state of mind.
See WatchGuard II,
Plaintiffs also provide another account by UW-4, noting that
[UW-4] also explained that [UW-4] doubted Valluri [ ]’s veracity during the periodic conference calls with financial analysts. [UW-4] stated that “Quarter by quarter, I listened to the announcements” and “there were times I wondered about the numbers.” Specifically, [UW-4] explained that [UW-4] had doubts about the numbers reported about the revenue from consulting work. [UW-4] stated that revenue from consulting work [was] estimated by multiplying the number of billable employees by the average utilization rate and then multiplying that figure by the average billing rate. [UW-4] further stated that Valluri [] exaggerated the utilization rate and the bill rate, explaining: “When I did deals, my bill rate wasn’t as high as he Valluri [ ] was indicating as average.” For example, [UW-4] explained that BearingPoint was charged $18 per hour, yet Valluri [ ] would tell analysts that Intelligroup’s average rate was in the $25-$30 per hour range. [UW-4] stated that Intelligroup was not charging clients $25-$30 per hour.... [UW-4] also explained that [UW-4] believed that Intelligroup overstated the number of billable employees that the Company claimed to have. [UW-4] said that although Intelligroup claimed to have a total of 900-1100 employees in its two offices in Hyderabad, India, [UW-4] doubted that the Company actually employed that many people in India, stating “the numbers of people Arjun stated Intelligroup had working offshore was too big.” [UW-4] explained that during the time period that Defendants were claiming to have 900 to 1100 employees working offshore, there were only 5 projects the Company was currently working on offshore. [UW-4] further explained that as the periodic reports from these projects stated, each of these projects employed only 30 to 40 people. [UW-4] added that, even giving Defendants the benefit of the doubt that perhaps there were a few more employees than stated in the reports, there “could not have been more than 300 or 400 offshore employees.” [UW-4] also confirmed that Defendants knew they were overstating the numbers of offshore employees because Defendants received the very same reports that [UW-4] received detailing the actual number of employees assigned to each of the Company’s offshore projects. By overstating the numbers of people Intelligroup employed offshore, the Company was misstating its expected revenue, since the Company’s consultant-generated revenue was proportional to the numbers of consultants actually working for Intelli-group’s clients.
Compl. ¶¶ 47, 49-50, 59.
The above-replicated excerpt is less than of exemplar clarity. However, it appears that the excerpt opens with UW-4’s discussion of Defendant Valluri’s conference calls with external stock market analysts assessing Intelligroup’s business prospects. Furthermore, it appears that the gist of UW-4’s statements is that Valluri was misleading the analysts by unduly exaggerating Intelligroup’s future successes by (a) amplifying the service rate that UW-4 both believed to be the going rate of Intelligroup and offered to those Intelli-group’s clients who purchased Intelli-group’s services through UW-4 personally, and (b) stating that the amount of Intelli-group’s staff was notably more than what UW-4 could presume on the basis of Intel-ligroup’s internal reports listing the staff *366 assigned to offshore operations. See id. UW-4’s knowledge as to the rates offered by UW-4 to the clients who negotiated their Intelligroup contracts personally with UW-4, and UW-4’s beliefs as to the going rate might be irrelevant of Intelligroup’s average rates (since other sales persons at Intelligroup could be more successful in selling higher-priced services or same services at a higher rate). Moreover, the entire issue of Intelligroup’s average service rates, and the actual amount of Intelli-group’s staff, are of no relevance to Plaintiffs’ claim, since (a) UW-4 unambiguously limited his conclusion to “misstaftements of Intelligroup’s predictions of] expected revenue,” rather than errors in financial data stated after Intelligroup actually rendered its services and collected (or became entitled to) the proceeds. See id. Therefore, statements of UW-4 related to alleged erroneous projections by Defendant Valluri shed no light on the issue of Defendants’ state of mind for the purpose of assessing the errors made in the Statements. 73
Finally, Plaintiffs allege that
[UW-4] confirmed [another UW’s] description of Intelligroup’s internal accounting and control procedures, explaining that even as late at April 2004, Intelligroup still relied on a system of spreadsheets that was in disarray and that these problems rendered Intelli-group “unable to count revenue.”
Compl. ¶ 59.
The Court finds UW-4’s observation as to unreliability of spreadsheets and Intelli-group’s inability to count revenue wholly unreliable, since UW-4’s statement does not explain how UW-4, Intelligroup’s Senior Manager for Business Development,
see
Compl. ¶ 34, came to know this purely accounting information. There is no indication that UW-4, not being part of Intelli-group’s accounting department, obtained personal knowledge about such matters as the nature of Intelligroup’s accounting methods, the reliability of these methods or the ability of Intelligroup’s accountants to determine corporate revenue. Therefore, the above-quoted statement by UW-4 does not carry indicia of reliability.
See Novak,
In sum, all UW-4’s extensive observations provide the Court with neither direct evidence of Defendants’ scienter nor even with circumstantial evidence for the purposes of this Court’s inquiry with regard to the errors made in Intelligroup’s Statements and Defendants’ scienter.
v. UW-S
According to Plaintiffs,
[UW-5] said that, at least as far back as 1999, Intelligroup’s internal accounting and control procedures were in “complete disarray, consisting only of a system of spreadsheets.” ... [W-5] explained that it was not until 2004 that Intelligroup decided to upgrade its financial accounting system, choosing to install a SAP software system, the very same type of system that Intelligroup installed for many of its clients. The installation of SAP did not go well [pre *367 sumably, according to UW-5. UW-5] compared Intelligroup’s disastrous implementation of the SAP system ... to the proverbial shoemaker’s son who goes barefoot____ [UW-5] added that [UW-5] believed that [Defendant] Visco was ultimately pushed out of [Intelli-group] when [Defendant] Visco finally began questioning [Defendant] Valluri []’s decisions, explaining that “[Defendant Valluri] didn’t understand that he didn’t own the company anymore” and “didn’t understand the ramifications” of [Intelligroup] being publicly as opposed to privately owned.
Compl. ¶¶ 59-60, 62, 65.
The statements made by UW-5, however, have no negative bearing on the issue of Defendants’ scienter. Leaving aside the observation that UW-5, hired by Intelli-group in 2002, see Compl. ¶ 35, could not have obtained firsthand knowledge about Intelligroup’s accounting procedures in 1999 and for the following three years, it is not clear to this Court how the degree of Intelligroup’s automation could be indicative of Defendants’ culpable state of mind. Similarly, the “growing pains” of Intelli-group, even if true, cannot suggest that Defendants’ acted with intent to defraud, or recklessly; to the contrary, such “growing pains” appear to suggest that Defendants indeed designed and kept upgrading Intelligroup’s control measures, but the procedures were having problems at the “grassroots” level. Finally, UW-5’s description of the alleged frictions between Defendants Visco and Valluri similarly does not include facts suggesting that the frictions were fraud-related; rather, the conflict described appears to be: (a) an unfortunate yet quite typical internal corporate power struggle, and (b) suggests that the resignation of Defendant Visco was entirely based on Defendants Visco and Valluri’s differences in management style. In sum, even if the statement of UW-5 included more specifics, e.g., dates of the events and facts verifying firsthand knowledge, none of UW-5’s statements would support a strong or even a weak inference of Defendants’ scienter, since the very substance of UW-5’s observations neither suffice as direct evidence of fraud or extreme recklessness nor amplify Plaintiffs’ other scienter-related allegations.
vi. UW-6
Finally, Plaintiffs state that “[UW-6] added [that] Intelligroup ‘was not well run and their controls were not good.’ ” Compl. ¶ 62. Responding to this allegation, Defendants point out that UW-6 statement is “laughably vague,”
see
Docket Entry No. 65, at 30, and this Court tends to agree. In fact, the Court’s extensive search revealed not a single case where a securities plaintiff offered an observation by a confidential source that the issuer’s business was “not well run” (or that the internal models “were not good”) and relied upon such statement as evidence of the defendant’s intentional fraud or such high degree of recklessness, that it equates to “a lesser form of intent rather than a greater degree of negligence.”
Hollinger,
In sum, the statements made by all six Plaintiffs’ UWs
do not ... allege that Defendants ... actually knew that misstatements were being made. Neither do they allege that Defendants ... received any warning that [the issuer’s] internal accounting practices were in anyway suspect such that Defendants’ failure to investí- *368 gate further marked severe recklessness.
Sportsline,
e. Internet Posting by an Anonymous Witness
In addition to the foregoing, Plaintiffs also offer, as evidence, the following unusual contention:
Intelligroup’s lack of internal controls were not limited to its India Operations. [Plaintiffs conclude so in view of a] message posted to the Yahoo! Message [an Internet blog-like site. The message was titled] Re: [Intelligroup’s] Board [of Directors and Valluri] dug themselves a big hol[e. The message was posted by Yahoo! Message user] congirl4889 [and dated] 08/25/04 01:39 pm. [The number of this particular message was] Msg: 53997 of 56753. [The message read:]
The rumors regarding fraud from [Defendant Valluri] were also wrapped in [Defendant] Visco’s departure. The story was that [Defendant] Visco refused to allow [Defendant Val-luri] to siphon off $750,000 for a “news” venture unrelated to [Intelli-group’s operations] in India. [Defendant] Viseo refused [to do so] unless [Defendant Valluri] sought [the B]oard[’s] approval, and was subsequently dismissed. 74
[Apparently after posting Msg: 53997 of 56753, but on an unstated date, the same username posted another message numbered Msg: 54309 of 56753, and reading:]
It’s even worse than has been confessed. I wondered during the [conference call] last week why [the CFO] went into detail about how every transaction was being validated for the [second fiscal quarter of 2004]? Well, the story I get is that the implementation failure was so bad that no TRUE systems professional could believe that it would happen to a SAP integrator. The story I got from inside went like this: 1. No experienced SAP resources (actually done an implementation) were assigned to the in-house project. All team members were in India with little communication done in the US. 2. [Defendant] Visco was originally in charge. After he left it was unclear who stepped up as executive sponsor, but it was NOT either [one of two Intelligroup’s employees unrelated to this legal action] prior to their departure. 3. The conversion of the old data from the old version of SAP went so badly that everything disappeared. No contracts. No timesheets. Nothing. Therefore, all transactions are being entered manually, but no-one knows if all the data can be reconstructed. 4. The data migration fiasco is why [In-telligroup’s auditing firm] resigned. They would not attest to the accuracy of the manual input with a qualified opinion on the quarterly financials. This was unacceptable to [Intelli-group’s] management. No compromise could be reached, so [Intelli-group’s auditing firm] quit politely. It is factually TRUE that there was no *369 “documented” disagreement. The qualified opinion was never “officially” written and submitted to [Intelli-group’s] management. 5. No backups were made to the SAP data ... prior to the attempted migration.
Compl. ¶¶ 61, 64.
Plaintiffs’ Complaint is silent as to the identity, employ, and any other facts about the username “congirl4889.”
See
generally, Compl. Indeed, in view of Court of Appeal’s express guidance, the information obtained from a securities plaintiffs undisclosed source may be introduced only if the plaintiff specifies the time period that the source worked at the defendant-company, the dates on which the relevant information was acquired, the facts detailing how the source obtained access to the information, details regarding the basis for the source’s personal knowledge and detailed descriptions of the alleged events,
see Chubb,
Having taken notice of this basic principle, the Court notes that, while statements posted by the username “congirl4889” certainly indicate that the information is, at best, secondhand and, thus, presents nothing more than the poster’s beliefs based on potentially exponential layers of hearsay,
see
Compl. ¶ 61, 64 (employing such terms and phrases as “rumors,” “the story was,” “the story I got”), the fact that the postings: (a) were made less than a months prior to the Press Release, or later, and more than three months after the last erroneous Statements were filed by Intelli-group,
see id.,
¶¶ 61, 64, 70; (b) depicts a scenario of a
sudden
corporate confusion and disorder that resulted from a massive software corruption; and (c) indicates that the resignation of Intelligroup’s auditing firm was an inadvertent result of loss of computerized data, suggests that: (a) In-telligroup’s control systems were sufficiently operable prior to implementation of the computer program that caused massive data migration and seeded havoc in Intelligroup, and (b) that Defendants neither intentionally cause the deficiencies nor could have anticipated them.
See id.
Moreover, read jointly with the statements made by W-5, who “explained that it was not until 2004 that Intelligroup decided to upgrade its financial accounting system, choosing to install a SAP software system [causing] disastrous” problems, Compl. ¶¶ 59-60, 62, 65, the statements made by the username “congirl4889” suggest that, during the time when Intelligroup executed filing of the Statement, Intelligroup’s financial accounting system, although perhaps poorly automated and somewhat archaic, did not provide Defendants with any “red flags” about the errors in their Statements. Moreover, in view of the posting by username “congirl4889,” it appears
*370
highly plausible that the massive software corruption — because of which “everything disappeared, [including all Intelligroup’s previous] contracts, [all billable] time-sheets [and the entire business] data [had to be] reconstructed [from scratch, apparently during or around the summer of 2004, since] no backups were made [of the computerized data reflecting Intelligroup’s previous business transactions,]”
id.
— was actually the sole cause for the extensive reconstruction and accompanying review of Intelligroup’s financials which, eventually, caused Intelligroup’s Audit Committee to discover the errors in the Statements.
Accord
Press Release (stating that, as a result of “recent upgrading of] financial system ..., [Intelligroup] has been undertaking a comprehensive review [which] resulted in ... September 22, 2004, ... Audit Committee[’s] ... conclusion that the financial [Statements and the related independent audit reports [contained accounting errors]”); Opposition at 63-65, nn. 34, 53 (where Plaintiffs (a) quote the Restatement, which noted that “lack of familiarity with the new [automated] system and loss of [computerized data]” around the time of the Press Release, and draw analogies between the Restatement language and the posting language, which discussed Intelligroup’s problem with implementation of the new system and noted that Intelligroup’s personnel capable of swifter resolution of implementation problems was assigned to and worked on Intel-ligroup’s projects in India, and (b) indicate that Intelligroup’s financial errors were discovered by Intelligroup’s then-CFO around the same period). Since Defendants’ ignorance about potential pitfalls and perils associated with a massive upgrading of Intelligroup’s automation system (or automation of financial system) that materialized during the summer of 2004 could not be indicative of either Defendants’ intent to defraud or of their conscious ignorance of “red flags” with respect to the errors in the product created months or even many years prior through the use of what appeared to be a sufficiently functioning system, the Court concludes that Plaintiffs’ proffering of the posting by the username “eongirl4889” suggests lack of Defendants’ scienter and, hence, detracts, to some degree, from Plaintiffs’ allegations that Defendants acted with culpable state of mind.
76
Accord Tellabs,
3. Totality of Evidence Analysis
According to the Supreme Court, a securities plaintiffs mere allegations “from which an inference of scienter rationally
could
be drawn” are insufficient as a matter of law.
Tellabs,
In the case at bar, the facts and inferences related to Defendants’ scienter appear to be as follows:
(1) Defendants, due to their senior management positions had an opportunity to commit the alleged fraud. However, Plaintiffs failed to allege any facts that Defendants had any motive to commit the wrongs, since the Complaint provides no indication that Defendants benefitted in a concrete and personal way from the purported fraud. Since it appears that Defendants neither sold a single stock to benefit from the allegedly artificially inflated price of Intelligroup’s securities, nor benefitted in any other way, this fact suggests an inference that Defendants did not operate with scien-ter. 77
(2) The fact that Defendants Visco left Intelligroup’s employ almost a year prior to the Press Release, while Defendant Valluri remained employed by Intelligroup for seven months after the Press Release, coupled with the facts that Intelligroup neither asserted, at any point, that resignations of Defendants Visco and Valluri were related to fraud nor took any measures of eorpo-rate punishment against these Defendants and, seemingly, preserved their severance packages, negates any inference of scienter that might be drawn from the mere facts of Defendants Vis-co and Valluri’s resignations. Therefore, for the purposes of its scienter inquiry, the Court allocates no weight to Plaintiffs’ allegations based on resignations of these Defendants.
(3) Similarly, the Court finds no significance in the fact of resignation of In-telligroup’s auditor, since the Complaint is void of any facts indicating that the audit firm resigned because Defendants continued issuing erroneous Statements after the auditors determined that Intelligroup’s Statements were fraudulent and notified Defendants of such fraud. Reading Plaintiffs’ allegations with respect to the auditors’ resignation in light of Plaintiffs’ allegations based on the posting of the username “congirl4889,” the Court concludes that the auditors’ resignation was caused solely by: (a) Intelligroup’s massive loss of its historic computerized data, and (b) the auditor’s decision not to audit Intelligroup’s future financial statements in data-void vacuum.
(4) While recognizing that Intelligroup’s Statements were executed not in accordance with GAAP, the Court gives this evidence no weight, since the Complaint does not allege any fact suggesting that Defendants knew about GAAP violations or recklessly disregarded any “red flags” indicating such violations. In addition, the Court does not *372 draw any inferences of Defendants’ scienter from the amount of GAAP violations, since the bulk of errors resulted from the workings of the balance sheet, which is so structured that a change of even a single entry automatically entails a multitude of changes. Finally, in view of the fact that these GAAP violations resulted in more-often-than-not understatements of Intelligroup’s net earnings, the Court concludes that the violations of GAAP were not indicative of Defendants’ knowledge of the fraud or even extreme recklessness about the possibility of misstatements.
(5) In addition, the Court does not draw any inferences of Defendants’ scienter from their SOX certifications, not merely in view of the fact that these certifications accompanied about a third of the challenged Statements, but mainly because the Complaint does not include any factual allegations indicating that Defendants affixed their signatures under SOX certifications in order to offer the market any additional assurances about the reliability of the Statement and, thus, entice investors into purchasing Intelligroup’s securities.
(6) Finally, after examining the statements of Plaintiffs’ undisclosed (as well as unidentifiable) witnesses, the Court concludes that the insights provided by the witnesses indicate that the discovery of errors in Intelligroup’s Statements was incidental to Intelligroup’s full review of its financial history, which took place during the summer of 2004 and was caused by massive automation failure and loss of data. These statements indicate that, at the time of Intelligroup’s filing of the Statements, Defendants neither knew of nor turned their “blind eye” to the signs of errors in the Statement, and supports an inference that Defendants did not act with a culpable state of mind.
78
The Court allocates no importance whatsoever to those statements that either addressed the financial issues unrelated to the matter at bar or described social, intellectual or character shortcomings of Defendants Valluri and Vis-co, or to the fact that Plaintiffs provide six different undisclosed witnesses paraphrasing the same.
See Chubb,
Summarizing the foregoing, the Court concludes that the totality of factual evidence provided in the Complaint indicates that Defendants did not act with the requi
*373
site degree of scienter.
Tellabs,
4. SeraNova Allegations
In addition to the allegations based on Defendants’ alleged affirmative misrepresentations and discussed supra, Plaintiffs also make the following assertion:
Intelligroup spun-off SeraNova, [Intelli-group’s subsidiary] in July 2000, retaining a $15.1 [million] unsecured promissory note dated May 31, 2000.... As of the end of the fiscal year 2000, Intelli-group knew or recklessly disregarded that it was probable it would not be able [to] collect on this promissory note yet failed to record an impairment charge to write this asset off in 2000, and accordingly, delayed recording an impairment charge until 2002 and 2003.
In connection with the [Restatement ..., [Intelligroup] reversed ... the charges recorded in 2002 and 2003, ... and moved such charges to 2000.
As a result [of such re-recording, it appears that] Intelligroup overstated [its] assets [and] understated [its losses and net income] in 2000 and 2001. Also, as a result, Intelligroup overstated its [losses and understated its net income] in 2002 and 2003.
Compl. ¶¶ 37, 104.
Plaintiffs do not specify how these alleged misstatements negatively affected Plaintiffs, and the Court cannot detect any financial fact alleging an injurious action with respect to those Plaintiffs who purchased Intelligroup’s securities during the years 2002 and 2003.
79
If anything, Plaintiffs’ SeraNova allegations harm Plaintiffs’ case by eliminating the transactional causation element from the claims based on the Statements issued during 2002 and 2003, since the alleged substantiality of the SeraNova note suggests that during all fiscal periods reflected in Plaintiffs’ Table,
see
Compl. at 11, Intelligroup’s financial position was, actually, notably better that what the market was led to believe (because of the inclusion of SeraNova write-off in these 2002-2003 Statements) and, therefore, the market substantially under-priced Intelligroup’s securities over these two years, thus providing Plaintiffs with a bargain.
80
However, while it appears that
*374
Intelligroup’s securities should have been even more attractive to the investors during these years, the Court will not reach the issue of transactional causation with respect to Plaintiffs’ SeraNova allegations, since the element of reliance was expressly eliminated from the list of 10b-5 elements by the Supreme Court’s decision in
Affiliated Ute Citizens v. United States,
In Affiliated Ute, a bank and its employees bought stock from a group of unsophisticated security holders with whom the bank had an ongoing business relationship. The bank purchased the stock at a price below market value without disclosing that it was a market maker for the securities and was reselling the stock to other investors at a substantially higher price. The trial court found, inter alia, that the bank had breached its duty to disclose material information concerning its activity as a market maker for the stock.
See id.
at 153,
[ujnder the circumstances of [the] case [which] involv[es] primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision .... This obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact.
Id.
at 153-54,
Courts frequently apply Affiliated Ute in actions brought pursuant to rule 10b-5(b) for omissions and misrepresentations.
See, e.g., Rifkin v. Crow,
In
Newton,
While a $15.1 million note is, no doubt, a substantial asset, it does not necessarily mean that non-collectability on the note is a material fact. To make such an inquiry, the Court of Appeals
fashioned a special rule for measuring materiality in the context of an efficient securities market.... In such an efficient market, “information important to reasonable investors ... is immediately incorporated into the stock price.” Burlington,114 F.3d at 1425 . As a result, when a stock is traded in an efficient market, the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock. Because in an efficient market “the concept of materiality translates into information that alters the price of the firm’s stock,” if a company’s disclosure of information has no effect on stock prices, “it follows that the information disclosed ... was immaterial as a matter of law.” Burlington,114 F.3d at 1425 .... [Therefore, in a case where the allegedly material undisclosed information] is actually disclosed ..., [the court should] apply Burlington and look to the movement in the price of [issuer’s] stock following disclosure to determine if the information was material.
Oran,
Since Plaintiffs’ complaint contains no allegations that, as a result of Intelli-group’s recording of impairment charges (associated with the SeraNova note) in 2002 and 2003, Intelligroup’s stock price experienced any notable downward fluctuation, see generally, Compl., the Court concludes that Plaintiffs failed to plead that information about the collectability of the SeraNova note was material.
However, even if the Complaint did allege this information, the Court must also consider whether the Complaint sets forth any facts supporting the second prong of the Affiliated Ute inquiry, i.e., whether Defendants acted with the requisite state of mind when they did not address the issue of the note collectibility during the year 2001. Plaintiffs’ allegations in that respect include two assertions: (1) that “Intelligroup’s 2004 [yearly filing with the SEC, namely, Intelligroup’s 10-K form (“10-K”) ] acknowledges [ ] the fact that the ... note from SeraNova ... would never be paid was apparent in 2000,” id. see Compl. ¶ 38; and (2) that “it was probable [Intelligroup] would not be able [to] collect on [the SeraNova] promissory note” because the note eventually proved to be uncollectible. See id. ¶ 104.
a. Allegations Based on Intelli-group’s 10-K
Although Plaintiffs’ assertions with respect to Intelligroup’s 10-K lacks any pin- *376 citation to this document, leaving the Court to guess what particular statement Plaintiffs had in mind, see Compl. ¶¶ 38-39, Plaintiffs’ allegation is factually unsubstantiated in view of the fact that the document did not include any statement that could be read as Intelligroup’s acknowledgment of the fact that Intelligroup was aware of non-collectability of the Sera-Nova note in 2000 or even 2001.
All references to the SeraNova note in the 10-K filed by Intelligroup are limited to the listings of the dollar value of the charge and related financial figures; discussion of an inter-company adjustments, the history of Intelligroup and creation and sale of SeraNova, Intelligroup-Sera-Nova tax-sharing, space-sharing and leasing agreements, the circumstances of Sera-Nova bankruptcy, and similar type of statements, none of which offers support to Plaintiffs’ claim that “Intelligroup’s 2004 10-K acknowledge^] the fact that the ... note from SeraNova ... would never be paid was apparent in 2000” or touches on the issue of what became apparent to In-telligroup’s officers and when. See <<http://www.sec.gov/Archives/edgar/ data/1016439/000112528205005480/ b409203 _10k.htm>>, at 5, 8, 11, 19, 27, 34, 37, 39, 49, 59-60, 62-63, 95-96, 112, 115, 127, 135-36, 13-41, 155, 158-78. 81 Moreover, the 10-K provides the following highly pertinent insight:
On May 31, 2000, SeraNova and [Intelli-group] formalized [the] promissory note [at issue] (“Note”)----SeraNova failed to make final payment of all amounts due under the Note to [Intelligroup] as of July 31, 2001. On August 16, 2001, [Intelligroup] filed a complaint against SeraNova and [two companies] which acquired SeraNova [(“Purchasers”)] in March 2001.... On September 25, 2001, [the Purchasers] filed a joint Answer to [Intelligroup]’s complaint.... After completion of the discovery process, [In-telligroup] moved for summary judgment. On April 17, 2003, the Court granted partial summary judgment.... On August 8, 2003, SeraNova and [the Purchasers] filed for Chapter 7 Bankruptcy, thereby staying this action.... There has been no notice that [the Purchasers were] insolvent. Shortly thereafter, counsel for [SeraNova and the Purchasers] asked the Court and was granted permission to be relieved as counsel. On September 22, 2003, [Intel-ligroup] moved for entry of default against [the Purchasers]. On May 24, 2004, the ... [c]ourt entered final judgment against [the Purchasers] in the amount of $11,472,000 (“Judgment”). [As of the date of its 10-K filing, October 24, 2005, Intelligroup] believes that collecting such Judgment from [the Purchasers] is not probable.
10-K, at 126.
This disclosure by Intelligroup unambiguously indicates that Intelligroup was actually expecting to collect on the Sera-Nova note and aggressively pursued such collection.
See id.
Furthermore, since the collection process involved a litigation initiated in the second half of 2001 and was further obstructed by unanticipated insolvency of SeraNova and its Purchasers in 2003, it appears very reasonable that Intelligroup postponed writing-off the Ser-aNova note until the collection became progressively litigious and increasingly doubtful, i.e., until 2002 and 2003. Therefore, the Court concludes that the content
*377
of Intelligroup’s 10-K indicates that Defendants’ did not act with scienter when they elected to delay write-offs of the Ser-aNova note, and Plaintiffs’ conclusion to the contrary is nothing but an impermissible bald assertion.
See Burlington,
b. Allegations Based on the Fact of Non-collectability
Plaintiffs’ second allegation that “it was probable it would not be able [to] collect on [the SeraNova] promissory note” because the note eventually proved to be uncollectible, see Compl. ¶ 104, provides this Court with nothing but an impermissible “fraud-by-hindsight” claim. Indeed,
the courts have been very reluctant to permit [plaintiffs to proceed on a “theory of fraud by hindsight” because corporate officials “are only responsible for revealing those material facts reasonably available to them” at the time of the alleged false or misleading statement or omission.
Wilson,
In the case at bar, Plaintiffs offer not a shred of data as to why Defendants should have been aware of non-collectability of the SeraNova note. Rather, Plaintiffs rely solely on Intelligroup’s accounting decision to re-record the loss. However, accounting decisions involving discretion as to the time of allocation are made for financial reasons, e.g., to legitimately reduce applicable income taxation. Thus, Intelli-group’s pure accounting decision made one or two years after individual Defendants left Intelligroup cannot be interpreted as an indication of Defendants’ culpable state of mind. Accord 10-K (indicating that “[i]n connection with the restatement and re-audit process, [Intelligroup] reversed ... the [SeraNova note] charges recorded in 2002 and 2003 ... and moved such charges to 2000, the [more appropriate] period [accounting-wise] in which SeraNo-va was spun off [and the ensuing income was recorded. Intelligroup, however,] left the portion of such charges related to the legal fees [against SeraNova and the Purchasers] and other costs incurred in trying to recover payment from SeraNova in the respective periods in which such costs were incurred”).
In view of the foregoing, this Court finds that Plaintiffs’ allegations related to the SeraNova note are void of any factual support as to the materiality element of the alleged non-disclosure, as well as to the scienter element. Moreover, Plaintiffs’ facts strongly suggest propriety of Defendants’ actions with respect to both the timing of SeraNova write-offs and re-re-cordation of these write-offs to the periods more proper accounting-wise.
D. Derivative Liability of Visco and Valluri
A controlling person may be liable for securities fraud only if it is determined that the person over whom control was exercised committed a primary violation of the securities laws.
See Merck,
*378
In the case at bar, Plaintiffs asserted two types of 10b-5 claim, one based on affirmative misrepresentation (entailing the obligation to plead, in addition to such obvious matters as purchase of a security and plaintiffs economic loss, four other elements jointly comprising the offence, i.e., materiality, scienter, transactional causation, economic loss and loss causation,
see Dura,
Here, Plaintiffs failed to plead (a) three out of four elements of their affirmative misrepresentation claim by alleging insufficient facts to show either Defendants’ scienter, or Plaintiffs’ transactional or loss causation, and (b) both elements of Plaintiffs’ claim based on Defendants’ alleged failure to disclose. In view of these shortcomings, Plaintiffs’ Complaint will be dismissed, as against Intelligroup, the issuer, for failure to state a claim asserting a primary violation of the securities laws. Given the foregoing, Plaintiffs’ Complaint will also be dismissed, as against Defendants Visco and Valluri, in their capacities as controlling persons of Intelligroup. 83
E. Leave to Amend
Having thoroughly examined Plaintiffs’ instant (Third Amended) Complaint and determined that Plaintiffs have still failed to set forth a viable 10b-5 claim asserting a primary violation of the securities laws and, consequently, to plead derivative claims under Section 20(a), this Court now turns to the question of whether Plaintiffs should be allowed to replead their claims for yet a fourth time. (The Court excludes from its count Plaintiffs’ original Complaint, see Docket Entry No. 1, and limits the count to Plaintiffs’ First, Second and Third Amended Complaints. See Docket Entries Nos. 31, 39 and 53.)
1. General Rule
Ordinarily, the plaintiff may be granted “leave [to amend,] ... when justice so requires.”
See Foman v. Davis,
2. Entry of Binding Precedent Clarifying Applicable Pleading Standard
Federal Rule of Civil Procedure 15(a) provides that, “[after] a party may amend [its] pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.” The Supreme Court has identified several factors to be considered when applying Rule 15(a):
If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be “freely given.”
Foman,
Thus, while “Rule 15(a) gives the court extensive discretion to decide whether to grant leave to amend after the time for amendment as of course has passed,” Charles A. Wright et al., Federal Practice and Procedure: Civil 2d § 1486 (2d ed.1990), the Rule 15(a) “generous standard is tempered by the necessary power of a district court to manage a case” in light of the factors listed in Foman.
See Shivangi v. Dean Witter Reynolds, Inc.,
Here, Plaintiffs filed the instant Complaint on January 25, 2007. On May 21 and June 27, 2007, while this case was still pending but after Plaintiffs’ filing of the Complaint, the Supreme Court issued its decisions in
Bell Atlantic
, — U.S. —,
“Rule 59(e) permits motions to amend or alter a judgment and may be granted to submit new, previously undiscovered evidence or to correct a clear error of law or prevent manifest injustice.”
Gutierrez v. Gonzales,
The opinion of the Court of Appeals for the Fifth Circuit in Schiller-Appellate was entered in response to the appeal taken by plaintiffs from the decision entered by the District Court for the Northern District of Texas in
Schiller v. Physicians Res. Group, Inc. (“Schiller-District
”),
argue[d] that leave to amend [was] warranted because [the] decision [issued by the Fifth Circuit, that is, the court whose decisions are binding upon the District Court] in Nathenson,267 F.3d 400 , represents an intervening change in the law. [The Fifth Circuit] rejected the plaintiffs’] argument for two reasons. First, Nathenson was decided on September 25, 2001, approximately five months before the district court granted the motions to dismiss, and thus cannot constitute an intervening change in the law. Second, [the Fifth Circuit] conclude[d] that Nathenson did not change the law with respect to the pleading requirements in securities fraud cases. Nathenson held that the enactment of the Private Securities Litigation and Reform Act (“PSLRA”) did not generally alter the substantive scienter pleading requirements for § 10(b) and Rule 10(b)(5) securities fraud claims. See Goldstein,340 F.3d 238 . The Court in Nathenson merely confirmed that scien-ter ... remained a valid basis for liability under § 10(b) and Rule 10(b)(5) in light of the plain language of the PSLRA. Id.; see also Nathenson,267 F.3d at 410 . [The Fifth Circuit] likewise rejected the plaintiffs’] argument that ABC [Arbitrage] Plaintiffs Group v. Tchuruk,291 F.3d 336 (5th Cir.2002), and Abrams,292 F.3d 424 , represented] an intervening change in the law. [The plaintiffs were] well aware of the pleading standards, but simply failed to meet them.
Schiller-Appellate,
Therefore, it appears that an entry of a binding precedent, which: (a) is issued while the matter is still pending, and (b) clarifies- — rather than alters the existing legal regime — cannot qualify as an intervening change in the law. If so, the Supreme Court’s decisions in
Bell Atlantic,
— U.S. —,
3. Repeated Failure to Cure Deficiencies and Futility of Amendment
In a securities class action lawsuit, it is proper for a district court to deny the plaintiffs leave to amend their complaint if: (a) the plaintiffs have been given three opportunities to state a claim upon which relief could be granted, but (b) in spite of the court’s prior directives and the court giving the plaintiffs a detailed roadmap for curing deficiencies in their claims, failed to cure those deficiencies.
See Chubb,
In the case at bar, Plaintiffs had three full opportunities to state a claim and failed to do so.
85
In spite of: (a) this Court providing Plaintiffs with a detailed roadmap in its previous opinion, extensively detailing the law and reviewing in detail the financial figures that Plaintiffs offered as evidence,
see
generally December Opinion (I
ntelligroup,
Although Plaintiffs have had three bites at the apple and have deposed a good number of Intelligroup’s senior officials, the content of their pleadings still fails to meet the pleading burden.
See NDCHealth,
Therefore, the Court concludes that granting Plaintiffs another leave to amend *384 will be futile and not in the interest of justice, and dismisses Plaintiffs’ Third Amended Complaint with prejudice.
VII. CONCLUSION
For the foregoing reasons, Defendants’ Motions to Dismiss will be GRANTED. Plaintiffs’ Third Amended Consolidated Class Action Complaint will be DISMISSED WITH PREJUDICE.
An appropriate Order accompanies this Opinion.
Notes
. On September 24, 2004, the last trading day before the Press Release, Intelligroup's stock closed at $1.65. On September 27, the stock opened at $1.58 and fell $0.45 to $1.13. Reading these figures in light most favorable to Plaintiffs, the Court deducts $1.13 from $1.65 rather than from $1.58.
. The SEC No-aclion Letter reads, in its entirety, as follows: "This investigation has been terminated, and no enforcement action has been recommended by the Commission. [The SEC is] providing this information under the guidelines [contained] in the final paragraph of the Securities Act Release No. 5310 (copy [of which is] attached).” This Court has no reason to believe that the SEC's Assistant Director presents sources whose accuracy should be questioned with respect to whether or not an investigation was terminated. The Court, however, stresses that this Court’s notice of the SEC No-action Letter shall not be interpreted as the Court's determination that the SEC examined the very same matters presented to this Court or that the SEC lacked agency discretion to terminate the investigation even if the SEC did find that Intelligroup violated securities provisions.
. "The purpose of the [Reform] Act was to restrict abuses in securities class-action litigation, including: (1) the practice of filing lawsuits against issuers of securities in response to any significant change in stock price, regardless of defendants' culpability; (2) the targeting of 'deep pocket’ defendants; (3) the abuse of the discovery process to coerce settlement; and (4) manipulation of clients by class action attorneys.”
Advanta,
. The Supreme Court’s decision in
Bell Atlantic
did not disturb the allowances traditionally provided by federal courts to civil rights litigants proceeding
pro se. See Erickson v. Pardas, -
U.S. -, -,
. The insufficiency of "factually neutral” pleadings under Rule 8 articulated in
Bell Atlantic
appear to draw from the same concerns noted in
Dura,
. Rule 23(a) states that certification will be available only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Rule 23(b)(3) permits certification only where the court finds that the "common questions of law or fact predominate over questions affecting only individual members and that a class action is the superior method for fair and efficient adjudication of the controversy.” As more than one court has pointed out, the several requirements of Rule 23 are not perfectly distinct from each other.
See, e.g., Weikel v. Tower Semiconductor Ltd.,
. In the instant action, Plaintiffs Senthilna-than Narayanan and Robert Farber ("Naray-anan Group”) were named as lead plaintiffs. See Docket Entry No. 24. The Narayanan Group purchased Intelligroup's stock on eleven occasions during the nine-month period running from August 27, 2003, to May 4, 2004. It appears that, after purchasing Intel-ligroup stock, Plaintiff Narayanan never sold his holdings. See Docket Entry No. 15-5. The purchasing pattern of Plaintiff Farber, however, was different. Just one month after his two initial purchases, Plaintiff Farber made three sales disposing of his entire Intel-ligroup stock within one week (about eight and a half months prior to Intelligroup’s Press Release qualified by Plaintiff as the disclosure event causing Plaintiffs’ losses). See id. Yet, just ten weeks after his three sales, Plaintiff Farber made three re-purchases of Intelligroup stock, buying almost twice as much shares as he had originally purchased. See id.
In addition to the Narayanan Group, the docket identifies a few other plaintiffs, including Plaintiffs Polos and Propst who jointly made eight purchases of Intelligroup stock during the nine months running from November 18, 2003, to August 18, 2004. See Docket Entry No. 15-6. (Plaintiff Polos also made three sales of Intelligroup stock during the week running from August 11, 2004, to August 18, 2004, that is, five and a half weeks prior to Intelligroup’s airing of the Press Release which, allegedly, caused Plaintiffs’ losses.) Thus, the joint purchasing period of the Narayanan Group, Polos and Propst was from August 27, 2003, to August 18, 2004, that is, less than one-third of the Class Period selected by Plaintiffs. (The dates of purchases of all other plaintiffs, i.e., Anthony Curzio, Michael Juppe, and Philip Ritchie, see Docket Entry No. 19, and plaintiffs in pre-consolidat-ed matters 04-4980, 04-5129, 04-5133, 04-5498, 04-5922, and 04-5923, see Docket Entry No. 24, are not immediately apparent from submissions made during this litigation.)
. The group pleading doctrine allows plaintiffs in securities fraud cases to attribute corporate statements to "one or more individual
*281
defendants based solely on their corporate titles.”
Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,
. This is true regardless of the defendant’s position in the company.
See Advanta,
. In addition, the language of SOX did not relax Plaintiff's pleading burden as to Rule 8 elements of their 10b-5 claim. This issue was extensively treated in the Court’s December Opinion,
see Intelligroup Secs. Litig.,
. Reliance is an element of a private claim under Rule 10b-5 but not in enforcement or criminal actions brought by government.
See United States v. Davis, 226
F.3d 346, 358 (5th Cir.2000);
United States v. Haddy,
. The presumption that the plaintiff actually relied on the market’s assessment of the value of security is rebuttable.
See Basic,
. Plaintiff's pleading of facts indicating that the plaintiff obtained a bargain dissolves plaintiff's claim of reliance in a way somewhat similar to the operations of the “truth on the market” theory (a corollary to the "fraud-on-the-market” theory,
see Assoc. Randall Bank v. Griffin, Kubik, Stephens, & Thompson, Inc.,
. Judge Posner of the Seventh Circuit noted that “what securities lawyers call ‘loss causation' is the standard common law fraud rule ... merely borrowed for use in federal securities fraud cases.''
Bastian,
. A "purchase-time value disparity, standing alone, cannot satisfy the loss causation pleading requirement,” because such an allegation "amounts to nothing more than a paraphrased allegation of transaction causation,” which may explain why the plaintiff bought (or bought at a particular price), "but not why [the plaintiff] lost money on the purchase, the very question that the loss causation allegation must answer.”
Emergent Capital,
. ''[I]mportantly, the complaint sa[id] the following (and nothing significantly more than the following) about economic losses attributable to the ... misstatement[s]: 'In reliance on the integrity of the market, [the plaintiffs] ... paid artificially inflated prices for Dura securities' and the plaintiffs suffered 'damage[s]' thereby.”
Dura,
. The Third Circuit has always followed an approach largely similar to that spelled out by the Supreme Court in
Dura. See Dura,
. The truth may be revealed to the investing public through means other than defendant’s corrective disclosure.
See Dura,
. In that respect, Plaintiffs' Complaint, read in the context of the Opposition, resembles more a motion for reconsideration rather than an amended pleading.
Cf. WatchGuard II,
. Twenty-four of these "negative-switched-to-positive” figures reflect Intelligroup’s accumulated deficit during various periods, with the other two being corrections of arithmetic errors with respect to percentile difference.
Compare
Compl. at 11 to Second Compl. at 8. The Court, however, finds it improper to consider Plaintiffs previous misstatements as binding admissions of facts disadvantaging Plaintiffs’ current claims.
Cf. Ptasinski,
. It appears that Plaintiffs were uncertain about percentile calculations of the items originally reported by Intelligroup as positive figures but set, upon revisions, as negatives. See Compl. at 11. (Plaintiffs’ percentile calculations of these items provided in the Second Complaint appear correct).
. The cases relied upon by Plaintiffs do not lend support to Plaintiffs’ position. The quotation picked by Plaintiffs from the language of
Sipex,
The same applies to the quotation from
Fleming,
Plaintiffs’ reliance on
Tut Sys.,
Plaintiffs’ reference to
Aldridge,
In view of the foregoing, it appears that Plaintiffs' argument tends to conflate elements of a 10b-5 claim and fails to appreciate the distinction between transactional causation, materiality, scienter and loss causation. See Opposition at 27, n. 12 (citing, for the purpose of alleging the element of transactional causation, the part of this Court's December Opinion that discussed the element of loss causation, and supporting their argument with a string of cases addressing the element of materiality).
. Since the cases cited by Plaintiffs,
i.e., Vee-co Instrs., Inc., Sec. Litig.,
. Reconsideration is limited to situations where "dispositive factual matters or controlling decisions of law” were presented to the court but were overlooked.
See Khair v. Campbell Soup Co.,
. An IPO is the first sale of a corporation's common shares to investors on a public stock exchange. The monies paid by investors for the newly-issued shares go directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO therefore allows a company to raise capital for future growth. See, e.g., Abby M. Alderman & Kenneth Y. Hao, The Initial Public Offering Process, in How to Prepare an Initial Public Offering (PLI Corporate Law & Practice Course Handbook Series No. B-904, 1995). Any secondary public offering by an issuer pursues effectively the same goals. In its December Opinion, this Court discussed the qualitative distinction between an IPO and a secondary market trades and the importance that corporate assets have at the outset of corporate life:
At the very outset of a corporation's life, the value of shares are directly related to the value of equity [that is, the difference between corporate assets and debts] because, when the corporation first sells to investors, it uses the monies to buy machinery, physical plants and other "real” goods or resources. See Smith, Investment Banking and the Capital Acquisition Process, 15 J. Fin. Econ. 3 (1986). But, once issued, stock can neither depreciate nor be consumed. Instead, it is sold and resold. These subsequent sales are nothing more than the market's expectations for the corporation’s prosperity since these sales do not add a penny to the corporation's coffers and do not affect the value of equity. See Fox, Shelf Registration, Integrated Disclosure, and Underwriter Due Diligence, 70 Va. L.Rev. 1005, 1010 (1984).
December Opinion at 23, n. 17
(Intelligroup,
. Lack of such suggestion is of little surprise, since SIRVA’s financials indicated that overstatements of income were accompanied by overstatements of assets and understatements of liabilities, while understatements of net income were made together with understatements of assets and overstatements of liabilities, i.e., all SIRVA's financials errors were coherent misrepresentations. See generally, SIRVA, 04-7644, Docket. Moreover, the language in SIRVA appears to indicate that the litigants and the court were indeed concentrating on the issuer’s net income — rather than other accounting data — for the purpose of assessing the issuer’s profitability.
. Since both overstatement and understatement of SIRVA's net income were included in SIRVA’s IPO prospectus, these misstatements, by definition, occurred before any secondary market for SIRVA stock came in existence.
. In
Craftmatic,
an IPO case examining false projections, the issue of overstatement of assets or understatement of liabilities was not examined at all.
See
("The thrust of plaintiffs' action is [that] defendants [’ forward-looking] statements concerning Craftmatic’s marketing, expansion, and upgrading programs [were] false and misleading.”)
Craftmatic,
. Plaintiffs quote the
Aina
court's observation that “the very fact that false financial information had been published by [the issuer] is a material fact which a reasonable investor would have wanted to know."
See
Opposition at 24 (quoting
Alna,
. The third district case cases relied upon by Plaintiffs,
Kaltman,
. “Accumulated deficit” is an accounting comparison, i.e., a concept describing the situation when accumulated losses exceed retained earnings. An excess of retained earnings over accumulated liabilities is conceptualized as "budget surplus.” See Introduction at 66.
. The first edition of the Security Analysis was published in 1939. See, e.g., Dale Arthur Oesterle, Mergers and Acquisitions: Revisiting the Anti-takeover Fervor of the '80s Through the Letters of Warren Buffett 565 n. 1, 19 Cardozo L.Rev. 565 (1997).
. The group that Graham and Dodd designated as "speculators” resembles those currently known at the stock market as "noise traders.” See, e.g., Paul G. Mahoney, Is There a Cure for "Excessive” Trading?, 81 Va. L.Rev. 713, 718-21 (1995).
. The intrinsic value theory eventually became the core financial theory employed by modern stock markets.
See, e.g.,
Henry T.C. Hu,
Faith and Magic: Investor Beliefs and Government Neutrality,
78 Tex. L.Rev. 777, 786-89 (2000);
see also
December Opinion at 23-25
(Intelligroup,
.It appears that, in alternative to their reliance on
Security Analysis,
Plaintiffs suggest that the issue how the stock market values a stock should be left to a jury to decide on the basis of their daily experiences rather than actual financial considerations employed by the stock market.
See
Opposition at 24. The Court disagrees. The typically utilized semi-strong form of the Efficient Capital Market Hypothesis is based on the presumption that all public information is absorbed and reflected by the market on the basis of the
*314
market’s calculative models.
See Basic,
. If read against Plaintiff's quotation from
Kaltman,
Although the court in
Kaltman
did not address the issue of reliance, it noted — while examining the element of materiality — that “it is unfathomable to believe that any reasonable investor would view the disappearance of 22% of a company's value to be anything but material.”
Kaltman,
. As explained supra, Plaintiffs' shortcomings are not limited to the periods reflected in the Table during which Intelligroup's income was understated; the shortcomings also encompass both the 2001 and 2004 Periods. With respect to the 2004 Period, the Court notes, in passing, that this Period followed two consecutive rounds of understatement in Intelligroup’s net income, specifically, the understatements made in Intelligroup’s 2003 yearly Statement and the following Statement (reflecting Intelligroup’s financial position at the end of the first fiscal quarter of 2004). See Compl. at 11. Since these two consecutive disseminations of information presenting *316 Intelligroup’s net earnings less favorably than what it was in actuality were the last two signals received by the market, it appears nearly certain that the market underpriced Intelligroup stock throughout the 2004 Period which continued to price the stock on the basis of this unduly unfavorable information.
. The sole fact that the Court, during earliest stages of this litigation, certified Plaintiffs’ class has no bearing on the instant inquiry, since the Court of Appeals endorses a liberal approach to class certification in securities actions noting that, “in a doubtful case ... any error ... should be committed in favor of allowing a class action.”
Eisenberg v. Gagnon,
. Indeed, Lead Plaintiffs' submissions for certification of the class identified only the number of purchases made during certain periods of the class, but not the number of purchasers. See Docket Entries Nos. 15-5 and 15-6. Since certain Plaintiffs were purchasers of Intelligroup’s stock time and again, See, e.g., Docket Entry No. 15-5, Plaintiffs’ submission is unclear even as to the number of those Plaintiffs who made their purchases during those parts of the Class Period where Plaintiffs are aware of the number of transactions, moreover as to the total number of Plaintiffs.
. This dissemination was made in two increments, one on May 11, 2004, and the other on May 17, 2004.
. The Complaint specifies that the May 11, 2004, announcement stated that the auditing firm would continue being Intelligroup's auditor for a limited period in order to prepare Intelligroup’s filing for the second fiscal quarter of 2004, but Intelligroup's May 17, 2004, announcement clarified that the auditor changed its mind and resigned without preparing the filing. See Compl. ¶ ó.
.The Stock Chart details the opening, closing, highest and lowest prices during each trading day, as well as the averaged closing price for each trading day. See generally, Stock Chart. Following the custom of financial markets, this Court utilizes the latter and refers to it as "actual” price, which does not indicate that the opening, closing, highest and lowest prices were "not actual.”
. The Court omits discussion of those claims in Plaintiffs' Second Complaint (and corresponding Court’s discussions thereof) which are not reiterated, one way or another, in the instant Complaint.
See Young,
. The Court’s focus on Intelligroup’s yearly net income for 2003 was a result of the fact that the sole error in the Statements addressed in the Press Release in terms of downscaling financial approximation was the yearly net income for 2003, rather than any other figure. See First Announcement, Press Release.
. It is not entirely unclear to this Court why Plaintiffs interpret the language of the Second Announcement reading "[Intelligroup] entered into [the private placement] agreement ... because [Intelligroup’s] cash availability under its $15 million revolving credit facility had become inadequate to fund ongoing operations,” as an announcement that Intelligroup "uncover[ed] ... gross accounting errors”. Compare Opposition at 31 (holding out the pertinent language of the Second Announcement) to id. at 30 (providing the aforesaid reading of the Second Announcement). Similarly, the Court is not entirely clear as to the basis for Plaintiffs’ interpretation of Intelli-group’s October 5, 2004, conference call. See Opposition at 31. During the conference call, Intelligroup stated that
The foundation for the investment [by the private placement investors] is their belief that the strength of [Intelligroup's] reference-able customer base and [Intelli-group’s] strategy positioning in the market place to leverage the increasing demand for onsite and offshore ... implementation [of service programs] and support services. [The investors] have stressed their faith in the current management to lead [Intelli-group] into the next level of competitiveness and profitability.... Intelligroup ... evaluated the alternatives and this investment was considered the best move for ... [Intelligroup’s] long-held goal of straightening [its] balance sheet. In addition, [Intel-ligroup] need[s] to solve immediate liquidity issues. [Intelligroup] now ha[s] fresh funding to drive [its] operations and to build on the foundation [it has], [The private placement funds] will allow [Intelli-group] to develop [its] core assets and continue to deliver the high-quality work [product] that [Intelligroup’s] clients have come to expect.
10/05/04 Transcript.
Although this language indicates that Intel-ligroup was interested in the private placement in order to develop its business operations further and maintain such development, Plaintiffs select the four words "solve immediate liquidity issues” from the entire discussion and maintain that these four words disclosed to the market something that the market should have understood as an indication that Intelligroup's stock had been overpriced on the basis of the errors contained in the Statements. See Opposition at 31, n. 14. However, the disclosed fact that Intelligroup was too cash-strapped to develop or maintain its operations was do not seem to be reflective of the fact that Intelligroup made accounting errors, since a period of financial hardship may occur to any business entity, regardless of whether or not the entity ever made any accounting errors.
. With respect to the First Announcement, the Court observed that: (a) information about Intelligroup's upcoming delisting or its planned adjustment of intercompany finan-cials was largely irrelevant to Plaintiffs' claim,
i.e.,
unlikely to be interpreted by the market as a signal that Intelligroup's overall position was represented in the Statements in an overly — favorable fashion, since intercom-pany adjustments typically do not affect the company’s overall finance; (b) information about upcoming correction of errors made before 2001 was irrelevant since the errors were committed before commencement of the Class Period and, in addition, was unlikely to have a substantial effect on the market's current pricing tendencies since the errors were almost four years old; (c) the disclosure of true information about the errors made in the Statements was limited to a neutral message lacking even approximate financial data and, thus, provided the market with no grounds to suspect that Intelligroup’s financial position was worse rather than better than that depicted in the Statements; and (d) by contrast, the untrue information about the errors made in the Statements did include an approximation of financial data and, indeed, provided the market with valid grounds to suspect that Intelligroup’s financial position was worse than that depicted in the Statements. Since the entire panoply of information in the First Announcement consisted only of irrelevant information, relevant-true-but-neutral information, and relevant-negative-but-untrue information, the Court found that the Press-Release Drop could not have been caused by disclosure of relevant-true-negative information in the First Announcement, since the Announcement contained no such information.
See
December Opinion at 40-46
(Intelligroup,
. The interrelation between the First and Third Announcement relied upon by Plaintiffs *326 was, therefore, limited to the notion that the implied facts in Message Two were the cause of the express facts and predictions in Message One. See Press Release, accord Opposition at 30-31.
. For the purposes of the instant discussion, the Court concentrates only on the errors in Intelligroup’s Statements made during those parts of the Class Period when Intelligroup misrepresented its financial data in a coherent fashion,
i.e.,
the spans of time designated in the December Opinion as Phases I, II, III and IV.
See
December Opinion at 29 (Intelli-
group,
. It appears that the court in
Sekuk
might have applied an unduly lenient standard to the
Sekuk
plaintiffs’ pleadings, since the Se-kuk court: (a) employed the standard of review based on the language from
Rosenberg v. City of Everett,
. As the Court detailed in its December Opinion, the single piece of news contained in the Press Release and relevant to Plaintiffs’ claim (based on the errors made in the Statements) was Intelligroup’s announcement that its yearly net income for 2003 was overstated by $0.9 million (warranting a loss of $0.05 per share). See December Opinion at 44
(Intelligroup,
[the Second] Complaint, as drafted, provides this Court with no grounds to piece together any allegations resembling [a] claim with respect to [this dissemination of the bad rather than good news], since the Complaint (1) sets forth no fraud allegations related to [such dissemination]; and (2) is bereft of the appropriate scienter pleadings ... indicating Defendants’ intentional state of mind.
December Opinion at 45 n. 33
(Intelligroup,
The Court’s above-quoted observation clearly indicated to Plaintiffs that they may, if they so wish, set forth a claim based on intentional dissemination of the bad rather than good news in their instant Complaint, that is, if Plaintiffs had facts to support such allegations.
See id.
Plaintiffs responded to the Court's guidance with the comment that, "[t]his Court misconstrues the applicability of ... the Exchange Act,” and asserted that ''[t]he Press Release is [perceived by Plaintiffs merely as a] curative disclosure.” Opposition at 34-35, n. 15. The Court, thus, reads this statement as Plaintiffs' conclusive waiver of any claim based on Intelligroup’s dissemination of the bad rather than good news, or as Plaintiffs' admission that Plaintiffs have no facts to support such a claim, and notes the distortion of its December Opinion.
Cf. Marsden v. Select Med. Corp.,
. Part C starts with the same error that Plaintiffs made with respect to the
GeoPhar-
*334
ma
opinion,
i.e.,
by Plaintiffs quoting the language of
Montoya v. Mamma.Com, Inc.,
. In that respect, the Court notes that the visual graph presented by Plaintiffs as Plaintiffs' Exhibit C to Plaintiffs’ Second Complaint is particularly depictive of the pace of Intelli-group’s stock price decline before and after the Press Release.
See
December Opinion at 10, 36-38
(Intelligroup,
. It appears that no "re-implication of the truth” and no "re-removal” of artificial price inflation is possible under the holding of
Sem-erenko,
since the market either knows the truth or it does not. The issue of "partial corrective disclosure” was addressed in
Buca Inc. Secs. Litig.,
. Assessing Plaintiffs' explanation for the Post-Release Recovery set forth in the Second Complaint, the Court noted that
Plaintiffs' assertion that the disclosure contained in the Press Release was the cause of the long depression of Intelligroup's stock price [i.e., the cause of the stock price decline that continued for almost ten months after the Press Release was aired,] unduly ignores the presence of the [Post-Release] Recovery period. Plaintiffs, effectively, maintain that the [Post-Release] Recovery period was but a market "fluke,” indicating nothing but the general fact that "Intelli-group’s stock price was quite volatile.” ... Plaintiffs err. The Efficient Market Hypothesis, upon which Plaintiffs rely, is premised on the belief that individuals are rational, self-governing actors who are able *338 to process the information wisely, and they do so promptly. Since Plaintiffs rely on the Efficient Market Hypothesis, ... Plaintiffs' allegation that the Recovery was a ''fluke” that could not reflect the investors’ assessment of Intelligroup’s financial conditions directly contradicts Plaintiffs’ claim that the Post-Release Drop was a result of the Press Release. Plaintiffs simply cannot have it both ways, i.e., rejecting all upward movements of Intelligroup’s stock as inconsequential signs of volatility, while simultaneously maintaining a direct causal connection between the downward movements (specifically, the Post-Release Drop and [the drops that occurred during the next ten months]) and Defendants’ alleged fraud. Claiming a temporal-proximity-based causal connection between the latter, Plaintiffs cannot avoid admitting the same with respect to the former.
December Opinion at 37-38
(Intelligroup,
Plaintiffs’ error in the Second Complaint was identical to that committed by the
Dura
plaintiffs who also tried to connect the alleged disclosure of the
Dura
defendants’ fraud to all following declines of the company stock, while ignoring that the stock price swiftly rebounded to its pre-disclosure level after the alleged disclosure and potentially suggesting that the decline following such rebound was not related to the disclosure but rather a result of (a) either the forces pre-existing the disclosure, or (b) post-disclosure events that warranted a price decline, or (c) the combination of both.
See Dura,
. Plaintiffs assert that the market might have lost its ''comfort” as a result of Intelli-group’s ''continued delay [in] restating] its financials ... over the next several months.” Compl. 1111. This allegation suggests the same conclusion as reached by the Court, i.e., that all declines in Intelligroup’s stock price were results of unfolding events rather that the market's response to the disclosure made in the Press Release. Indeed, the Press Release expressly notified the market that Intel-ligroup’s filing of second-quarter-of-2004 fi-nancials was not forthcoming for months, and neither was the Restatement. See Press Release (putting the market on notice that "reconciliation of [accounting] difference [is] the primary reason for further delay in filing [of the second-quarter-of-2004 financials, and that — because of this delay — Intelligroup] is in default [on] its ... credit [and] is working ... to obtain waivers for such defaults.” At no point did the language of the Press Release suggest that, instead of seeking waivers, Intelligroup had any hopes to cure the default by a speedy filing of its second-quarter-of-2004 financials, and the time-line or deadline for Restatement was not even remotely addressed: the only information disclosed was that the Restatement was "expected” to be made, and that the Restatement would involve a very extensive accounting review). Consequently, Plaintiffs’ assertion that the stock price kept declining after the Post-Release Recovery because of Intelli-group’s failure to file its second-quarter-of-2004 financials (and financial consequences of such failure) actually severs the connection between Plaintiffs’ reliance on the misrepresented news and the disclosure of truth about this news, since an effective market should absorb news upon disclosure and speedily adjust the stock price rather then keep "readjusting” the price for months and months, all on the basis of the same initial disclosure.
. Obviously, since Intelligroup, a juridical entity, could have neither motives nor opportunities to commit fraud, or the ability to act consciously or recklessly, the Court examines the acts of Intelligroup’s duly authorized officials, i.e., natural entities named as Defendants in this action, and for the purposes of its scienter inquiry, the Court excludes Intelli-group from the Court’s reference to collective Defendants but attributes the acts of the natural entities who operated as Intelligroup’s officials to Intelligroup.
. See infra, this Opinion, at 177-84, for a detailed discussion of facts associated with the note.
. The Court notes, in passing, that even if the law supported Plaintiffs’ position, Plaintiffs’ allegation would still be insufficient, since Intelligroup actually disclosed the fact of non-collectability of the note in (and such disclosure did not affect Intelligroup’s credit facilities). Therefore, Intelligroup’s alleged motive dissipated, partly, in 2002 and, fully, in 2003, see Compl. ¶¶ 37, 104, that is, about a year before expiration of the Class Period, hence eliminating any scienter element during one-fourth of the Class Period.
. The actual language of the Opposition (replicated in this excerpt) is thickly peppered with references to David Distel ("Distel”) who was named as a Defendant in the original complaint, but dismissed in the Second Complaint,
see
Docket Entry No. 39, and is not named as a Defendant in the instant Complaint.
See
Compl. ¶¶ 26-29 (Plaintiffs designation of "Parties” to this action). Notwithstanding the fact that Distel is not named as Defendant in this action, Plaintiffs assert that Distel acted with a culpable state of mind.
See
Opposition at 63-64 ("[T]he timing of the 'resignation' of former CFO David Distel ... contribute^] to a strong inference [of other Defendants’ scienter since] the most logical and plausible inference to be drawn from [this] ‘resignation [ ]’ is that ... Distel [was] at least aware of or recklessly disregarded] the massive internal control deficiency and was therefore terminated.... Indeed, the fact that [Intelligroup’s] board and new auditor investigated the fraud and Distel ... then resigned (or lost) [his] job speaks volumes”);
see also
Compl. at 31-33 (stating allegations against Distel). In addition, Plaintiffs’ allegations with respect to Distel are supplemented with the following notation: “Distel even went so far as to later reveal in his resume that he had uncovered years of accounting irregularities before he left [Intel-ligroup].” Opposition at 64, n. 35. This Court is not entirely clear as to the reason for Plaintiffs’ allegations with respect to the state of mind of an entity who is not a party to this suit. Had Plaintiffs’ alleged any facts indicating that Distel shared his alleged awareness about the accounting irregularities with the named Defendants, the Court would be able to
see
at least a certain connection between Defendants’ alleged scienter and Plaintiffs' assertions with respect to Distel. However, the Complaint is void of any such allegations. Moreover, the logic ensuing from Plaintiffs’ comment (about the alleged content of Dis-tel’s resume) suggests that Distel was unaware of Intelligroup’s accounting irregularities until shortly prior to his resignation.
See id.
If so, Distel, who left Intelligroup well after the expiration of the Class Period,
see
Docket Entry No. 1 (original complaint), ¶ 8(d), clearly could not advise Defendants during the Class Period about what Distel, Intelligroup’s CFO, did not discover yet. Since the circumstances of Distel's resignation, whatever they were, could not be quali
*344
fied as "red flags” that Defendants were presented with during the class period (and which, therefore, Defendants could not intentionally or recklessly ignore), the Court does not find Distel’s resignation indicative of Defendants’ culpable state of mind for the purposes of the errors contained in Intelligroup's Statements.
See Tellabs,
. Two other cases cited by Plaintiffs appear to be misplaced, as they both address the mode of inferring scienter from one's motive and opportunity, rather than from circumstantial evidence.
See
Opposition at 64 (quoting
Helwig v. Vencor, Inc.,
Referring to Helwig, Plaintiffs quote the phrase "self-interested motivation of defendants in the form of saving their salaries or jobs,” alleging that Defendants were motivated to commit fraud because of their desire to remained employed. See id. Plaintiffs fail to observe that, in Helwig, the Court of Appeals for the Sixth Circuit adopted a list of nine factors indicative of scienter, the ninth of which is “the self-interested motivation of defendants in the form of saving their salaries or jobs.” The Court of Appeals for Third Circuit, however, has not directed district courts in this Circuit to apply such an analysis. Conversely, the Court of Appeals recently guided the district courts that,
[i]n every corporate transaction ... officers will usually reap financial benefits from a successful transaction. Such allegations alone cannot give rise to a "strong inference” of fraudulent intent. See Burlington,114 F.3d at 1424 ; see also Phillips v. LCI Int’l, Inc.,190 F.3d 609 , 623 (4th Cir.1999) ("... allowing a plaintiff to prove a motive to defraud by simply alleging a corporate defendant’s desire to retain his position with its attendant salary, or realize gains on company stock, would force the directors of virtually every company to defend securities fraud actions every time that company [undertakes a business action]”); ... Tuchman, 14 F.3d [at] 1068 ... ("[incentive compensation can hardly be the basis on which an allegation of fraud is predicated”); ... Leventhal v. Tow,48 F.Supp.2d 104 , 115 (D.Conn.1999) (“[T]he allegation that the defendants artificially inflated [corporate] stock price in order to 'protect and enhance their executive positions' ... fail[s] to give rise to a strong inference of scienter. This motive has been rejected routinely”).
GSC,
As for those individuals whose culpable participation is admitted, ... [t]he possibility of adverse interests between [these admittedly] guilty employees and the corporation remains open.... [Another court, in] Phar-Mor, [addressed this issue and noted that] *345 “[¡Indeed, a reasonable trier of fact could conclude that the true motive of the wrongdoers was the preservation of their employment, salaries, emoluments, and reputations, as well as their liberty, at the expense of [the corporation’s] well-being.”
Cendant,
. The Court notes, in passing, that — in view of Plaintiffs’ allegations suggesting that there were certain frictions between Defendant Val-luri and some of his colleagues, Valluri's decision to leave Intelligroup appears particularly logical and unrelated to any issue of fraud. See Compl. V 65 (indicating, for example, that Defendant Valluri did not enjoy good working relationship with one of Intelligroup's Vice Presidents of Sales who perceived Valluri as "tyrant” and believed that Valluri was “a pretty ruthless guy with the employees”). Similarly, Defendant Visco’s departure almost a year prior to Intelligroup’s airing of the Press Release removes any logic from Plaintiffs’ claim that Visco was committing fraud in order to prolong or retain his employ at Intelligroup.
. In view of the totality of elements required to be plead to set forth a 10b-5 claim, which include, as the first requirement, a false or misleading statement,
see Dura,
.The remainder of Plaintiffs' page-long discussion of Deloitte's resignation is dedicated to the issue of whether Deloitte's "clean” audit of all Intelligroup’s Statements negates inference of scienter and, if so, to what degree.
See
Opposition at 65-66. The Court notices, in passing, the correctness of Defendants’ observation that a "clean” outside audit provides certain grounds for Defendants’ placid state of mind and advocates against inference of scienter.
See
Docket Entry No. 69, at 8 and n. 4 (properly noting that Plaintiffs' reliance on
NextCard, Inc. Sec. Litig.,
. Moreover, Plaintiffs’ focus on Deloitte's resignation is directly undercut by the fact that, in recent years, significant numbers of companies have changed auditors. During the period 2003 to 2005, roughly 4000 public companies changed accounting firms in the United States. See Mark Grothe, Jay Saban, Ann Pham, Mum’s the Word 5 (Glass, Lewis & Co.2006), available at <<www.soxfirst.com/ 502267 1 l/Auditor% 20Turnover.pdf> >. That represents about 33% of all public companies. See id. In 2005 alone, 1430 public companies (about 11%) changed auditors. See id. at 4-5. About 60% of the time, companies initiated the change by dismissing their auditors. See id. at 5. The other 40% of the time, the auditors resigned. See id. at 5. Moreover, of those companies switching auditors in 2004, 85% posted $ 100 million or less in revenues that year, i.e., comprised a group to which Intelli-group belongs. See Diya Gullapalli, Moving the Market: Number of Firms That Switched Auditors Jumped' 78% in 2004, Wall St. J. (Feb. 17, 2005); accord Compl. at 11 (Plfs.’ Table). Therefore, the fact that Deloitte resigned, and Intelligroup hired another outside auditor, does not seem to depict an extraordinary event.
. Defendants correctly observed that these three cases are factually inapposite to the case at bar, since they presented "a vety different question of whether a company's
auditor
can be liable for repeatedly performing deficient audits.” Reply at 13 (emphasis in original). While the language selected by Plaintiffs from these cases is well in line with the general rule and, thus, does not warrant this Court's attention to the factual differences for the purposes of evaluating Plaintiffs' pleading, a short overview of the facts and reasoning of
Carley,
. In view of the difference between GAAP-based contentions against such GAAP-sawy *352 entities as accountants and auditors and GAAP-related allegations against GAAP-unacquainted corporate managers, this Court is not clear as to the reasons for quoting the Carley language in MicroStrategy.
. Obviously, the Court allocates no eviden-tiary value whatsoever to the fact of these certifications for the purposes of establishing Defendants' scienter during the parts of the Class Period when Intelligroup’s Statement were filed without SOX certifications.
. Plaintiffs do not clarify the meaning of the term "SAP.” In view of the industry Intelli-group is part of, the Court presumes that "SAP” stands for "Systems Applications and Products.”
. Since the Complaint details the exact periods of employ of each UW, this requirement is expressly deemed met with respect to all UWs and will not be addressed by the Court.
. The Court notes that the statement made by UW-3 is especially in need of factual specificity, since Plaintiffs clarify that UW-3 was an investor in SeraNova, Intelligroup's spun-off subsidiary that eventually went bankrupt, see Compl. ¶ 33; Intelligroup's 10-K, at 126, and such fact, read together with fact-free generality of UW's conclusions, detracts from UW-3's credibility — and renders his statement more susceptible to doubt — in view of UW-3's potential bias against Intelligroup and/or individual Defendants.
. UW-4’s "doubts” are also doubtful, since UW-4, who worked at Intelligroup from November of 2002 to August 2004, referred to " 'three or four CFO’s’ in a short amount of time,” while, in reality, Intelligroup had only two CFOs, Defendant Visco, who performed these duties from November 2000 to November 2003, see Compl. ¶ 29, and David Distel, who performed the duties from the time when Defendant Visco left Intelligroup and until August of 2004, i.e., the time when Distel left Intelligroup, which was exactly the time when UW-4 himselftherself stopped being an Intelli-group’s employee. See Docket Entry No. 1, ¶ 8 (Pife.’ original Complaint).
. Intelligroup's current Internet site lists four locations in the United States, one in Puerto Rico, four in India, two in Europe and one in Japan, that is, after divestiture of Intel-ligroup's Asia-Pacific operations. See <<http://www.intelligroup.com/global locations.html>>; Opposition at 54-55.
. Moreover, since Plaintiffs’ Table indicates that Intelligroup actually understated its net income more often than overstated, see Compl. at 11, the validity of UW-4's conclusion that Intelligroup was exaggerating the profitability of its operations “quarter by quarter” is highly questionable, if read in light of the correct financial data set forth in the Restatement, since if Intelligroup's erroneous Statements were matching Defendant Valluri’s allegedly erroneous predictions, it appears that Defendant Valluri was, at least half time, too modest in his assessments of Intelligroup’s business prospects.
. This account is qualitatively identical to that provided by UW-5 and defines a power struggle between Defendants Visco and Vallu-ri. Accord Compl. ¶¶ 59-60, 62, 65. Same as the account given by UW-5, the discussion of the conflict between Defendants Visco and Valluri provided by the username “con-girl4889” is void of any fraud-related connotations since the term "siphon,” as used with respect to monies, appears to imply a spendthrift — rather than fraudulent — expenditure (that could be related to accounting errors only through assertion of facts suggesting that the expenditure was unduly concealed, which the posting does not indicate was the case).
. In fact, Plaintiffs ardently maintain that statements made by the username "con-girl4889” should be deemed both correct and highly reliable. See Opposition at 63, n. 34.
. It appears that Plaintiffs implicitly recognize this point, see Opposition at 63-65, nn. 34-35, but maintain that Defendants were reckless in (a) creating Intelligroup’s internal control environment in the fashion unable to withstand the massive problems associated with adoption of the new automated financial system, and (b) not maintaining sufficient personnel at Intelligroup's United States facilities to prevent the consequences defined by UW-5 as "disastrous.” However, if so, these allegations have no relevance to either the errors that infested Intelligroup’s Statements years before the events of summer 2004 or Defendants' state of mind that existed at the time when the Statements were publicized.
. Moreover, executive incentives based on earnings do not provide grounds for inference of scienter,
see, e.g., Tuchman,
. The Court of Appeals for the Seventh Circuit recently suggested that, under the Supreme Court’s holding in Tellabs, no statement allegedly made to a securities plaintiffs by undisclosed witnesses could be properly considered for the purpose of establishing defendant’s scienter. The Seventh Circuit clarified as follows:
The Supreme Court’s opinion, Tellabs, ..., establishes two propositions.... First, "[a] complaint will survive [a motion to dismiss] only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”... Second, in applying this standard, "the court must take into account plausible opposing inferences.” [The] upshot of the approach that Tellabs announced is that [the court] must discount allegations that the complaint attributes to ... "confidential witnesses” [since it] is hard to see how information from anonymous sources could be deemed "compelling” or how [the court] could take account of plausible opposing inferences [considering one-sided statement of witnesses proffered by an interested party]. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist.
Higginbotham,
. Needless to say, any understatements of Intelligroup's loss or overstatements of assets in the year 2000 are: (a) irrelevant, in view of the fact that the Class Period started to run on May 1, 2001, see Compl. at 1, and (b) a factual impossibility since Plaintiffs themselves assert that, at least until "the end of fiscal year 2000,” Intelligroup did not know about non-collectability of the SeraNova note.
. Although not being presented with Plaintiffs allegations specifying when or how Defendants initially advised the market about the SeraNova note being collectable, the Court presumes, hypothetically, that Intelli-group expressly offered — or expressly repeated — such assurances at some point during the Class Period, hence triggering the threshold duty to enter a corrective statement if the situation changed as to the collectability.
See Oran,
. The Court considers Intelligroup’s 10-K incorporated in the Complaint by reference and, thus, takes judicial notice of the entire content of this document, as filed by Intelli-group with the SEC.
See TMJ Implants, Inc. v. Aetna, Inc.,
. Since reliance is not an element of 10b-5 enforcement actions by the SEC or a criminal prosecution, see
Davis,
. The Court notes, in passing, that the totality of Plaintiffs’ claims and arguments suggests that Plaintiffs relied on the apparently common opinion of Intelligroup's employees that Defendant Valluri had an unpleasantly controlling personality.
See generally,
CompL; Opposition. However, the "controlling person” provision set forth in 15 U.S.C. § 78(a) utilizes the phrase as a term of art and has no relevance to the defendant's personality. As to Defendant Visco, the Court is not entirely clear as to Plaintiffs' reasons for naming him as a Defendant in this action, since (a) Plaintiffs’ scarce allegations against Defendant Vis-co are effectively limited to vague discussions of Defendant Visco’s mild personality,
see generally,
CompL; Opposition; thus, (b) even if Defendants Intelligroup and Valluri were deemed potentially liable, Defendant Visco could not be liable, since the group pleading doctrine is not permitted in this Circuit.
See Tyson,
. The Court notes, in passing, its awareness of the recent decision by the Court of Appeals for the Fifth Circuit in
Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp,
On September 6, 2005, the Flaherty plaintiffs commenced their action by filing Plaintiffs’ Original Class Action Complaint.
See Flaherty & Crumrine Preferred Income Fund v. TXU Corp.,
The district court granted the defendants' ... motion [on the grounds that the plaintiffs] fail[ed] to satisfy the Private Securities Litigation Reform Act's ... requirement [to] plead, with particularity, facts raising a "strong inference” of scienter. While the case was on appeal, the United States Supreme Court issued an opinion in Tellabs, ... in which the Court clarified the appropriate standard for determining whether a securities fraud complaint gives rise to a "strong inference” of scienter, within the meaning of the PSLRA.... At oral argument, the plaintiffs indicated that remand to the district court would be appropriate because they did not have the benefit of Tellabs in drafting their complaint.
Flaherty-Appellate, at 254.
Concluding that the district court ... did not have the opportunity to consider whether the plaintiffs' allegations meet the PSLRA's pleading requirements in light of the clarifications articulated in Tellabs, the Fifth Circuit remanded the matter for reconsideration under the standard articulated in Tellabs (but without granting the plaintiffs an opportunity to replead). See Flaherty-Appellate, at 254.
In the case at bar, the Court assessed Plaintiffs' pleadings in light of the clarifications offered by the Supreme Court in Tellabs and Bell Atlantic, thus availing Plaintiffs to a review under the latest clarifications available with respect to the applicable statute and rules of Federal Civil Procedure, including comparative analysis (of inferences that could be drawn in favor of Plaintiffs' contentions and competing inferences) emphasized by the
Third Circuit in Winer Family Trust,
The fact that Plaintiffs were not aware of these clarifications at the time of their drafting of the Third Amended Complaint is of no import, since Plaintiffs, having been provided with three opportunities to replead after twice failing to meet the applicable standards were obligated to marshal all their available facts and arguments in their instant Third Amended Complaint and, presumably, did so. Consequently, granting Plaintiff yet another leave to amend on the grounds of issuance of new clarifying decisions would: (a) create an anomalous precedent preventing any conclusive litigation by enabling securities plaintiffs to perpetually seek leave to amend their insufficient complaints through a mere act of citing those judicial decisions, which were issued after these plaintiff filed their complaints, and (b) therefore, frustrate the whole purpose of both Rule 15(a) and PSLRA.
See Foman,
. This case has been pending with the Court since October 12, 2004, that is, for over three years, and it is still at the stage of Rule 12(b)(6) motions. Its litigation history and volumes of parties’ submissions (heavily laden with accounting and financial data and laced with long excerpts from GAAP) support the conclusion that “securities class actions disproportionately claim judicial time and attention [because] they take longer to resolve than most other class actions.” See Retrospective, 106 Colum. L.Rev. at 1540 and n. 13 (citing Admin. Office of the U.S. Courts, Judicial Business of the United States Courts 395-97 tbl.X-4 (2002), 393-400 tbl.X-4 (2003), and 400-07 tbl.X-4 (2004)).
. During the last amendment, Plaintiffs' curative measures were reduced to mere paraphrasing of Plaintiffs’ original allegations into the language resembling that used by the Court in its December Opinion, often causing incongruous results. See, e.g., Compl. ¶ 113 (responding, apparently, to this Court’s observation that the market’s pricing of a stock traded on a secondary market is primarily geared to the issuer’s net income rather than assets and liabilities figures, Plaintiffs' altered their allegations pertaining to the reliance element of 10b-5 by paraphrasing them so to include an assertion of Plaintiffs' express reliance on Intelligroup’s assets and liabilities figures, even though Plaintiffs kept maintaining that their reliance should be presumed under the fraud-on-the-market theory, which has no connection with Plaintiffs’ actual reliance).