910 at 27 n.22. All three cases discuss the "contemporaneous" trading in the context of an implied 10b-5 action against an insider.
In Shapiro and O'Connor, the plaintiffs' and defendants' trades occurred less than a week apart, and the courts found that plaintiffs had stated causes of action for insider trading under 10b-5. Shapiro, 495 F.2d at 241; O'Connor, 559 F. Supp. at 803. The O'Connor court further held that plaintiffs who trade prior to the time that the defendant does are not harmed. Id. In Wilson, the court recognized that a rule which allowed all parties who purchased or sold securities during the full period from when the insider traded to when the insider disclosed would not serve the purpose of the insider trading cause of action because non-contemporaneous traders do not require protection. Thus, the Wilson court held that parties who trade a month after defendants do not trade "contemporaneously." Wilson, 648 F.2d at 94-95.
By reference to these cases, the drafters of ITSFEA meant to protect and compensate investors who trade at the same time as the insider or for some short period thereafter, and that a reasonable period of liability could be as short as a few days, but no longer than a month. In Alfus I, the court considered these cases and others in the context of a 10b-5 cause of action and, without determining one way or another whether an implied 10b-5 cause of action for insider trading exists in the Ninth Circuit, held that "the contemporaneous requirement is not met if plaintiff's trade occurred more than a few days apart from defendants' transactions." Alfus I, 745 F. Supp. at 1522 (citing Wilson, 648 F.2d at 94-95).
Defendants' two alleged insider trades occurred (1) at the time of the March 13, 1990 IPO, when VeriFone and many of the individual defendants sold shares of VeriFone stock, and (2) on August 20, 1990, when defendant Caufield allegedly sold almost 500,000 shares of VeriFone stock. Compl., P69. The representative plaintiffs are alleged to have purchased their stock on April 4, 1990, July 24, 1990, August 3, 1990 and August 6, 1990. Plaintiffs do not state a claim under § 20A on the basis of these trades.
The IPO sales by the individual defendants fail to state a § 20A claim because, as discussed above, no violation of the securities laws occurred in connection with the IPO. As plaintiffs' complaint merely asserts that the defendants failed to disclose projections in connection with the IPO, neither the issuer or the individual defendants were under an obligation to disclose any "material, nonpublic information" other than that which was disclosed in the prospectus. part III.A.1, supra.
Plaintiffs' insider trading claims against Caufield fail because no plaintiff traded "contemporaneously" with Caufield's sale on August 20. All of the named plaintiffs had completed their trading activity before the date in which defendant Caufield allegedly sold his shares. Insiders are under a duty to refrain from trading until the material, nonpublic information in their possession is disclosed. No liability can attach for trades made by plaintiffs before the insider engages in trading activity. O'Connor, 559 F. Supp. at 803; T. Rowe Price New Horizons Fund, Inc., 749 F. Supp. at 710; Alfus I, 745 F. Supp. at 1523.
Thus, even if the plaintiffs are able to state a claim under 10b-5 for the allegedly misleading analysts' reports, and even if plaintiffs can show that Caufield was in possession of material, nonpublic information which would have made the statements in the analysts' reports not misleading, the representative plaintiffs nonetheless cannot state a § 20A claim against Caufield because each of the plaintiffs' trades occurred prior to Caufield's.
Plaintiffs argue that even if the representative plaintiffs cannot assert an individual claim against the defendants under § 20A, they may nonetheless maintain a class action for the benefit of those who did trade contemporaneously with defendants. Not so. Where a plaintiff lacks standing to bring a claim personally, that plaintiff cannot represent the class. Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 40, 48 L. Ed. 2d 450 , 96 S. Ct. 1917 , 38 A.F.T.R.2d (P-H) 5027 (1976); La Mar v. H & B Novelty and Loan Co., 489 F.2d 461, 465-66 (9th Cir. 1973); In re Seagate Technology II Securities Litigation, Fed. Sec. L. Rep. P95,427 (N.D. Cal. 1990).
The class action "representative" requirement embodied in Rule 23(a) is often considered to be a question of standing. Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 1761. Some commentators, however, have observed that Rule 23(a) will also bar certain class actions where all of the requisites for Article III standing are established.
In these cases, Rule 23(a) serves to deter litigation by making it difficult for counsel to locate representative plaintiffs. In some situations, this judicial deterrence of private law suits creates under-enforcement of the law. In the case at bar, however, the deterrent effect of the "representative" requirement serves the Congressional enforcement scheme for insider trading litigation.
Plaintiffs' contrary argument that § 20A will be rendered "meaningless" if plaintiffs who do not have § 20A claims are prohibited from asserting class actions on behalf of investors who have valid § 20A claims is absurd. Those investors who did trade contemporaneously with defendants have an incentive to bring suit, and all the incentive that Congress wished to create rests with those contemporaneous traders. By limiting actions under § 20A to investors who traded contemporaneously with insiders, and by limiting recoverable damages to the amount by which the defendant benefited, Congress deliberately created a narrow private cause of action. The drafters of § 20A could have created as broad a private enforcement scheme as the courts have created under Rule 10b-5, but chose not to do so. Significantly, the final version of ITSFEA deleted provisions for an express cause of action for non-contemporaneous trading which had been present in earlier versions of the legislation. H.R. Rep. 910 at 27. Plaintiffs cannot persuade this court that § 20A is "useless" if it does not apply as broadly as 10b-5 might.
Defendants' motion to dismiss plaintiffs' claims under § 20A is GRANTED WITH PREJUDICE.
IV. THE UNDERWRITER DEFENDANTS' MOTION TO DISMISS.
The underwriter defendants have moved to dismiss the complaint on many of the same grounds as the VeriFone defendants.
A. Statements in the VeriFone Documents.
For the reasons discussed in parts III.A.1. and III.B., supra, the underwriter defendants' motion to dismiss all federal and state law claims against the underwriters arising out statements in VeriFone's prospectus, VeriFone's Forms 10-Q, and VeriFone's press releases is GRANTED WITH PREJUDICE.
B. Statements in the Analysts' Reports.
As discussed above, part III.A.2. supra, the research reports of the underwriter defendants did make actual projections, and liability attaches under Rule 10b-5 for projections that lacked a reasonable basis at the time they were published. Marx, 507 F.2d at 489, Alfus II, 764 F. Supp. at 603.
However, the complaint against the underwriter defendants fails for the same reasons as does the complaint against the VeriFone defendants.
Plaintiffs' conclusory assertion, repeated in PP44, 49(c), 53 and 56(b) of the complaint, that the defendants lacked a "reasonable basis" for the projections disclosed, does not satisfy the pleading requirements of Rule 9(b).
As discussed above, plaintiffs can satisfy the scienter requirement for a 10b-5 cause of action in the context of an allegedly misleading projection only if they can assert facts which show that the underwriter defendants had no reasonable basis for the projections made in the analysts' reports at the time that those reports were published. It is insufficient to allege merely that the forecasts did not come true, Marx, 507 F.2d at 490; it is insufficient to allege merely that other, less positive forecasts were known to the underwriter defendants; and it is insufficient merely to allege that the VeriFone defendants were aware of internal information so that the VeriFone defendants would have had no reasonable basis for publishing the reports. The scienter of the underwriter defendants must be established to state a claim against them. Ernst & Ernst, 425 U.S. at 206 ("There is no indication that Congress intended anyone to be liable for such practices unless he acted other than in good faith.").
The underwriter defendants' motion to dismiss the claims against them arising out of the projections in the analysts' reports is GRANTED. Plaintiffs will be given 30 days from the date this order is filed to amend their complaint.
For the reasons discussed, IT IS HEREBY ORDERED THAT:
A. The VeriFone defendants' and the underwriter defendants' motions to dismiss plaintiffs' federal and state law claims arising out of statements in the March 13, 1990 prospectus, VeriFone's Forms 10-Q, and VeriFone's press releases is GRANTED WITH PREJUDICE.
B. The VeriFone defendants' and the underwriter defendants' motions to dismiss plaintiffs' 10b-5 claims relating to the reports of stock analysts is GRANTED. Plaintiffs are given 30 days from the date of this order to amend their allegations regarding the April Morgan Stanley report and the May and July Dean Witter reports in accordance with this order.
C. The VeriFone defendants' motion to dismiss plaintiffs' § 20A claims for insider trading is GRANTED WITH PREJUDICE.
D. As no claims can be asserted against Robertson, Stephens & Co, the clerk shall enter judgment in favor of that defendant.
VI. ORDER FOLLOWING HEARING ON PLAINTIFFS' MOTION TO VACATE.
Following the court's order granting defendants' motion to dismiss, plaintiffs moved to vacate same. The court heard argument on February 14, 1992, and has considered the briefs filed by counsel. For the reasons stated by the court at the February 14 hearing, plaintiffs' motion to vacate is DENIED.
The court's order, affording plaintiffs 30 days to file an amended complaint with respect to the analysts' reports only, was originally filed on December 21, 1991. At the February 14 hearing on plaintiffs' motion to vacate that order, the court observed that the 30 day period had expired and inquired whether plaintiffs would seek to file an amended complaint following the denial of plaintiffs' motion to vacate. Counsel for plaintiffs informed the court that plaintiffs had no additional facts to allege and that no amended pleading was anticipated.
Accordingly, this matter is hereby DISMISSED WITH PREJUDICE in its entirety. The clerk is directed to enter judgment in favor of all remaining defendants.
DATED: February 21, 1992
VAUGHN R. WALKER
United States District Judge
JUDGMENT IN A CIVIL CASE - February 21, 1992, Filed
Decision by Court. This action came to trial or hearing before the Court with the judge (magistrate) named above presiding. The issues have been tried or heard and a decision has been rendered.
IT IS ORDERED AND ADJUDGED
In accordance with the Court's Amended Order Granting Motions To Dismiss of February 21, 1992, this action and all related actions are hereby dismissed with prejudice in its entirety and judgment is granted in favor of all remaining defendants.