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April 23, 2004.

NUI CORPORATION, et al., Defendants

The opinion of the court was delivered by: MARY COOPER, District Judge


This matter comes before the Court on the motion by defendants, NUI Corporation ("NUI"), John Kean, Jr. ("Kean") and Mark Abramovic ("Abramovic"), to dismiss the Second Amended Complaint pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6). Defendants claim plaintiffs*fn1 fail to plead with sufficient particularity the securities fraud violations alleged. For the reasons stated herein, defendants' motion will be granted in part and denied in part.


 I. Scope of Inquiry

  On a motion to dismiss the Court accepts as true the well-pled allegations in the Second Amended Complaint, and may consider "the documents incorporated by reference therein." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 206 (3d Cir. 2002).*fn2 Plaintiffs state that the allegations in the Second Amended Complaint are

based upon the investigation of [lead] plaintiff's counsel, which included a review of United States Securities and Exchange Commission ("SEC") filings by NUI . . ., securities analysts' reports about [NUI], press releases and other public statements made by . . . defendants, media reports about [NUI] and interviews with former [NUI] employees.
(2d Am. Compl. at 1.) A significant portion of plaintiffs' allegations regarding defendants' misconduct are based on information provided by Charles Eisenberg ("Eisenberg"), a former employee of NUI Telecom ("Telecom"), a subsidiary of NUI. (Id. at ¶ 24.) Eisenberg held the position of operations director for Telecom's international division from February 2002 through July 2002, when his employment was terminated. (Id.)

 II. Plaintiffs' Allegations

  Plaintiffs bring this securities fraud action on behalf of all purchasers of NUI securities between November 8, 2001, and October 17, 2002 ("the Class Period"). (Id. at ¶ 1.) Plaintiffs claim that during the Class Period, defendants failed "to disclose known risks regarding [NUI's] business and issued false and misleading statements about its businesses, current and future financial prospects and results, causing NUI's stock to trade at artificially inflated levels during the Class Period." (Id. at ¶ 3.) Specifically, plaintiffs claim defendants intentionally inflated NUI's earnings by (1) making misleading statements concerning, and failing to properly record, NUI's true bad debt levels ("the bad debt practice") and (2) pursuing illegal telecommunications billing practices ("reterminating"). (Id. at ¶ 5.)

  NUI announced to the public on October 18, 2002, that contrary to previous forecasts it would "sustain greatly reduced earnings for its 2002 fiscal year." (Id. at ¶ 6.) As a result, NUI's share price decreased by more than 50%. (Id.) Plaintiffs instituted this action shortly thereafter.

  NUI is a Delaware corporation with its "principal executive offices" in New Jersey. (Id. at ¶ 11.) Telecom is a subsidiary of NUI. (Def. Supp. Br. at 1.) Kean is, and at all relevant times was, NUI's president and CEO. (2d Am. Compl. at ¶ 12.) Abramovic is, and at all relevant times was, NUI's CFO. (Id. at ¶ 13.) At all relevant times, both Kean and Abramovic: were directors and members of NUI's Executive Committee; acted as spokespersons for NUI; participated in the day-to-day management and overall direction of NUI; had access to confidential proprietary information concerning NUI; and were "actively involved in preparing, reviewing, authorizing and disseminating NUI's public statements, as well as [their] own statements." (Id. at ¶¶ 12-13.) Plaintiffs allege that all of the defendants "either knew or recklessly disregarded that the wrongful course of conduct and misleading statements and omissions described [in the Second Amended Complaint] would . . . artificially inflate or maintain the price of NUI securities." (Id. at ¶ 14.)

  Count I of the Second Amended Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), codified at 15 U.S.C. § 78j, and Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, by all of the defendants. (Id. at ¶¶ 125-34.) Count II alleges that Kean and Abramovic violated Section 20(a) of the Exchange Act, codified at 15 U.S.C. § 78t(a). (Id. at ¶¶ 135-38.)


 I. Rule 12(b)(6), Rule 9(b), and the PSLRA

  A court may dismiss a complaint pursuant to Rule 12(b)(6) for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). On a motion to dismiss we generally must accept as true all of the factual allegations in the complaint, and must draw all reasonable inferences in favor of the plaintiffs. Doe v. Delie, 257 F.3d 309, 313 (3d Cir. 2001). The Court need not credit bald assertions or legal conclusions alleged in the complaint, however. See, e.g., In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp.2d 551, 565 (D.N.J. 2001). "Dismissal of claims [on a motion to dismiss] is appropriate only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim upon which relief may be granted." Jakomas v. McFalls, 229 F. Supp.2d 412, 419 (W.D. Pa. 2002).

  A securities fraud action, however, "requires more than mere reference to the conventional standard applicable to motions under Rule 12(b)(6)." In re Rockefeller, 311 F.3d at 215. Rather, the Private Securities Litigation Reform Act ("PSLRA"), codified at 15 U.S.C. § 78u-4 et seq., and Rule 9(b) impose heightened pleading requirements that must be satisfied for a complaint sounding in securities fraud to survive a motion to dismiss. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 531 (3d Cir. 1999); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1424 (3d Cir. 1997).

  Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constitutinq fraud or mistake shall be stated with particularity." "This particularity requirement has been riqorously applied in securities fraud cases." In re Burlington, 114 F.3d at 1417 (citations omitted). Though Rule 9(b) does not require plaintiffs to plead every material detail of the fraud, it nevertheless "requires, at a minimum, that plaintiffs support their allegations of securities fraud with all of the essential factual background that would accompany the first paraqraph of any newspaper story — that is, the who, what, when, where and how of the events at issue." In re Rockefeller, 311 F.3d at 217 (quotations and citations omitted).

  Courts are sensitive, however, "to the fact that application of [Rule 9(b)] prior to discovery may permit sophisticated defrauders to successfully conceal the details of their fraud." Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir. 1992) (quotations and citations omitted). "Accordingly, the normally rigorous particularity rule has been relaxed somewhat where the factual information is peculiarly within the defendant's knowledge or control." In re Burlington, 114 F.3d at 1418.

  The PSLRA, too, mandates more particularized pleading. Specifically, it requires plaintiffs to

specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
15 U.S.C. § 78u-4(b)(1). This "particularity [requirement] . . . extends that of Rule 9(b) and requires plaintiffs to set forth the details of allegedly fraudulent statements or omissions, including who was involved, where the events took place, when the events took place, and why any statements were misleading." In re Rockefeller, 311 F.3d at 218.

  The PSLRA also modifies the burden of pleading intent, or scienter, by requiring plaintiffs to "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). To plead scienter in compliance with the PSLRA, plaintiffs must allege facts that either "(1) establish a motive and an opportunity to commit fraud, or (2) constitute circumstantial evidence of either reckless or conscious behavior." In re Digital Island Sec. Litig., 357 F.3d 322, 328-29 (3d Cir. 2004). See also In re Advanta, 180 F.3d at 534-35. "Either way, plaintiffs must plead facts `with particularity,' and these facts must give rise to a `strong inference' of a knowing or reckless misstatement." In re Digital Island, 357 F.3d at 329. See also id. at 330 (noting that "the PSLRA requires a strong — as opposed to merely reasonable — inference [of scienter] to survive a motion to dismiss").

 II. Section 10(b) and Rule 10b-5

  Section 10(b) and Rule 10b-5 create liability for securities fraud. Section 10(b) provides, in pertinent part:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of national securities exchange —
  (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j. Rule 10b-5, which establishes a private cause of action, was promulgated by the SEC in order to implement this section. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975). Rule 10b-5 makes it unlawful:
(a) To employ any device, scheme, or artifice to defraud, (b) To 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 light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
  Five elements must be pled to state a Rule 10b-5 claim:
(1) a specific false or misleading statement in connection with the purchase or sale of a security (2) of a material fact (3) with the intention that it should be acted upon, (4) upon which plaintiff relied (5) to plaintiff's detriment.
See Semerenko v. Cendant Corp., 223 F.3d 165, 174 (3d Cir. 2000); Jones, 274 F. Supp.2d at 626.

  a. False or Misleading Statements

  Defendants can be liable for both affirmative misstatements and misleading omissions. Omissions, however, can give rise to liability only where the defendant had an affirmative duty to disclose the information in question, such as "when there is insider trading, a statute requiring disclosure, or an inaccurate, incomplete or misleading prior disclosure." Oran v. Stafford, 226 F.3d 275, 285-86 (3d Cir. 2000). See also In re Aetna Inc. Sec. Litig., 34 F. Supp.2d 935, 948 (E.D. Pa. 1999) ("There is a duty to disclose information when disclosure is necessary to make defendants' other statements, whether mandatory or volunteered, not misleading."). Under the PSLRA, courts must analyze each statement at issue to determine whether each alleged misrepresentation is pled with the requisite particularity. In re Westinghouse Sec. Litig., 90 F.3d 696, 712 (3d Cir. 1996).

  b. Materiality

  Rule 10b-5 "explicitly require[s] a well-pleaded allegation that the purported misrepresentations or omissions at issue were material." In re Rockefeller, 311 F.3d at 211. A fact is material only if "there [is] a substantial likelihood that [it] would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available" to the investing public. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

  c. Scienter

  "[T]o state a violation under Rule 10b-5, plaintiffs must allege that defendants acted with the requisite state of mind." In re Rockefeller, 311 F.3d at 211. To be actionable, a material misstatement "must be made with conscious or reckless disregard of its falsity." In re ATI Techs., Inc., Sec. Litig., 216 F. Supp.2d 418, 428 (E.D. Pa. 2002). As noted supra, to establish this state of mind plaintiffs must plead facts that either (1) constitute circumstantial evidence of either reckless or conscious behavior or (2) establish a "motive and opportunity" to commit fraud.

  Conscious misbehavior is alleged by "stating with particularity facts giving rise to a strong inference of conscious wrongdoing, such as intentional fraud or other deliberate illegal behavior." In re Advanta, 180 F.3d at 535. "A reckless statement is one involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading . . . that is either known to defendant or is so obvious that the actor must have been aware of it." In re Digital Island, 357 F.3d at 332 (quotations and citations omitted). Motive and opportunity are properly stated when a plaintiff alleges facts showing that defendants "had the motive to commit fraud and a clear opportunity to do so." Wilson v. Bernstock, 195 F. Supp.2d 619, 633 (D.N.J. 2002) (quotations and citations omitted). d. Reasonable Reliance

  "To state a claim for securities fraud under Section 10(b)and Rule 10b-5 thereunder, a complaint must show that plaintiffs reasonably relied on defendants' allegedly fraudulent misrepresentations, omissions, or conduct." Jones, 274 F. Supp.2d at 632 (citing Zlotnick v. TIE Communications, 836 F.2d 818, 821 (3d Cir. 1988)). Defendants do not contest that reasonable reliance has been properly alleged.

  e. Damage

  Plaintiffs in securities fraud cases must plead (1) damages and (2) that their reliance on the fraud proximately caused those damages. See Semerenko, 223 F.3d at 174; In re Rent-Way Sec. Litig., 209 F. Supp.2d 493, 512 (W.D. Pa. 2002). This second requirement is sometimes called pleading "loss causation." Defendants do not contest that plaintiffs have adequately pled both of these elements for their claim based on the alleged bad debt practice. Defendants do, however, claim plaintiffs have not properly pled damages or loss causation for the alleged reterminating practice.

 III. Section 20(a)

  "Section 20(a) creates a cause of action against individual defendants alleged to have been `control persons' of companies guilty of securities fraud." Jones, 274 F. Supp.2d at 644. Section 20(a) states: Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling ...

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