Turner v. MagicJack VocalTec Ltd. et al

Filing 50

OPINION re: 35 MOTION to Dismiss. filed by Daniel Borislow, Peter J. Russo, Andrew Macinnes, Gerald T. Vento, MagicJack VocalTec Ltd. For the reasons set forth above, Defendants' motion to dismiss is granted. IT IS SO ORDERED. (Signed by Judge Robert W. Sweet on 1/29/2014) (ama)

Download PDF
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK --x DOUGLAS TURNER, Individually and on Behalf Of All Others Similarly Situated, 13 Civ. 0448 Plaintiffs, OPINION -against MAGICJACK VOCALTEC, LTD., ANDREW MACINNES, DANIEL BORISLOW, GERALD T. VENTO, and PETER J. RUSSO, rr _, Defendants. ~-::- ___ t.. T.:SD~ S~NY , DOCuMt.NT I : r:'~' ,Ff'T) ---X .. L ..• ~ tl,ONJCALLY p' I ,i ODe ,fl:. fLED 1/ I, ---- ---- ---- ---- - 'T '1!)~~)?f=fl --, A P PEA RAN C E S: --~ Attorne et al. for the Defendants MAGICJACK VOCALTEC LTD. ARNOLD & PORTER, LLP 555 Twelfth Street NW Washington, DC. 20004 By: John A. Freedman, Esq. ARNOLD & PORTER, LLP 399 Park Avenue New York, NY 10022 By: Stewart D. Aaron, Esq. Plaintiffss and the Class POMERANTZ GROSSMAN HUFFORD DAHLSTROM & GROSS LLP 600 Third Avenue, 20th Fl. New York, NY 10016 By: Marc I. Gross, Esq. Jeremy A. Lieberman, Esq. Murielle J. Steven Walsh, Esq. . ~.,-. -~.-~.-.~~'-----~ Star Mish 1 Tyner, Esq. THE ROSEN LAW FIRM 275 Madison Avenue, 34th Fl. New York, NY 10016 By: Laurence M. Rosen, Esq. Phill Kim, ESq. Turner Attorne BRONSTEIN GEWIRTZ & GROSSMAN LLP 60 East 42nd Street, S 4600 New York, NY 10165 Peretz Bronstein, Esq. 1 Sweet, D. J. Defendants magicJack VocalTec Ltd. "Company"), Andrew Ma nnes ("magicJack" or ("MacInnes"), Daniel Borislow ("Borislow"), Gerald Vento (Vento") and Peter Russo ("Russo") (collectively "Defendants") move to dismiss the Second Amended Complaint ("SAC") of Plaintiffs Douglas Turner, individually and on behalf of all others similar situated ("Turner" or "Plaintiffs") . For the reasons set forth below, Defendants' motion is granted. Procedural History Plaintiffs led the rst Complaint on January 18, 2013, and the First Amended Complaint ("FAC") on March 12, 2013. On April 26, 2013, pursuant to Section 21 D(a) (3) (B) of the Exchange Act, 15 U.S.C. §7Su-(a) (3) (B), the magicJack Investor Group and s members were appointed as Lead Plaintiffs for the class because they have the largest financial interest in s litigation and otherwise is the requirements of R. Civ. P. 23, and the Rosen Law Firm P.A. and Pomerantz 2 Grossman Hufford Dahlstrom & Gross LLP were appointed Co-Lead Counsel. On July 22, 2013, Amended Complaint ("SAC"). Plaintiffs filed their Second Defendants filed their motion to dismiss the SAC on September 13, 2013. Defendants' motion was heard and marked fully submitted on November 20, 2013. Facts This purchasers February of 28, is a securities magicJack 2012, "Class Period"). securities through (CompI. MagicJack is class and action during including on the January behalf period 8, of from 2013 'j[ 1.) an Israeli company that develops and sells software and hardware for making telephone calls over the internet. (CompI. 'j['j[ 2, 15, 21 23.) between the period of February 28, Plaintiffs allege 2012 through January 8, that 2013, the Company made a series of "false and/or misleading statements and/or failed to the purpose sclose material facts of keeping the Company's stock price inflated. 3 II (CompI. 'j[ 3.) The Complaint also disclose a lawsuit write-down (Compl. alleges (Compl. 'j['j[ that 'j['j[ 81 100); the 56-57); (Compl. that his Borislow had pledged addition, the Complaint failed record an (2) to (1) inventory disclose the significance of (3) revenue recorded from puts Company 107-115); and (4) 'j['j[ stock maintains (Compl. that disclose 34-46). 'j['j[ throughout In the Class Period, magicJack was engaged in a buyback program to repurchase $100 Ilion of its stock. (Compl. 'j['j[ 104, 106.) The individual Defendants are of cers and directors of magicJack during the Class Period. Borislow served as magicJack's CEO from the beginning of t Class Borislow is shares of (Compl. 'j[ and Period through alleged to magicJack 34), strategic December have pledged as collateral 2012. (Compl. "over one million against personal "$3.7 (Compl. investors, million 'j['j[ of 16.) his debt," which he was alleged to have sold to "long term including the Company's President and three shareholders," at a price whi a 'j[ scount from then-current mar Chairman, represented prices." 42, 145.) On May 9, 2012, Thompson Reuters published an article detailing how the CEO of Green Mountain Cof 4 Roasters had been ousted atter had sold pledged shares to meet margin calls. The article quoted former SEC chairman Arthur Levitt, "The perception holdinas is so of d management borrowing against I would encourage . stating, their reholders to push companies to implement such protections where they don't (Compl. 41.) <]I Nine days later, 8-K filed on May 18, magicJack shares own st." Defendants revealed in a form 2012 that Borislow disposed of 1.1 million for "liquidity, that II the ision had been "moved along quicker" by recent news regarding executive margin accounts, and that Defendants Vento and MacInnes were among the group of investors purchasing Bo prices. (Compl. represented float. agreed more (Id. ) not disclosure, to 4, <]I <]I than The pledge magicJack 43. ) 5 May slow's shares at The percent 18 his of shares (Compl. <]I declined Borislow's pledges p or though such disclosure was required. pledged as Company's per sold outstanding Borislow had future. $1.13 er share, this or 6 to close at $17.74 per share Defendants Compla the to of Regulation S-K requires the stock 5.) According disclose of stated that in percent over two trading sessions, on May 18, 2012. the 8-K also shares amount low market to this announcement, (Compl. sclosure of did the <]I 4.) not even Item 403(b) number of shares security by named executive officers and directors. 5 See 17 C. F. R. 130 with the § 229.403. SEC, For persons required to pledges of securities disclosed within ten days of the pledge, are Ie Schedule required as well as "material" sales that result from any margin call or foreclosure. 240.1 2 (a); (Compl. to at Id. § 45.) <JI Borislow is also alleged to have been the benellc of a program disclosed the July 23, 2012 proxy statement that would have awarded him 50,000 shares for each dollar of earnings r share does not reported allege starting that Bo at year slow was end 2012. The Complaint actually awarded any shares under this agreement and notes that Borislow resigned from the Company on December 28, 2012, and accordingly Ie before he was eligible for the award. MacInnes was President of the before the beginning of the Class Period December 2012. (Compl . <JI (Compl. 2012. to have sold any of his stock Vento was last seven days of Class the until Complaint, MacInnes is not alleged rsonally. President and CEO of the to just some of the stock Borislow 52.) <JI between (February 2012) According 17.) MacInnes is alleged to have purchas sold on May 18, Company Period 6 the (between Company for January 1 the and January 8, Directors 2013), and previously was Chairman of the Board of starting od start in April (Compl. purchased some of en: 2012, 18.) one month after Class Pe stock Borislow sold on May 18, od. (Compl. en:en: Class Vento is also alleged to have to have signed the 2012 Form 10 K three months a t the 31, 53.) 2012, and er the end of Vento is not alleged to have sold any of his stock personally. Russo was CFO of the Company "at all relevant times" during Class Pe od. (Compl. en: 19.) He is alleged to have signed the 2011 and 2012 Form 10-Ks, and Forms 10-Q first three quarters of 2012. also alleged to have signed the (Compl. May 2012 Borislow's stock sale to MacInnes and Vento, to have sold any of his stock personally. On January 9, "Copperfield Report." a number of 2013, Russo is 8-K disclosing but is not alleged (Compl. en: 54.) eld Research posted the The Report assert (CompI. en: 121.) Company's t Copper 27-31.) en:en: 18, each of securities filings were that inaccurate, luding each of the purported misrepresentations identified in Complaint, previously Plaintiffs and fil allege contained disclosures that in 125 and response 7 tations other to the to the public Report, Company's information. magicJack's stock price fell $2.01 per share or 11.6 percent. (CompI. <J[ 128. ) The report noted the existence of class action litigation on behalf of at least 100 counties alleging that the Company had failed to col in excess filings total of ct 911 charges, $ 5 million. (CompI. d not mention the suit, litigation liabilities <J[ In a December ranged 2012 6.) The Company's SEC and instead represented that from "0 million" and that there was no mat 60-61. ) with damages claimed to less al litigation. press represented that magicJack had "litt re se, than (CompI. Borislow litigation." $1.5 <J[<J[ also (Compl. <J[ .) The Copperfield Report misreoresented stock sale. the identit (CompI. 47.) <J[ s rt of the claimed that Defendants purchasers of Borislow's The May 18 8-K represented that the stock was sold to "long term and strategic" investors, including three than investors five (Compl. <J[ "each percent of which already beneficially owns more of magicJack's outstanding 0 nary shares." Plaintiffs allege that the Schedule 130 48.) lings around the time of the sale show that only one shareholder, Adam Street Partners description. LLC, (Compl. existed <J[ who 53.) 8 could fit the May 18 8-K's In was addition, committing maintained that manipulations. changed and ancilla the equipment 72), cutting $1.6 million estimated from rs depreciation in expenses 2012. allegedly materially (Compl. 125), (Comp 1. omitted recording a to by <Jr life at 79. ) should quarter. have (Compl. entire <Jr inventory understated of in though if income would to have riod. inventory, by income share, prior million the Writing $2.1 million, (CompI. 28 a <Jr<Jr Company had <Jr 94.) or 94, in the to income percent 100.) This recorded the substantially ng" 25 in the and the omission percent earnings per write-down, its unchanged Furthermore, the second take 20.4 in also fact, failure increase or write-down when, brea <Jr write-downs overstated "record percent remained from the in writing down the aiming to write off raw materials like chips, Defendants wrote off 97 . ) earlier Company inventory amount switches percent inventory entire 125.) (Compl. 50 The Defendants' report and (Compl. while 81.) 2012. Defendants increase the write-down expenses second quarter enabled recorded its years least over the second and third quarters of 2012, Company <Jr123, of 10-15 accurate $3.1 Company the Company allegedly useful 3 the (Compl. the first quarter of 2012, ly <Jr Report accounting For example, arbitra t off finished goods, finished goods 9 i. e. magicJacks. would have (Compl. signal to investors the actual demand for magicJack's products lower than the project s the Company utilized for the inventory required levels of and was ermini manufacturing activity. (Id. ) securities The Report also detailed Borislow's all accused law violations, and asserted that he had previously of secur ies fraud for issuing misleading earnings with his old company, Tel Save. into question (Compl. whether ~~ Borislow "not to margin or pledge his (Id. ) 2012, It noted that, the Borislow 25, gifted 2 had reneged remaining on res his commitment in the future. " he resigned as CEO on December 28, million of released as collateral 241,028 s loan to "unaffili Report also called 122.) third his shares res se rties." to trusts and ng as security for a (Id. ) This pledge was not disclosed until the day of Borislow's retirement. (Compi. ~ 45. ) Finally, the Report mainta misrepresentations misle ng earnings, investors (see (Id. ) On May about Compl. strategy's potential 29, concerning ~~ risks the the Company had put option strategy by nature of its true 107, that 109-11), and exposure Wall 2012, 10 and to the Company's withholding significant Street Journal the losses. ("WSJ") published an article entitled "Mag Jack 'Puts' Money on Line," stating that: The strategy worked like this: MagicJack brought in cash by selling put options. Those options gave third parties the ght to sell MagicJack shares to the Company a set price The options would generally only be exercised if the s re ice fell. As long as it didn't, the income from selling puts was pure profit [The sale of put options] accounted for 20% of MagicJack's first-quarter profit However, if the ce of MagicJack res lined, it could have been a costly trade. (Compl. 'll 102.) MagicJack stock fell $1.59 per share, or 9.4 percent, by the end of day on May 29, 2012 after the article was additional published, and following day. by an a press re ase that claimed that movement of (2) Company's (Defendants' as of May 25, its book, and (3) going forward. mainta t t that percent Defendants responded to the article 'other income/loss' sheet" 9.9 2012, generate balance or (CompI. 'll 103.) On June 4, with $1.52 t ( 1) se puts " [t] can during a quarter depending on the stock ce Memorandum, with "Def. no affect Mem."; on Ex. its 11) ; Company had a "minimal" amount of puts on it would minimize its reliance on the strategy The Copperfield Report, this press release was and Complaint, inaccurate, emphasiz if the Company had to payout substantial amounts 11 both the event of stock price decline, be heavily impacted and the Company's cash position would would affect the balance sheet. The Report also pointed out that the Company had over $24.7 million worth of put obligations (as in reported 2012), the contrary remai second to ng on quarter its books 10-Q Defendants' misrepresentation that their put pos filed as of June 30 August 8, on previous purported ion was "minimal. u The Applicable Standard On a motion to di ss pursuant to Rule 12 (b) (6), all factual allegations in the complaint are accepted as true, and all inferences are drawn favor of the Molecular Corp., 12 F.3d 1170, 1174 eader. Mills v. Polar (2d Cir. 1993). The issue "is not whether a plaintiff will ultimately prevail but whetner dence to support the the claimant is entitled to ofter cla 378 " Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, (2d Cir. 1995) 235-36 (quoting Scheuer v. Rhodes, 416 U.S. 232, (1974)). To survive a motion to dismiss pursuant to Rule 12(b) (6), "a compla must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) 12 (quoting Bell Atl. Corp. v. Twombly, 550 PIa iffs must allege suf claims across the 1 550 U.S. at 570. u.s. 544, 570 (2007)). cient facts to "nudge [ ] their from conceivable to au sib1 e ." Twomb 1 y, Though the court must accept the factual allegations of a complaint as true, it is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 555). In a private securities fraud action, "[u]nder the PSLRA's heightened pleading instructions," enacted in 1995 "[a]s a check against abusive litigation by private parties," Tellabs, 551 U.S. at 313, 321, the plaintiffs must do more. See, e.g., Teamsters Local 445 Freight Divi Capital Inc., 531 F.3d 190, 194 on Pen (2d on Fund v. Dynex r. 2008) ("Teamsters Local 445 "). Section 21D(b) (2) of the PSLRA, codified at 15 U.S.C. § 78u-4 (b) (2), provides that [iJn any private action arising under this chapter in which the plaintiffs may recover money damages only on proof that the defendant acted with a particular state of nd, compla t shall, with respect to each act or omission alleged to violate this chapter, state with rticula ty cts gi ng rise to a strong inference that the defendant acted with the red state of mind. 15 U.S.C. § 78u-4(b) (2) (emphases added). I. Plaintiffs Fails to Adequately State a Claim Under Section lO(b) and Rule lOb-S 13 Plaintiffs allege actionable misstatements lawsuit; iling (2 ) magicJack shares; by to that (1) failing disclose mis (3 ) Defendants Company's put option strategy; Borislow senting (4) various to disclose a material that and made facts in pledged his regarding the ating the financi results through GAAP violations and accounting manipulations. A. Applicable Standa lOb-5 Under Section lOeb) To state a claim under Section 10 (b) the "plaintiffs must allege that the (3) and Rule 10b-5, defendants misstatements or omissions of material fact, (2) and Rule (1) made with scienter, in connection with the purchase or sale of securities, upon which the plaintiffs relied, and (5) was the proximate cause of its injury." p intiffs' (4) reliance ATSI Commc'ns v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir. 2007). B. Plaintiffs Fail to Adequately Misstatements or Omissions Plead Material Plaintiffs allege numerous misstatements by Defendants that were misstatements, purportedly the actionable. Complaint must alleged to have been misleading, 14 To "specify plead each mater 1 statement the reason or reasons why the statement is misl statement or omission ng, is and, if made all on in ion rmation rding the and belief, the complaint shall state with particularity all facts on which that rmed." lief is 15 U.S.C. First, 78u-4{b) (1) (B). § Plaintiffs contend that Defendants falsely srepresented that they had no material litigation Ii ilities and that their legal liabilities amount million," by failing to lawsuit. was (Compl. igated regulations. "any mater rout ~~ to sclose t 1 liti pending ion 331 (2d lawsuit to 2002); the icable iola v. see also Hall SEC (requiring disclosure of other than ordinary business"). Further, once Defendants chose to ir legal liabilities, r. under proceedings, incidental accurate and complete." Madison Count class act 229.103 § legal according to Plaintiffs, amount of the See 17 C.F.R. 1.5 Plaintiffs maintain that magicJack 58-64.) disclose to "0 to less ak on the they had "a duty to tibank, N.A., v. Chil both 295 F.3d 312, s' Place Retail Stores, Inc., 580 F. Supp. 2d 212, 226 (S.D.N.Y. 2008). The Madison County lawsuit was fil in open court, the complaint and docket are matters of public record, suit was dismiss on Ma 15, the 2013 without the payment of any damages and with no class ever having been certified. 15 • I Ex. 20.) Further, the Company repeatedly risk associated with 911 fees, was predicated. (De disclosed the regulatory the practice upon which the suit nt's Memorandum ("Def. at 15 ("our emergency and E911 calling se us to significant liability.").) Mem."); ces Ex. 10 . may expose The Complaint's assertion that the suit represented a potential liability of $42 million is not found in the Madison County complaint 21) and is not supported other than with reference to the Copperf d Report. (CompI. the 65.) <J[ suit There are no facts pled for the contention that incurred such potential liability were misled concerning the suit. assert that Company's 772, 773 payment was actually regarding 2004). or that made its that As such, PI rendered pending Unilab Corp., materially misrepresented litigation 87 Fed. Appx. ntiffs do not show that their potential Plaintif maintain that liability Borislow's cite in support of this date that quicker" by "recent (1) highly Borislow's sale was "moved pUblici zed events news pertaining to Board Members and executive margin accounts May 9 Reuters article) (see 16 stock Plaintiffs pledge should have been disclosed in the 2011 10-K. the the ally omitted relevant information. Second, along stors Plaintiffs do not and cannot See Bond Opty Fund v. (2d Cir. Defendants or mate any statements inaccurate. Ex. (id.; Compl. <J[ 42); (2) (i.e. Borislow "committed not to rna or pledge his future," he had pledged his suggesting his net worth ously p in the shares the past Borislow's base salary was $200,000, (3) (see id.); remaining shares and most of is in magiJack Schedule filed stock; 13Ds and as Even ta existence of the pI (4) Borislow had not disclosing requi se allegations together, are insufficient to show, beyond mere speculation, that Boris had the actually issued, his stock satisfy Appx. the in the "May Wright v. at PSLRA allegation t t 4, Ernst 773 pleading the any event Company governs to Form 10 fail omitt the t to there 10-Q" was in s a is made officer, See in the 17 C.F.R. § appl that Borislow or the Borislow's stock pledge in any 17 (2d Cir. see 1998) motion papers), and rement or S K s the stockholder's Item 403, which only to Form 10-K, 229.403 (Item 403 disclosure not required). allege s' Complaint, 178 director Regulation 10 Plainti to been dis disclosure sure of stock pledges, Form 10-Q. r, s complaint SEC was insufficient should not 10-K See Bond is 152 F.3d 169, no any Form speculation edge Young, sclose ownership not of standard."). Borislow 2012 & ("Mere (a plaintiff may not amend in as nine weeks before the May 18 stock sa Fed. Fund, pledged & Instructions Plainti s to thus Company misrepresented or ired form disclosure. Thi mis ~materially the Plaintiffs sented" purchasers issue in the of assert states Company's Chairman (i. e. the how many shares Borislow's 9-K that shares that Vento), The sold President 18 8-K of magicJack stock owned. Borislow May (i. language shares e. to at ~the MacInnes), and three shareholders, each of which already beneficially owns more than five percent of magicJack's outstanding ordinary shares." (Def. Mem. Ex. 14.) cause r ~ne Company's PIa Vento nor MacInnes owned more than 5% outstanding language of already bene iffs contend that this was misleading 8-K, stock." however, ially is owns '!I (Compl. clear more that than The 51.) t plain of which ~each five of the rcent" clause describes the three shareholders that purchased stock, not the enumerated oftlcers. follows rectly after (Def. the description of Vento (appropriate "whom" of Ex. phrase including rs," shareho and uses natural Moreover, 14.) "three or MacInnes, entities MacInnes fil day phrase (appropriate MacInnes) . Mem. the phrase stockholders) rsons such as disclosing the extent of their Vento or MacInnes outstanding stock. owned more (Compl. '!I'!I 51-52.) 18 than 5% of Vento than and Vento and 2012, the same holdings, making clear that the Company was not intending to that t ~which" rather the Complaint acknowledges Form 4s with the SEC on May 18, 8-K, not the and srepresent Company's Fourth, Plaintiffs assert that the May 18 misleading because Borislow committed "not to marg his rema ing purportedly Plaintif shares pledged his the future," shares after or pledge (Compl. making was 45), ~ this but commitment. base this contention on a Form 13G filed by Borislow on December 28, states in 8-K that 2012, Borislow seven months after the pledge. The Form "released Ordinary as collateral 241,028 Shares that served as security for a loan to unaffil parties." (De f. Mem. Borislow pledged his Ex. own 17 . ) The shares or was instead shows that Borislow releas had provided to h Form does not himself As such, state that released, shares that a to secure a loan. ed third P but third party intiffs fails to show any misrepresentation. , Plaintiffs assert that the Company's disclosure regarding its inventory position in the 2011 10-K was misleading (Compl. ~ language, legal dis or 99), pi but do not cite the y purport any facts to support the assertion, accounting sure was Sixth, without disclosure, standard e laining why the misleadi or c any additional ired. Plaintiffs contend that the Company used, a highly risky put option trading strategy 19 that expos 107 . ) put investor cash to The Complaint all option strategy in signi cant losses. (Compl. <J[ s that Defendants misrepresented the the June 4 8-k, which concerned the company's use of puts in conjunction with its stock repurchase program, in several respects. As an in ial matter, Plaintiffs allege that Company stated that the put option strategy had "no [elffect on its of balance positions context, losses sheet,1/ as $2.2 though, in statements, statement, but reported million. asset (Compl. value the 101-06.) <J[<J[ put Taken the 8-K speaks only to how unrealized gains or option positions noting that would reflected they would be on financial reflected on the rather than the balance sheet. income The disclosure does not suggest that the asset value of any put positions would not be (" reflected on the balance se puts can generate sheet. Def. (See 'other income/ loss' Mem. Ex. 11 during a quarter depending on the movement of the Company's stock price with no [sltock price drops can have affect on its balance s an 'other income/loss' with no affect on t Next, impact using the put/call strategy but balance sheet. "). aintiffs allege that because it stated that "as of May 25, 20 the 2012, 8-K was misleading t Company had a min amount of put contracts outstanding." (Compl. However, the Company disclosed in its August 8, 2012 Q that it had puts $24.7 million." sclosed to purchase "928,400 that it intended to (Def. such, re contract represents was no the ght to $100 Mem. Ex. In srepresentation. shares for The Company had also repurchase stock during the Class Period. 2012 10­ ordinary (Def. Mem. Ex. 18 at 18.) en 106.) purchase mill of 6.) any 100 As a put so 12; Ex. its the event, shares f number of contracts at issue was less than 9,300 and the total value of puts at year end 2012 was $2.2 million, considered (See but min 1 en109 ("[IJt is too e CompI. it should given exceed magicJack's $34 market which can be capitalization. y to predict total revenue, million the quarter" for June 2012.) Plaintiffs also maintain the 8-K on June 4, those released on September 6, October 19, and December 26, were misleading in that t y fail to dis ose that the put strategy "contributed significantly to earnings." The Company, positions though, would be had with ass puts. Pe od t (See Def. sclosed ly market-to-market losses would be recogniz during the repeat (CompI. and enen 107-113.) that unrealized and in each of t its gains Ex. 21 10 at 31, or 10-Ks and 10 Company disclosed gains ass Mem. put 76 ated ($2.2 million gain); Ex. 13 at 25 loss); Ex. 19 at thus disclosed ($1.656 million gain); 4 the revenue associat its Pincus & (2d Cir. defendant 1991) is Oppenheimer v. P.C. with the (where alleged a to report have position. Co., contains mis ($371k The Company purported misrepresentation, such did not materially misrepresent Assoc., 18 at 7 (noting $3.44 million gain).) contemporaneously with & Ex. puts and as See Meyer 936 F.2d 759, the ented, fact 763 is cannot it that be misleading) . Finally, GAAP provisions iffs assert that the Company violated PIa by "using an incorrect life" useful in depreciating its switches, and that the Company should have also taken a $3.1 million invento just in Q3 2012. sale." ~ (Compl. Company's manipulations, misclassi wrlte-down Further indicative according to Plaintiffs, is Defendants cation of its "trading" securities as "avail (Compi. ~ 115.) By financial statements so doing, Defendants e for allegedly losses and gains to net income in failed to include unrealiz the 81.) Q2 2012 rather than as required by GAAP, and avoided earnings volatility. Wi respect to the switches, rests on the Copper aintiffs' assert eld Report's comparison of the useful life 22 of telecommunication network There equipment, is no switches such support as for same server," time. and is because Further, terms t of at that the Company time. or a Computer servers. the r of and "router, assertion Report's gateway a (see CompI. Ii that <J[ change in use [or] switch 76) life is was (Compl. 1l 72.) write-downs, disclos "obsolete inventory" during Q2, downs not unsupported the Ql 2012 10-Q. In life gateways, comparlson 15 year useful insufficient. disclosed that 10 to useful s were all required to be written at "switch" Plaintiffs' cannot have a thus A the routers, this contention that the materi the to a the Complaint separate write it should have ta (Compl. 1I down both write- However, 93.) alleaes Plaintirrs acknowledge that there was discussion in the Q3 earnings release 8-K that the write-down was for "ch in danger of not having (CompI. Tsunami in Japan." the assertion that same mate als Company disclos enough t that <J[ inventory as 89.) wri te-downs were s we procured when we were written a of the There is thus no basis for of down ps in in Q3 concern the Q2. the write-down in its Q3 10-Q. 23 result Further, the Plaintiffs do not explain how this constitutes an improperly accounted also il allege ror write-down. 1 Generally, magicJack's magicJack change auditor was was refused to sign required to error. To the magicJack's s auditor the its financial auditors support statements. As to opinions, accounting contrary, issued financial statements were prepared magicJack and audit restate in restatement, intiffs there or that that because has opinions been no that the accordance with GAAP, the accounting and position Plaintiff such, a in ils to adequately allege any GAAP violations. Plaintiffs have thus particularity any facts which, Defendants were information. 2004); accord mater See Rombach ATSI, 493 ly v. failed to specify with read in context, demonstrate that misleading Chang, F.3d at or mat 355 F.3d 164, 99 ally omitt 174 (2d Cir. ("Allegations that are : Plaintiffs maintain that the Complaint has pled actionable misstatements by the Defendants with to their accounting manip~lations, and does not have to prove the falsity of the misrepresentations, citing McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105, 125 (S.D.N.Y. 2013) ("It is sufficient for plaintiffs to point to circumstances that, drawina reasonable inferences in their favor, would render their claims pla~sible. discrepancies of the magnit~de of those al by Plaintiffs u are s~fficient). Here l though I Plaintiffs have not alleged any discrepancy of such "magnitude,u or pled facts supporting the various assertions of error. As such, Plaintiffs' conclusory alleqations are insufficient. 24 conclusory or unsupport by ctual assertions are insufficient.") . To adequately allege scienter, an t renee of scienter reasonable." U.S. 308, lege Scienter Plaintiffs Fail to Adequately C. Tell 324 , must advance is "more than merely plausible or v. Makor Issues Inc. The (2008). aintif allegations & must ., ghts, give rise 551 to an inference of scienter that is "cogent and at least as compelling as any opposing in renee" of non-fraudulent intent. Even if the misrepresentat adequate, that the Complaint fails were s pled by Plaintif to adequately pI scienter, or Defendants acted with "a mental state embracing intent to deceive, manipulate or de As evidence aUd." of Tellabs, scienter, the 551 U.S. at 319. Complaint all s slow had actual knowledge of his stock sales and (I ) which Id. he provided indicative sclose iled to disclose; Defendants of the sc th er; Madison (3) (2) t put the knew lawsuit; County Company and violations, taken as a whole, weigh 25 of (4) edge st power concrete a option that motive and did the favor of scienter. not GAAP Plaintiffs allege that both and the put option strategy incent magjicJack's stock price, as a Borislow's zed decl because t option allegedly could have As an (Compl. ~~ triggered a Further, Defendants Company's success hinged on the stock above a certain level. keep stock provided edge Company to inflate margin call or decrease in available credit. strategy stock t with put mot ice staying 133-44.) ial matter, motives such as the desire to ces high to avoid triggering liabilities or to increase executive compensation are not a sufficient basis for scienter. See, e.g., In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d 432, 450 (S.D.N.Y. 2005) (insuffi ent motives include "the desire for the corporation to appear profitable and the desire to keep stock prices high to increase offlcer compensation. H) . "In attempting to show that a defendant had fraudulent intent, it is not sufficient to allege goals that are possessed by virtually all corporate insiders, such as the ire to maintain a high credit rating for the corporation or otherwise sustain the appearance of corporate profi lity or the success of an investment, or the desire to maintain a high stock price in order to increase executive compensation. H S. Cherry St., LLC v. Hennessee Grp., 573 F.3d 98, 109 10 (2d Cir. 2009) (internal citations omitted). 26 Though the desire to flate stock prices may support a viable claim when a defendant sells his own shares, the sale "unusual or suspicious in timing." must Gildan Activewear, Inc. (S.D.N.Y. 2009) Sec. Litig., (insider stock sa 772 F. Supp. 2d 573, 587 "unusual" or "suspi (S.D.N.Y. 2011) 29.) at Rather, ). Here, Borislow's Class Period was not unusual r (approximately 50 percent) the Class of $27 per snare. (Def. Mem.; Exs. 10 at 92, 12 at Because Borislow's sale was not unusual in timing, was not high of the Class Period, and no alternative mot from general prof scienter." 425, 438 as is adequately alleged, "the allegation is not so specific as to give all (whether sales are slow's sale was intended y and was be Period h ); Glaser v. The9 Ltd., ous" depends on the percentage of holdings personal sale of stuck during liqui "unusual" or s must sold and the number of defendants sell or suspicious. In re 636 F. Supp. 2d 261, 270 ish mot "suspicious" in order to est See, e.g., se to a strong in Woodward v. Raymond James (S.D.N.Y. 2010) what percent a 732 F. Supp. 2d s defendants sold or why the s aside from general mot see also 380544 CANADA, INC. 199, 221 (S.D.N.Y. 2008) ./ Inc., (no scienter where plaintiffs did not of was unusual or suspic rence of v. Aspen Tech., ("Stock owner 27 ip est for profit); 544 F. Supp. ishes motive only if defendants are also alleged to have bene inflated stock price in a particular manner, tted from an r example, by selling a large number of shares shortly after the alleged fraud.") (quoting Shields v. 1124, 1130-31 (2d tytrust Bancorp, Inc., 25 F.3d r.1994)). Similarly, Borislow's compensation package does not give rise to scienter, as Borislow never received any compensation pursuant to the incentive and "executive compensation dependent upon stock value does not rise to a strong inference of scienter" because "[iJf scienter could pleaded on that basis alone, virt ly every company in the United States that experiences a downturn be forced to Gr., Inc., stock price could fend securities fraud actions." 47 F.3d 47, 54 Acito v. IMCERA (2d Cir. 1995). In addition, Vento, Russo, or MacInnes did not sell shares of magicJack. To the contra ,Vento and MacInnes individually purchased stock during the Class Period. 42, 48, 51, 52.); see also In re MRU Hol F. Supp. 2d 500, 519 (S.D.N.Y. 2011) the s res ... (CompI. err gs Sec. Litig., 769 (purchase and "retention of [is] inconsistent with the allegation that [they] harbored information that the Company's financial health was grave jeopardy.") (quoting In re Keyspan Corp. Sec. Litig., 383 28 F.Supp.2d 358, 383 (E.D.N.Y.2003)). The Complaint does not address why MacInnes and Vento would have purchased Borislow's shares if, as the Plaintiffs alleqe, the individual Defendants were conspiring to artifi price. ally inflate the Company's stock That three of the four individual Defendants, all high- ranking execut s at the Company, did not sell stock during the Class Period, and that two of these Defendants instead purchased stock during the relevant period, rebuts an in scienter. In re eSpeed, Inc. Sec. Litig., 457 F. See, e.g., Supp. 2d 266, 289 (S.D.N.Y. 2006) negate inference of scienter) F. Supp. 2d 446, 462 rence of i (S.D.N.Y. sales by insiders (lack of stock sales tends to In re N. 2000) ecom Sec. Litig., 116 ("The absence of stock is inconsistent with an intent to defraud shareholders."); San Leandro, 75 F.3d at 814 ilure of some defendants to sell stock during (the ass period undermined the plaintiffs' allegations that any defendant intended to inflate stock for personal pro t). Independently, as set forth in the Complaint, during the Class Period, magicJack was engaged in a massive, $100 million stock buyback. It is unreasonable to assume that magicJack would artificially inflate its stock price when it was repurchasing a significant amount of its own shares on the open market. As courts in this dist ct have recognized, a "strategy 29 of repurchasing stock at a knowingly in economi ated price would be ly irrational." In re UBS AG Sec. Litig., No. 07 Civ. 11225, 2012 WL 4471265, at *13 (S.D.N.Y. Sept. 28, 2012) (quoting Davidoff v. Farina r No. 04 Civ. 7617(NRB), 2005 WL 2030501, at *11 n. 19 (S.D.N.Y. Aug. 22, 2005) (granting motion to dismiss where "it would have made no economic sense for defendants to invest literally billions of dol rs in a venture that they knew would fail") )2. Moreover, with respect to the put option allegations, the put strategy was used to effectuate t locking-in advantageous pricing. at 27 stock buyback by (See Compl. ~ 133-44, Ex. 13 ("We have sold common equity put option contracts in connection with our share repurchase program in order to lower the average share price paid for ordinary shares we purchase[]"); Ex. 11 (the Company "used sales of puts and purchases of calls to reduce the cost of some share repurchases [tJhe put/call strategy used by the Company is the same cash outJ.ay r repurchases regardless of moves in the stock price as the puts guarantee the Company can lockprice if put the stock"); ~ a repurchase 143 (the puts were for magicJack "to Plaintiffs' single cited case to the contrary, Guilford Mills, 1999 WL 33248953, at *5 (S.D.N.Y. Jul. 21, 1999), is inapposite because it involved allegations that four defendants sold s ficant portions of their stock at inflated prices and that "the company was not aware of the fraud or the effect its exposure would have on the value of the stock. u Id. Here, in contrast, three of the four individual Defendants did not sell stock, and two bought stock during the relevant 2 30 purchase its own shares"). strat arti The Complaint fails to explain how a to repurchase stock is consistent th an incentive to cially inflate the stock price. Plaintiffs also contend that ilure to sclose the Madison County lawsuit supports an inference of scienter through actual knowledge. Under applicable SEC ions, magicJack was obligated to disclose "material pending litigation." C.F.R. § legal proceedings, 229.103 See 17 (requiring disclosure of "any material pending other than ordinary routine litigation incidental to the business") . As discussed, or misrepresentation Plaintiffs related to predicated on the purported fees to a repeatedly county this lawsuit. The suit was ilure of the Company to remit 911 (Compl. 56 67.) sk regulatory The Company associated with 911 (Defendant's Memorandum ("Def. Mem."); Ex. 10 at 15 ("our fees. emergency and signi cant without the E911 court, Complaint's calling payment of The any no assertion class that lawsuit damages was ever the 31 suit expose us was any other mater I suit was filed in the certified. resent di to itself or Moreover, the Company. and may services liability.").) consequence open the government. disclosed any omission iled to pI Further, a s the potential liability of $42 complaint (id.; million Ex. 21) is not and is found not facts pled potential 1 suit. the Madison other (CompI. 65.) that the <J[ suit County than wi There are incurred such ility or that investors were misled concerning the "Mere pleading contention the supported reference to the Copperfield Report. no in culation standard. suf is ent Bond Opty Fund ft v. to the satis Unilab Corp., PSLRA 87 Appx. 772, 773 (2d Cir. 2004). Final fail to pI supra I. (c), irregul in terms and ties, 2000); of Chi. (same) the GAAP violations, these allegations with regardless, standing securlties fraud claim." Cir. of such alone, are relevant specificity, allegations "or insufficient Novak v. Kasaks, see accounting to state a 216 F.3d 300,309 (2d see also ECA and Local 134 IBEW Joint V. JP Morgan Chase Co., aintiffs 553 F.3d 187, 200 Pen on Trust (2d Cir. 2009) .3 3 Plaintiffs' al ions of scienter based on the res ions of Borislow, MacInnes and Russo from the Company are not in the Complaint, t v. Ernst & Young, LLP, 152 F.3d 169, 178 (2d Cir. 1998) (a may not amend its aint in motion papers), and in any event, ions must be "highly un~sual and cious" in order to support an inference of scienter. Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 598 (S.D.N.Y. 2011). In Plaintiffs' sole cited , Hall v. Childrens' Place Retail Stores, Inc., 580 F. supp. 2d 212, 233 (S.D.N.Y. 2008) the res ions included the company's public audiLor and forced resignation of the CEO, =acts not present here. 32 Thus, Plaintiffs raise a have sufficient to strong Defendants, failed or the Company itself, ference to allege that the facts Individual had the motive to commit or actual knowledge of any alleged fraud. D. Plainti Causation Plaintiffs precisely how Fail to maintain each Adequately that the fraud-related Plead Complaint is sclosure Loss alleges causally connected to a specific stock drop and provides "fair notice" to Defendants of the causal connection. Loss causation "is the causal link between the alleged misconduct and plaintiffs." codified the economic Emergent this harm 343 Capital, judge-made ultimately F.3d requirement: "In at any suffered 197. by The private the PSLRA action arising under this chapter, the plaintiffs shall have the burden the defendant alleged to of proving that the act or omission violate this chapter caused the loss seek to recover damages." 15 U.S.C. Court recently clarified the § for which the 78u-4 (b) (4). pleading plainti The Supreme requirements loss causation in the context of alleged violations of Section 10(b). properly plead loss causation, a plaintiff must provi "the defendants with notice of what the relevant economic loss might be [and] what the causal connection might 33 be between the loss and the [alleged] misrepresentation." Dura 544 U. S. Pharm., at 347, 125 S. Ct. 1627. In support of loss causation, stock ice dropped disclosures, almost 6% 11% 10% in in response response response to to the stock the Copperfield WSJ to the intiffs cite t Article Report, and exposing (CompI. inherent to the Company's put option scheme. pl risks CjfCjf 5, 8, 103, 128.) Both opt slow's strat material stock pl discussed in misrepresentations, ss causation. information Plaintiffs See cited fail connecting the to WSJ Article and thus cannot I.(b). supra in the disclosure the with specific al d not be Ive basis r same holds true for the Copperfield all and the put Report. Rega particularity mis sentations less, any s to lines in stock value. For the March 15, percentage of instance, Pla iffs assert that a statement in 2012 Year-End 2011 10-K that there was "a higher magicJack units distributors at wholesale pr being s to as opposed to customers at retail prices" was false 34 sold (Compl. Cjf retai rs and rect sales to 117) because on the same page of the same 2011 10 K it states that "in 2011 and 2010, sales retail of the magicJack and magicJack plus outlets respectively." represented (Compl. approximately 118.) ~ A units 57% through and statement 73% cannot be misleading where the corrective dis osure was made on same page cannot r of decline a spectus, in stock prlce. and as such See Meyer ncus Oppenheimer & Co., 936 F.2d 759, 763 also reaction il alleged that to cite any corrective market disclosure. be (2d r. the & Assoc., 1991). P.C. v. Plaintiffs corresponding Similarly, a to Plaintiffs the assert the Company "manipulated and understated the depreciation expense of estimated certain useful assets" life of by its "a trarily switches and chang[ing] other equipment from 3 years to either 10 or 15 years," 72), basis but do not allege any facts market the put position ancillary (Compl. ~~ 70, supporting a market reaction corresponding to this disclosure. any specif the aintiffs also do not allege reaction attributable to disclosure of the Q2 10 In any event, the Copperfield Report acknowledges that "all rmation contained from public sources." [in the report] In cases where, has as here, been obtained Defendants have not otherwise misrepresented the public facts upon which such a report is pr ct , the report cannot establish loss causation. 35 See, e.g., r. t Teachers' Ret. Sys. 2007) se (" facts already their [subsequent] stock price Litig., to 597 constitute F.3d Ci v 97 5 , of 2 0 12 WL In re (2d 512 501, Cir. previously corrective a disclosed theory in . public Comnicom filings, at * 31 [ the] Inc. Sec. does facts anything of dings, In re CRM so not gat disclosed disclosure 1 64 68 8 8 , Group, 2010) (4th is could not have caused decline.") ; [author's] opinions"); 10 en revelation characterization 477 F.3d 162, 187 lem with plaintiffs' p had V. Hunter, Ltd. Sec. ( S . D. N . Y. but t Litig., No. Mar. 4, 2 0 13 ) ("[i]nvestors cannot establish loss causation merely by relying on after-the-fact information); tig., 568 negative In F. negative characterization re Merrill Supp. charact 2d zation Lynch 349, of Co. & 363 of Research (S.D.N.Y. existing hidden from investors does not permit already facts public Reports Sec. ("The mere 2008) t were [plaintiffs] to pI never loss causation.") ci ted precedent Plaintif In In re Winstar Communications, 473885 (S.D.N.Y. reports causation or mate "contrary to 2006), not No. 01 the court based on publicly available loss 27, is contrary. to Civ. 3014, found 2006 WL that information did not negate ali ty where the public information was Ise statements made by 36 defendants" and "[t]he reports also practices, aware." Inc., reveal of which public at *15. Id. 341 F. fendants' ) Supp. Similarly, 2d 274, that even where had 290 questionable not p ously in Forgarazzo v. 2004), (S.D.N.Y. accounting made Lehman Bros, the court held "true facts were available for the world to see," the later reports of these facts were sufficient to show loss causation where the defendant misleading statements about t conclusion" that contrast, where, public the allegations of later reported, material establish loss causat "negat and where failing. In s support investors misstatements, no cannot merely by relying on an after-the-fact rmation. (2d II In re r.2010) . loss causation is not sufficiently pled. See Lentell v. Merrill Lynch, 396 F.3d 161, 173 (2d Cir. 2005). The Section 20(a) Claim is Dismissed In order to plead a alleae was Sec. Litig., 597 F.3d 501, 512 Accordingly, II. company characterization of already-public i Omnicom Grp., Inc. and facts to "obscure object defendant's inaccurate , a defendant has properly disclosed the as information issued (1) a primary vi § 20(a) ation 37 of claim, the "a complaint must [Exchange] Act by a controlled person, defendant of (2) the direct primary or indirect violator, control and by the 'culpable (3 ) rticioation.'" Janbay v. Canadian Solar Inc.1' 2012 WL 1080306, at *17 see also have 5, (S.D.N.Y. and 15 Mar. U.S.C. § 28, 2013) 78t(a). (internal As set citations forth above, omitted); P intiffs iled to plead a primary violation of § 10(b) and § 10(b) Plaintiffs' § 20 (a) Janbay, 2012 WL 1080306, claim is therefore dismissed. See at *17. Conclusion For the reasons set forth above, Defendants' motion to dismiss is granted. It is so ordered. New York, NY January )1' ' 2014 ROBERT W. SWEET U.S.D.J. 38

Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.

Why Is My Information Online?