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United States District Court, District of New Jersey

September 28, 1999


The opinion of the court was delivered by: Barry, District Judge.


This matter comes before the court on a motion to dismiss plaintiffs' two count amended complaint filed by Ultralife Batteries, Inc. ("ULBI"), Bruce Jagid, Martin G. Rosansky, Joseph N. Barella, Frederick F. Drulard, Joseph C. Abeles, Arthur M. Lieberman, Richard A. Hansen, Carl H. Rosner (collectively as "the Individual Defendants"),*fn1 Lehman Brothers, A.G. Edwards & Sons, Inc., Pennsylvania Group, Ltd. (collectively as "the Underwriter Defendants") pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b). For the reasons which follow, the motion will be granted as to all defendants.*fn2

I. Statement of Facts

The factual underpinnings of this case are not in dispute. Before turning to the specific facts relevant here, however, some background information is necessary. ULBI "develops, manufactures and markets primary and rechargeable lithium batteries". Am. Compl. ¶ 8. ULBI's lithium batteries allegedly "are ultra-thin, light-weight and [] generally achieve longer operating time than competing batteries". Id. The advanced rechargeable batteries are "integrated into consumer electronic applications such as portable computers and cellular telephones" while the primary batteries, specifically the 9-volt battery at issue here, are "marketed to the consumer retail, security and safety equipment, medical device and specially [sic] instrument market, and [are] currently used in devices such as smoke detectors, home security devices and medical infusion pumps." Id.

On February 27, 1998, ULBI filed a Registration Statement with the Securities and Exchange Commission ("SEC"), offering to sell 2,500,000 shares of its common stock at $12.50 per share and intending to use the proceeds of the sale to "increase production capacity of its advanced rechargeable batteries." Am. Compl. ¶ 39. The Registration Statement was amended on April 3, 1998 and April 30, 1998 and incorporated a Prospectus that became effective May 4, 1998 (Registration Statements, amendments and Prospectus collectively as "the Offering documents"). See id. The Offering was a "firm commitment underwriting agreement" by several firms, including the Underwriter Defendants who represented the group of underwriters. See Feig Decl., Exh A.

Although the Offering documents primarily address the advanced rechargeable batteries, reference to the 9-volt lithium battery is made as well:

  The Company's primary battery products are based on
  its proprietary lithium-manganese dioxide technology.
  The materials used in, and the chemical reactions
  inherent to, the Company's lithium batteries provide
  significant advantages over currently available
  primary battery technologies, including lighter
  weight, longer operating time, longer shelf life, and
  a wider operating temperature range. The Company's
  primary batteries also have relatively flat voltage
  profiles which provide stable power. Conventional
  primary batteries, such as alkaline batteries, have
  sloping voltage profiles, which result in decreased
  power during discharge. While the price for the
  Company's lithium batteries is

  generally higher than commercially available alkaline
  batteries, the Company believes that the increased
  energy per unit of weight and volume of its batteries
  allows longer operating time and less frequent
  battery replacements for the Company's targeted
  applications. Therefore, the Company believes that
  its primary batteries are price competitive with
  other battery technologies on a price per watt hour

Am. Compl. ¶ 40. The Offering documents, furthermore, state that ULBI anticipates that "profit margins from sales of 9-volt batteries will increase as production volumes increase" (id. ¶ 41) and declare that "the decrease in inventories during the six months ended December 31, 1997 is the result of continued improvement in the turnover of 9-volt battery inventories and the completion of the Company's contract to produce BA-5372 batteries for the U.S. Army." Id. ¶ 42.

Also mentioned in the Offering documents is the recently enacted Oregon law, and its impact upon the 9-volt battery market:

  The Company expects that its 9-volt lithium battery
  market has expanded as a result of a state law
  recently enacted in Oregon. The Oregon statute
  requires that, as of January 1, 1998, all
  battery-operated smoke detectors sold in that state
  must include a 10-year battery. Similar legislation
  has been recently proposed in New York State that
  would also require all smoke alarms operated solely
  by a battery to include a battery warranted to last
  10-years. The Company manufactures the only standard
  size 9-volt battery warranted to last 10-years.

Id. ¶ 43 With respect to the production facility for the 9-volt lithium battery, the Offering documents state:

  The Company believes that its 9-volt lithium battery
  production facility based in Newark, New York, is one
  of the most automated and efficient lithium battery
  production facilities of its kind currently
  operating. The Company's production facility
  currently has the capacity to produce 9-million
  9-volt lithium batteries per year with its existing

Id. ¶ 44.

The Offering was consummated on May 4, 1998. On May 12, 1998, ULBI announced the results "for the third quarter and first nine months of fiscal year 1998 for the period ended March 31, 1998" (the "Release") which "continued to tout its growth in the 9-volt lithium battery business". Id. ¶ 47. Noting a decline in sales, ULBI attributed the losses to a manufacturing plant fire in the United Kingdom. See id. The Release went on to note that "[p]artially offsetting the shortfall for the UK operations were a gain in 9-volt lithium battery sales, up 58% during the quarter over the last year, and higher technology contract revenues from programs that advanced both primary and rechargeable battery technology." Id. The Release further stated that:

  The demand for our 9-volt lithium battery from both
  OEM and retail customers has increased dramatically
  and with our current level of booked orders we expect
  to achieve record sales of this product in the
  current fiscal year.

Id. ¶ 48.

On June 10, 1998, an analyst at A.G. Edwards downgraded the ULBI stock from "buy" to "accumulate". Id. ¶ 49. Subsequent to the downgrade, the common stock fell $2.00 per share, to close at $10.00 per share. See id. Late in the afternoon of the next day, June 11, ULBI made the following announcement:

  While demand for the Company's 9-volt lithium battery
  is at an all time high, and the product will achieve
  record sales in this fiscal year, manufacturing has
  not been able to ramp up to planned production rates
  as quickly as anticipated. As a result, the Company
  has incurred higher than anticipated production costs
  and fallen short of anticipated revenues for the
  quarter. However, the necessary

  corrective actions have been taken to accelerate
  production to the required levels and improve

Id. ¶ 50. Following the announcement, the stock closed at $9.75 per share. Id. ¶ 51. On June 12, 1998, the day after the announcement, the stock fell to $8.1875 per share, losing "19.08% of its value in one day". Id. ¶¶ 3, 52. As plaintiffs had "purchased shares of ULBI common stock pursuant to the Offering and during the Class Period," they suffered losses. Id. ¶ 7.

After filing an initial complaint on August 3, 1998, plaintiffs filed an amended complaint on January 5, 1999 alleging that ULBI, the Individual Defendants and the Underwriter Defendants made false and material misleading statements in or omissions from the Offering documents in violation of Sections 11 and 12(2) of the Securities Act, 15 U.S.C. § 77k, 771(2) (1933), and further sought to hold the Individual Defendants*fn3 liable as "control persons" under Section 15 of the Securities Act, 15 U.S.C. § 77o (1933) ("the Securities Act"). Defendants now move for dismissal of the complaint for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity, pursuant to Fed.R.Civ.P. 9(b).

II. Discussion

A motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) will be granted if the court finds "beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). All well-pleaded allegations in the complaint must be accepted as true and all reasonable inferences must be drawn in favor of the non-moving party. See Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 31 L.Ed.2d 263 (1972); Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991). Moreover, while a court usually looks only to the facts alleged in the complaint on a motion to dismiss, documents referred to in the complaint, such as the Offering documents here, may be referred to if they form the basis for plaintiff's claims. See In re Donald Trump Casino Securities Lit., 7 F.3d 357, 368 n. 9 (3d Cir. 1993), cert. denied sub nom., 510 U.S. 1178, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994); In re MobileMedia Securities Lit., 28 F. Supp.2d 901, 922 (D.N.J. 1998).

In their own words, plaintiffs allege that "defendants, in connection with a public offering of ULBI common stock . . . made a series of false and misleading statements relating to ULBI's 9-volt lithium battery and, in particular, the ability of ULBI to manufacture such batteries in sufficient quantities and in a sufficiently timely fashion to satisfy demand." Am. Compl. ¶ 2 (emphasis added). Defendants argue that plaintiffs fail to state a claim upon which relief can be granted under either § 11 or 12 of the Securities Act and that plaintiffs fail to allege fraud with sufficient particularity.

To state a claim for a violation of § 11,*fn4 it must be alleged that: plaintiffs purchased securities traceable to an effective registration statement; the defendants fall within the statutorily enumerated categories;*fn5 and the registration statement, at the time it became effective, contained a material misstatement or omission.

In re MobileMedia, 28 F. Supp.2d at 923 (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); In re Trump, 7 F.3d at 365 n. 2, 368 n. 10). "A section 11 claim can be asserted against every person who signed the prospectus, the issuer's officers and board of directors, the underwriters of the securities offering[]". Rhodes v. Omega Research, Inc., 38 F. Supp.2d 1353, 1359 (S.D.Fla. 1999). Finally, the restrictions of § 11 "concern[] only registration statements" and, thus, "any additional statements, including `roadshow' presentations, analysts' reports or statements to institutional investors (i.e. conference calls) are generally outside the reach of section 11." Id. at 1360 n. 8 (citing In re Stac Electronics Securities Lit., 89 F.3d 1399, 1405 (9th Cir. 1996), cert. denied sub nom., 520 U.S. 1103, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997)).*fn6 Under § 12(2)*fn7 any defendant who:

  `offers or sells a security . . . by means of a
  prospectus or oral communication' containing a
  materially false statement 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,' shall be
  liable to any `person purchasing such security from

  Rhodes, 38 F. Supp.2d at 1359 (quoting 15 U.S.C. § 77l(a)(2)); see also In re MobileMedia, 28 F. Supp.2d at 924 (citing Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 687-88 (3d Cir.), cert. denied, 502 U.S. 820, 112 S.Ct. 79, 116 L.Ed.2d 52 (1991)).

Neither a § 11 nor a § 12(2) claim requires that a plaintiff plead fraud or scienter, for the claims may sound in negligence. See In re Cendant Corp. Lit., 60 F. Supp.2d 354, 364 (D.N.J. 1999). Should a plaintiff's claim sound in fraud, however, compliance with the pleading requirements of Fed.R.Civ.P. 9(b) is required. See Shapiro v. UJB Financial Corp., 964 F.2d 272, 288 (3d Cir.) ("[w]e hold that when § 11 and § 12(2) claims are grounded in fraud rather than negligence, Rule 9(b) applies"), cert. denied, 506 U.S. 934, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992); see also Cooperman v. Individual Inc., 171 F.3d 43, 47 n. 6 (1st Cir. 1999); In re Stac, 89 F.3d at 1404-05; Schoenhaut v. American Sensors, Inc., 986 F. Supp. 785, 795 (S.D.N.Y. 1997) (noting that "if plaintiffs have plead fraud, they must comply with the requirements of Rule 9(b)").

Rule 9(b) requires that a plaintiff plead:

(1) a specific false representation of material fact;

  (2) knowledge by the person who made it of its

  (3) ignorance of its falsity by the person to whom it
      was made;

(4) the intention that it should be acted upon; and

  (5) that the plaintiff acted upon it to his [or her]

Shapiro, 964 F.2d at 284 (citation omitted). Because in the securities context the "factual information is peculiarly within the defendant's knowledge or control," the Third Circuit has stated that "the normally rigorous particularity rule has been relaxed somewhat . . . But even under a relaxed application of Rule 9(b), boilerplate and conclusory allegations will not suffice. Plaintiffs must accompany their legal theory with factual allegations that make their theoretically viable claim plausible." In re Burlington Coat Factory Securities Lit., 114 F.3d 1410, 1418 (3d Cir. 1997) (citing Shapiro, 964 F.2d at 284-85).*fn8

The common thread running through plaintiffs' claims, as it must, is the presence of a material false or misleading statement, or the omission of material information, in connection with an offering of securities. To put it another way, "`[a]t a minimum, each of the securities fraud provisions' allegedly violated by the Defendants `requires proof that the defendants made untrue or misleading statements or omissions of material fact.'" Zucker v. Quasha, 891 F. Supp. 1010, 1014 (D.N.J. 1995) (quoting In Re Trump, 7 F.3d at 368), aff'd, 82 F.3d 408, cert. denied, 519 U.S. 825, 117 S.Ct. 85, 136 L.Ed.2d 42 (1996). Unless a materially false or misleading statement, or omission, is pled, therefore, none of plaintiffs' claims may go forward. The court, then, will turn its attention to that thread in resolving defendants' motions to dismiss.

Plaintiffs argue that the statements set forth in paragraphs 40-44 of their amended complaint (set forth supra at 481-82) indeed constitute material misrepresentations.*fn9 See Pl. Br. Opp. at 17. In their view, the enumerated statements, touting the demand and growth potential for the 9-volt battery market, were false and misleading because on June 11, 1998, forty days after the May 12 Release and forty-eight days after the Prospectus became effective, ULBI disclosed its "ramping up" difficulties with respect to the 9-volt battery. See id. at 17-18. Further, plaintiffs argue that defendants not only had a duty to know or should have known of the ramping up problems (see id. at 18), but, in fact, "were obviously acutely aware of the state of ULBI's manufacturing facilities" based on statements made about the facilities at an earlier date and because "a problem of this magnitude impacting such an important product would not sneak up on ULBI overnight" Pl. Opp. Br. at 19. Thus, plaintiffs allege both material misstatements and omissions. See, e.g., In re Stac, 89 F.3d at 1408 (noting that plaintiff had alleged "both material omissions and misstatements" by alleging that defendant "failed to disclose its inadequate reserves for returns" and affirmatively misstated in its Prospectus that "it provides adequate allowances for returns"). Defendants argue that not only have plaintiffs failed to allege the falsity of any statement made in the Offering documents, they have also failed to offer any facts to support their conclusion that ULBI must have known about the production problems at an earlier date and, therefore, omitted material information. This court agrees with defendants.

At the outset, the court notes that despite their arguments to the contrary, (see Pl. Opp. Br. at 14), plaintiffs' claims against defendants sound in fraud and thus are subject to the demands of Rule 9(b). The amended complaint is replete with allegations of intentional or reckless, rather than negligent, conduct on the part of defendants. See e.g. Am. Compl. ¶ 20 ("ULBI and the Individual Defendants participated in the alleged wrongdoing, in part, in order to continue and prolong the illusion of ULBI's financial growth, to inflate ULBI's publicly reported revenues and earnings, to conceal the adverse facts concerning ULBI's operations, financial condition and business and to permit ULBI to raise millions of dollars pursuant to the Offering"); id. at 53 ("[T]he Underwriter Defendants participated in the scheme to inflate ULBI's stock price through the dissemination of material misrepresentations[]"). While plaintiffs correctly point out that they are the masters of their complaint (see Pl. Opp. Br. at 14), the court is not required to put on a blindfold when ruling on a motion to dismiss. Even construing the allegations of the amended complaint in the light most favorable to plaintiffs and accepting their contention that the word "fraud" is not mentioned therein, their §§ 11 and 12(2) claims drip with allegations of intentional misconduct. See In re Stac, 89 F.3d at 1404 n. 2 (noting that plaintiff's argument that it "specifically disclaimed any allegations of fraud with respect to its Section 11 claims" was "unconvincing where the gravamen of the complaint is plainly fraud"); see also Shapiro, 964 F.2d at 287-88 (holding that based on allegations of knowing and reckless behavior, "[t]he only reasonable conclusion that can be drawn is that plaintiffs charge defendants with fraud. There is not a hint in the allegations that defendants were negligent in violating §§ 11 and 12(2).").*fn10

Next, it is clear that plaintiffs do not allege that any of the aforementioned statements, or alleged misrepresentations, were actually false. Plaintiffs do not argue, for example, that ULBI's profit margins did not increase (see Am. Compl. ¶ 41) or that there was not increased demand for the 9-volt battery. See id. ¶ 48. Neither do plaintiffs dispute that ULBI is the only maker of 9-volt lithium batteries (see id. ¶ 43) or that the sales of the 9-volt battery increased.*fn11 See id. ¶ 47. Instead, plaintiffs argue that defendants failed to disclose at an earlier date the production problems they announced in June. See Pl. Opp. Br. at 19-20. In other words,

  The story in this complaint is familiar in securities
  litigation. At one time the firm bathes itself in a
  favorable light. Later the firm discloses that things
  are less rosy. The plaintiff contends that the
  difference must be attributable to fraud.

Urbach v. Sayles, 779 F. Supp. 351, 359 (D.N.J. 1991) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627-28 (7th Cir.), cert. denied, 498 U.S. 941, 111 S.Ct. 347, 112 L.Ed.2d 312 (1990)).

To satisfy the "must be," plaintiffs must plead "non-conclusory facts that, if true, would demonstrate that the projections were false when made" and "facts `from which an inference of fraud by a given defendant may be drawn.'" Urbach, 779 F. Supp. at 359 (citing In re Union Carbide Corp. Consumer Products Business Securities Lit., 666 F. Supp. 547, 557 (S.D.N.Y. 1987)). Here, to survive the motions to dismiss, plaintiffs must allege specific facts — as opposed to conclusory allegations — supporting their contention that ULBI was aware of its production problems with the 9-volt battery at the time of the challenged statements in or omissions from the Offering documents.*fn12 See Zuck er, 891 F. Supp. at 1014. What plaintiffs cannot do is rely on a theory of "fraud by hindsight," a theory soundly rejected by several courts. See, e.g., Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir. 1996) ("We have consistently held that a securities plaintiff does not satisfy the requirements of Rule 9(b) merely by pleading `fraud by hindsight'") (§ 10b-5 case);*fn13 Schoenhaut, 986 F. Supp. at 790 (same); Zucker, 891 F. Supp. at 1014 ("`[F]raud by hindsight,' the attempt to impose liability on management for unrealized economic predictions, is not actionable."). Instead, plaintiffs must show that defendants misrepresented or omitted existing material information which gave rise to a false and misleading impression:

  As an outgrowth of the requirement that a statement
  must be materially misleading at the time it was made
  for liability to attach, courts have held that:
  omissions that create a misleading impression —
  particularly one that is misleading only in
  hindsight — are not sufficient to constitute the
  basis of a securities action under section 11 or
  section 12(2).

Zucker, 891 F. Supp. at 1017 (quoting In re Bank of Boston Securities Lit., 762 F. Supp. 1525, 1538 (D.Mass. 1991) (italics in original)).

To that end, plaintiffs point to the brief period of time in between the Offering documents and the May 12 Release and the June 11 disclosure of production problems.*fn14 See Pl. Br. Opp. at 17-18. They suggest, thereby, that the production problems "couldn't have happened overnight." See id. at 19. Unfortunately for plaintiffs, that theory alone, without even allegations of facts contemporaneous to the issuance of the Offering documents supporting the theory, is simply not enough to withstand a motion to dismiss. Stated somewhat differently, alleging in a wholly conclusory fashion that an inference of defendants' knowledge can be drawn based on the mere lapse of time between the release of the Offering documents and the disclosure of the production problems announced on June 11, 1998, with nothing contemporaneous to support that conclusion,*fn15 is insufficient. See In re Number Nine, 51 F. Supp.2d at 17 (holding that plaintiffs had "insufficiently alleged material misstatements based solely on the subsequent announcement of inventory markdowns by [defendant]" eight months after the initial public offering); DiLeo, 901 F.2d at 627; Greenstone v. Cambex Corp., 975 F.2d 22, 25-26 (1st Cir. 1992) (holding that without detailed factual allegations, the mere existence of an undisclosed lawsuit does not indicate fraudulent conduct by defendant); Gross, 93 F.3d at 995 (holding that statements made at June 14 board meeting regarding delayed orders did not support inference that defendant was aware of delay at the time of May 3 press release); but see Cooperman, 171 F.3d at 48 (holding that departure of President and CEO of defendant company four and one-half months after the IPO could support inference that a "Board-level conflict" existed at the time of the offering). Plaintiffs' amended complaint, therefore, must be dismissed for failure to allege fraud with particularity.*fn16 As they have requested (see Pl. Opp. Br. at 33 n. 21), plaintiffs are granted leave to again amend their complaint to remedy, if they can, this otherwise fatal deficiency.

III. Conclusion

For the foregoing reasons, defendants' motions will be granted and the amended complaint will be dismissed without prejudice. An appropriate order will issue.


This matter having come before the court on a motion to dismiss plaintiffs' complaint filed by Ultralife Batteries, Inc. ("ULBI"), Bruce Jagid, Martin G. Rosansky, Joseph N. Barella, Frederick F. Drulard, Joseph C. Abeles, Arthur M. Lieberman, Richard A. Hansen, Carl H. Rosner (collectively as "the Individual Defendants"), Lehman Brothers, A.G. Edwards & Sons, Inc., Pennsylvania Group, Ltd. (collectively as "the Underwriter Defendants"); and the court having considered the parties' submissions without oral argument pursuant to Fed.R.Civ.P. 78; and consistent with this court's opinion of even date;

IT IS on this 28th day of September, 1999,

ORDERED that plaintiffs' amended complaint be and hereby is dismissed without prejudice; and it is further

ORDERED that plaintiffs are granted leave to amend their amended complaint within thirty days of the date of this order.

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