Opinion
01 Civ. 1748 (SHS)
December 12, 2003
OPINION AND ORDER
Plaintiffs, purchasers of securities in Globalstar Telecommunications Ltd. ("GTL"), Globalstar L.P. ("Globalstar") or Globalstar Capital Corporation ("Globalstar Capital") during the period from December 6, 1999 to October 27, 2000 (the "Class Period") assert violations of the securities laws against defendants GTL, Globalstar, Globalstar Capital, Bernard Schwartz and Loral Space Communications Ltd. ("Loral") of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and Sections 11, 12(2)(a) and 15 of the Securities Act of 1933 (the "1933 Act"). Plaintiffs claim that 1) all defendants (except Loral) artificially inflated the value of Globalstar's stock by making material misrepresentations and omissions regarding the company's financial prospects in violation of Section 10(b) and Rule 10b-5 of the Exchange Act; 2) GTL and Schwartz violated Section 11 of the 1933 Act with respect to GTL's registration statement; and 3) GTL violated Section 12(2)(a) of the 1933 Act based on misrepresentations and omissions in the January 26, 2000 Prospectus Supplement. Plaintiffs also assert control person liability claims against Schwartz and Loral pursuant to Section 20(a) of the Exchange Act and Section 15 of the 1933 Act.
Defendants have moved to dismiss the consolidated amended class action complaint pursuant to Rules 9(b) and I2(b)(6) of the Federal Rules of Civil Procedure for failure to plead fraud with sufficient particularity, for failure to comply with the pleading requirements set forth in the Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, 109 Stat. 737 (codified in various sections of 15 U.S.C.) ("PSLRA"), and for failure to state a claim upon which relief can be granted.
On February 15, 2002, defendants Gloablstar and Globalstar Capital filed a voluntary petition for bankruptcy pursuant to Chapter 11 in the United States Bankruptcy Court for the District of Delaware. On July 15, 2003, Loral also filed a voluntary petition for bankruptcy pursuant to Chapter 11 in the United States Bankruptcy Court for the Southern District of New York. Accordingly, this action, which was commenced prior to the filing of Globalstar, Globalstar Capital, and Loral's bankruptcy petitions, is stayed as against them pursuant to the automatic stay of 11 U.S.C. § 362(a). Now, for the reasons set forth below, the motion by remaining defendants GTL and Schwartz to dismiss the consolidated amended class action complaint is denied.
I. BACKGROUND
This Court accepts the allegations in the consolidated amended class action complaint as true for the purposes of this motion to dismiss.
During the Class Period, Bernard Schwartz served as chief executive officer of Globalstar, GTL and Globalstar Capital, and owned approximately 1.7% of GTL's common stock. (Compl. ¶ 21). Schwartz also served as chairman of the board and chief executive officer of Loral. (Id. ¶ 22). Loral shared a number of officers and directors with GTL and Globalstar. (Id. ¶ 24). Loral was Globalstar's managing partner, held a 43% interest in Globalstar and beneficially owned approximately 14% of GTL's common stock. (Id. 122). GTL, a general partner of Globalstar, was founded to permit equity ownership in Globalstar and completed an initial public offering in 1995. (Id. ¶ 36). Globalstar Capital, a wholly-owned subsidiary of Globalstar, was formed that same year to serve as a co-issuer and co-obligor with respect to Globalstar's debt obligations. (Id. ¶ 19).
In 1994, Loral and Qualcomm Incorporated founded Globalstar to provide cost-effective telephone service that would serve consumers around the world who were underserved by existing telecommunications infrastructures. (Id. ¶ 37; Ex. 2 at 2). Globalstar phones functioned as cellular phones where cellular phone service was available and as satellite phones in areas where cellular phone service was unavailable. (Id.). The system operated through a series of terrestrial "gateways," each covering a large geographic area. (Id. ¶ 40). Globalstar satellites relayed calls to earth through the gateways, which then routed the calls through the existing local public telephone network. (Id.). Gateways are technologically complex facilities including large antennas, call processing equipment, and implementation and billing software. (Id.). Globalstar contracted with manufacturers to produce the satellite phones and entered into agreements with telephone service providers throughout the globe to market and implement its services. (Id., Ex. 5 at 4). In 1995, the Federal Communications Commission ("FCC") granted Globalstar a license to construct and launch a 48 satellite global telephone system. (Id.). Globalstar began placing its satellites in orbit in 1998 and the $3 billion satellite system became operational in 1999. (Id. ¶ 39). Once the satellites were in place, Globalstar had to implement its system on the ground. Full commercial service began in the first quarter of 2000. (Id.).
Globalstar's system was recognized early on as a risky investment. According to the complaint,
[t]here was much trepidation regarding Globalstar's prospects. Among other things, getting Globalstar to the point where its system could begin operations cost billions of dollars, which placed Globalstar in enormous debt. Moreover, the first company to launch commercial telephone services using low-earth orbit satellites, Indium L.L.C., filed for bankruptcy in August 1999. Thus, by the time of the October 11, 1999 announcement that Globalstar had officially introduced its mobile and fixed telephone service, the market was asking serious questions about Globalstar's financial viability as well as the viability of its technology.
(Id. ¶ 42).
Nonetheless, Globalstar officials had high hopes for the potential market for the new technology. In December 1999, Globalstar announced projections for approximately $300 million in revenue and approximately 600,000 paying subscribers by the end of 2000. (Id. ¶¶ 44-48).
On December 6, 1999, Satellite News published an interview with Schwartz regarding Globalstar's prospects. In response to a question about Globalstar's projected revenues and production and sale of handsets, Schwartz stated that
the management of the company feels that we are almost right on target for all the expectations and requirements to fulfill the expectation of the program. . . . We are experiencing no difficulties with the telephones, no difficulties with the software for the gateway and the phones, everything is working exactly right. What we've said for some time is that the long pole in the tent is getting enough telephones into the hands of the distributors and users, and that's going to take a short period, two or three months. By December 31, [1999] we're talking about 35,000-40,000 phones. By December 31, 2000 we're talking about 650,000 phones. That's a fast buildup. I'd rather see a faster buildup than that, because I think the market is there, if we can get the phones manufactured and deployed.
(Id. ¶ 44).
In a December 17, 1999 conference call with securities analysts, Globalstar's management reiterated that Globalstar was "on target" to generate approximately $300 million in revenue in 2000 and have approximately 600,000 paying customers by year end 2000. (Id. ¶ 46).
Specifically, Schwartz stated that "[W]e think we can — there is sufficient demand to take whatever phones that are going to be out in the distribution channel, that we're inhibited in that by the manufacturing pace. We expect to have, by the end of December 31, 2000, between 665. I'm sorry 600 and 650 thousand phones manufactured. If we do that, our projection is that our revenue will be about $300 million." (Id., Ex. 4 at 23). Later, Schwartz stated that he expected between 550 and 600 thousand paying customers by year end: "[I]t's hard to be kept down to specifics on this. You know, we're talking a year in advance. So much depends on whether or not we can get, maybe, a faster rate of production. You know, there are a lot of things that go in here. But this seems like a very reasonable target for us and I wouldn't want to be off by 20 thousand and people say, you misled us. Particularly if we're on the high side." (Id., Ex. 4 at 26). Schwartz also stated that 15 gateways had been installed, nine were in operation, and the company expected to have 26 gateways in operation by "maybe the second quarter" of 2000. (Id., Ex. 4 at 3).
On January 26, 2000, GTL conducted a secondary public offering of common stock, pursuant to which it sold 8.05 million shares at a price of $35 per share, yielding gross proceeds of $268.5 million. (Id. ¶ 51).
Shares in Globalstar's stock, which had been trading as high as $50 in January, began a steady decline in February. (Id., Ex. 34). On a March 8, 2000 conference call, where Globalstar management updated investors on the company's progress, Schwartz stated that Globalstar was still on track to achieve 500,000 subscribers and $250-$300 million in revenue for the year. (Id. ¶ 59). Schwartz noted the "nervousness" in the investment community and stated he was "unhappy" with Globalstar's falling stock price, but said the company was "holding to" its earlier predictions of 500,000 subscribers, and $300 million worth of revenue, "because I don't know what to change it to, and I won't know what to change it to until later in the year when the experience gets a little bit stronger for us to base an assessment on." (Id., Ex. 10 at 27-28). Scwartz declined to comment on subscription numbers, saying it was too early to tell. (Id., Ex. 10 at 27).
In early May 2000, Globalstar announced its financial results for the first quarter of the year. It reported that by March 31, 2000, 25 countries were in full service, served by 11 gateways. (Id., Ex. 18 at 1). The company recorded 550,000 minutes of billable service, and revenues, including royalties, were $609,000. (Id.). The accompanying press release noted that service utilization figures were low, "since service did not begin in any significant degree until March. . . . Important markets such as Canada and Brazil were in full commercial service for only a few weeks of the quarter, and another, Australia, began service only on March 30. Moreover, full commercial service is soon to be initiated in other key markets such as China, Russia, and South Africa." (Id.).
As the year progressed, Globalstar began to face financial difficulties. In mid-June, Globalstar revealed that it would need additional funding by September or October of that year. (Id. ¶ 80). On June 30, 2000 Globalstar announced that it had implemented an agreement providing for replacement financing of a $250 million line of credit. (Id. ¶ 83).
Globalstar's second quarter earnings, announced July 19, 2000, showed some improvement. (Id., Ex. 29 at 1). Globalstar reported 1,137,000 minutes of billable service, and $483,000 in gross service revenue, making a total of 1,687,000 billable minutes and $660,000 in gross service revenue for the first half of 2000. (Id.). Revenues from royalties were reported as $788,000 for the first half of the year and 17 gateways were functioning at the close of the second quarter, providing service to 39 countries. (Id., Ex. 29 at 2).
Globalstar secured additional funding on September 19, 2000, when GTL announced that it had entered into an agreement with Bear Sterns Co., Inc., pursuant to which Bear Stearns agreed to purchase $105 million of GTL common stock. (Id. f 90). Several days later, five of Globalstar's founding partners announced that they would purchase 5.2 million shares of GTL for $56 million. (Id.).
On October 30, 2000, Globalstar announced its financial results for third quarter 2000. (Id. ¶ 92). The company disclosed that its growth rate in usage and subscribers was "unacceptably low" and that the company had only 21,300 subscribers. (Id.). In a Wall Street Journal article that same day, Schwartz announced that Loral would no longer invest in Globalstar. (Id. ¶ 94). GTL stock closed at $2.375 per share on October 30, down $3.625 per share from the previous day and more than $45 per share from the stock's high during the Class Period. (Id. ¶ 93).
In January 2001, GTL/Globalstar announced that it was suspending payments on all its funded debt. (W. ¶ 95). Schwartz resigned as Chairman and CEO in May 2001. (Id. ¶ 97).
II. DISCUSSION
A. Standard of Review
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all of the well-pleaded facts as true and draw all reasonable inferences from those allegations in favor of the plaintiffs. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). The complaint will survive the defendants' motion to dismiss unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). At the motion to dismiss phase, the court's focus should be on the pleadings, but it may also consider "any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that (he plaintiffs either possessed or knew about and upon which they relied in bringing the suit" Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-8 (2d Cir. 1991).
B. Section 10(b) Claims
Section 10(b) of the Exchange Act forbids the use of "any manipulative or deceptive" practice in connection with (he purchase or sale of securities. 15 U.S.C. § 78j(b). As a claim made pursuant to section 10(b) asserts securities fraud, it must also comply with the pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), as well as the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, The PSLRA requires a complaint to "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading," 15 U.S.C. § 78u-4(b)(1);see In re Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286, at *2 (S.D.N.Y. June 1, 1998), as well as "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Similarly, pursuant to Rule 9(b), a Section 10(b) claim "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research. Inc., 174 F.3d 79, 84 (2d Cir. 1999) (quoting Acito v. IMCERA Group. Inc., 47 F.3d 47, 51 (2d Cir. 1995)); see also Novak v. Kasaks, 216 F.2d 300, 306 (2d Cir. 2000).
The U.S. Court of Appeals for the Second Circuit has found that the PSLRA pleading requirements are essentially a codification of the Second Circuit's interpretation of what is required by Rule 9(b). See Levitt v. Bear Stearns Co., 340 F.3d 94, 104 (2d Cir. 2003) (citing Novak, 216 F.2d at 309-311 ("the PSLRA did not change the basic pleading standard for scienter in this circuit"). Accordingly, in order to state a claim for violation of section 10(b) and the corresponding Rule 10b-5, "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiffs reliance on the defendant's action caused injury to the plaintiff." Lawrence v. Cohn, 325 F.3d 141, 147 (2d Cir. 2003) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000)).
1. False Statements Made with Scienter
Each of the misrepresentations alleged in the consolidated amended class action complaint were made in specifically identified financial disclosures, news articles, communications with analysts or press releases discussing financial disclosures. Thus, plaintiffs have satisfied the first three prongs of the Rule 9(b) requirements. To satisfy the fourth prong — the "why" prong — plaintiffs must plead both that defendants made false statements and that they did so with the requisite scienter. See In re Revlon. Inc. Sec. Litig.. No. 99 Civ. 10192, 2001 WL 293820, at *7 (S.D.N.Y. Mar. 27, 2001) (citing San Leandro Emergency Medial Group Profit Sharing Plan v. Philip Morris Co. Inc., 75 F.3d 801, 812-13 (2d Cir. 1996)). "When, however, as here, information contrary to the alleged misrepresentations is alleged to have been known by defendants at the time the misrepresentations were made, the falsity and scienter requirements are essentially combined." In re Revlon. 2001 WL 293820 at *7 (citing Rothman, 220 F.3d at 89-90).
A plaintiff may establish the requisite scienter in one of two ways: "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious behavior or recklessness." Novak, 216 F.3d at 307 (quotingAcito. 47 F.3d at 52); In re Worldcom Inc. Sec. Litig., No. 02 Civ. 3288, 2003 WL 21219049, at *16 (S.D.N.Y. May 19, 2003). Where, as here, the plaintiffs in the complaint do not allege motive and opportunity, "it is still possible to plead scienter by identifying circumstances indicating conscious behavior by defendant, though the strength of the circumstantial allegations must be correspondingly greater.'" Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (quoting Beck v. Mfrs. Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), abrogated on other grounds byU.S. v. Indelicate, 865 F.2d 1370 (2d Cir. 1989)); In re Initial Public Offering Sec. Litig., 241 F. Supp.2d 281, 329 (S.D.N.Y. 2003) ("in re IPO").
Reckless conduct is "`at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'"Kalnit, 264 F.3d at 142 (quoting In re Carter-Wallace. Inc. Sec. Litig.. 220 F.3d 36, 39 (2d Cir. 2000)). The Second Circuit has clarified that a strong inference of recklessness or conscious misbehavior may arise where the complaint sufficiently alleges that the defendants: (1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor. Novak. 216 F.3d at 311; In re Interpublic Sec. Litig., No. 02 Civ. 6527, 2003 WL 21250682, at *10 (S.D.N. Y. May 29, 2003).
"[S]ecurities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation." Novak, 216 F.3d at 308; In re Nortel Networks Corp. Sec. Litig., 238 F. Supp.2d 613, 631 (S.D.N.Y. 2003). However, corporate officials "need not be clairvoyant" and are only responsible for information reasonably available to them. Novak, 216 F.3d at 309. Nor are corporate officials required to paint "an overly gloomy or cautious picture of current performance and future prospects," provided that their public statements are consistent with reasonably available data. Id.
Plaintiffs allege that defendants knew the December 1999 forecast of year 2000 earnings was false when made because, "[a]ccording to an ex-Globalstar senior business development manager," the forecast was based on the premise that a majority of Globalstar's 38 planned gateways were in operation as of October 1999, when in fact allegedly only three gateways were then operating and the rollout of gateways was plagued with numerous delays. (Compl. ¶¶ 3, 45). In a December 17, 1999 call with securities analysts, defendants maintained the forecast — "Globalstar was `on target' to produce approximately $300 million in revenue in 2000 and have approximately 600,000 paying subscribers by year end 2000,"Id. ¶¶ 46 — despite stating during the call that only 9 gateways were operating (Id., Ex. 4 at 3). During a February 22, 2000 interview, Globalstar officials continued to contend they were still "pretty much on the plan" during an interview on February 22, 2000, (Id.. ¶¶ 56), and repeated this contention during an investor call on March 8, 2000 — "Globalstar was still on track for $250-300 million in revenue for the year," (Id. ¶¶ 59) — although by March 31, 2000, only 11 gateways were in "full service." (Id., Ex. 18 at 2).
Defendants correctly point out that Globalstar officials repeatedly disclosed the number of operating gateways and never represented that a majority of gateways were operating in third quarter 1999. However, plaintiffs' claim is not that defendants misrepresented the status of gateway rollouts, but rather that defendants misrepresented the effect of the gateway rollouts on potential revenues and subscription rates. The allegation that defendants were in possession of specific information which called into doubt their stated projections is sufficient to raise a strong inference of scienter.
Defendants contend that the complaint is devoid of facts supporting the allegation that defendants misrepresented the effect of gateway rollouts on revenues and subscription rates, thus implicating a failure to satisfy Rule 9(b) and the particularity requirements of the PSLRA. A plaintiff can meet the particularity pleading requirements "by providing documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs' beliefs." Novak, 216 F.3d at 314. Plaintiffs generally need not reveal the identity of confidential personal sources at the pleading stage, "provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged." Id.
This Court finds that the description of the confidential personal source, an ex-Globalstar senior business development manager, in conjunction with other documentary evidence, provides an adequate basis to support plaintiffs' allegations, at least for the purposes of a motion to dismiss. Plaintiffs allege that defendants were updated on a weekly basis with the number of Globalstar subscribers and the amount of minutes sold. (Compl. ¶ 45). Globalstar's 1999 10-K notes that "[e]ach Globalstar Phone will communicate through one or more satellites to a local Globalstar service provider's interconnection point (known as a gateway) which will, in turn, connect into existing telecommunications networks." (Id., Ex. 2 at 3). Therefore, as each call must connect to a gateway, weekly information about billable minutes should have a correlation to the effect of gateway rollouts on revenues and subscription rates. In addition, directly following the Class Period, defendants announced that "Globalstar's growth rate in terms of usage and subscribers was "unacceptably slow. GTL also disclosed that Globalstar had only 21,300 subscribers . . ." (Compl. ¶ 92). These factual allegations support plaintiffs' belief that defendants knew that they were materially misrepresenting the effect of gateway rollouts on potential revenues and subscription rates during the Class Period, Together, the confidential source, weekly reports and post-class period statements by defendants sufficiently support plaintiffs' allegation. See In re IPO, 241 F. Supp.2d at 358-59 (confidential sources corroborated with documentary evidence "obviates the need for absolute particularity" of the confidential sources); Fadem v. Ford Motor Co., No. 02 Civ. 0680, 2003 WL 22227961, at *7 (S.D.N.Y. Sept. 25, 2003) (citing In re Smith Gardner Sec. Litig.. 214 F. Supp.2d 1291, 1301 (S.D. Fla. 2002) (alleging that a former employee was "involved with the installation without providing the employee's position in the company and "without another adequate basis for believing plaintiffs' allegations is insufficient" to state a claim).
This allegation of weekly reports is supported by defendants' May 8, 2001 press release. (Compl., Ex. 18 at 1). After reporting the number of minutes of billable service and revenues, including royalties, for the quarter ending March 31, 2000, the press release state that "[a]lthough, as noted, these results are based on a small number of markets, usage of the service has continued to grow from week to week." (See also Compl. ¶ 74).
2. Materiality
Pursuant to section 10(b) and Rule 10b-5, a misstatement or omission is material "`if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to [act]."Basic. Inc. v. Levinson, 485 U.S. 224, 231 (1988) (quoting TSC Indus. Inc. v. Northway. Inc., 426 U.S. 438, 449 (1976)). "At the pleading stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions." Caiola v. Citibank, N.A. New York, 295 F.3d 312, 329 (Fed. Cir. 2002) (quotingGanino, 228 F.3d at 162 (citing Basic, 485 U.S. at 231), Because the materiality of a given statement depends on the factual circumstances of the particular case, a court generally may not dismiss a claim for immateriality on a Rule 12(b)(6) motion unless the misstatements "are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Ganino, 228 F.3d at 162 (citing Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985));see also In re Int'l Bus. Machs. Corp. Sec, Litig., 163 F.3d 102, 107 (2d Cir. 1998); In re Nokia Corp. Sec. Litig., No. 96 Civ. 3752, 1998 WL 150963, at *6 (S.D.RY. Apr. 1, 1998). This rule often applies to optimistic predictions of future performance. Sec Novak, 216 F.3d at 315 ("statements containing simple economic projections, expressions of optimism, and other puffery are insufficient"). Defendants seek to place their revenue and subscriber projections for the year end 2000 within the realm of mere puffery. However, the Court is reluctant at this stage to conclude that the projections are "so obviously unimportant to a reasonable investor," especially when plaintiffs have already sufficiently alleged scienter with respect to the projections. Ganino, 228 F.3d at 162.
However, certain forward-looking statements may not be material as a matter of law if the statements fall under the protection of the "bespeaks caution" doctrine or the safe harbor provision of the PSLRA. Pursuant to the "bespeaks caution" doctrine, "a misstatement or omission [related to a forward-looking statement] will be considered immaterial if cautionary language is sufficiently specific to render reliance on the false or omitted statement unreasonable." In re Alliance Pharm. Corp. Sec. Litig., 279 F. Supp.2d 171, 192 (S.D.N.Y. 2003) (quoting In re Independent Energy Holdings PLC Sec. Litig.. 154 F. Supp.2d 741, 755 (S.D.N.Y. 2001), abrogated on other grounds by In re IPO. 241 F. Supp.2d 281 (2003)). The safe harbour provision of the PSLRA established a "safe harbor" for otherwise material forward-looking statements under two circumstances: (1) a forward-looking statement is inactionable if it is "identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement," 15 U.S.C. § 78u-5(c)(1)(A), and (2) a forward-looking statement, even if unaccompanied by cautionary language, is protected if the plaintiff fails to prove that the statement was made with "actual knowledge" that it was false and misleading. 15 U.S.C. § 78u-5(c)(1)(B). See also In re Alliance, 279 F. Supp.2d at 192.
Defendants made a number of forward-looking statements, including at the December 17, 1999 securities analyst call, where a vice president of Globalstar stated that "some of the remarks we make about our future expectations, plans and prospects will be forward-looking statements under the Private Securities Litigation Reform Act of 1995." (Id., Ex. 4 at 1). During the February 22, 2000 interview, Schwartz stated that "[i]t is a very unstable beginning like all beginnings are in terms of being able to predict exactly where you're going to be at any one point in time." (Ex. 9, at 3). And during the investor call on March 8, 2000, Schwartz cautioned that Globalstar would maintain its financial projections for year end 2000, but only because Schwartz wouldn't "know what to change it to . . . until later in the year when the experience gets a little bit stronger for us to base an assessment on." (ID. Ex. 10 at 27). In addition, as will be described, the public filings also contained a number of cautionary statements.
However, "[s]tatements regarding projections of future performance may be actionable under Section 10(b) or Rule 10b-5 if . . . the speaker does not genuinely or reasonably believe them,' In re Int'l Bus. Machs., 163 F.3d at 107: see also Gabriel Capital, L.P. v. NatWest Finance, Inc., 122 F. Supp.2d 407, 419 (S.D.N.Y. 2000), abrogated on other grounds by In re IPO 241 F. Supp.2d at 352, n. 85 (denying motion to dismiss where complaint sufficiently stated that the defendant knew statements were false at the time they were made) (citing Milman v. Box Hill Systems Corp., 72 F. Supp.2d 220, 231 (S.D.N.Y. 1999) ("[N]o degree of cautionary language will protect material misrepresentations or omissions where defendants knew their statements were false when made."); Ruskin v. TIG Holdings. Inc., No. 98 Civ. 1068, 2000 WL 1154278, at *7 (S.D.N.Y. Aug. 14, 2000) ("[C]autionary language does not protect material misrepresentations or omissions when defendants knew they were false when made."). Because plaintiffs sufficiently allege that defendants knew their misrepresentations were false when made, see, e.g. Compl. ¶¶ 3, 45, the safe harbor provision of the PSLRA and the "bespeaks caution" doctrine provide no relief for defendants. See In re Prudential Sec. Inc. Partnership Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996).
3. Reliance
In addition, defendants urge that statements made by Globalstar officials could not have defrauded the market since the market had absorbed the information that subscription rates were much lower than had previously been announced. To establish such a "truth on the market" defense to plaintiffs1 fraud on the market theory, defendants "must show that the public received accurate, corrective information from an alternative source with the `degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created" by the defendant's misrepresentations." Fellman v. Electro Optical Sys. Corp., No. 98 Civ. 6403, 2000 WL 489713, at *12 (S.D.N.Y. Apr. 25, 2000) (quoting In re Apple Computer Sec. Litig.. 886 F.2d 1109, 1116 (9th Cir. 1989)). Defendants' position has a certain intuitive appeal: Globalstar's stock price declined consistently from February 2000 to the end of the class period. Moreover, certainly after Globalstar's July announcement that revenue for the first half of 2000 was less than $1.5 million, it is difficult to believe that any reasonable investor could have expected the company to achieve $300 million in earnings by the end of the year. Nonetheless, the Second Circuit has cautioned that a truth-on-the-market defense is "intensely fact-specific and it is rarely an appropriate basis for" a Rule 12(b)(6) motion. Ganino. 228 F.3d at 167; In re Vivendi Universal. S.A., No. 02 Civ. 5571, 2003 WL 22489764, at *16 (S.D.N.Y. Nov. 3, 2003). The question of whether, and when, the market had received enough information to counteract the allegedly misleading statements is best resolved on a summary judgment motion or at trial, not at this stage of the litigation.
Accordingly, defendants' motion to dismiss the section 10(b) claim should be denied. As this allegation — that Globalstar knew that the rollout of its gateways was significantly delayed and that the delay would materially affect its revenues and financial projections — survives this motion to dismiss, this Court need not address whether plaintiffs' remaining allegations also survive.
B. Section 11 Claim
Section 11 of the Securities Act provides that:
In case any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security [may] sue (1) every person who signed such registration statement [or] (2) every person who was a director of . . . the issuer at the time of the filing . . .15 U.S.C. § 77k.
"Thus, to maintain a claim for failure to disclose information pursuant to § 11, a plaintiff must demonstrate both that the defendant had an affirmative duty to disclose the information and that the omitted information was material" Milman, 72 F. Supp.2d at 227.
"A prospectus will violate federal securities laws if it does not disclose `material objective factual matters' or buries those matters beneath other information, or treats them cavalierly." Demaria v. Anderson, 318 F.3d 170, 180 (2d Cir. 2003) (quoting Olkey v. Hyperion 1999 Term Trust Inc., 98 F.3d 2, 5 (2d Cir. 1996) (citations omitted)). However, "[c]ertain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering." Halperin v. EBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002). As discussed previously, this rule of law is the "bespeaks caution" doctrine. Id. A prospectus will be found to "bespeak caution" when it is "balanced by extensive cautionary language" which is prominent and specific and which "warn[s] investors of exactly the risk plaintiffs claim was not disclosed." Olkey, 98 F.3d at 5. The PSLRA's safe harbor provision is also applicable to defendants' prospectus. The court looks to the prospectus "as a whole" to determine whether "defendants' representations, taken together and in context, would have misled a reasonable investor about the nature of the securities." Id. at 4 (citation omitted).
Plaintiffs allege that the January 26, 2000 Registration Statement and Prospectus for the Secondary Offering should have disclosed that operational and regulatory delays in rolling out gateways in a number of markets made Globalstar's business plan unrealistic. (Compl. ¶ 52). Globalstar's January 2000 prospectus contained an 8 page discussion of "risk factors" regarding the company's prospects, including that
Globalstar service providers could fail to; obtain local partners; acquire, install, or adequately maintain and operate the Globalstar gateways; or obtain the regulatory licenses needed for service in their countries. If Globalstar is unable to offer service in any particular region or country, it will not benefit from the potential demand in that region or country.
Some Globalstar partners and other third parties are building parts of the Globalstar system. The failure of these partners or other parties to perform as expected could delay the roll-out of Globalstar's commercial service and increase Globalstar's costs.
* * *
A number of factors may cause delay in Globalstar's achievement of revenues and positive cash flow. These factors, many of which are beyond Globalstar's control, include: regulatory delays; delays in integrating Globalstar's system into the land-based telecommunications networks; delays in constructing additional gateways by service providers; delays in integrating or testing the local ground segments of the system by Globalstar vendors; inadequate marketing effort[s] by service providers; and slower-than-anticipated consumer acceptance."
(Id., Ex. 7 at S-4, S-5).
The prospectus thus informed investors that regulatory and other problems might delay the availability of Globalstar's worldwide service and negatively affect revenues. The consolidated amended class action complaint, however, does not merely allege that defendants failed to disclose these risks. Rather, plaintiffs claim that by December 1999 defendants knew the introduction of the system was being significantly delayed by problems with terrestrial infrastructure, and that at the time of the filing of the prospectus the system was still significantly delayed, with only 10 out of a projected 38 gateways in operation, (Id., Ex. 7 at 2), and that they knew this delay would significantly impact their potential revenues. Defendants can seek no protection for the alleged misrepresentation of a currently existing fact. See Milman, 72 F. Supp.2d at 231. See also In re Prudential, 930 F. Supp. at 72 ("The doctrine of bespeaks caution provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.");Credit Suisse First Boston Corp. v. ARM Financial Group, No. 99 Civ. 12046, 2001 WL 30073, at *7 (S.D.N.Y Mar. 28, 2001) ("[W]arnings of specific risks like those in [defendants'] Prospectus do not shelter defendants from liability if they fail to disclose hard facts critical to appreciating the magnitude of the risks described.").
Accordingly, defendants' motion to dismiss the section 11 claim should be denied.
Although the Second Circuit has expressly reserved judgment on the question of whether section 11 claims are held to the Rule 9(b) pleading standards, sec In re N2K Inc., Sec. Litig. 202 F.3d 81 (2d Cir. 2000) (per curiam), several district courts have recently held that heightened pleading standards do not apply to section 11 claims. Sec, e.g. In re EPO 241 F. Supp.2d at 398 n. 61, 399; In re Worldcom Inc. Sec. Litig., 02 Civ. 3288, 2003 WL 22738546, at *7 (S.D.N.Y. Nov. 21, 2003). This Court need not decide this issue here, since it has already determined that plaintiffs adequately pleds — pursuant to the heightened pleading standard required of a Section 10 and Rule 10b claim — that defendants knew that the rollout of the Gateway service was substantially delayed by infrastructure problems.
C. Section 12 Claim
Section 12(2)(a) of Securities Act, codified at 15 U.S.C. § 771(a)(2), attaches liability to: [a]ny person who . . . offers or sells a security, . . . by means of a prospectus or oral communication. . . . which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.
The statute neglects to define who is a seller. The United States Supreme Court defined who is a seller within the meaning of section 12(1) of the Securities Act as one who must have either (1) passed title of the security to the plaintiff or (2) successfully solicited the purchase motivated at least in part by his own financial interest. See Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988). The same analysis of who constitutes a statutory seller governs section 12(2)(a). See Wilson v. Saintine Exploration and Drilling Corp., 872 F.2d 1124, 1126 (2d Cir. 1989); Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988). As plaintiffs purchased GTL shares in the secondary offering from GTL and sufficiently alleged that GTL violated sections 11 and 10(b), plaintiffs have sufficiently stated a claim for relief under section 12(2)(a).
Defendants did not address plaintiffs' section 12(2)(a) claim.
D. Section 15 and Section 20(a) Claims
Section 15 of the 1933 Act provides that "[e]very person who . . . controls any person liable under [Section 11 or Section 12] of this title shall also be liable jointly and severally with and to the same extent as such controlled person. . . ." 15 U.S.C. § 77o. Section 20(a) of the Exchange Act provides that [e]very person who . . . controls any person liable [for a § 10(b) violation] shall also be liable jointly and severally with and to the same extent as such controlled person." 15 U.S.C. § 78t (a). There is some dispute among district courts in the Second Circuit as to precisely what degree of particularity plaintiffs must plead in order to survive a motion to dismiss a section 15 and 20(a) claim, and the Second Circuit has yet to address squarely the issue subsequent to the enactment of the PSLRA. This Court, as set forth previously in In re Duetsche Telekom AG Sec. Litig., holds that two elements are required to establish a prima facie case of control person liability for violations of the section 15 of the 1933 Act: (1) an underlying primary violation of the securities laws by the controlled person; and (2) control over the controlled person. See In re Deutsche. 2002 WL 244597 at *6; In re Vivendi, 2003 WL 22489764 at *12; In re EPO, 241 F. Supp.2d at 352,
For a discussion of this split, see In re Deutsche Telekom AG Sec. Litig., No. 00 Civ. 9475, 2002 WL 244597, at *5-6 (S.D.N.Y. Feb. 20, 2002); see also In re IPO, 241 F. Supp.2d at 352, 392-397.
In order to withstand a motion to dismiss a section 20(a) claim, plaintiffs must, in addition to the requirements of section 15, also show that the controlling person was "in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person." Ganino, 228 F.3d at 170; Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998); SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). See also In re Deutche, 2002 WL 244597 at *7 (plaintiff must plead facts with "sufficient particularity that a strong inference is raised that the section 20(a) control person knew or should have known that the controlled person was engaging in fraudulent conduct"); Cromer Finance Ltd, v. Bergen, 245 F. Supp.2d 552, 563 (S.D.N.Y. 2003); Internet Law Library, Inc. v. Southridge Capital Mgmt. L.L.C., 223 F. Supp.2d 474 (S.D.N.Y. 2002). A bare allegation of ownership of a large block of stock or the status of a person as a corporate officer of a controlled entity is not enough to establish liability under section 20(a). See Cohen v. Citibank, N.A., 954 F. Supp. 621, 629 (S.D.N.Y. 1996); Hemming v. Alfin Fragrances, Inc., 690 F. Supp. 239, 245 (S.D.N.Y. 1988): see also Lew Lieberbaum Co., Inc. v. Randle, 85 F. Supp.2d 123, 127 (E.D.N. Y. 2000) (citing Hemming). Because the Court finds that plaintiffs have sufficiently pled a section 10(b) claim, the first prongs of the tests for violations of sections 15 and 20(a) have been met.
Defendants allege that sections 15 and 20a are not applicable to defendant Schwartz, as a matter of law, because plaintiffs cannot bring a control person liability claim against both a primary violator and a control person. Sec Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001) ("Controlling-person liability is a form of secondary liability, under which a plaintiff may allege a primary § 10(b) violation by a person controlled by the defendant and culpable participation by the defendant in the perpetration of the fraud"); accord In re Scholastic Corp. Sec. Litig., 252 R3d 63, 77 (2d Cir. 2001); Rich v. Maidstone Financial Inc., No. 98 Civ. 2569, 2002 WL 31867724, at *6 (S.D.N.Y. Dec. 20, 2002). As plaintiffs allege Schwartz violated sections 10(b), 11, 15 and 20(a), Schwartz could be both a primary violator and a controller of a primary violator, and thus fall outside the scope of sections 15 and 20(a).
However, plaintiffs also allege Schwartz controlled other defendants, including GTL, Globalstar Capital and Globalstar, for whom plaintiffs have sufficiently pled primary securities violations. Schwartz was the chief executive officer of GTL, Globalstar Capital and Globalstar and "beneficially owned approximately 1.7% of GTL's common stock." (Compl ¶ 21). In addition, plaintiffs allege that Schwartz "had direct involvement in or intimate knowledge of the day-to-day operations of Globalstar Capital [and GTL/Globalstar] and is presumed to have the power to control or influence the particular transactions giving rise to the securities violations alleged." (Id. ¶¶ 115, 117). Schwartz had intimate knowledge of GTL/Globalstar's financial condition and influenced and controlled the decision-making of GTL/Globalstar, including the content and dissemination of false and misleading statements, and had the ability to prevent the issuance of these statements or cause their correction. (Id. ¶ 114). Schwartz also allegedly signed GTL's 1998 10-K and 1999 10-K. (Id., Ex. 2 at 38, 39; Ex. 5 at 34, 35). Thus, plaintiffs have sufficiently pled that Schwartz is a controlling person of Globalstar, GTL and Globalstar Capital and that he culpably participated in their primary violations. See, e.g. In re Oxford Health Plans. Inc., 187 F.R.D. 133, 143 (S.D.N.Y. 1999); hi re Par Pharmaceutical Inc. Sec. Litig., 733 F. Supp. 668, 680 (S.D.N.Y. 1990); see also In re Twinlab Corp. Sec. Litig., 103 F. Supp.2d 193, 209 (E.D.N.Y. 2000). As the Court finds that plaintiffs have sufficiently pled section 10(b) claims against defendants controlled by Schwartz, defendants1 motion to dismiss the section 15 and 20(a) claims against Schwartz is denied.
III. Conclusion
For the reasons set forth above, defendants' motion to dismiss the consolidated amended class action complaint is denied.
SO ORDERED.