P 67. Additionally, Plaintiffs contend that Firefox was extending credit under liberal terms without deferring revenue. Complaint P 67.
Again, Plaintiffs' allegations fail for lack of particularity. The Complaint does not name a single customer or sale where Firefox "parked" its inventory or prematurely recognized revenue. See Stack v. Lobo, 1995 U.S. Dist. LEXIS 19966, *14; In Re Wall Data Securities Litigation, 1995 U.S. Dist. LEXIS 19812, *11-20. Additionally, the Complaint fails to identify "any contemporaneous facts or statements which suggest that Defendants were engaging in premature recognition of revenue." Stack, 1995 U.S. Dist. LEXIS 19966 at *14. As such, Plaintiffs' allegations that Defendants improperly recognized revenue are too conclusory to satisfy Rule 9 (b).
Plaintiffs also allege that Firefox's risk of bad debts increased as well as its time for collecting receivables, yet Firefox failed to set aside adequate reserves for doubtful accounts. Complaint PP 69 & 70. Further, Plaintiffs state that Firefox's reserves were much lower than competitors despite high receivables. Complaint P 70. Unlike Plaintiffs' other allegations, these assertions meet the particularity requirements of Rule 9(b).
Plaintiffs allege that Firefox ended its factoring arrangement which increased its risk of bad debt. Complaint P 67. Plaintiffs also assert that Firefox's days' sales outstanding (DSO) increased from 102 days to 152 days. Complaint P 68. Additionally, the Complaint provides that competitors, who had lower DSOs, maintained reserves of 4% of gross receivables while Firefox's allowance for doubtful accounts represented less than 1/2 of one percent of its gross receivables. Complaint P 70. Accepting these allegations as true, the Complaint sufficiently identifies Defendants allegedly misleading conduct and how it was improper.
However, as explained below, this claim fails, along with Plaintiffs' others claims, because the Complaint does not provide facts that give rise to a strong inference that the Defendants acted with the required state of mind. In other words, even assuming Defendants acted improperly in failing to keep adequate reserves, Plaintiffs have not set forth sufficient facts to allow for a strong inference that Defendants' actions were intentional or reckless.
4) False and Misleading Boilerplate Warnings and Disclaimers
Plaintiffs also allege that Firefox released misleading warnings and disclaimers when it filed reports with its Form 10-Qs. Complaint P 73. These allegations do not and cannot form the basis for a claim pursuant to § 10(b) or Rule 10(b)(5).
Firefox's reports stated that its financial results may vary significantly due to several factors. The reports also stated that due to its sales with large customers significant fluctuations can arise from the cancellation of a small number of orders. Further, the reports contained warnings regarding Firefox's volume of sales at the end of each quarter, its inability to adjust spending in a timely manner and the possibility of reduced prices.
According to Plaintiffs, these warnings were nothing but generic statements and the reports should have contained specific disclosures of the adverse factors which were then negatively impacting Firefox's business. In other words, Plaintiffs argue that Fire fox should not have stated that certain adverse factors may effect the financial statements, but rather it should have said they are effecting Firefox's business.
Plaintiffs' argument is absurd. Defendants' warnings regarding potential adverse factors are not actionable as a matter of law. Plaintiffs do not assert that any of the warnings were without basis or wrong. Instead, Plaintiffs assert that the warnings should have been more specific. Section 10(b) and Rule 10(b)(5) are designed to protect against false and misleading statements, not statements that are too abstract. Thus, Plaintiffs' claims that Firefox's warning and disclaimers were false and misleading are DISMISSED WITH PREJUDICE.
B. Required State of Mind
Scienter is a necessary element of every 10-b(5) claim. In Re Time Warner Inc. Securities Litigation, 9 F.3d 259, 268 (2nd Cir. 1993), cert. denied sub nom. 128 L. Ed. 2d 70, 114 S. Ct. 1397 (1944). Further, the Reform Act requires that securities fraud complaints, "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Pub.L. 104-67, 109 Stat. 746-747.
There are two distinct ways in which a plaintiff may plead scienter without direct knowledge of Defendants state of mind. First, a plaintiff can allege "facts constituting circumstantial evidence of either reckless or conscious behavior." In Re Time Warner, 9 F.3d at 269. Second, a plaintiff can allege facts "establishing a motive to commit fraud and an opportunity to do so." Id.
Here, the Complaint falls short under either approach. The Complaint does not include "facts constituting circumstantial evidence of either reckless or conscious behavior." As previously stated, Plaintiffs do not sufficiently specify any reasons why Defendants' statements were misleading when they were made. Further, Plaintiffs do not set forth any contemporaneous facts to support their assertions of knowledge and recklessness. Instead, Plaintiffs rely on Firefox's subsequent disclosure to create an inference that Defendants deliberately deceived the public. However, "misguided optimism is not a cause of action, and does not support an inference of fraud." Shields v. Citytrust Bancorp Inc., 25 F.3d 1124 (2nd Cir. 1994).
As for motive and opportunity, Plaintiffs allege that Defendants conducted a fraudulent scheme so that they could bring about a high acquisition price for Firefox. In other words, Plaintiffs assert that Defendants knew Firefox was encountering difficulties, but they tried to conceal the company's mismanagement so that they would receive more for the stock they owned. The problem with Plaintiffs' theory is that the merger did not take place until after Firefox's stock price plummeted. Thus, even if Firefox's stock price was inflated, Defendants did not benefit from it.
Plaintiffs attempt to overcome this fact by generally alleging that Fire fox attempted to arrange the acquisition before the disclosure on January 3, 1996. Complaint P 10. However, in alleging scienter, a plaintiff cannot base its claims on conclusory allegations, but instead, must provide an ample factual basis to support their charges. O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2nd Cir. 1991). Here, Plaintiffs do not allege any facts to support the proposition that Defendants intended to complete the acquisition before revealing Firefox's fourth quarter results. Thus, pursuant to the Reform Act, the Court DISMISSES the Complaint because it fails to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 109 Stat. 746-747.
C. Dismissal pursuant to The Reform Act
Defendants contend that since the Complaint fails to satisfy the pleading requirements of the Reform Act, it should be dismissed without leave to amend. Defendants argue that the language of the Reform Act and its legislative history compel such a result. Defendants' argument is unpersuasive.
Section 21D(b)(3)(A) of the Reform Act provides that "in any action arising under this title, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) are not met." Contrary to Defendants' assertions, there is nothing in this language to indicate that district courts are required to dismiss securities fraud claims without leave to amend. Further, without a clear directive from Congress, this Court refuses to read into the Reform Act any limitation on the ability of trial courts to permit an opportunity to amend.
Plaintiffs' claims based on the allegedly false and misleading analysts' reports, company statements, and financial statements are DISMISSED WITH LEAVE TO AMEND. Plaintiffs' claims based on the allegedly false and misleading boilerplate warnings and disclaimers are DISMISSED WITH PREJUDICE. Further, Plaintiffs shall have until July 5, 1996, to amend their Complaint.
IT IS SO ORDERED.
United States District Judge