The opinion of the court was delivered by: Pisano, District Judge
THIS DOCUMENT RELATES TO: ALL ACTIONS
Defendants Grove Street Ventures, Inc. ("GSV") (formerly Cybershop.com, Inc.), Jeffrey Tauber, Jeffrey Leist, and Ian Phillips are before the Court on their motion to dismiss the Plaintiff's consolidated amended class action complaint ("amended complaint") under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendants allege that Plaintiff has failed to plead sufficient facts to prove its alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). The class period relevant to these alleged violations extends from October 26, 1999 through February 24, 2000 (the "class period"). (Am. Compl. at ¶ 14). The Court heard oral argument on Defendants' motion on January 4, 2002, and has jurisdiction to consider this matter under 28 U.S.C. § 1331. For the reasons set forth below, Defendants' motion to dismiss the Plaintiff's amended complaint is granted.
For the limited purpose of this motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court, as it must, accepts as true the facts alleged in the amended complaint and all reasonable inferences drawn from those facts. See Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992); see also infra IV. Rule 12(b)(6) Standard. Accordingly, the facts recited below are taken from Plaintiff's amended complaint, and do not reflect this Court's factual findings.
Lead Plaintiff FU Investment Company and all other class members purchased common stock in Cybershop sometime between October 26, 1999 and February 24, 2000. (Am. Compl. at ¶¶ 7, 14-20.) Cybershop, then a Delaware corporation operating a principal place of business in Jersey City, New Jersey, was an online and direct-to-consumer retailer throughout the relevant class period. (Am. Compl. at ¶¶ 8, 24.) Cybershop's "store," which was located online at www.cybershop.com sold discounted, designer and brand-name apparel, electronics, home accessories, toys, gifts and watches at closeout prices. (Am. Compl. at ¶¶ 8, 24.) Through a joint venture with Tops Appliance City ("Tops"), Cybershop also sold online at www.electronics.net various consumer electronics, appliances, and home office equipment. (Am. Compl. at ¶¶ 8, 24.)
Defendants Jeffrey S. Tauber, Ian S. Phillips, and Jeffrey Leist (collectively referred to as the "Individual Defendants"), were officers and/or directors of Cybershop during the class period. Tauber, at all relevant times, was the Chairman, Chief Executive Officer, President, Principal Executive Officer, and a director of Cybershop. (Am. Compl. at ¶ 9.) In these capacities, he was responsible for signing quarterly reports on Form 10-Q with the Securities and Exchange Commission (the "SEC"), and for issuing statements on Cybershop's behalf. (Am. Compl. at ¶ 9.) Phillips was a director of Cybershop and the Chief Executive Officer of MG Acquisition Corp., a wholly-owned subsidiary of Cybershop. (Am. Compl. at ¶ 10.) Leist was the Senior Vice President and Chief Operating Officer as of February 1999, and also was the Chief Financial Officer from April 1999 until April 2000, when he resigned. (Am. Compl. at ¶ 11.)
Initially, approximately thirteen parties filed separate complaints alleging that Cybershop and the Individual Defendants violated securities regulation laws . (T3 at 12-15. *fn1 ) After a conference with the parties on April 15, 2000, the Court entered an order consolidating all cases. The Court also selected FU Investment Co. as lead Plaintiff ("Plaintiff"), appointed Bernstein Liebhard & Liftshitz LLP as lead counsel, and directed Plaintiff to file a consolidated amended class action complaint. Plaintiff so filed, and that pleading is the one that this Court reviews in considering the motion now before it. Plaintiff opposes that motion, and contends alternatively that it should be granted leave to amend under Rule 15 of the Federal Rules of Civil Procedure so that it may cure any deficiencies within the amended complaint. (Pl.'s Opposing Mem. at 39 n. 21.)
The allegations in the amended complaint are based primarily "on the investigation by Plaintiff's attorneys." (Am. Compl. at ¶ 1.) That investigation included a review of: SEC filings *fn2 , reports and advisories, Cybershop's press releases and other public statements, and media reports. (Am. Compl. at ¶ 1.) The amended complaint alleges that Cybershop and the Individual Defendants caused Plaintiff to purchase Cybershop's common stock at "artificially inflated prices" during the class period. (Am. Compl. at ¶ 7.) It further alleges that the Individual Defendants violated section 20(a) of the Exchange Act by breaching their duty to correct Cybershop's false and misleading public statements. (Am. Compl. at ¶ 13.) The amended complaint also asserts that Cybershop made material misrepresentations to the public or failed to disclose to the public facts that "would tend to induce a reasonable investor to misjudge the value of Cybershop*s common stock." (Am. Compl. at ¶ 22.) Additionally, Plaintiff claims that various analysts wrote and released public reports regarding Cybershop to the sales force, to brokerage firm customers, and to various automated data retrieval services. (Am. Compl. at ¶ 22).
Effective June 1, 1999, Cybershop tendered one million shares of Cybershop's common stock and five thousand dollars to acquire all of the outstanding common stock of The Magellan Group, Inc. ("Magellan"), an online and direct response retailer of high quality personal care, home-and health-related products. (Am. Compl. at ¶ 26.) Cybershop began operating its Tools for Living division, formerly the Magellan business, during the second quarter of 1999. (Am. Compl. at ¶ 26.) That division offered high quality merchandise in the personal care, health, and home accessories categories, and promoted its merchandise through direct response, print media campaigns in national consumer magazines and at its website, www.toolsforliving.com. (Am. Compl. at ¶ 26.)
Cybershop's quarterly report dated August 13, 1999, which was filed with the SEC on Form 10-Q, identifies the company as "an online and direct[- ]to[-]consumer retailer" with two online sites, www.cybershop.com and www.electronics.net. (Am. Compl. at ¶ 24.) In that l0-Q filing, Cybershop reported "a shift" in its commercial strategy:
Beginning in the first quarter of the current year, the Company began implementing several operating initiatives at its flagship store, cybershop.com, designed to better serve its customers and streamline its operations. The Company has completed a shift in its merchandising strategy to focus on offering off-price branded merchandise such as that found in outlets and traditional discount retailers. The Company initiated a significant overhaul of its infrastructure, migrating its web-based order processing onto a new platform, redesigning the web site and integrating it with a new order fulfillment system. The transition to an inventory-based model was completed in the second quarter with the development of a new distribution and fulfillment center. In addition, the Company launched two new online auction sites. With this initiative, the Company introduced the excitement of the online auction experience to all its customers, complementing its existing product offerings. The initiative also offers the Company a new way to attract customers, learn more about their shopping preferences and provide an effective mechanism to manage excess inventory. (Am. Compl. at ¶ 25.)
During the third and fourth quarters of 1999, Cybershop made public announcements that allegedly "were intended to, and did, convey, the impression that Cybershop was successfully positioning itself as the premier online name-brand discount retailer." (Am. Compl. at ¶ 27.) First, on September 16, 1999, Cybershop announced that it had signed exclusive, online distribution agreements with "key designer apparel brands": "Cybershop.com is leveraging its experience as traditional merchants and its position as a pioneer in e-commerce, to purchase close-outs and over stocks directly from America*s most prestigious manufacturers." (Am. Compl. at ¶ 28.) Commenting on those agreements, Tauber stated that "[j]ust as T.J. Maxx and Marshalls . . . have become the dominant brick and mortar retailer [sic] for off-price brands, we are positioning Cybershop.com as the key internet destination to purchase designer apparel and home furnishings." (Am. Compl. at ¶ 28.)
Next, on September 21, 1999, Cybershop announced that it had secured for its auction site additional distribution from Lycos, Excite@Home, and MSN: "[a]uctions have been an exciting feature, attracting thousands of new customers and registrants to CyberShop.com and electronics.Net who register to bid and win top quality, branded consumer electronics." (Am. Compl. at ¶ 30.) To this, Tauber added that "[a]uctions have been an exciting way for us to acquire new customers for both CyberShop.com and electronics.Net . . . This new distribution from Lycos, MSN and Excite has given a real boost to our traffic and demand for auctions." (Am. Compl. at ¶ 31.)
On September 23, 1999, Cybershop announced that it had entered into an agreement with LookSmart to be featured in RewardMall, LookSmart*s online shopping mall. Commenting on that new agreement, Tauber stated:
Securing this key area will help to position us as the premier place to shop for branded discount merchandise and our broad selection of consumer electronics.... We believe our positioning with LookSmart in their RewardMall combined with their significant growth in traffic will be an important contributor to our traffic growth into the fourth quarter. (Am. Compl. at ¶ 32.)
On September 30, 1999, Cybershop completed an equity securities private placement raising $5.1 million in gross proceeds. (Am. Compl. at ¶ 33.) Relevant to that placement, Cybershop issued a class of warrants that gave the investors the right to receive additional shares if the price of the stock trades fell below certain, specified levels. (Am. Compl. at ¶ 33.)
On October 4, 1999, Cybershop announced that Tops, its partner in the electronics.Net joint venture, had decided to discontinue consumer electronics sales so as to focus on higher-margin appliances sales. (Am. Compl. at ¶ 34.) Though electronics.Net would have access to Tops' inventory through the year, Cybershop had then started to seek alternative supply arrangements, indicating that "it is not believed that this decision by Tops will have a detrimental impact on the operating results of CyberShop.com." (Am. Compl. at ¶ 34.)
On October 21, 1999, Cybershop announced that it had signed an expanded agreement with Yahoo! to include its products in the Yahoo! shopping directory, (Am. Compl. at ¶ 35.):
CyberShop.com is quickly establishing itself as one of the leading sites for designer apparel and other brand name merchandise at deep discount prices. With this deal, CyberShop.com will be well positioned to capitalize on the upcoming holiday season, which according to Jupiter Communications, an internet research firm, is estimated to generate $6 billion in online sales. (Am. Compl. at ¶ 35.)
Focusing on how this agreement would impact its continuous strategy, Tauber remarked:
CyberShop.com has been growing rapidly with our last quarter revenues increasing over 270% over the June quarter ended 1998. This agreement with Yahoo! will further enable us to continue driving top line growth and bringing our deep merchandise mix to millions of additional online shoppers.... This deal highlights our ongoing strategy to become the premier destination on the Web for brand name merchandise while providing a fast and convenient shopping experience. (Am. Compl. at ¶ 36.)
On the first day of the class period, October 26, 1999, Cybershop issued a press release entitled, "CyberShop.com(R) Third Quarter Net Sales Increase Over 450% from the Prior Year with Strong Product Gross Margins of 34%." The opening lines of that press release report:
CyberShop.com(R), Inc. (NASDAQ: CYSP), a leading online retailer (http://www.cybershop.com) of brand name merchandise, announced today that its net sales of $2,788,000 for the third quarter of 1999, were up 458% from $500,000 in the third quarter of 1998 and up 35% from $2,067,000 in the second quarter of 1999. Gross margins for the quarter improved to 34% of net sales from 30% in the second quarter of 1999. (Am. Compl. at ¶ 37.)
Relevant to the Company's Tools for Living division, that press release informs:
In June 1999, CyberShop.com acquired tools-for-living.com, a direct to consumer marketer of high quality merchandise in personal care, health and home accessories. These products are promoted on the http://tools.cybershop.com site and through print media campaigns in national consumer magazines. (Aff. of Miranda Schiller ("Schiller Aff."), Ex. 25.)
It does not specify Tools for Living's financial statistics or its impact on the company's revenues.
That press release quotes Tauber on the company's holiday sales preparations: "We are now gearing up for the upcoming holiday season with a host of online and off line initiatives to promote a number of hot products." (Am. Compl. at ¶ 37.) Cybershop also reported on its inventory and its service capabilities for that season: "In preparation for the holiday season, CyberShop.com is carrying thousands of products and over 150 top brands, and has boosted its fulfillment and customer service capacity to process many more orders in preparation for the fourth quarter." (Am. Compl. at ¶ 37.)
On November 5, 1999, Cybershop issued a press release summarizing an interview that Tauber gave to The Wall Street Reporter. During that interview, Tauber described Cybershop as a retailer "providing consumers a better way to buy name brand apparel at deep discounts." "The new business model has been in place for a little more than two quarters with great success. In the second quarter we did roughly $2 million with a 30% gross margin, which is four times last year, and in our third quarter we did $3 million with a 34% gross margin." (Am. Compl. at ¶ 45.) Also during that interview, Tauber commented that "[w]e made a very important acquisition in June with Tools for living.com and we will continue to look for more acquisitions. (Am. Compl. at ¶ 45.) Tauber specifically noted some of the products offered through that division:
the fourth quarter can represent over 50% of our business . . . . Right now we are expecting an enormous fourth quarter and its very exciting. We are not only leveraging our expertise picking toys, we will run Pokemon and Sega Dreamcast, we also have some great apparel items and a china pattern from Spode. We are ready. (Am. Compl. at ¶ 45.)
Within approximately two weeks after the October 26, 1999 press release and within five days after the press release recounting Tauber's Wall Street Reporter interview, on November 11, 1999, Tauber and his wife sold 200,000 shares of Cybershop common stock at $10 per share, earning proceeds of $2 million. (Am. Compl. at ¶ 75.) Fifteen days later, on November 26, 1999, Tauber and his wife sold an additional 475,000 shares of Cybershop common stock, or 26% of their aggregate holdings. (Am. Compl. at ¶ 75.) Likewise, between November 22, 1999 and November 29, 1999, Phillips sold 40,000 shares of Cybershop common stock at prices ranging from $10.50 to $14 per share, earning $480,000. (Am. Compl. at ¶ 75.) Additionally, Linda Wiatrowski, Cybershop's General Merchandise Manager and Vice President, sold 20,000 shares of the Company's stock on November 29, 1999, at $13.47 per share, earning proceeds of more than $269,000. (Am. Compl. at ¶ 75.) Neither Phillips nor Wiatrowski had previously sold any of their shares. (Am. Compl. at ¶ 75.) Plaintiff does not allege that Leist sold any stock.
Meanwhile, Cybershop issued a number of press releases announcing developments in its core operations:
§ an extension in its relationship with AOL (Am. Compl. at ¶ 42.)
§ implementation of the Business Evolution's @Once Service Center to enhance its customer service capabilities (Am. Compl. at ¶ 44.)
§ an agreement with Merrill Lynch to feature Cybershop's online stores on Merrill Lynch's eShopping channel (Am. Compl. at ¶ 48.)
§ it had been "aggressively building" marketing relationships with key shopping channels including AOL, Yahoo! Shopping, Microsoft's eShop and Inktomi in preparation the 1999 holiday selling season (Am. Compl. at ¶ 48.)
§ an agreement with Women.com, under which its merchandise would be prominently featured under the fashion, beauty, and electronics categories and advertised in interactive publications such as Cosmopolitan, Good Housekeeping, and Marie Claire (Am. Compl. at ¶ 52.) and
§ an aggressive print ad for the holiday season in such publications as Time, Newsweek, USA Today Weekend, Parade, LA Times Sunday Magazine, Ladies Home Journal, Popular Mechanics, Better Homes and Gardens, and US News and World Report (Am. Compl. at ¶ 53.)
Next, Cybershop announced that ON24, Inc. selected it as one of the elite Network Economy stocks to own. (Am. Compl. at ¶ 56.) Chosen as a "core holding" for investors based on anticipated growth during the holiday season, the Company stated that it was picked by ON24's Editor-in-Chief as the "racing horse stock pick" that was "clearly going to benefit from the onset of the Christmas selling season." (Am. Compl. at ¶ 56.)
On December 23, 1999, the Company issued a press release reporting that "[e]arly financial data is encouraging, indicating solid year over year revenue growth and healthy gross margins." (Schiller Aff., Ex. 25.)
On February 1, 2000, the Company announced its unaudited financial results for the fourth quarter of 1999, reporting revenues double those earned in 1998: approximately $4.2 million for the quarter and $10 million net for the year. That announcement does not analyze the revenues earned respectively from each Cybershop division.
On February 10, 2000, the Company issued a press release over the Business Wire announcing that it was closing its e-tailing sites, CyberShop.com and electronics.net, and selling those operations' retail assets. (Am. Compl. at ¶ 65.) Announcing a change in its core strategy, the Company indicated that it would begin operating as an Internet incubator, GSV. ...