The opinion of the court was delivered by: Pisano, District Judge
This is a securities class action on behalf of all parties who purchased the common stock of Lucent Technologies, Inc. ("Lucent" or the "Company") between October 26, 1999, and December 21, 2000 (the "class period"). Before the Court is the motion of Defendants Lucent, Richard A. McGinn, Donald K. Peterson, and Deborah C. Hopkins' *fn1 to dismiss Plaintiffs' Fifth Consolidated and Amended Class Action Complaint (the "Fifth Complaint") alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the Exchange Act"). This Court has jurisdiction over this matter under 28 U.S.C. §§ 1331, -37 and 15 U.S.C. § 78aa, and resolves this matter under Rule 78 of the Federal Rules of Civil Procedure. For the reasons set forth below, Defendants' motion to dismiss is denied.
The Co-Lead Plaintiffs are Teamsters Locals 175 & 505 D & P Pension Trust Fund (the "Pension Trust Fund") and The Parnassus Fund and Parnassus Income Trust/Equity Income Fund. (Fifth Compl. at ¶¶1-2.) The Pension Trust Fund is a multi-employer pension trust organized in West Virginia and created under collective bargaining agreements between a number of employers and Teamsters Local Nos. 175 and 505. (Fifth Compl. at ¶ 24.) The Trustees nominated by both employers and the union administer the Pension Trust Fund. (Fifth Compl. at ¶ 24.) Co-Lead Plaintiff Parnassus, which was founded in 1984 and located in San Francisco, has a principal investment objective of long-term growth of capital. (Fifth Compl. at ¶ 25.) It invests solely in companies that practice corporate social responsibility. (Fifth Compl. at ¶ 25.)
Defendant Lucent is a Delaware corporation operating its principal place of business and chief executive offices in Murray Hill, New Jersey. (Fifth Compl. at ¶ 27.) Lucent designs, builds, and installs a wide range of public and private networks, communications systems, data networking systems, business telephone systems, and microelectronics components, and manufactures integrated circuits and optoelectronic components for the computer and telecommunications industries. (Fifth Compl. at ¶ 27.)
Defendant McGinn was Lucent's President, Chief Executive Officer, and Chairman of its Board of Directors from February 1996 until the Company's Board of Directors discharged him on October 22, 2000. (Fifth Compl. at ¶ 28(a).) McGinn signed the Company's 1999 annual report on Form 10-K (the "1999 10-K"). (Id.) During the class period, McGinn was quoted frequently in the news media, in press releases, and in other publicly disseminated materials. (Id.) Defendant Peterson was Lucent's Chief Financial Officer and Executive Vice President until March 1, 2000. (Id. at ¶ 28(b).) Peterson signed the 1999 10-K. (Id.)
Defendant Hopkins joined Lucent as Chief Financial Officer on April 24, 2000. (Id. at ¶ 28(c).) Hopkins was responsible for executive management and oversight of all financial operations. (Id.) Hopkins issued many of the allegedly misleading statements. (Id.)
II. Procedural History *fn2
Between January 7, 2000 and March 2, 2000, eighteen class action complaints were filed against Lucent, McGinn, and Peterson. *fn3 (Op. & Order dated April 17, 2001 ("the April 17 2001 Opinion") at 6.) On February 25, 2000 and March 16, 2000, orders were entered consolidating these actions ("Lucent I"). (Order dated Feb. 25, 2000, at 1; Order dated March 16, 2000, at 1.)
By opinion and order dated April 27, 2000 (the "April 27, 2000 Opinion"), the Pension Trust Fund was appointed provisional lead plaintiff in Lucent I. In re Lucent Techs., Inc. Sec. Litig., 194 F.R.D. 137, 158 (D.N.J. 2000). After an auction, the firm of Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss") was selected as lead counsel. (Op. & Order dated Aug. 2, 2000 (the "Aug. 2, 2000 Opinion"), at 24.)
On November 3, 2000, the Pension Trust Fund filed a Consolidated and Amended Class Action Complaint (the "First Consolidated and Amended Complaint") alleging a class period from October 26, 1999 through January 6, 2000. (First Consol. & Am. Compl. at ¶ 1.)
On November 21, 2000, Lucent issued a press release announcing that it had improperly recognized approximately $125 million in revenues during the fourth quarter of 2000. (April 17, 2001 Op. at 8.) Lucent also announced in this press release that it had reported this revenue recognition issue to the Securities and Exchange Commission ("SEC"). (Id. at 8-9.)
Following the November 21, 2000 press release, a number of other class action complaints ("Lucent II") were filed against Lucent, McGinn, Henry B. Schacht, and Deborah C. Hopkins. It appears that the Lucent II actions were filed as a result of this press release. (Id.)
On November 22, 2000, the Pension Trust Fund filed a Second and Consolidated and Amended Class Action Complaint (the "Second Complaint"). (Id.) The Second Complaint broadened the class period, extending it through October 10, 2000. (Second Compl., ¶ 1.)
On December 1, 2000, the Pension Trust Fund filed a Third Consolidated and Amended Class Action Complaint (the "Third Complaint".) (April 17, 2001 Op. at 9.) The class period alleged in the Third Complaint was further extended to include October 26, 1999 through November 21, 2000. (Third Compl. at ¶ 1.)
On December 21, 2000, Lucent issued a press release announcing that it would reduce fourth quarter 2000 revenues by an additional $700 million. (April 17, 2001 Op. at 9.) Several additional class action complaints were filed following the December 21, 2000 press release (also referred to as "Lucent II"). Id.
On January 4, 2001, the Pension Trust Fund filed a Fourth Consolidated and Amended Class Action Complaint (the "Fourth Complaint"). (Id. at 10.) The class period alleged in the Fourth Complaint was then extended further to include the period between October 26, 1999 and December 21, 2000. (Fourth Compl. at ¶ 1.)
On December 26, 2000, Judge Alfred J. Lechner, Jr. entered an order consolidating the Lucent II complaints with the Lucent I action (the "December 26, 2001 Consolidation Order.") On January 23, 2001, Defendants Lucent, McGinn, and Peterson filed an answer to the fourth complaint. (April 17, 2000 Op. at 10.)
By letter dated January 4, 2001, counsel for Parnassus Income Trust/Equity Income Fund ("Parnassus") requested that the December 26, 2000 consolidation order be vacated. (First Jan. 4, 2001 Letter at 1.) Likewise, by letter dated January 4, 2001 (the "Second January 4, 2001 Letter"), counsel for the Anchorage Police & Fire Retirement System and the Louisiana School Employees' Retirement System, also requested that the December 26, 2000 consolidation order be vacated. (Second Jan. 4, 2001 Letter at 1-2.) Collectively, these letters were treated as a motion to vacate the December 26, 2000 consolidation order. (April 17, 2001 Op. At 6.)
After oral argument on March 9, 2001, Judge Lechner denied the motion to vacate. (Id. at 48.) Further, since the Court determined that additional representation would benefit the class, it appointed Parnassus to serve as Co-Lead Plaintiff with the Pension Trust Fund. (Id. at 39.) An auction was held to select co-lead counsel to serve with Milberg Weiss. (Id. at 42.)
By order entered June 13, 2001, the Court appointed the firm of Bernstein Litowitz Berger & Grossman LLP to serve as co-lead counsel. On August 10, 2001, the co-lead plaintiffs filed a Fifth Consolidated and Amended Class Action Complaint ("Fifth Complaint"), which is now the subject of Defendants' motion to dismiss. *fn4
For the limited purpose of this motion to dismiss under Rule 12(b)(6), the Court, as it must, accepts as true the facts alleged in the Fifth Complaint and all inferences reasonably 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 Plaintiffs' Fifth Complaint, and do not represent this Court's factual findings.
Lucent, which spun off from AT&T in 1996, at one time held a dominant position in the telecommunications equipment market. (Fifth Compl. at ¶ 3.) Plaintiffs allege that by mid-1999, however, Lucent had "squandered" its position. (Id.) As the telecommunications industry shifted from transmission of voice to data, new technologies and products developed, and new entrants into the marketplace began to compete with Lucent. (Id.) Plaintiffs allege that Lucent misrepresented at all relevant times that it was at the "`forefront of [this] competition'" and that it expected continued growth. (Id.)
At the beginning of the class period, Lucent was suffering severe problems. (Fifth Compl. at ¶ 4.) Plaintiffs claim that Lucent had fallen behind in developing its then "product of choice," specifically, optical networking products capable of running at "OC-192" speed. (Id.) It was experiencing widespread problems that resulted in loss of sales and revenues. (Id.) Additionally, rampant problems concerning product design, reliability, and timeliness of deliveries throughout Lucent's product lines caused customer dissatisfaction and order cancellations, particularly for Lucent's WaveStar and wireless products. (Id.) Further, Lucent developed problems with AT&T, its largest and most important customer. (Id.) Lucent became unwilling to manufacture to AT&T's specifications, AT&T expressed its desire to diversify its sources of supply, and Lucent was unable to adequately develop products that met AT&T's requirements. (Id.)
By fall 1999, Lucent had met or exceeded analysts' published revenue and earnings expectations for fourteen straight quarters. (Fifth Compl. at ¶ 5.) At the beginning of the class period, Lucent's management acknowledged in internal e-mails that its optical networking group was in "`serious disrepair'" and that Lucent, as a result, was "`up against a revenue wall.'" (Id.)
An October 24, 2000 Wall Street Journal article, Lucent Ousts McGinn as CEO and Chairman, reports that Lucent senior executives had informed McGinn that Lucent needed to reduce public projections of revenue and earnings because new products were not yet ready for sale while sales of older products had declined. (Fifth Compl. at ¶ 6.) Plaintiffs allege that McGinn failed to heed this instruction, and Lucent, consequently, failed to advise investors of its declining business. (Id.)
Plaintiffs allege that Lucent and the Individual Defendants took various steps to conceal from the investing public the Company's true financial situation. (Fifth Compl. at ¶ 7.) They claim that Lucent, among other things, misrepresented actual demand for its optical networking products. (Id.) According to Plaintiffs, Lucent failed to disclose that customer demand for optical networking products had decreased even when it was producing at a rate slower than its competitors and discovering persistent technological problems with its products. (Id.) As a result, Defendants allegedly knew that potential customers were deserting Lucent, preferring instead competitor companies that were successfully deploying newer OC-192 capable products. (Id.)
Faced with a declining product demand, Lucent allegedly inflated its reported sales by shipping unready products. (Fifth Compl. at ¶ 8.) Specifically, in September 1999, Lucent's optical networking head, Harry Bosco, told the Company's directors at a meeting in Nuremberg, Germany that Lucent had a strategy to ship faulty optical networking products before solving their design and technical problems. (Id.) Though this decision was intended to increase reported sales, it exacerbated Lucent's existing problem regarding poor product quality and further diminished product acceptance and sales. (Id.)
According to Plaintiffs, Lucent's accounting improprieties began during the first quarter of fiscal year 2000 (ended December 31, 1999) and continued throughout the class period. (Fifth Compl. at ¶ 9.) Plaintiffs allege that Lucent's most senior officers knew throughout the class period that: (1) Lucent's accounting practices violated generally accepted accounting principles ("GAAP"); (2) Lucent had improperly booked hundreds of millions of dollars of revenue on sales to customers in situations where customers had not ordered products; (3) Lucent had improperly booked hundreds of millions of dollars of revenue on shipments to distributors even though Lucent's senior officers had specifically granted these distributors the right to ultimately return unsold products; (4) Lucent sales people were routinely entering into "`side deals'" with distributors to allow them to return the product while improperly reporting these deals as current sales; and (5) Lucent was "`stuffing'" its distributors with products they did not want, did not need, and had not ordered. (Fifth Compl. at ¶ 9.)
On January 6, 2000, Lucent announced that the Company would miss analysts' earnings estimates for the first quarter of fiscal year 2000. (Fifth Compl. at ¶ 10.) At that time, McGinn allegedly made false assurances regarding the strong demand for the Company's optical networking products, and attributed the principal causes of the shortfall to manufacturing constraints limiting the Company's ability to fulfill customer orders. (Id.)
Throughout the spring and summer of 2000, McGinn and Lucent allegedly continued to reassure the investing public of a strong demand for the Company's products. (Fifth Compl. at ¶ 11.) However, at this time Lucent lost all business for its newest optical networking products with its largest customer, AT&T, and had internally declared a "`sales crisis.'" (Id.) By no later than the end of Lucent's fiscal year 2000 second quarter, which ended March 31, 1999, Lucent's most senior officers had explicitly recognized that "`[a]s the first half of 2000 comes to a close, it is clear that we cannot continue with the current operational model -- it just doesn't work.'" (Id.) Still, Lucent's reported results for the March quarter met expectations, and its share price was $62.39 on July 17, 2000. (Id.)
Yet Lucent's results for the third fiscal quarter of 2000 failed to meet expectations. (Fifth Compl. at ¶ 12.) In a July 20, 2000 press release announcing those results, McGinn informed investors that Lucent's business remained strong, that Lucent's pro forma revenues from continuing operations would grow about 15% for the fourth fiscal quarter of 2000, and that pro forma earnings per share would be roughly in line with revenue growth. (Id.) In fact, Plaintiffs claim that McGinn's information was knowingly misleading. (Id.) A complaint filed against Lucent in December 2000 by Nina M. Aversano, Lucent's former President, North America - Service Provider Networks, allegedly reveals that McGinn knew then that fourth quarter revenue and earnings projections were unattainable. (Id.)
On October 10, 2000, Lucent disclosed information allowing analysts to determine that its optical networking business had actually declined 15% for the quarter and that it was increasing its reserve for uncollectible accounts receivable. (Id.) On October 11, 2000, Lucent's share price fell more than $10 per share, closing at $21.19 (Id.)
On October 23, 2000, Lucent announced to analysts that fourth quarter revenues of $9.4 billion and pro forma earnings of $0.18 per share would meet expectations. (Fifth Compl. at ¶ 14.) By November 11, 2000, Lucent's share price increased to approximately $24 per share, leaving analysts to conclude that Lucent had begun to take a "`step in the right direction.'" (Id.)
On November 21, 2000, however, Lucent revealed that 2000 fourth quarter results reported on October 23, 2000, materially overstated the Company's results and, thus, that Lucent had missed analysts' expectations for that quarter. (Fifth Compl. at ¶ 15.) Specifically, Lucent stated that an unspecified "`revenue recognition problem'" had affected approximately $125 million of reported quarterly revenue. (Id.) As a result, the Company announced that it would restate its fiscal quarter revenues and that both quarterly and yearly earnings would drop approximately two cents per share. (Id.) Lucent share value fell decreased then to $17.63. (Id.)
Finally, on December 21, 2000, Lucent disclosed that its November 21, 2000 announcement regarding its revenue recognition problem was inaccurate. (Fifth Compl. at ¶ 16.) In a December 21, 2000 announcement and conference call with analysts, Lucent indicated that it, again, would restate its fiscal fourth quarter revenues by reducing revenue for the quarter by $679 million to $8.7 billion - a figure $700 million less than the quarterly revenues initially reported, and more than $400 million greater than the restatement amount announced on November 21. (Id.) The Company also revised its earnings per share for the quarter from $0.18 per share to $0.10 per share. (Id.) Additionally, the Company revealed that it would take a $1 billion restructuring charge in late January 2001. (Id.)
The December 21, 2000 announcement revealed that Lucent's sales practices were responsible for, among other things, inappropriate recognition of substantial revenues for sales of products later returned as a result of either a prior agreement or the product's incompleteness. (Fifth Compl. at ¶ 17.) Following this announcement, Moody's Investor Services downgraded Lucent's credit rating, and Lucent share price dipped significantly to $2.19 per share. (Fifth Compl. at ¶ 18.)
In the Fifth Complaint, Plaintiffs plead two claims: (1) Lucent and the Individual Defendants did not reveal their allegedly improper sales and accounting practices, and thus violated Section 10(b) of the Exchange Act by making false and misleading statements and failing to disclose material facts necessary to make legitimately those statements (Count I); and (2) the Individual Defendants, as controlling persons of the Company, caused the Company to engage in its allegedly wrongful conduct and thus violate Section 20(a) of the Exchange Act (Count II).
Defendants have filed this motion to dismiss the Fifth Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. They contend that: (1) Plaintiffs' fraud claims arising out of Lucent's reported financial results for the first and second quarters of fiscal year 2000 are untimely; (2) the Fifth Complaint fails to plead with the requisite particularity that Lucent's third quarter fiscal 2000 financial results were intentionally false and misleading; (3) Plaintiffs' claims relating to Lucent's unaudited financial results for the fourth fiscal quarter 2000 fail to plead scienter; and (4) the Fifth Complaint fails to state a cognizable claim for relief arising from Defendants' other allegedly fraudulent public statements made between October 26, 1999 and October 10, 2000.
IV. Rule 12(b)(6) Standard
Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss a complaint that fails "to state a claim upon which relief can be granted." In considering a Rule 12(b)(6) motion, a court accepts as true all of the factual allegations within the complaint and any reasonable inferences that may be drawn from them. Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992). Claims should be dismissed under Rule 12(b)(6) where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Though a court must take as true all facts alleged, it may not "assume that the [plaintiff] can prove any facts that it has not alleged." Associated Gen. Contractors of Calif., Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). Further, on a 12(b)(6) motion, a court shall properly reject any "conclusory recitations of law" pled within the complaint. Commonwealth of Pennsylvania v. PepsiCo, Inc., 836 F.2d 173, 179 (3d Cir. 1988); see Morse v. Lower Merion School Dist., 132 F.3d 902, 906 (3d Cir. 1997) (noting that "a court need not credit a complaint's `bald assertions' or `legal conclusions' when deciding a motion to dismiss").
Accordingly, a district court reviewing the sufficiency of a complaint has a limited role. In performing that role, the court determines not "whether the plaintiffs will ultimately prevail," but "whether they are entitled to offer evidence to support their claims. Langford v. Atlantic City, 235 F.3d 845, 847 (3d Cir. 2000); see also In re Burlington Coat Factory Sec. Litig. ("Burlington Coat"), 114 F.3d 1410, 1420 (3d Cir. 1997); Syncsort Inc. v. Sequential Software, Inc., 50 F. Supp. 2d 318, 325 (D.N.J. 1999); In re MobileMedia Sec. Litig., 28 F. Supp. 2d 901, 922 (D.N.J. 1998). Generally, the court's task requires it to disregard any material beyond the pleadings. Burlington Coat, 114 F.3d at 1426; Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993).
A district court may, however, consider the factual allegations within other documents, including those described or identified in the complaint and matters of public record, if the plaintiff's claims are based upon those documents. Burlington Coat, 114 F.3d at 1426; In re Westinghouse Sec. Litig. ("Westinghouse"), 90 F.3d 696, 707 (3d Cir. 1996); In re Donald Trump Sec. Litig., 7 F.3d 357, 368 n.9 (3d Cir. 1993); Pension Benefit Guar. Corp., 998 F.2d at 1196. In other words, the court may review those such documents that are "integral to or explicitly relied upon in the complaint," Burlington Coat, 114 F.3d at 1426 (citation and quotations omitted), so as to avoid
[t]he situation in which a plaintiff is able to maintain a claim of fraud by extracting an isolated statement from a document and placing it in the complaint, even though if the statement were examined in the full context of the document, it would be clear that the statement was not fraudulent. Id.
Yet just because the court elects under these circumstances to examine documents outside of the complaint does not mean that it need treat the motion as one for summary judgment. Burlington Coat, 114 F.3d at 1426; Pension Benefit Guar. Corp., 998 F.2d at 1196-97.
In moving to dismiss under 12(b)(6), Defendants contend that the applicable statute of limitations bars certain § 10(b) claims raised within the Fifth Complaint. They alternatively contend that Lucent's allegations either fail to state a cognizable claim under 10(b)(5) or to satisfy the Private Securities Litigation Reform Act's ("PSLRA") pleading requirements.
V. Statute of Limitations
Defendants claim that the Fifth Complaint alleges for the first time in this litigation that Lucent's reported financial results for the first and second quarters of fiscal year 2000 were false and misleading. (Fifth Compl. at ¶¶ 254(a) & (g).) They argue that these new claims are time-barred because Plaintiffs had timely inquiry notice and that relation-back principles under Rule 15(c) of the Federal Rules of Civil Procedure do not save those claims. (Defs.' br. at 10-14.) Plaintiffs oppose, contending that they sufficiently pled accounting fraud claims for those periods in the Third Consolidated and Supplemental Class Action Complaint. (Pls.' br. at 26-27), and that any new allegations involving "financial and accounting manipulations" relate back to that timely pleading.
To be timely, claims brought under § 10(b) or Rule 10b-5 must be filed "within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991). Inquiry notice is the standard for determining when the one-year limit begins to run. In re Campbell Soup Co. Sec. Litig. ("Campbell Soup"), 145 F. Supp. 2d 574, 600 (D.N.J. 2001); In re Prudential Ins. Co. of Am. Sales Practices Litig. ("Prudential"), 975 F. Supp. 584, 599 (D.N.J. 1996). This means that the limitations period commences when the plaintiff "`should have discovered the general fraudulent scheme.'" Prudential, 975 F. Supp. at 599 (quoting McCoy v. Goldberg, 748 F. Supp. 146, 158 (S.D.N.Y. 1990)). Where a plaintiff makes a reasonably diligent investigation to discover, courts apply a two-part inquiry before fixing the limitations period. Campbell Soup, 145 F. Supp. 2d at 601 (citing Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000)). First, a court must decide when a plaintiff's duty to investigate arose; that is, a court shall find that a duty is triggered "`when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded.'" Id. (citing Rothman, 220 F.3d at 96 (quoting Dodds v. Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993))). Second, a court "`must further determine . . . when knowledge of the facts constituting the violation of section 10(b) and Rule 10b-5 will be imputed if, after the duty to inquire arises, the investor does indeed inquire.'" Id. (quoting Rothman, 220 F.3d at 97). Though inquiry notice in some cases is decided as a matter of law, Campbell Soup, 145 F. Supp. 2d at 602 (citing In re Dreyfus Aggressive Growth Mut. Fund Litig., No. 98 civ. 4318, 2000 WL 10211, at *3 (S.D.N.Y. Jan. 6, 2000)), "it is inappropriate to dismiss claims as time-barred where . . . the analysis is so fact-intensive." Campbell Soup, 145 F. Supp. 2d at 602 (citations omitted). Put another way, "[w]hether a plaintiff had sufficient facts to place him on inquiry notice of a claim for securities fraud under S.E.C. Rule 10b-5 is a question of fact, and such is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6). Marks v. CDW Comp. Centers, Inc., 122 F.3d 363, 367 (7th Cir. 1997) (citations omitted); see In re Mobilemedia Sec. Litig., 28 F. Supp. 2d 901, 941 (D.N.J. 1998) (noting that "[d]ismissal pursuant to Rule 12(b)(6) based upon the running of the statute of limitations is often inappropriate." (citation omitted)); Salinger v. Projectavision, Inc., 972 F. Supp. 222, 229 (S.D.N.Y. 1997) ("The question of constructive knowledge and inquiry notice may be one for the trier of fact and therefore ill-suited for determination on a motion to dismiss.") (citations omitted).
In support of their argument, Defendants claim that Plaintiffs had made sufficient inquiry by June 2, 2000, the date of Milberg Weiss' sealed bid in support of its motion to be appointed lead counsel, and were then on notice that Lucent's reported revenue for the first two quarters of fiscal year 2000 might have been false and misleading. (Defs.' br. at 11.) Plaintiffs do not address the inquiry notice issue in their opposition. (Pls. br. at 25-29.)
A finding that Plaintiffs were on inquiry notice as of no later than June 2000 requires the Court to conclude that Plaintiffs then possessed all information needed to sufficiently plead their 10(b)(5) claims relevant to the first two quarters in 2000. From the face of the Fifth Complaint, the Court can not fairly reach that conclusion. Because the Court can not resolve this issue without making factual findings, the Court declines to dismiss Plaintiffs' claims regarding the first two quarters of fiscal 2000 as untimely. The requisite analysis of this issue is appropriate for a later stage in this litigation. Accordingly, the Court shifts its focus to the viability of Plaintiffs' 10(b) claims under the heightened pleadings standards.
Section 10(b) and Rule 10b-5 apply to "false or misleading statements or omissions of material fact that affect trading on the secondary market." Burlington Coat, 114 F.3d 1410, 1417 (3d Cir. 1997); Campbell Soup Co., 145 F. Supp. 2d at 583 (D.N.J. 2001) (quoting Burlington for same proposition). Section 10(b) bans 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). Applicable to section 10(b), Rule 10b-5 makes it illegal "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b); see Campbell Soup, 145 F. Supp. 2d at 583.
A plaintiff must plead five elements to demonstrate a claim under Section 10(b) and Rule 10b-5: (1) defendant made a representation or omission of material fact; (2) scienter motivated defendant's representation or omission; (3) defendant made that representation or omission in the context of a securities purchase or sale; (4) plaintiff relied on defendant's representation or omission; and (5) plaintiff's reliance proximately caused damages. E.g., EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 871 (3d Cir. 2000) (citing Weiner v. Quaker Oats Co., 129 F.3d 310, 315 (3d Cir.1997)); In re Advanta Corp. Sec. Litig. ("Advanta"), 180 F.3d 525, 537 (3d Cir. 1999) (citing Westinghouse, 90 F.3d 696, 710 (3d Cir. 1996)).
A defendant can not be held liable for failure to disclose unless plaintiff first demonstrates that defendant, indeed, had a duty to disclose. See Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."); Campbell Soup, 145 F. Supp. 2d at 583 (citing Basic as support). But once a defendant makes a disclosure, that defendant must ensure that any disclosure is accurate. Campbell Soup, 145 F. Supp. 2d at 583 (citation omitted). In Section 10(b) and Rule 10b-5 actions, "[a] statement is false or misleading if it is factually inaccurate, or additional information is required to clarify it." In re Nice Sys., Ltd. Sec. Litig. ("Nice Sys."), 135 F. Supp. 2d 551, 573 (D.N.J. 2001) (citations and quotations omitted); Campbell Soup, 145 F. Supp. 2d at 583.
Not just any false or misleading statement gives rise to liability; instead, only a material representation or omission is actionable. Basic, 485 U.S. at 238; Campbell Soup, 145 F. Supp. 2d at 583 (citing Basic). Material information in the context of a 10(b)(5) case is "information that would be important to a reasonable investor in making his or her investment decisions." Burlington Coat, 114 F.3d at 1425; Campbell Soup, 145 F. Supp. 2d at 583-84 (quoting Burlington Coat, 114 F.3d at 1425). "Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see Campbell Soup, 145 F. Supp. 2d at 584 (quoting TSC Indus., Inc., 426 U.S. at 449) (citation omitted). A material representation is different from both a subjective statement, including one expressing an opinion, motive, or intent, and a generally optimistic ...