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In re Intelligroup Securities Litigation

December 20, 2006


The opinion of the court was delivered by: Brown, Chief Judge.


This matter is before the Court on Defendants' motions (collectively "Motions") to dismiss the Plaintiffs' Second Amended Consolidated Class Action Complaint ("Complaint") pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 ("Reform Act" or "PSLRA"), 15 U.S.C. §§ 78u-4, et seq. For the reasons discussed below, Defendants' Motions are GRANTED, and Plaintiffs' Complaint is DISMISSED without prejudice.


Plaintiffs, investors who purchased the common stock of Defendant Intelligroup ("Intelligroup" or "Company," or "Issuer") during forty months between May 1, 2001, through and including September 24, 2004 ("Class Period"), brought this securities fraud class action alleging that Defendants defrauded them by artificially inflating the value of the stock through false and misleading statements disseminated into the investing community. See Compl. at 1.

The litigation was initiated on October 12, 2004, see Docket Entry No. 1, when the first of six class action complaints was filed with the Court. On August 10, 2005, all six actions were consolidated into the instant action. See Docket Entry No. 24. On October 10, 2005, Plaintiffs filed their joint Amended Complaint ("Original Complaint") against the Issuer and four former officers of the Issuer, two of whom were Defendants Valluripalli and Visco. See Docket Entry No. 31. On December 5, 2005, certain Defendants filed their motion to dismiss Plaintiffs' Original Complaint. See Docket Entry No. 3. On February 10, 2006, the instant Complaint was filed against the Issuer and Defendants Valluripalli and Visco; with all claims against the other two officers being dismissed. See Docket Entry No. 39. On March 27, 2006, Defendants filed their instant Motions, see Docket Entries Nos. 40 and 42, and Plaintiffs filed their brief in opposition ("Opposition") to the Motions on May 11, 2006. See Docket Entry No. 43. Defendants filed their reply ("Reply") on June 9, 2006. See Docket Entry No. 44.

This matter was transferred to the undersigned on November 2, 2006. See Docket Entry No. 50. Except for the instant Motions, no other applications are currently pending in this action.


I. Elements of a 10b-5 Claim

Congress passed the Securities Exchange Act of 1934 (" '34 Act"), 15 U.S.C. §§ 78a-78kk (1994 & Supp. IV 1998), assuring the disclosure of full and fair information to the investing public. See H.R.Rep. No. 73-1383, at 1-2 (1934) (describing the legislation's purposes). In relevant part, Section 10(b) of the '34 Act proscribed 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). The ensuing Rule 10b-5, 17 C.F.R. § 240.10b-5, emerged in 1943 as a small legislative acorn that ultimately developed into a full-blown judicial oak.*fn1 See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (where Justice Rehnquist presented this well-known metaphor). Like Section10(b), Rule 10b-5 prohibits "any act ... which operates or would operate as a fraud or deceit upon any person" and 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). Under this Rule, "the basic elements [of a private federal securities fraud action] include: (1) a material misrepresentation ...; (2) scienter, i.e., [defendant's] wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to ... as `transaction causation'; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss." Dura Pharm., Inc. v. Broudo (" Dura "), 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (citing 15 U.S.C. § 78u-4(b)(4); Basic Inc. v. Levinson, 485 U.S. 224, 231-232, 248-249, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps, 421 U.S. at 730-731, 95 S.Ct. 1917; Thomas Lee Hazen, Law of Securities Regulation, ¶¶ 12.11[1], [3] (5th ed.2002)).

II. Pleading Requirements of a 10b-5 Claim

Plaintiff's pleading requirements are different with respect to different elements of a 10b-5 claim. The general standard of review triggered by defendant's motion to dismiss under Rule 12(b)(6) is well-settled, i.e., the court must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party.*fn2 See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), overruled on other grounds, Harlow v. Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982); Allegheny Gen. Hosp. v. Philip Morris, Inc., 228 F.3d 429, 434-35 (3d Cir.2000). Therefore, dismissal is not appropriate unless it appears beyond doubt that the plaintiff can prove no set of facts in support of plaintiff's claim which would entitle him to relief. See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 346 (3d Cir.2001) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

A. Heightened Pleading Requirements

The Rule 12(b)(6) standard of review is, however, altered by Rule 9(b), which imposes a heightened pleading requirement of factual particularity with respect to allegations of fraud. Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). "This particularity requirement has been rigorously applied in securities fraud cases." Burlington Coat Fact. Sec. Litig., 114 F.3d at 1417 (citations omitted). Therefore, a plaintiff averring securities fraud claims must specify " `the who, what, when, where, and how: the first paragraph of any newspaper story.' " Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.1999) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)).

The Third Circuit clarified:

[a]though Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use "alternative means of injecting precision and some measure of substantiation into their allegations of fraud."

Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 216 (3d Cir.2002) (quoting Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d at 577). Moreover, a "stringent" reading of the requirements set forth in Rule 9(b) is expressly applicable to two elements of a securities fraud claim, i.e., scienter and material misrepresentation, because of the analogous heightened pleading requirements contained in the Reform Act.*fn3 See 15 U.S.C. § 78u-4(b)(1) and (b)(2).

Therefore, when stating "falsity," i.e., "material misrepresentation" element of his/her 10b-5 claim, a securities fraud plaintiff must "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."*fn4 15 U.S.C. § 78u-4(b)(1), (2). Similarly, with respect to the scienter element of his/her 10b-5 claim, the Reform Act requires that "the complaint shall ... state with particularity [all] 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).

In sum, the Reform Act modified the traditional Rule 12(b)(6) analysis for the purposes of pleading "material misrepresentation" and "scienter." See Digital Island Sec. Litig., 357 F.3d 322, 328 (3d Cir.2004) ("The Reform Act requires a `strong inference' of scienter, and accordingly, alters the normal operation of inferences under Rule 12(b)(6)"); Rockefeller Ctr. Props. Secs. Litig., 311 F.3d at 224 (noting that "whereas under Rule 12(b)(6), [the court] must assume all factual allegations in the complaint are true, ... under the Reform Act, [the court would] disregard `catch-all' or `blanket' assertions that do not live up to the particularity requirements of the statute," quoting Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 660 (8th Cir.2001)); Advanta, 180 F.3d at 531 (stating that plaintiff's failure to meet the heightened pleading requirements results in dismissal of the complaint); accord Greebel v. FTP Software, Inc., 194 F.3d 185, 196 (1st Cir.1999) ("A mere reasonable inference is insufficient to survive a motion to dismiss").

B. Rule 8 Pleading Requirements

It appears, however, that the heightened pleading requirements of PSLRA might be inapplicable to the remaining elements of a 10b-5 claim. See Dura, 544 U.S. at 346, 125 S.Ct. 1627 ("[The Court] assume[s], at least for argument's sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss"). Indeed, since only the first two Subsections of 15 U.S.C. § 78u-4(b) require investors to specify falsity and plead facts supporting a strong inference of scienter, while the following Subsections apply only after the heightened pleading standards of 15 U.S.C. § 78u-4(b)(1) and (2) have been met, it is fair to infer that the remaining clements of any 10b-5 claim are subject to ordinary notice-pleading standards set forth in Rule 8. See 15 U.S.C. 78u-4(b)(3); accord Dura, 544 U.S. at 346, 125 S.Ct. 1627 ("[T]he Federal Rules of Civil Procedure require only `a short and plain statement of the claim showing that the pleader is entitled to relief' ") (quoting Fed.R.Civ.P. 8(a)(2)).

But, even so, the "short and plain statement" must provide the defendant with "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). [The Court recognizes] that ordinary pleading rules are not meant to impose a great burden upon a plaintiff. [ See ] Swierkiewicz v. Sorema N. A., 534 U.S. 506, 513-15, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002). But it should not prove burdensome for a plaintiff ... to provide a defendant with some indication of the [facts] that the plaintiff has in mind.... [A]llowing a plaintiff to forgo giving any indication of the [facts] that the plaintiff has in mind would bring about harm of the very sort the [Reform Act] seek[s] to avoid. Cf. H.R. Conf. Rep. No. 104-369, p 31 (1995) (criticizing "abusive" practices including "the routine filing of lawsuits ... with only a faint hope that the discovery process might lead eventually to some plausible cause of action"). It would permit a plaintiff "with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence." Blue Chip Stamps, 421 U.S. at 741, 95 S.Ct. 1917. Such a rule would tend to transform a private securities action into a partial downside insurance policy. See H.R. Conf. Rep. No. 104-369, at 31; see also Basic, 485 U.S. at 252, 108 S.Ct. 978 ....

Dura, 544 U.S. at 347-48, 125 S.Ct. 1627.


While the factual matters pertaining to potential proof of legal elements of Plaintiffs' claim are as interminable as they are complex, the key facts of this case appear to be both simple and straightforward. Adversarial vocabulary and technical terms aside, these facts are set forth identically in Plaintiffs' Complaint and Defendants' Motions, with the following exception.

Plaintiffs appear to assert that this Court's factual inquiry has to be limited solely to the facts set forth in Plaintiffs' Complaint. See Opposition at 17, n. 10. Although Plaintiffs expressly made this claim only with respect to the fact that the SEC conducted a formal investigation into the events leading to the Announcement and terminated the investigation without filing any charges against the Company, see id., Defendants apparently presumed that Plaintiffs wished to make the same assertion with respect to any fact not set forth in the Complaint. See Defendants' Request for Judicial Notice ("Request"), Docket Entry No. 40 (seeking judicial notice of Intelligroup's (1) Form 10-K filed with the SEC on March 30, 2004; (2) Press Release of September 24, 2004 ("Press Release"); (3) stock chart compiled by Market Watch ("Stock Chart"); and (4) transcript of October 5, 2004, conference).

Rule 201(b), Federal Rules of Evidence permits a district court to take judicial notice of facts that are "not subject to reasonable dispute in that [they are] either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Rule 201(b). Under Rule 201(d), Federal Rules of Evidence, a district court must take judicial notice "if requested by a party and supplied with the necessary information." Rule 201(d).

In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir.2002) (finding that a judicial notice was properly taken with respect to "three different categories of documents [which] included: (1) documents relied upon in the Complaint ( [including] Company['s] press releases); (2) documents filed with the [United States Securities and Exchange Commission ("]SEC[") ]; and (3) stock price data compiled by [a reliable financial] news service").

Therefore, for the purposes of the instant Opinion and accompanying Order, this Court takes judicial notice of the Stock Chart and the Press Release. The Stock Chart is a table of historical prices compiled by a reliable financial news service that specifies, to the penny, the adjusted closing prices of Intelligroup's stock over the week following the Press Release. Moreover, Plaintiffs own Exhibit C is a line graph of historical prices which is identical, information-wise, to the Stock Chart, short of the fact that the graphical image of Intelligroup's stock price fluctuation contained in Plaintiffs' Exhibit C prevents this Court from reading the values to the penny. Hence, this Court takes notice of the Stock Chart, see Issuer's Brief, Ex. F, as a document enhancing the information contained in Plaintiffs' Exhibit C.

The situation, however, appears somewhat different with respect to the Press Release. See Issuer's Brief, Ex. A. The allegations made in Plaintiff's Complaint, while containing indirect references to the Press Release i.e., a document filed by Intelligroup with the SEC (and even quoting certain language contained in the Press Release), see Compl. ¶ 8, create the impression that there was only one announcement in the Press Release about erroneous accounting practices. However, the Press Release contained three different announcements, each equally important to the inquiry at hand from the financial point of view. Since it would be contrary to the express guidance of the Third Circuit to exclude the part of the Press Release overlooked by Plaintiffs, this Court takes judicial notice of the entire content of the Press Release. See NAHC, 306 F.3d at 1331.

The Court now turns to the uncontested facts of the case. Intelligroup is a publicly traded company incorporated in the State of New Jersey and keeping its principal office at 499 Thornall Street, Edison, New Jersey. See Compl. ¶¶ 1, 21; Issuer's Brief at 4. Intelligroup has subsidiary operations in India, Japan, United Kingdom and Denmark. The Company develops and supports information technology programs for multinational and local businesses. See Compl. ¶ 2; Intelligroup's Brief in Support of Motion ("Issuer's Brief") at 4. "Much of Intelligroup's work is done by sending the work offshore to the Company's subsidiary in India." Compl. ¶ 2. Intelligroup's stock was traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). See Compl. ¶ 6, Issuer's Brief at 5.

Defendant Valluripalli served as Company's CEO, President and Chairman of the Board during the Class Period, see Compl. ¶ 22, Issuer's Brief at 4, and Defendant Visco served as Company's CFO from November of 2000 to November of 2003. See id.

On September 24, 2004, Intelligroup issued the Press Release making an announcement ("First Announcement") that it expected to restate its financial statements issued and filed with the United States Securities and Exchange Commission ("SEC") during 2001, 2002, 2003 and the first quarter of 2004 ("Statements"). See Compl. ¶ 5; Issuer's Brief at 5; Press Release. In the very same Press Release, the Company made two other announcements, one about Intelligroup's anticipated private placement ("Second Announcement"),*fn5 and another about Intelligroup's default on-and loss of-revolving credit ("Third Announcement"). See Press Release. On September 24, 2004, the last trading day before these three Announcements, Issuer's common stock closed at $1.65. See Compl.¶ 6 and Ex. C; Issuer's Brief at 5-6. On September 27, 2004, the first day after the Announcements, the stock opened at $1.58 and fell to $1.13 per share, under heavy trading. See id.; see also Stock Chart. Within the next five days, however, Intelligroup's stock kept steadily rising from $1.13 to $1.15, then $1.20, then $1.42, finally climbing to $1.60, that is, two cents above the opening price on the Press-Release day. See Stock Chart.

The restatement of the Company's financials ("Restatement") was made on October 24, 2005, more than one year after the issuance of the Press Release. See Compl. ¶ 8. Although the Restatement revealed that the Company's Statements required corrections so "extensive [that they] affected virtually every line item" of the Statements, the market displayed no reaction to the Restatement. See Compl., Ex. C.

Plaintiffs now assert that Defendants' issuance of the Statements containing a host of accounting errors amounted to a violation of Section 10(b) of '34 Act and the ensuing Rule 10b-5. Plaintiffs maintain that Defendants' accounting errors were so systematic and endemic as to render the Statements false, and to inflate the market value of Intelligroup securities. Compl.¶ 14. In addition, Plaintiffs maintain that the fact that "Defendants repeatedly signed, filed, and published certifications that Intelligroup's internal controls were adequate when ... Intelligroup's internal controls were [in fact,] weak or non-existent" establishes Defendants' liability under Rule 10b-5 and, in addition, signifies that Defendants Valluripalli and Visco were liable for Plaintiffs' injuries as controlling persons, since these Defendants "knew [about] or recklessly disregarded" the falsity of Intelligroup's accounting data contained in the Statements.*fn6 Id. ¶¶ 12-14; Opposition at 32-36 and notes 19, 20 (citing to Compl. ¶¶ 70-75, referring, in turn, to Section 906 of the Sarbanes-Oxley Act) (brackets omitted).

With respect to the causation element of their 10b-5 claim, Plaintiffs assert that causation is established by the fact that "Intelligroup's common stock traded in an open, well-developed and efficient market, [and] the market for Intelligroup securities promptly digested ... all publicly-available [information] and reflected such information in Intelligroup's stock price. Under these circumstances, [Plaintiffs] suffered [an] injury through their purchase of Intelligroup securities at artificially inflated prices." Compl. ¶ ¶ 105-06. Finally, setting forth the economic loss clement of their claim, Plaintiffs allege that: "Plaintiffs ... suffer[ed] actual economic loss when ...

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