MEMORANDUM AND ORDER
Plaintiff shareholders of SeaChange International, Inc. ("SeaChange")bring this putative class action against SeaChange, two members of itsmanagement team, three of its directors, and the three lead underwritersof its January 28, 2002 secondary stock Offering (the "Offering"). Theshareholders allege that the registration statement and prospectusSeaChange filed with the Securities and Exchange Commission ("SEC") inconjunction with the Offering contained material misrepresentations andomissions in violation of §§ 11, 12(a)(2), and 15 of the SecuritiesAct of 1933 ("Securities Act"). Defendants now move through two separatemotions — one by SeaChange, the management team defendants, and thedirector defendants; the other by the underwriters — to dismiss thecase pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim.
SeaChange is a Delaware-incorporated company with its principalexecutive offices in Maynard, Massachusetts. SeaChange is a leadingdeveloper, manufacturer, and marketer of videoPage 2storage systems, which automate the management and distribution ofvideo streams, such as feature-length movies and advertisements.Consolidated and Amended Class Action Complaint ("Complaint") at ¶29. SeaChange markets its systems to cable television operators andbroadcasters as a means to offer video-on-demand ("VOD") movies andprogramming, which allow viewers to watch content at any time with remotepause, rewind, and fast-forward features. Id. SeaChange's ITVSystem, for example, digitally manages, stores, and distributes digitalvideo, allowing cable operators and telecommunications companies to offerVOD and other interactive television services, including retrieval ofinternet content through the television. Ex. 1 ("Prospectus"), at 3.Additionally, SeaChange's SPOT System allows cable operators andbroadcasters to insert targeted digital advertisements into cableprogramming, Complaint at 1 29, and its MediaCluster System, a groupingof several individual servers, allows broadcasters to directly transmitvideo content to viewers without the need for tape libraries and otherstorage and playback systems. Prospectus at 30, 35.
On January 9, 2002, SeaChange filed a final Form S-3 RegistrationStatement ("Registration Statement"), which included the Prospectus, withthe SEC; and on January 29, 2002, SeaChange conducted the Offering.Complaint at ¶ 37. In the Offering, SeaChange and seven stockholders(including defendants William Styslinger, William Fiedler, and MartinHoffman) sold 3,594,411 shares of its common stock at a price of $28.99per share. Id. ¶Page 338. The underwriters of the Offering1 exercised an over-allotmentoption and purchased an additional 539,162 common shares fromSeaChange. Id. The Offering netted total proceeds of$108,630,307 for SeaChange and $5,768,280 for the seven sellingshareholders. Id.
On March 5, 2002, SeaChange issued a news release, announcing itsfinancial results for the fourth quarter, which ended on January 31,2002, two days after the Offering. Id. ¶ 39. Althoughresults for the quarter exceeded its prior projections, as evidenced bythe company's 10-K form, SeaChange reported VOD segment sales of $10.3versus analyst estimates of $12 million. In addition, on March 5 itbecame public that AOL Time Warner's cable unit had awarded the contractto provide VOD services in Manhattan to nCUBE, one of SeaChange'scompetitors. Id. SeaChange's shares fell that day 17%, from$22.26 to $18.49, with a volume of 8.26 million shares traded, more thanten times the three-month daily average. Id.
On May 28, 2002, nCUBE announced that a jury in the federal districtcourt in the District of Delaware had returned a jury verdict againstSeaChange in favor of nCUBE.2 Id. ¶ 47. The jury foundthat SeaChange had willfully infringed on nCUBE'sPage 4patented VOD software and awarded nCUBE $2 million in damages and a7% royalty on systems going back to February 1, 2002. Id. Indaytime trading on May 28, 2002, SeaChange shares fell 15% to $10.39, andin after-hours trading, the shares fell to $9.09. Id. 148.
On June 5, 2002, SeaChange reported a net loss of $21 million ($0.82per share) for the first fiscal quarter of the year. Id. Thelosses included $14.4 million in one-time charges and adjustments relatedto the nCUBE litigation. Id.
B. Procedural History
On October 20, 2002, Leon and Rena Beylus filed a class actioncomplaint against SeaChange, two members of its management team, three ofits directors, and the three lead underwriters of the Offering. Shortlyfollowing the filing of the Beylus complaint, three additional sets ofplaintiffs filed related complaints. Three of the plaintiffs in the casesmade competing motions to consolidate the actions and for appointment aslead plaintiff. Subsequently, all sets of plaintiffs agreed bystipulation that the four actions would be consolidated in this actionand that James A. Radley would serve as lead plaintiff. Additionally,they agreed under the stipulation that Bernstein Leibhard & Lifshitz,LLP would serve as lead plaintiffs counsel and Shapiro Haber & Urmy,LLP would serve as liaison counsel.
Lead plaintiff James Radley purchased common stock pursuant to ortraceable to the allegedly false statements in thePage 5Registration Statement and the Prospectus. Complaint at ¶ 7.Radley represents a putative class of those who similarly bought stock inthe Offering.
In addition to SeaChange, plaintiffs bring this action against: WilliamStyslinger, who is SeaChange's chairman, president, and chief operatingofficer; William Fielder, who is SeaChange's chief financial officer;Martin Hoffman, Thomas Olson, and Carmine Vona, who are SeaChangedirectors; and Morgan Stanley & Co., Inc., Thomas Weisel PartnersLLC, and RBC Dain Rauscher, Inc., the three lead underwriters for theOffering. Id. ¶¶ 9-17. For the remainder of this discussion,I refer to SeaChange and the individual defendants (Styslinger, Fielder,Hoffman, Olson, and Vona)3 collectively as "SeaChange defendants,"and I refer to the three underwriter defendants as the "Underwriters."
Plaintiffs allege that SeaChange defendants and the Underwriters madematerial misrepresentations or omissions in the Prospectus pertaining tofive general circumstances. Specifically, plaintiffs allege that theProspectus omitted information or contained misleading statementsconcerning the fact that SeaChange: (1) was willfully infringing an nCUBEVOD patent, (2) was operating at a competitive disadvantage becausePage 6it could not provide the VOD capacity to compete in the largestmetropolitan areas, (3) was at a competitive disadvantage because itsSPOT system was analog and did not provide the digital applications thatrival systems did, (4) had already been informed by AOL Time Warner thatit would not be awarded the contract for Manhattan, and (5) had noreasonable expectation of achieving financial results in line with theconsistent earnings projections they had been making for the five monthsprior to the Offering. Complaint at ¶ 2.
II. STANDARD OF REVIEW
A. Rule 12(b)(6)
In considering a motion to dismiss pursuant to Fed.R.Civ.P.12(b)(6), a court must take well-pled factual allegations in thecomplaint as true and must make all reasonable inferences in favor of theplaintiff. Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993).The court, however, need not credit "bald assertions, unsupportableconclusions, and `opprobrious epithets.'" Chongris v. Bd. ofAppeals, 811 F.2d 36, 37 (1st Cir. 1987) (quoting Snowden v.Hughes, 321 U.S. 1, 10 (1944)), cert. denied,483 U.S. 1021 (1987). Dismissal under Rule 12(b)(6) is only appropriate if thecomplaint, so viewed, presents no set of facts justifying recovery.Cooperman v. Individual, Inc., 171 F.3d 43, 46 (1st Cir. 1999).
In a securities action, a court, in deciding a motion to dismiss, mayproperly consider the "relevant entirety of a document integral to orexplicitly relied upon in the complaint."Page 7Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1stCir. 1996). Even if such documents are not attached to the complaint, thedefendant may attach them to a motion to dismiss — and a court mayconsider them — without turning the motion into one for summaryjudgment. Id.; Romani v. Shearson Lehman Hutton,929 F.2d 875, 879 n.3 (1st Cir. 1991). This prevents a plaintiff from"excising an isolated statement from a document and importing it into thecomplaint, even though the surrounding context imparts a plainlynon-fraudulent meaning to the allegedly wrongful statement."Shaw, 82 F.3d at 1220.
B. Heightened Pleading Requirement
In 1995, Congress enacted the Private Securities Litigation Reform Act("PSLRA") to curb abuse in private securities litigation. Greebel v.FTP Software, Inc., 194 F.3d 185, 191 (1st Cir. 1999). The PSLRAstates, in part: In any private action arising under this chapter in which the plaintiff alleges that the defendant — (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.15 U.S.C. § 78u-4(b)(1).
Prior to the enactment of the PSLRA, a plaintiff who allegedPage 8a knowing or intentional falsehood was required to meet therequirements of Fed.R.Civ.P. 9(b) by stating the circumstancesconstituting the falsehood "with particularity."4 On the other hand,if the complaint did not "sound in fraud" — if, in other words, theplaintiff alleged negligent or innocent misrepresentation — noheightened pleading requirement applied. See Shaw, 82 F.3d at1223.
Section 78u-4(b)(1) does away with the need to determine whether acomplaint "sounds in fraud" and imposes a heightened pleading requirementon all § 11 and § 12(a)(2) claims arising out of allegedmisrepresentations or omissions. The PSLRA's pleading standard is"congruent and consistent with the pre-existing standards" of the FirstCircuit for Rule 9(b), which are "notably strict and rigorous."Greebel, 194 F.3d at 193. Thus, under the PSLRA, as previouslyunder Rule 9(b), a plaintiff must specify each allegedly misleadingstatement or omission, and additionally, "the plaintiff must not onlyallege the time, place, and content of the alleged misrepresentationswith specificity, but also the `factual allegations that would support areasonable inference that adverse circumstances existed at the time ofthe offering, and were known and deliberately or recklessly disregardedby defendants.'"5 Id. at 193-94 (quotingPage 9Romani, 929 F.2d at 878).
A. Sections 11 and 12
Section 11 of the Securities Act provides that if any part of acompany's registration statement for an offering "contained an untruestatement of a material fact or omitted to state a material fact requiredto be stated therein or necessary to make the statements therein notmisleading," a purchasing shareholder has a cause of action against,inter alia, the company, its directors and mangers, and the offeringunderwriters.6 15 U.S.C. § 77k(a).Page 10
Similarly, liability to a purchasing shareholder attaches under §12(a)(2) for
offer[ing] or sell[ing] a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission).15 U.S.C. § 771.
For present purposes, there are two key differences between § 11and § 12. First, while only statutory "sellers" can be liable under§ 12, § 11 has no such requirement. Second, liability under §12, unlike under § 11, must be tied to affirmative statements inregistration statement. Liability may be imposed under § 12 eitherbecause a statement is itself false or because an omission of materialfact makes the statement misleading. Section 11, on the other hand,imposes liability not only where a registration statement contained anuntrue material statement or omitted a material fact necessary to makestatements therein not misleading, but also where it "omitted to state amaterial fact required to be stated therein." See Shaw, 82F.3d at 1205. Thus, § 11, unlike § 12, grounds liability onfreestanding omissions of material fact to the degree required to be madein the registration statement.
Finally, scienter is not an element under either § 11 or under§ 12. See In re Donald J. Trump Casino Sees. Litig.-Taj MahalLitig., 7 F.3d 357, 368 n.10 (3d Cir. 1993) (comparing therequirements under § 10 of the 1934 Securities Exchange Act withPage 11the requirements under § 11 and § 12), cert. deniedsub nom., Gollomp v. Trump, 510 U.S. 1178 (1994); see alsoShaw, 82 F.3d at 1223 (no scienter requirement under § 11).
B. Statutory Sellers
As an initial matter, the SeaChange defendants contend that plaintiffshave failed sufficiently to allege that any of the SeaChange defendantswere statutory "sellers" under § 12(a)(2).7 Under § 12(a)(2),only one who "offers or sells" a security is liable for violations of thesection's substantive provisions. The plaintiffs did not argue inopposition to the motion to dismiss that a § 12 action could bemaintained against the SeaChange defendants. At the hearing on the motionto dismiss, plaintiffs confirmed that they were abandoning the § 12claim as to the SeaChange defendants.
C. Misleading Material Statements
While in their complaint, plaintiffs tend to mix together allegationsof material misrepresentations and allegations of material omissions,they identify a number of affirmative statements in the Prospectus thatthey contend either were false or, due to omissions of material facts,misleading. Plaintiffs point out five categories of such statements:statements concerning (1) demand for SeaChange products, (2) SeaChange'scompetitive position, (3) sources of revenue, (4) revenue growth, and (5)proprietary information and the nCUBE litigation. I findPage 12these allegations fail to state a claim under § 11 or §12.First, statements in the first four categories were "forward-looking"within the meaning of the safe harbor provisions of the PSLRA andtherefore cannot ground § 11 or § 12 liability. Second, thestatements regarding proprietary information and the nCUBE litigationprovided such disclosure of material information as was required.
(1) Forward-Looking Statements
The "Safe Harbor" provisions of § 102(b) of the PSLRA state, inpart, that: in any private action arising under this chapter that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person . . . shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that — (A) the forward-looking statement is — (i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or (ii) immaterial.15 U.S.C. § 78u-5(c)(1). Under § 102(b), "forward-looking"statements include: (A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;
(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or servicesPage 13 of the issuer;
(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission. (D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C).Id.
Plaintiffs identify a number of statements in the Prospectus that theyclaim were materially misleading because the statements did not includefacts known by SeaChange at the time of the Offering. For example, withregard to demand for SeaChange products, the Prospectus stated: If there were a decline in demand or average selling prices for our broadband products, including our ITV System and SPOT system, our revenues would be materially affected. We expect our broadband products to continue to account for a significant portion of our revenues. Accordingly, a decline in demand or average selling prices for our broadband products, whether as a result of new product introductions by others, price competition, technological change, inability to enhance the products in a timely fashion, or otherwise, would have a material adverse effect on our business, financial condition and results of operations.Prospectus at 7.
Plaintiffs contend that these statements were materially false andmisleading because "at the time they were made, the Company was thenexperiencing a decline in demand, profit margin and average sellingprices for its broadband products." Complaint at ¶ 54.Page 14
The statements plaintiffs identify are clearly forward-looking innature and therefore fall squarely within the safe harbor provisions ofthe PSLRA. The same is true of the statements concerning competitiveposition, sources of revenue, revenue growth that plaintiffs allege to bematerially misleading.8 Thus, none of the statements can be thesource of § 11 or § 12 liability.
All the statements identified by plaintiffs appear in a section of theProspectus entitled "Risk Factors." The statements generally fall withinthe subject matter contemplated by § 102(b)'s definition of"forward-looking" as they concerned SeaChange's plans and expectationsregarding revenues, products and services, and economic performance.Moreover, the statements all are couched in conditional terms or phasedin the future tense. For example, the excerpt of the Prospectus aboveconcerning demand for products stated that "If there were adecline" and "We expect" and "a decline in demand or averageselling prices . . . would have a material adverse effect."(Emphasis added). The same type of "forward-looking" language appears inthe other statements identified by plaintiffs. While materialmisrepresentations of present fact are actionable under § 11 and§ 12, even where they are encompassed within "forward-looking"Page 15statements, see Shaw, 82 F.3d at 1213,plaintiffs fail to point to any "present-oriented aspect" of thestatements they allege were materially misleading.
Additionally, the statements plaintiffs identify included and wereaccompanied by sufficient cautionary language to put them within thebounds of the safe harbor provisions. Indeed, the section of theProspectus in which the statements appeared was entitled "Risk Factors."The section began with the following: You should carefully consider the following risks before investing in our common stock. If any of the following risks come to fruition, our business, results of operations or financial condition could be materially adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.Prospectus at 6. Many of the statements plaintiffs identify asmisleading themselves warned investors of potential risks and factorsthat could adversely affect SeaChange. In a section under the heading"Special Note Regarding Forward-Looking Statements" which immediatelyfollowed the "Risk Factors" section, the Prospectus stated:
We have made statements under the captions "Prospectus Summary," "Risk Factors," "Management Discussion and Analysis of Financial Condition and Results of Operations," "Business" and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "future," "potential," or "continue," the negative of these terms and other comparable terminology . . . . These statements are only predictions based on our current expectations and projections about futurePage 16 events. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance, or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled "Risk Factors." You should specifically consider the numerous risks outlined under "Risk Factors."
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as otherwise required by law, we are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.Prospectus, at 13.
Given the abundance of cautionary language and the forward-lookingtone of the "Risk Factors" section, I find that the statements plaintiffsidentify within the section — regarding demand for products,competitive position, and revenue growth — were not materiallymisleading because they are protected under the safe harbor provisions ofthe PSLRA.
(2) Proprietary Information and nCUBE Litigation —In addition to the statements from the "Risk Factors" section, plaintiffsallege that a number of statements in the Prospectus regardingSeaChange's proprietary information were materially misleading.Specifically, plaintiffs allege in the complaint that references to
"our ITV System," "our video systems," and our "MediaCluster System" . . . were materially false and misleading because Defendants represented that SeaChange had full proprietary rights to the Mediaserver technology when, in fact, at the time thePage 17 statements were made, SeaChange did not have proprietary rights to the technology and was willfully infringing upon nCUBE's patent on this technology.
Complaint at ¶ 50.
Plaintiffs similarly allege that the following statements, from asection of the Prospectus entitled "Legal Proceedings," were materiallyfalse and misleading as to the nCUBE litigation: We responded on January 26, 2001, denying the claim of infringement. . . . We cannot be certain of the outcome of the foregoing litigation, but do plan to oppose the allegations against us and assert our claims against the other parties vigorously. [W]e are unable to estimate the impact to our business, financial condition and results of operations or cash flows.Id. ¶ 52.
Plaintiffs contend the statements were false and misleading becauseSeaChange was, at the time it made the statements, willfully infringingon nCUBE's patent. Thus, plaintiffs argue that SeaChange knew with a"high degree of certainty" that nCUBE would receive a jury verdict in itsfavor, which would adversely impact SeaChange's business. Id.
The only factual allegation plaintiffs offer to support theircontention that SeaChange knew the statements to be false or misleadingis the jury verdict, subsequent to the Offering, which found thatSeaChange had willfully infringed nCUBE's VOD system patent. I observe,as well, from the nCUBE litigation docket that the trial judge found thecase to have been exceptional under 35 U.S.C. § 258 and awardedattorneys fees to nCUBE. Such a finding is generally reserved for casesinvolvingPage 18willful infringement and the conduct of litigation asserting badfaith claims and defenses. See generally Multiform Desiccants, Inc.v. Medzam, Ltd., 133 F.3d 1473 (Fed. Cir. 1998).
To be sure, willfulness in the context of patent infringement is notequivalent to actual knowledge. State Indus., Inc. v. Mor-FloIndus., Inc., 883 F.2d 1573, 1581 (Fed. Cir. 1989), aff'd afterremand, 948 F.2d 1573 (Fed. Cir. 1991) ("[a]ctual knowledge is notrequired" for a finding of willful infringement); see Vulcan Eng'gCo. v. Fata Aluminum, Inc., 278 F.3d 1366, 1378 (Fed. Cir. 2002),cert. denied, 537 U.S. 814 (2002). But it may be inferred, fromthe jury verdict of willful infringement and the judge's grant ofattorneys fees against SeaChange, that SeaChange knew it was infringingnCUBE's patent when generating the Prospectus and Registration Statement.This permissible inference is sufficient at the pleading stage toestablish knowledge by SeaChange at the time of the registrationstatement that a loss in the nCUBE litigation was highly likely.
Given the permissible inference that SeaChange knew that it wasinfringing on nCUBE's patent — or, in the words of plaintiffs, thatit "knew the suit [against it] was meritorious" — ! turn to thequestion whether the statements made as part of the registrationstatement were affirmatively misleading. It cannot seriously be disputedthat the statements in the Prospectus concerning the nCUBE litigationwere literally true; the statements merely described the litigation invery broad terms. Plaintiffs, however, cite Roeder v. AlphaIndustries,Page 19Inc., 814 F.2d 22, 26 (1st Cir. 1987), for theproposition that "[w]hen a corporation does make a disclosure —whether it be voluntary or required — there is a duty to make itcomplete and accurate." Accordingly, they argue that while SeaChange'sstatements about the nCUBE litigation might have been literally true,they were nevertheless incomplete and misleading because they did notdisclose the patent infringing conduct.
The disclosure duty referred to in Roeder, however, is not sodiffuse as plaintiffs suggest. While a company that chooses to revealmaterial information, even though it had no duty to do so, "must disclosethe whole truth," Id., it need not disclose everything itknows; rather, the company is required only to make additionaldisclosures to keep the information from being materially misleading. Asthe First Circuit stated in Backman v. Polaroid Corp.,910 F.2d 10 (1st Cir. 1990): Plaintiffs quote Roeder that even a voluntary disclosure of information that a reasonable investor would consider material must be "complete and accurate." This, however, does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be "so incomplete as to mislead."Id. at 16.
Here, the Prospectus mentions the nCUBE litigation in generaldescriptive terms, as required by Item 103 of Regulation S-K, discussedinfra section III.D.1. The Prospectus stated that SeaChange wascontesting nCUBE's claim of patent infringement,Page 20that it was not certain what the outcome of the litigation wouldbe, and that it could not "estimate the impact" of the litigation. Itcontained no statements suggesting that SeaChange would prevail in thelitigation or implying that the impact of the litigation on the companywould be positive.9 Given that at the time of the Offering the juryhad not yet returned a verdict,10 SeaChange was not obligated topredict the outcome or estimate the impact of the nCUBE litigation.11See Weilgos v. Commonwealth Edison Co., 892 F.2d 509, 517-18(7th Cir. 1989).
The information provided in the Prospectus was accurate,Page 21even considering knowledge of the patent infringing conduct. Whilethe information may have been, in some predictive sense, incomplete, Ifind that, given the well understood vagaries of litigation, it was notso incomplete as to mislead investors.
D. Omissions of Material Fact Required to be Stated
In addition to alleging that affirmative statements in the Prospectuswere materially misleading, plaintiffs also contend that defendantsviolated § 11 by failing to disclose in the Prospectus orRegistration Statement material facts known by SeaChange at the time ofthe Offering. In their amended complaint plaintiffs confusingly conflateallegations of omissions related to affirmative statements in theProspectus with allegations of free-standing omissions unrelated tospecific statements. However, in their summary judgment opposition,plaintiffs clarify that their allegations encompass the latter type ofomission.12 In other words, plaintiffs contend that even if none ofthe affirmative statements in the Prospectus are actionable as misleadingunder § 11 or § 12, SeaChange nevertheless had a duty under §11 to disclose information it possessed at the time of the Offering about(1) the nCUBE litigation, (2) the AOL Time Warner Manhattan contract, and(3)Page 22intra-quarter performance.
To avoid dismissal of a claim based on a free-standing omission ofmaterial fact — one not tied to a specific statement in theProspectus — plaintiffs must sufficiently allege: (1) that theProspectus contained an omission; (2) that the omission was material; (3)that defendants were under a duty to disclose the omitted information;and (4) that such omitted information existed at the time the Prospectusbecame effective. Cooperman, 171 F.3d at 47. Considering inturn whether plaintiffs allegations of omissions satisfy these elements,I find that plaintiffs have failed to state a claim because they have notalleged facts which implicate any duty on the part of SeaChange todisclose the information plaintiffs contend was unlawfully omitted fromthe Prospectus. Even if omitted information is material, there can be noliability for the omission under the securities laws unless there is aduty to disclose the information. In other words, "[s]ilence, absent aduty to disclose, is not misleading." Polaroid,910 F.2d 10.13 Here, plaintiffs have failed to identify anysuch duty as to any of the allegedly omitted information.Page 23
(1) nCUBE Litigation —
Plaintiffs suggest that even if none of the statements in theProspectus describing the nCUBE litigation were materially false ormisleading, SeaChange nevertheless had, under § 11, the obligation todisclose the fact that it was likely to lose the litigation becauseSeaChange knew at the time of the Offering that it was infringing onnCUBE's patent. This allegation is closely-aligned with the allegationfound deficient above, see supra section III.C.2, but it isdistinct in that it is not tied to any affirmative statements in theProspectus.
Plaintiffs point to no duty — other than a generalized duty ofdisclosure, which as discussed, infra, is not sufficient— that would require SeaChange to describe the nCUBE litigationdifferently or in more detail than it did in the Prospectus. Thedefendants fully complied with the disclosure duty imposed by Item 103 ofRegulation S-K which requires registrants to: [d]escribe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject [and to include] the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought.17 C.F.R. § 229.103.
Item 103 marks the extent of a registrant's obligation to discloseinformation pertaining to pending litigation. In directing the requireddisclosure in Item 103 to the generalPage 24contours of ongoing litigation, the SEC has deliberately chosen notto impose the type of duty of disclosure that plaintiffs contenddefendants' breached. See Roeder v. Alpha Industries, Inc.,814 F.2d 22 (1st Cir. 1987) ("The SEC  was given complete discretion . . .to require in corporate reports only such information as it deemsnecessary or appropriate in the public interest or to protectinvestors.'" (quoting S. Rep. No. 792, 73d Cong., 2d Sess. 10 (1934))).The disclosure required by Item 103 is meant to put potential investorson notice of pending litigation, not to force companies to predict aparticular outcome in the litigation. See Wielgos, 892 F.2d at517-18 ("Nothing [in Item 103 is] about the status of the litigationwithin the tribunal, or how the tribunal is organized, or the probabilitythat the tribunal will deliver a particular decision."). Here, theProspectus set forth information required in Item 103 and further statedthat the company could not be certain of the outcome of the litigationand that it could face "significant liability for damages andinvalidation of [its] proprietary rights." Prospectus, at 10. Thisdisclosure was certainly enough to alert investors of the nCUBElitigation and to prompt them to make further inquiry directly about thelitigation should they choose to do so.
Plaintiffs' citation of Roeder, is misguided. Whileplaintiffs may be correct that Roeder supports the conclusion thatSeaChange's patent infringing conduct was material, thePage 25decision does not assist them in locating the source of a duty todisclose necessary to their claim. Indeed, the First Circuit inRoeder found that while the fact that the defendant company hadpaid a bribe to obtain a subcontract was material, plaintiff failed tostate a claim for securities fraud14 because he did not allege factsthat, if proved, established the defendant had a duty to disclose thebribe.15 Id. at 28. The Roeder court stressedthat "[a] duty to disclose `does not arise from the merePage 26possession of nonpublic market information,'" and endorsed "theprevailing view . . . that there is no  affirmative duty of disclosure"in cases where "there is no insider trading, no statute or regulationrequiring disclosure, and no inaccurate, incomplete, or misleading priordisclosures." Id. at 27. Roeder applies here andrequires dismissal of plaintiffs' nCUBE claims given their failure toallege facts which give rise to any affirmative duty of SeaChange todisclose its patent infringing conduct.
(2) AOL Time Warner Contract
Plaintiffs allege that at the time of the Offering SeaChange "hadalready been informed by AOL Time Warner that it would not be awarded AOLTime Warner's" Manhattan contract. Complaint at ¶ 2(d). As alleged,the information was omitted, it was material, and it was known at thetime of the Offering.16 Thus, the only question concerns whetherSeaChange had a duty to disclose information about the contract in theOffering filings.
The parties spar over this point, broadly disagreeing about whether andto what extent SeaChange had a free-standing duty of disclosure incompleting the Offering materials. In arguing that plaintiffs have failedadequately to allege a § 11 violation,Page 27defendants rely upon the "fixture" in securities law that "silence,absent a duty to disclose, cannot be actionably misleading" and itscorollary proposition that "the mere possession of material nonpublicinformation does not create a duty to disclose it." Shaw, 82F.3d at 1202. Plaintiffs, on the other hand, seize on language, also inShaw, that supports a more generalized duty of disclosure. InShaw, the First Circuit stated: The obligations that attend the preparation of [public stock offering] filings embody nothing if not an affirmative duty to disclose a broad range of material information. Indeed, in the context of a pubic offering, there is a strong affirmative duty of disclosure. [T]he determination of whether the alleged nondisclosures in this case provide a legally sufficient basis for the plaintiffs' claims cannot be severed from consideration of the basic policies underlying the disclosure obligations of the applicable statutes and regulations.Id. at 1203 (internal citations omitted). Shawcontinues its discussion of the securities laws' duty disclosure with ananalogy to insider trading, stating that: [j]ust as an individual insider with material nonpublic information about pending merger or license negotiations could not purchase his company's securities without making disclosure, the company itself may not engage in such a purchase of its own stock, if it is in possession of such undisclosed information. By extension, a comparable rule should apply to issuers engaged in a stock offering. Otherwise, a corporate issuer selling its own securities would be left free to exploit its informational trading advantage, at the expense of investors, by delaying disclosure of material nonpublic negative news until after completion of the offering.Id. at 1204 (internal citations omitted).Page 28
Building on this language, plaintiffs argue that because "[it] isundisputed that no corporate insider would have been able to sell stockwhile in possession of that information before its public disclosure,"SeaChange had a duty to disclose the information or abstain from theOffering.
The insider trader analogy, however, takes plaintiffs only so far.While the analogy underscores "the policy reasons supporting a comparablystrong disclosure mechanism in the context of a public offering,"Shaw, 82 F.3d at 1204, it does not obviate the need to "look tothe explicit statutory and regulatory framework to determine whether theSecurities Act provides such a mechanism." Id. Thus, the simplefact that an insider in possession of the alleged information about theAOL contract might not have been able to sell stock does not, by itself,create a free-standing duty on the part of SeaChange to disclose theinformation.
Although not alleged as such in their amended complaint, plaintiffs, intheir summary judgment opposition brief, point to Item 303 of RegulationS-K and Instruction 11(a) of Form S-3 of the SEC filing materials.Pursuant to Form S-3's Instruction 11(a), SeaChange was required disclose
any and all material changes in the registrant's affairs which have occurred since the end of the latest fiscal year for which certified financial statements were included in the latest annual report to security holders and which have not been described in a report on Form 10-Q or Form 8-K filed under the Exchange Act.Shaw, 82 F.3d at 1205. While SeaChange was not requiredtoPage 29complete Form S-K but rather employed Form S-3,17 the scope ofInstruction 11(a)'s "material changes" disclosure is circumscribedlargely by the scope of requirements of Item 303 of Registration S-K.Item 303 states, in part: (i) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and, in each case, indicate the extent to which income was so affected . . . . (ii) Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.17 C.F.R. § 229.303(a)(3).
Here, reference in both subparts of Item 303 to "continuing operations"implies the event, transaction, or trend at issue must have somerelevance to the company as it stood at the time of the filing. Indeed,according to the SEC's 1989 release interpreting Item 303(a), "[a]disclosure duty exists where a trend, demand, commitment, event oruncertainty is both  presently known to management and  reasonablylikely to have material effects on the registrant's financial conditionor results of operation." Management's Discussion and Analysis ofFinancial Condition, Securities Act Release No. 6835 (May 18,Page 301989), Fed. Sec. L. Rep. (CCH) ¶ 72,436, at 62,143, reprintedat ¶ 73,193, at 62,842; see Steckman v. Hart Brewing, Inc.,143 F.3d 1293, 1296-97 (9th Cir. 1998). While plaintiffs have adequatelypled that SeaChange knew at the time of the Offering that it had lost itsbid for AOL Time Warner's Manhattan contract, the failed bid was notrelevant to SeaChange's "financial condition or results of operation" atthe time of the Offering.
In discussing the requirements of Item 303, the Ninth Circuit hasstated: Required disclosure is based on currently known trends, events and uncertainties that are reasonably expected to have material effects, such as: A reduction in the registrant's product prices; erosion in the registrant's market share; changes in insurance coverage; or the likely non-renewal of a material contract. In contrast, optional forward-looking disclosure involves anticipating a future trend or event or anticipating a less predictable impact of a known event, trend or uncertainty.Steckman, 143 F.3d at 1297. Here, SeaChange's failed bidon the AOL contract, unlike a non-renewal of a material contractor the erosion of market share, constituted a failed attempt bythe company to expand its customer base and market share. At worst, thefailed bid represents the beginning of a future trend that would affectfuture expectations of revenue and growth. The fact that, as plaintiffsallege, SeaChange stock declined 17% upon release of the news of thefailed bid does not save the claims because the decline can be viewed asmarket anticipation of future trends.18 Plaintiffs have not allegedthat the failed AOLPage 31contract affected SeaChange's continuing operations-by, forexample, influencing pricing, costs, market share, or revenues — asthey stood at the time of the Offering. Thus, I will dismiss plaintiffsclaims as they relate to SeaChange's failed AOL Time Warner contract bid.
(3) Intra-guarter Performance
Plaintiffs allege that defendants did not satisfy the duties ofdisclosure mandated by either Item 303 of Regulation S-K or Instruction11(a) of Form S-3 of the Registration Statement materials by failing todisclose the following information which impacted SeaChange'sintra-quarter performance and which SeaChange knew would lead toworse-than-expected fourth quarter performance: (a) SeaChange was at a competitive disadvantage due to its inability to serve large metropolitan areas that would otherwise have been a showcase for the Company's products; (b) SeaChange was losing its opportunity to capitalize on the rollout of VOD services to its competitors; (c) SeaChange VOD revenues, which had been expected to rise due to increasing demand for VOD services, were flat-to declining; and
(d) The price of SeaChange's VOD equipment was declining faster than had been expected.19Page 32
Complaint at ¶ 63.
(a) Competitive Disadvantage — While plaintiffs offersome basis to ground their claim that SeaChange knew at the time of theoffering that it was at a competitive disadvantage as compared to itscompetitors, I find that they nevertheless have not sufficiently made outa claim. Plaintiffs offer two separate bases for their allegationsconcerning SeaChange's competitive disadvantage: First, they argue thatstatements by Styslinger, in a television interview, admitted thatSeaChange was at a competitive disadvantage. Second, plaintiffs allegethat according to a former SeaChange manager and supervisor, deficienciesin SeaChange's products put it at a competitive disadvantage.
In their amended complaint, plaintiffs offer the following statementsby Styslinger in the CNBC interview when asked about the failed AOL TimeWarner contract: In the case of Manhattan, Manhattan has the view that they are a very large cable operation. They're not as small as the surrounding Cablevision operation, which is a SeaChange system, you know, roughly a third of that size. But they view themselves as very large and wanted the world's largest server to deal with that and nCUBE claims they have the world's largest server.Complaint at ¶ 40. Far from an admission that SeaChange was ata competitive disadvantage, Styslinger's statements suggest little morethan that nCUBE claimed to have the world's largest server and, perhaps,that AOL Time Warner believed that claim. ThePage 33statements do not suggest what plaintiffs must allege to state aclaim: that SeaChange knew, at the time of the Offering, that it wasoperating at a competitive disadvantage.20
Neither do the alleged statements of the former SeaChange engineerprovide a sufficient basis for § 11 liability. Plaintiffs allege thataccording to the engineer: SeaChange's software was less proven than that of its competitors for use with very large numbers of subscribers. SeaChange's servers could not handle as many digital streams, and had less "back office" capacity than nCUBE's. (With nCUBE's back office functions, cable companies could bill and manage subscriber information, including collecting data on what programs subscribers are watching.) One nCUBE server could service a large cable system, considered preferable to SeaChange, which could only service large systems by clustering several of it's [sic] smaller servers together. In addition, SeaChange's SPOT system of advertisement insertion was at a competitive disadvantage, as it lacked sufficient digital applications, a problem SeaChange was aware of and working to rectify.Complaint at ¶ 57.
While these allegations marginally support plaintiffs' contention thatSeaChange had certain competitive disadvantages, plaintiffs failadequately to tie the contention to a duty to disclose under Instruction11(a). As noted above, see supra section III.D.2, the "materialchanges" instruction concernsPage 34continuing operations, and while it is clear that a significantcompetitive disadvantage could hinder future performance, plaintiffs havenot sufficiently alleged that the competitive disadvantage hindered theongoing operations of SeaChange. And again, as discussed in sectionIII.D.2, supra, reference to the failed AOL Time Warnercontract to make such a connection is unavailing. Accordingly, plaintiffsclaims as they relate to SeaChange's alleged competitive disadvantagewill be dismissed.
(b) VOD Rollout — Plaintiffs allege no basis for theirconclusory contention that SeaChange had knowledge that it was losing itsopportunity to capitalize on the rollout of VOD services to itscompetitors. Insofar as the failed AOL Time Warner contract is meant toprovide the basis for the contention, it is redundant of the claimsdiscussed in section III.D.2, supra. Accordingly, any claimthat relates to the rollout of VOD services will be dismissed.21
(c) VOD Revenue — Plaintiffs allege that SeaChange hada duty to disclose intra-quarter information indicating that VOD segmentsales would not reach expectations. SeaChange's VOD segment sales for thefourth quarter, which ended on January 31, 2002, two days aftercompletion of the Offering, were 10.3 million compared to analysts'estimates of $12 million. Complaint at ¶ 39.Page 35
In Shaw, the First Circuit rejected both a categorical rulethat disclosures regarding intra-quarter performance are never requiredand a bright-line rule that such disclosures are required whenever acompany perceives a possibility that its quarter results will disappointthe market. 82 F.3d 1210. Rather, the court stated that if
the issuer is in possession of nonpublic information indicating that the quarter in progress at the time of the public offering will be an extreme departure from the range of results which could be anticipated based on currently available information, it is consistent with the basic statutory policies favoring disclosure to require inclusion of that information in the registration statement.Id. I find that plaintiffs here have failed to allegethat SeaChange was in possession of such information. Plaintiffs havealleged a number of underlying facts which not only do not by themselvesconstitute viable claims but also fail to support the overall allegationthat SeaChange knew it would not meet VOD revenue expectations.
In another setting, the timing of the Offering might lend support toplaintiffs' allegations of securities fraud. The Shaw courtstated with reference to the 9(b) standard that:
in testing the allegations of the complaint against Rule 9(b), we need not turn a blind eye to the obvious: the proximity of the date of the allegedly fraudulent statements and omissions to both the end of the quarter then in progress and the date on which disclosure was eventually made. While the short time frame between an allegedly fraudulent statement or omission and a later disclosure of inconsistent information does not, standing alone, provide a sufficient factual grounding to satisfy Rule 9(b), see Arazie, 2 F.3d at 1467-68, there is nothing in Rule 9(b) that precludes consideration of such temporal proximity as a circumstance potentially bolstering the complaint's claimsPage 36of fraud.
Shaw, 82 F.3d at 1224-25. Cf. Classman v.Computer-vision Corp., 90 F.3d 617, 632 (1st Cir. 1996) (dismissingclaim where allegedly disclosed information was only seven weeks into thequarter). But here the overall results exceeded prior projections by thedefendants. The defendants did not make such projections as to the VODrevenue contribution to the overall results in the fourth quartersufficient to ground a misrepresentation on a shortfall in that sector.There is no meaningful basis to conclude that the shortfall had amaterially disproportionate impact on consolidated financials or that afailure to provide discussion by segment was either incomplete ormisleading. In short, the plaintiffs have not sufficiently alleged aspecific factual foundation that grounds a duty of disclosure as to theVOD revenue claims. Rather, they offer only the inference arising out ofthe timing of the Offering, and such allegations of "fraud by hindsight"are not sufficient to stake a claim for securities fraud. SeeShaw, 82 F.3d at 1223.
(d) Price Erosion — Plaintiffs allege that SeaChangehad a duty to disclose information concerning the fact that the "price ofSeaChange's VOD equipment was declining faster than had been expected."Complaint at § 62. Plaintiffs, however, allege no factual support forthese allegations. Plaintiffs offer only a report by an analyst at ThomasWeisel, which stated: "Our main concern going forward is price erosion inthe VOD market." Id. ¶ 45. The report, however, was issuedon March 6, 2002, after thePage 37Offering, and plaintiffs merely state, in conclusory fashion, thatthe report was "based largely on pricing trends already existing at thetime of [the Offering]." Id. ¶ 46. Plaintiffs allege nofacts to support their contention that VOD prices were in fact eroding atthe time of the Offering, but more importantly, they allege no basis fortheir claim that SeaChange was aware of the trend at the time of theOffering such that it should have disclosed it in the Prospectus. Acompany is required only to disclose a known trend that it "reasonablyexpects will have a material favorable or unfavorable impact on net salesor revenues or income from continuing operations."17 C.F.R. § 229.303(a)(3). Plaintiffs have not pled sufficient facts tosupport its claim that the alleged price erosion was such a trend.Therefore I dismiss plaintiffs' claims related to allege price erosion.
B. § 15
Section 15 of the 1933 Securities Act states: Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.15 U.S.C. § 770.Page 38
To state a claim for controlling person liability, plaintiffs mustadequately allege: (1) an underlying primary violation; and (2) theindividual defendant had control over the primary violator, namelySeaChange. Aldridge v. A.T. Cross Corp., 284 F.3d 72, 85 (1stCir. 2002). As discussed above, plaintiffs have failed sufficiently toallege a primary violation under § 11 or § 12. Accordingly,plaintiffs' § 15 claims will be dismissed.Page 39
For the reasons set forth more fully above, defendants' motions todismiss under Fed.R.Civ.P. 12(b)(6) are GRANTED as to all claims.
1. There were in total ten underwriters. The three that purchasedthe most shares are defendants in this case. Prospectus at 43.
2. nCUBE had filed the action, nCUBE Corp. v. SeaChange, Int'l,Inc., No. 01-CV-11, on January 8, 2001. Complaint at ¶ 32.
3. Plaintiffs allege that each of the individual defendants signed— personally or by attorney-in-fact — the RegistrationStatement. Complaint at ¶ 19.
4. Rule 9(b) states in full: "In all averments of fraud or mistake,the circumstances constituting fraud or mistake shall be stated withparticularity."
5. Although the pleading requirements under the PSLRA are strict,they do not alter the underlying Rule 12(b)(6) standard of review. Thus,even under the PSLRA, a court must draw all reasonable inferences fromthe particular allegations in the plaintiff's favor. Aldridge v.A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002).
6. Section 11 states that any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue — (1) every person who signed the registration statement; (2) every person who was a director of . . . the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted; . . . (5) every underwriter with respect to such security.15 U.S.C. § 77k.
7. Underwriters do not argue that they were not statutory "sellers"for the purposes of 12(a)(2) liability.
8. Excerpts from the Prospectus relating to these topics are inparagraphs 56, 58, and 60 of the Complaint. Because the excerpts arelengthy and, more importantly, because my rulings are based on theirgeneral nature as "forward-looking" rather than on the specifics of theircontent, I do not reproduce them here.
9. Such statements would have been much firmer grounds for § 11or § 12 liability. See Burnstein v. Applied Extrusion Tech.,Inc., 150 F.R.D. 433 (D. Mass. 1993) (affirmative statement thatmanagement did not believe pending lawsuit would have a material, adverseeffect on the operation of the company was actionable).
10. According to the Prospectus, discovery was completed aroundDecember 2001 with a claim construction hearing to follow the conclusionof discovery.
11. Plaintiffs cite two cases, In re TCW/DW North AmericanGovernment Income Trust Securities Litigation, No. 95 Civ. 0167(PKL), 1997 WL 727487 (S.D.N.Y. Nov. 20, 1997), and In re PrudentialSecurities, Inc. Ltd. Partnerships Litigation, 930 F. Supp. 68(S.D.N.Y. 1996), which held that risk disclosures were not sufficient andtherefore were misleading. Those cases are inapposite because in bothcases, unlike in this case which involves predictions about the vagariesof litigation, the defendants had actual knowledge of information whichthey failed to disclose thereby rendering prospectus statementsmisleading. In In re TCW/DW, the court found that plaintiffssufficiently stated a claim where defendants allegedly failed toadequately disclose the consequences of a "maturity extension risk" forsecurities in defendants' portfolio, which defendants knew couldsubstantially affect the volatility of the securities. 1997 WL 727487, at5*. In In re Prudential, the court held that warnings inprospectuses that the residual value of defendant's aircraft coulddecline were not adequate where plaintiffs cited evidence that defendanthad been warned by experts that residual values of its aircraft woulddecline radically. 930 F. Supp. at 72.
12. The Underwriters describe plaintiffs approach as "march[ing] asubtle retreat from the original premise of [their] claims" and contendplaintiffs "now abandon any suggestion that the Prospectus containedaffirmative misstatements on those topics." Fairly read, however, thecomplaint sets forth — albeit not distinctly — allegations ofboth general omissions and omissions relating to specific statements inthe Prospectus.
13. In Polaroid, the First Circuit discussed in depth theplaintiffs' (and the trial court's) initial failure to appreciateRoeder's clear mandate that a duty of disclosure must undergirdan alleged material omission for the omission to constitute securitiesfraud. Polaroid, 910 F.2d at 12-15. The decision, however,centrally concerned the claims which plaintiffs had reformulated asmisleading misrepresentations on rehearing (see supra sectionIII.C.2).
14. Roeder concerned § 10(b) of the Securities Act butis applicable to the § 11 and § 12 claims here as to materialityand disclosure requirements.
15. Plaintiffs similarly misapprehend the import ofWielgos, 892 F.2d 509. In that case, investors alleged thatthe defendant company violated § 11 by failing to disclose specificfacts regarding a pending license application before the NuclearRegulatory Commission, but the Seventh Circuit found no violation.Plaintiffs here cite Wielgos for the proposition that"[m]ateriality depends not only on the magnitude of an effect but also onits probability." 892 F.2d at 517. They contend that while inWielgos the probability that the safety license applicationwould be denied was minuscule, here the probability that SeaChange wouldlose the nCUBE litigation was high, given its willful infringement. Evenif this is so, it only goes to the question of materiality. TheWielgos court decided the case "without regard to materiality"because the defendant "revealed all that Item 103 requires."Id. The court rejected plaintiffs' contention that thedefendant had a duty to disclose more specific information than requiredby Item 103, including which particular part of the Nuclear RegulatoryCommission would consider the application and the likelihood and impactof an adverse decision. The court stated that "[t]he securities acts donot have this ex post perspective. Their approach is exante." Id. at 518. The court concluded: [The defendant] firm lived up to the technical requirements of Item 103. No one's interests would be served by requiring the details Wielgos demands from the privileged position of hindsight, as opposed to the "brief" description the SEC solicited.Id.
16. The SeaChange defendants dispute this last point, arguing thateven if AOL Time Warner had informed SeaChange that SeaChange would notget the Manhattan contract, SeaChange still could not have known at thetime of the Offering whether AOL Time Warner would hold true to its word.I find this argument without merit. As alleged, SeaChange knew at thetime of the Offering that it would not win the Manhattan contract.
17. Form S-3 is a streamlined registration statement for certainwell-capitalized, widely-followed issuers. Shaw, 82 F.3at1205. A registrant, like SeaChange, which is authorized to use Form S-3makes certain disclosures by incorporating by reference its most recentForm 10-K and Forms 10-Q. Id. The "material changes"requirement in Instruction 11(a) is meant to require a company to provideinformation updating those incorporated forms, which is similar to theinformation required of an ordinary company that uses the Form S-K.See id.
18. I note additionally that, even by plaintiffs description, the17% stock drop was precipitated by both news of the failed bid andSeaChange's fourth quarter financial results. Complaint at ¶ 39.Thus, it would be difficult — if not impossible — to inferfrom the stock drop alone the negative impact of failed bid.
19. In their opposition memorandum, plaintiffs add to this listinformation concerning nCUBE litigation and the AOL Time Warner Contract.As discussed supra, these additions do not form the sufficientbases for claims whether with reference to Instruction 11(a) orotherwise.
20. As defendants point out, Styslinger's statement that Manhattanis not as "small as the surrounding Cablevision operation" seems to be amisstatement. Regardless, even assuming it was not, the excerpt does notsuggest what plaintiffs allege it suggests. Additionally, defendants offer the excerpt in the context of prior andsubsequent exchanges in the interview. While it appears plaintiffs wrenchthe excerpt out of the larger context, given my finding that the excerptis not an admission of competitive advantage, I need not address theinterview as a whole.
21. Plaintiffs, moreover, do not include this category ofinformation in their recital in their opposition brief of whatdisclosures Instruction 11(a) required.