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)

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.

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A P PEA RAN C E S:

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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