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
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.
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
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
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
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).
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).
"[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.
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
"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 ...