ORDER & MEMORANDUM OPINION ON MOTIONS TO DISMISS
THIS CAUSE is before the Court upon the separate motions to dismissfiled by (1) Robert New;1 (2) Jonathan New; (3) Stuart Cauff(collectively the "Individual Defendants"); and (4) Morgan Stanley DeanWitter & Co., Salomon Smith Barney, Inc., and Friedman, Billings, RamseyGroup,Inc. (collectively the "Underwriters"). The motions have been fullybriefed, and they are ripe for adjudication.
This is a putative class action lawsuit, which arises from UnicapitalCorporation's ("Unicapital") brief existence as a publicly-traded company.Counts I and II of the amended class action complaint assert claims under§§ 11 and 12(a)(2) of the Securities Act of 1933 (the "SecuritiesAct"), respectively. Count IV of the amended class action complaint assertsa claim pursuant to § 10(b) of the Securities Exchange Act of 1934(the "Exchange Act") and the Security and Exchange Commission's (the "SEC")Rule 10b-S. Additionally, Counts III and V of the amended class actioncomplaint assert claims for controlling person liability against theIndividual Defendants under § 15 of the Securities Act and §20(a) of the Exchange Act, respectively. In order to assess the viabilityof these claims, it is necessary to set forth in some detail the formation,structure, and operation of Unicapital as a publicly-traded company.2
A. The Rise of Unicapital
"Unicapital was founded in 1997 to create a national consolidator andoperator of equipment leasing and specialty finance business serving thecommercial market." Prospectus at 4. Unicapital's founders, Jonathan J.Ledecky and Robert New, did not break into the equipment leasing andfinancing business in a gradual manner. Rather, within a year of itsformation, Unicapital went public and purchased a number of existingequipment leasing companies and related businesses (the "Targetedcompanies") and consolidated them. See id. at 6-8 (listing the companiesto be acquired). The purchase of the targeted companies was financedprimarily by an initial public offering of 28 million shares of commonstock on May 14, 1998 (the "1998 public offering"), which raisedapproximately $532 million in capital. In financial parlance, Unicapitalundertook what is known as a "roll-Lip" — the acquisition andconsolidation of a number of companiesin a field of business, which is often financed by an initial publicoffering.3
1. The Assets Acquired Through the Roll-up
In conjunction with the 1998 public offering, Unicapital, in accordancewith the Securities Act, filed its registration statement and prospectuswith the SEC.4 Those documents contained pro forma financialstatements for Unicapital, which combined the assets and liabilities ofthe targeted companies.5 See Prospectus at F-4 to F-15. As shown inthe pro forma balance sheets, the acquisition of the targeted companiesyielded total assets of $674,649,00.00. See id. at F-6. An adjustment wasmade to this figure, chiefly by the addition of $470,215,000.00 worth ofgoodwill, resulting in adjusted total assets of $1,174,400,000.00. Id.
The prospectus explained the $470,215,000.00 figure as follows:
Approximately $470.2 million, or 40%, of[Unicapital's] pro forma total assets as of March 31, 1998, after giving effect to [the 1998 public offering], consists of goodwill arising from the acquisitions of the [targeted companies]. Goodwill is an intangible asset that represents the difference between the aggregate purchase price for the net assets acquired and the amount of such price allocated to such assets for purposes of [Unicapital's] pro forma balance sheets.
Id. at 17. In terms of the $559.5 million, which Unicapital paidto purchase the targeted companies, the prospectus accounted for thegoodwill figure as follows:
$21.8 million of the purchase price [was] allocated to aircraft under operating leases and $33.2 million to a deferred tax liability to be established upon the conversion from S Corporation or partnership status of certain of the [targeted companies] and the remaining purchase price in excess of book value of assets acquired it was allocated to goodwill.
Id. at F-12 (emphasis supplied). In other words, $470,215,000.00, or 84%, of the $559.5 million price that Unicapital paid to acquire thetargeted companies, and establish its operations, was attributed togoodwill. Unicapital's pro forma financial statements also provided thatthe goodwill was to be amortized "over a 15 to 40 year period." Id. at 31n. 3.
2. Unicapital"s Operational Structure and the Big Ticket Division
Unicapital's stated goal was "to become a leading consolidator andoperator of equipment leasing and specialty finance businesses." Id. at5.6 Upon completionof the roll-up of the targeted companies, Unicapital had acquired andconsolidated twelve entities from the leasing and specialty financeindustry. Unicapital organized those entities into five departments: (1)the computer and telecommunications equipment leasing department, whichincluded lease financing for computers, workstations, servers, telephonesystems, switches, networks, peripherals, and related hightechnologyequipment; (2) the large ticket leasing and structured financedepartment, which covered leases for equipment with a purchase price inexcess of $5,000,000.00, such as aircraft, satellites, rail and othertransportation equipment; (3) the middle market leasing department, whichgenerally included leases for equipment with a purchase price of between$250,000.00 and $5,000,000.00, such as construction and manufacturingequipment; (4) the small ticket leasing department, which covered leasesfor equipment with a purchase price of less than $250,000.00; and (5) thelease servicing department, which was responsible for leaseadministration and processing services. See id. at 6-8. These departmentswere further divided into practice groups. See generally Amend. Compl. at13-14.
Of particular import to the instant case is the large ticket leasingand structured finance department, which the parties refer to in themoving papers as the Big Ticket Division.7 Initially, three of thetargeted companies, Cauff, Lippman Aviation, Inc.("CauffLippman"),Municipal Capital Markets Group, Inc. ("MCMG"), and the NSJ Group("NSJ"), were integrated into the Big Ticket Division. SeeProspectus at6-7. MCMG, a financing company, was purchased by Unicapital for $14million, with one-half of the purchase price being cash and one-halfUnicapital common stock. Both Cauff Lippman and NSJ provided leasefinancing for used commercial jet aircraft and jet aircraft engines.Cauff Lippman was purchased for $80 million ($48 million in cash and $32million in Unicapital common stock). Additionally, Stuart Cauff, thepresident of Cauff Lippman, became the chief executive officer of the BigTicket Division. See id. at 103. NSJ was purchased for $26.7 million ($16million in cash and $10.7 million in Unicapital common stock). Throughthe purchases of Cauff Lippman and NSJ, Unicapital acquired a fleet ofaircraft "includ[ing] B727s, B737-200s, [and] DC-9s, many of which hadPratt & Whitney JT8D engines." Amend. Compl. at ¶ 81. That fleetformed the bulk of the leasing inventory for the Big Ticket Division.
Early on, the Big Ticket Division (specifically, its aircraft leasinggroup, designated as the "Air Group") appeared profitable. In 1998, thatsector "purportedly contributed the hon's share of revenue andprofitability to [Unicapital]— — $348.5 of $511 million, ornearly 70%, in revenues and $41.5 million of $57 million in profits."Id. at ¶ 38. The Big Ticket Division rapidly expanded its originalfleet of aircraft. By July of 1998, Unicapital had spent an additional$143 million to purchase more airplanes for the Big Ticket Division'sfleet. See id. at ¶ 86. Eventually, Unicapital "expend[ed] over $1billion to acquire 45 commercial jet aircraft to increase [its Big TicketDivision's] Air Group's portfolio to 70 commercial aircraft." Id. "[B]yall measurements, the [1998 public offering] was a tremendous success,raising over half a billion dollars, and the [c]ompany seemed poised forincreasing growth and profitability — especially in its mostprofitable aircraft leasing division." Id. at ¶ 40.
B. The Fall of Unicapital
Unicapital's success, and in particular that of the Big TicketDivision, was short-lived. After enjoying immediate success in 1998, itsfirst year of operation, Unicapital experienced an extremely volatileyear in 1999. At that time, its stock price dipped as low as $1.875 pershare from the opening price of $19.00 per share during the 1998 publicoffering. See Amend. Compl. at ¶¶ 120-143 (chronicling Unicapital's1999 fiscal year). At the outset of 2000, Unicapital's prospects againlooked strong, and its stock price rebounded somewhat, after Unicapitalreported favorable 1999 fourth quarter earnings. see id. at ¶¶141-143. The optimism attributable to those numbers, however,did not lastlong.
On May 15, 2000, Unicapital for the first time revealed that the BigTicket Division recorded no new lease originations during the fourthquarter of 1999. See id. at ¶ 149. Moreover, Unicapital announcedthat it was ceasing the operations of the Big Ticket Division and that:
it had incurred a pre-tax loss of $298.3 million in the first quarter [of 2000], that included the following special charges: (a) a write-off of $239.1 million of impaired goodwill, principally due to the [c]ompany's decision to exit the Big Ticket Division; (b) a $33.5 million write-down of the book value of aircraft engine inventory due to the decline in the current market value of certain engine assets; (c) a special charge of $11.7 million incurred by Unicapital from its exposure to Tower Air, which declared bankruptcy; (d) a $4.0 million write-down of the book value of the [c]ompany's aircraft portfolio due to adverse market conditions; and (e) restructuring costs of $1.9 million associated with the closing of non-core businesses and staff reductions.
Id. at ¶ 166. This news caused Unicapital's stock price to plummet.The stock price quickly fell below $1 per share, and, by July 26, 2000,the stock was trading at less than $00.44 per share.8 Unicapitalnever recovered. And, on December 11, 2000, it filed for bankruptcyprotection.9
This putative shareholder class action followed in the wake ofUnicapital's precipitous decline.10 The gravamen of the amended classaction complaint is that the value of the assets acquired by Unicapitalthrough the buyout of the targeted companies, in particular the valueplaced upon goodwill, was materially misrepresented. Plaintiffs especiallytake issue with the valuation of the fleet of aircraft that Unicapitalacquired from Cauff Lippman and NSJ. In that regard, Plaintiffs maintainthat Unicapital's registration statement and prospectus failed todisclose that a significant number of the acquired planes would becomeobsolete as of December 31, 1999, by operation of the Airport Noise andCapacity Act of 1990 (the "ANCA"), 49 U.S.C. § 47510 et seq.Moreover, Plaintiffs contend that Unicapital continued to misrepresentthe value of its fleet in public filings and statements, until itannounced that its was disbanding the Big Ticket Division on May 15,2000. The amendedclass action complaint names as defendants: (1) Robert New, Unicapital'sformer chief executive officer; (2) Jonathan New, Unicapital's formerchief financial officer; (3) Stuart Cauff, the former chief executiveofficer of Unicapital's Big Ticket Division and a former director ofUnicapital;and (4) the Underwriters, the investment banks that underwroteUnicapital's 1998 initial public offering.11
At this point, a brief overview of the ANCA is necessary. In 1969, theFederal Aviation Agency (the "FAA") established regulations setting noiselimits for aircraft. See generally Vicky Tsilas, Note, An Analysis of thePhase-out Provisions of the Airport Noise and Capacity Act of 1990(hereinafter "Phase-out Provisions"), 4 Fordham Envtl. L.R. 83, 84-87(1992) (discussing the development of FAA's noise regulations). Underthis regulatory regime, "[a]ircraft are categorized by the noise levelranging from stage 1, the noisiest, to stage 3, the quietest.,12 FineAirlines, Inc. v. F.A.A., 51 F.3d 1033, 1034 (11th Cir. 1995) (percuriam). In 1990,Congress enacted the ANCA, "which is designed to providea long-term solution to the nations (sic) aircraft noise pollutionproblem." Phase-out Provisions, 4 Fordham Envtl. L.R. at 84.
The ANCA's provisions were designed to establish a national aviation noise policy. In establishing this national policy, the statute concentrates on two separate and distinct goals. The first goal is the national phasing out of stage two aircraft and the eventual creation of an all stage three fleet. The second goal, is the implementation of a national noise policy to review proposed airport noise and access restrictions on the operations of stage two and stage three aircraft.
Id. at 89-90 (emphasis supplied) (footnotes omitted). The ANCA set thedeadline for phasing out stage 2 aircraft for December 31, 1999 see49 U.S.C. § 47528 (a), and assigned to the Secretary ofTransportation the responsibility for developing a phase-out schedule.See 49 U.S.C. § 47528 (c). "Air carriers could comply with the noiserequirements by purchasing stage 3 aircraft or, through hushkits,adapting their stage 1 or 2 aircraft to stage 3 noise levels." FineAirlines, Inc.,51 F.3d at 1034.13 In short, the ANCA mandated that,as of "December 31, 1999, all aircraft that operate to or from an airportin the United States must comply with stage three noise levels, asdetermined by the Secretary of Transportation." Phase-out Provisions, 4Fordham Envtl. L.R. at 90.
In the amended class action complaint, Plaintiffs aver that the fleetof aircraft acquired by Unicapital in May of 1998, which formed themajority of the Big Ticket Division's inventory, was made up largely ofstage 2 aircraft that could not operate in the United States afterDecember 31,1999, unless they were retrofitted with "hushkits" to makethem stage 3 compliant. See Amend. Compl. at ¶¶ 81-85. According toPlaintiffs, the cost of equipping the fleet with "hushkits" or replacingthe stage 2 aircraft by December 31, 1999 was prohibitive. See id. at¶¶ 84-86. Thus,Plaintiffs argue, Unicapital was destined to abandonthe Big Ticket Division in 2000, asthe fleet it acquired in May of 1998 "only had a useful economic life ofat maximum, until December 31, 1999." Id. at ¶ 87. Defendants havemoved to dismiss the case. They argue that the factual allegations in theamended class action complaint are insufficient to state claims undereither the Securities Act or the Exchange Act. The Court will address theclaims under the two acts separately.14
A. The Securities Act Claims
In Counts I and II of the amended class action complaint, Plaintiffs haveasserted claims under §§ 11 and 12(a)(2) of the Securities Act,respectively. The Eleventh Circuit has succinctly set forth the elementsfor claims under these two provisions, as follows:
Section 11 of the Securities Act creates a private cause of action wherea registration statement either contained an untrue statement of materialfact or omitted to state a material fact required to be stated therein ornecessary to make the statements therein not misleading. A § 11 claimcan be brought against the issuer of the securities, the issuer's directorsor partners, the underwriters of the offering, and accountants named ashaving prepared or certified the registration statement.
Section 12(a)(2) of the Securities Act creates a private cause ofaction against persons who offer or sell a security which includes anuntrue statement of a material fact or omits to state a material factnecessary in order to make the statements, in light of the circumstancesunder which they were made, not misleading. Section 12 liability extendsto those who transfer title to the security and to those who successfullysolicit the purchase.
Ehlert v. Singer, 245 F.3d 1313, 1315-16 1(11th Cir. 2001) (internalquotation marks and citations omitted). "Thus, in order to state a claimunder §§ 11 and 12, Plaintiffs must allege [only] that there was amaterial misrepresentation or omission." Id. at 1316; see also In reNewbridge Networks Sec. Litigation, 767 F. Supp. 275, 278 (D.D.C. 1991)("To establish a prima facie case, plaintiffs need only show a materialmisrepresentation or omission."). It is important to observe that claimsunder §§ 11 and 12(a)(2) of the Securities Act do not require anyintent to defraud on the part of the defendant, or even knowledge of themisrepresentation or omission. See Herman & MacLean v. Huddleston,459 U.S. 375, 381-82 (1983). Rather, these two provisions give effect tothe basic purpose underlying the Securities Act — full disclosureto investors of pertiment information concerning the issuers ofsecurities and the securities themselves — by imposing strictliability for material misinformation contained in a registrationstatement or prospectus. See id. at 382 (stating that liability under§ 11 is "virtually absolute").
"The test for determining materiality is whether a reasonable man wouldattach importance to the fact misrepresented or omitted in determininghis course of action." SEC v. Carriba Air, Inc., 681 F.2d 1318, 1323(11th Cir. 1982). In assessing whether a misrepresentation or omissionwas material, courts may not employ 20/20 hindsight; instead, they mustconsider whether the misrepresentation or omission was material on thedate the prospectus or registration statement was issued. See Rudd v.Suburban Lodges of Am., Inc., 67 F. Supp.2d 1366, 1370(N.D. Ga. 1999 In re Mobilemedia Sec. Litigation, 28 F. Supp.2d 901, 924(D.N.J 1998). Materiality, though, is a question of fact that may rarelybe resolved at the motion to dismiss stage. See In re Twinlab Sec.Litigation, 103 F. Supp.2d 193, 201 (E.D.N.Y. 2000). "Only if the allegedmisrepresentations or omissions are so obviously ummportant to aninvestor that reasonable minds cannot differ on the question ofmateriality is it appropriate for the district court to rule that theallegations are inactionable as a matter of law." Weiner v. Quaker OatsCo., 129 F.3d 310, 317 (3d Cir. 1996).
1. Have Plaintiffs Alleged a Material Misrepresentation or Omission?
Through their separate motions to dismiss, Defendants argue that theamended class action complaint fails, as a matter of law, to allege thatUnicapital's prospectus and registration statement contained any materialmisrepresentations or omissions. The Court disagrees. As explained below,the amended class action complaint has (1) identified a materialmisrepresentation in the prospectus and registration statement and (2)alleged that material information was omitted.
First, the amended class action complaint asserts that the prospectusand registration statement materially misrepresented the value of theassets acquired by Unicapital through the roll-up of the targetedcompanies, by failing to account for the effect that the ANCA's December31, 1999 conversion deadline would have upon the value of the acquiredfleet of aircraft More specifically, it is alleged that Unicapitaloverstated the aggregate amount of goodwill attributable to the roll-upof the targeted companies by at least $100 million. See Amend. Compl. at¶ 67 ("[Unicapital's] pro forma combined financial statements whichwere contained within the Prospectus. . . fail to reflect the recognitionof no less than a $100 million write-off of goodwill"); see also id. at¶ 68. In other words, the prospectus and the registration statementoverstated Unicapital's goodwill by approximately 20% and, consequently,its total assets by approximately 8%.15 Such misstatements wouldpresumably be important to a reasonable investor. See In re Twinlab Corp.Sec. Litigation, 103 F. Supp.2d at 202-03 (finding allegation thatcompany failed to state, in its prospectus, that there had been ""amaterial decline in the [c]ompany's retail' sales during the firstquarter of 1998" sufficient to allege a material misrepresentation);Carley Capital Group v. Deloitte & Touche, LLP, 27 F. Supp.2d 1324, 1336(N.D. Ga. 1998) (finding allegations of false representations concerningcompany's earnings in financial reports sufficient to allege a materialmisrepresentation, for purposes of a Rule 10b-claim); see generallyGaskins v. Grosse, No. CV 48 1-387, Fed. Sec. L. Rep. (CCH) 99, 105, 1983WL 1282 (S.D. Ga. Jan. 31, 1983) ("I can think of nothing more criticalto the average potential investor's ultimate decision to purchasesecurities than representations with regard to the worth of the company.. . ."). Because it cannot be said that no reasonable investor wouldattach importance to a $100 million, or 8%, overstatement of the assetsin Unicapital's prospectus and registration statement, Plaintiffsaverments concerning the overvaluation of Unicapital's goodwillsufficiently allege a material misrepresentation that is adequate tosupport a claim under §§ 11 and 12(a)(2) of the Securities Act.
The amended class action complaint also asserts that the prospectus andregistration statement failed to disclose that a significant portion ofthe fleet of aircraft that Unicapital was acquiring would become obsoletein less than two-years time. See Amend. Compl. at ¶ 59("[D]efendants knew and failed to disclose that [Unicapital's] inventoryof aircraft and aircraft engines were, in significant part, not Stage 3compliant and that, accordingly, such non-compliant equipment would ceaseto be leased by customers not later than December 31, 1999."). Asdiscussed above, it is Plaintiffs' theory of the case that Unicapital'sprincipals knew that many of the aircraft that they were acquiring in Mayof 1998 were due to be phased out by December 31, 1999, by operation ofthe ANCA. Just as a reasonable investor would presumably be interested inthe fact that Unicapital's goodwill was overstated by $100 million, areasonable investor would also be interested in knowing that asignificant portion of Unicapital's leasing inventoly had a usefullife-span of less than two years. See Helwig v. Vencor, Inc., No. 99-5153251 F.3d 540 at 554-56 2001 WL 578541, at *10-*11 (6th Cir. May 31,2001) (en banc) (holding, where there was a strong inference that thedefendants knew that pendinglegislation would "adversely affect theiroperations, "the failure to disclose that information constituted amaterial omission) (emphasis supplied); In re World Access. Inc.Securities Litigation, 119 F. Supp.2d 1348, 1354-55 (N.D. Ga. 2000)(finding, inter alia, "allegations that Defendants deliberately providedpublic misinformation regarding the potential success of[a product,] whichthey knew to be inoperable" sufficient to state a materialmisrepresentation in a Rule 10b-5 case). Thus, the amended class actioncompliant sufficiently alleges a material omission with respect to thefailure to acknowledge the limited life-span of Unicapital's fleet ofaircraft.
In sum, the amended class action complaint's allegations concerning (1)the misrepresentation of Unicapital's goodwill and (2) the omission ofinformation concerning the useful life of Unicapital's aircraft are bothsufficiently material to state a claim under §§ 11 and 12(a)(2) ofthe Securities Act.16
2. Who May the §§ 11 and 12(a)(2) Claims be Asserted Against Directly?
The §§ 11 and 12(a)(2) claims of the amended class action complaintare captioned as being brought "[a]gainst [a]ll [d]efendants." Section 11claims may be asserted against an array of individuals, namely: (1) every person who signed the registrationstatement;
(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;
(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;
(4) every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report, or valuation, which prepared to have been prepared or certified by him; [and]
(5) every underwriter with respect to such security.15 U.S.C. § 77k(a). Section 12(a)(2) claims, on the other hand, mayonly be asserted against a person who "offers or sells a security."15 U.S.C. § 771 (a). The Securities Act does not explicitly definewho may be held liable as an offeror/seller of securities under §12(a)(2). In Pinter v. Dahl, 486 U.S. 622 (1988), though, the SupremeCourt, interpreting identical language from § 12(a)(1), 17clarified the reach of offeror/seller liability.18 The Supreme Courtruled that inclusion of the term "offers, "along with the term "sells, "extended liability not only to those who actually pass title to thesecurities, but also to those who solicit the sale (i.e., brokers and thelike). See id. at 642-44; Ehlert,245 F.3d at 1316. Thus, § 12(a)(2)liability effectively extends to any individual that may be described asa purveyor of materially misrepresented securities, whether or not thatindividual was a formal party to the contract for the sale of thesecurities.19 See Pinter, 486 U.S. at 643. In the present case, theUnderwriters are plainly subject to both § 11 and § 12(a)(2)liability. With respect to the § 11 claim against the IndividualDefendants, Jonathan New and Robert New are subject to liability becausethey signed the registration statement as directors of Unicapital 20see 15 U.S.C. § 77k(a)(1), and Stuart Cauff is subject to liabilityas a person "named in the registration statement as being or about tobecome a director, person performing similar functions, or partner.2115 U.S.C. § 77k(a)(3). The Individual Defendants, however, may not besubjected to § 12(a)(2) liability as they were notpurveyors of Unicapital stock. In light of the foregoing, to the extentthe § 12(a)(2) claim (Count II) is asserted directly against theIndividual Defendants, it is due to be dismissed.
3. May the Individual Defendants be Subjected to Controlling PersonLiability for the §§ 11 and 12(a)(2) Claims
Count III of the amended class action complaint seeks to imposecontrolling person liability upon the Individual Defendants for thealleged §§ 11 and 12(a)(2) violations. Section 15 of the SecuritiesAct provides:
Liability of controlling persons
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 [11, 15 U.S.C. § 77k or 12, 15 U.S.C. § 771,] of this title, shall also be liablejointly 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. § 77o. In order to state a claim for controlling personliability against a defendant, it must be alleged that the defendant had(1) the power to control the general affairs of the entity primarilyliable for the § 11 or § 12 violation at the time of theviolation and (2) the power to control or influence the specific policythat resulted in primary liability under § 11 or § 12. See Brownv. Enstar Group, Inc., 84 F.3d 393, 396 (11th Cir. 1996).22Naturally, if there is no primary violation under § 12 or § 11,there can be no vicarious liability under § 15. See id. at 396-97.
The § 15 controlling person claim against the Individual Defendantsis premised upon their alleged control of Unicapital and Unicapital'salleged violations of the Securities Act. See Amend. Compl. at ¶ 203("Each of the Individual Defendants was a control person at Unicapital .. . . Under § 11, an issuer of securities, such as Unicapital, isstrictly liable for material misrepresentations and omissions containedin its registration statement. See Krim v. Banctexas Group. Inc.,989 F.2d 1435, 1445 (5th Cir. 1993) ("Issuers are absolutely liable formaterial misstatements or omissions made under § 11 of the 1933Act."). Therefore, the discussion above as to material misrepresentationsand omissions applies equally to establish a prima facie § 11violation against Unicapital. See supra Part II(A)(1). As the amendedclass action complaint adequately pleads (1) primary § II violationby Unicapital (the controlled person) and (2) that Robert New andJonathan New exercised control over Unicapital at the time of the primaryviolation and had the power to control the primary violation, Plaintiffshave stated a § 15 controlling person claimwith respect to § 11 against Robert New and Jonathan New.23 Asfor Stuart Cauff, though, it is undisputed that he was not a director orprincipal of Unicapital at the time of the alleged, primary § 11violation. When the allegedly misleading registration statement wasissued, Stuart Cauff was not part of Unicapital's management; he wasstill associated with CauffLippman, one of the targeted companies. Underthese circumstances, he could not have exercised control overUnicapital. The controlling person claim (Count III) with respect to§ 11 must therefore be dismissed against Stuart Cauff.
With regard to controlling person liability for a § 12(a)(2)violation, there is no allegation that the Individual Defendantsexercised, or had authority to exercise, control over the Underwriters— the entities allegedly responsible for the primary § 12(a)(2)violation. Control over the entity responsible for the primary violationis essential element of a claim for controlling person liability. Thus,to the extent the controlling person claim (Count III) seeks to imposevicarious liability upon the Individual Defendants for the alleged §12(a)(2) violation, it must dismissed.24
4. Do the Class Members Lack Standing to Pursue the §§ 11 and 12(a)(2)Claims?
Defendant Stuart Cauff argues that the §§ 11 and 12(a)(2) claimsmust be dismissed for lack of standing because "the lead plaintiffs didnot purchase their Unicapital stock in the actual offering ofsecurities, but in the secondary market." According to Cauff,"iability under Sections 11 and 12(a)(2) of the Securities Act islimited to persons who purchase securities in a public offering." Cauffsargument conflates §§ 11 and 12(a)(2).25 "[W]hile Section 11 andSection 12 are indeed parallel statutes, their wording is significantlydifferent as to who can bring a suit." Hertzberg v. Dignity Partners.Inc., 191 F.3d 1076, 1081 (9th Cir. 1999). Section 12 restricts to whomthe seller of a violativesecurity may be liable. Specifically, the seller's liability is limitedto "the person purchasing such security from him." 15 U.S.C. § 771(a) (emphasis supplied). "This is an express privity requirement, givinga cause of action only to individuals who purchase securities directlyfrom a person who sells the securities by means of a prospectus." Josephv. Wiles, 223 F.3d at 1161. Thus, in order to have standing under §12, "a plaintiff must have purchased the security directly from theissuer of the prospectus." Hertzberg, 191 F.3d at 1081.
On the other hand, § 11 contains no privity requirement as to whomay maintain an action. Rather, § 11 provides that "any personacquiring such security" may bring suit. 15 U.S.C. § 77k(a) (emphasissupplied). As the Ninth Circuit explained, "Congress's decision to use"from him' in Section 12 but not in Section 11 must mean that Congressintended a different meaning in the two sections." Hertzberg, 191 F.3d at1081 see also Joseph v. Wiles, 223 F.3d at 1161 ("We must assume thatCongress intended the two sections to be interpreted differently."). Inorder to have standing under § 11, one must simply be able to tracethe purchase of his securities to the registration statement thatallegedly violated § 11 (i.e., contained a material misrepresentationor omission). See Adar v. Bristol Tech. Sys., Inc., 179 F.R.D. 126, 133(S.D.N.Y. 1998).
Here, all of the shares of Unicapital stock are traceable to the May14, 1998 registration statement; therefore, all of the class members havestanding to maintain the § 11 claim against Cauff and the otherdefendants. As for the § 12(a)(2) claim, which may only be maintainedagainst the Underwriters (i.e., the sellers of securities), those classmembers who did not purchase their shares directly from one of theUnderwriters will not be allowed to participate in the claim because theylack standing to maintain a cause of action under § 12. Whichplaintiffs may participate in the § 12(a)(2)claim, though, shall beresolved at the class certification stage, when the direct purchasers andsecondary purchasers can be segregated into appropriate subclasses.
In accordance with the analysis and rulings set forth in this section,the § 11 claim will proceed against the Individual Defendants and theUnderwriters, the § 12(a)(2) claim will proceed against theUnderwriters (only for those class members who purchased their shares ofUnicapital stock in the initial public offering), and the § 15controlling person liability claim will proceed against Robert New andJonathan New with respect to the § 11 claim.
B. The Exchange Act Claims
Count IV of the amended class action complaint asserts a securitiesfraud claim, pursuant to § 10(b) of the Exchange Act and SEC Rule10b-5, against the Individual Defendants and the Underwriters.Additionally, Count V seeks to impose controlling person liability uponthe Individual Defendants pursuant to § 20(a) of the Exchange Act."To allege securities fraud under Rule 10b-5, a plaintiff must show: 1) amisstatement or omission, 2) of a material fact, 3) made with scienter,4) on which [the] plaintiff relied, 5) that proximately caused hisinjury. " Brvant v. Avado Brands, Inc. . 187 F.3d at 1281. The motions todismiss primarily argue that the amended class action complaint fails tostate a claim under Rule 10b-5 because the element of scienter is notpled with the requisite specificity needed to satisfy the heightenedpleading requirement imposedby the Private Securities Litigation Reform Act of 1995 (hereinafter the"PSLRA"), 15 U.S.C. § 78u-4 et seq. The motions to dismiss also raisetwo defenses to the Rule 10b-5 claim: (1) truth on the market and (2) thePSLRA's codification of the bespeaks caution doctrine,15 U.S.C. § 78u-5. Each of these arguments will be addressed below.
1. The PSLRA s Pleading Requirement: Scienter
The Federal Rules of Civil Procedure have long required thatallegations of fraud be pleaded with "particularity." See Fed. R. Civ.P. 9(b) ("[i]n all averments of fraud or mistake, the circumstancesconstituting fraud or mistake be stated with particularity"). "Thepurpose behind Rule 9(b)'s specificity requirement is to eliminate fraudactions in which all of the facts are learned through discovery after thecomplaint is filed." Arral Indus. . Inc. v. Touch Ent., Inc., No.99-916-CIVHIGHSMITH, 2000 WL 141269, at *3 (S.D. Fla. Jan. 18, 2000)(internal quotation marks and citation omitted). In pre-PSLRA securitiesfraud cases, Rule 9(b) required that the complaint state "the who, what,when, where, and how [of the alleged fraud]: the first paragraph of anynewspaper story." Dileo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990) (Easterbrook, J.) These requirements alone, however, provedineffective in curtailing vexatious securities litigation. See In reComshare Sec. Litigation, 183 F.3d 542, 548 (6th Cir. 1999) ("Despite theapplication of the Rule 9(b) heightened pleading requirement to securitiesfraud cases, the Supreme Court recognized long ago that `litigation underRule 10b-5 presents a danger of vexatiousness different in degree andkind from that which accompanies litigation in general.'") (quoting BlueChip Stamps v. Manor Drug Stores, 421 U.S. 723, 739-44 (1975)).Therefore, Congress amended the Exchange Act, through the PSLRA, torequire:
In any private action arising under this chapter in which the plaintiffmay recover money damages only on proof that the defendant acted with aparticular state of mind, the complaint shall, with respect to each act oromission alleged to violate this chapter, state with particularity factsgiving rise to a strong inference that the defendant acted with therequired state of mind.
15 U.S.C. § 78u-4(b)(2) (emphasis supplied). "The "required state ofmind' in § 78u-4(b)(2) refers to the scienter requirement applicableto the underlying securities fraud claim . . . ." In re SiliconGraphics. Inc. Sec. Litigation, 183 F.3d 970, 975 (9th Cir. 1999). Thus,beyond the who, what, when, where, and how of the alleged fraud, acomplaint pleading securities fraud must now also plead the mens rea ofthe cause of action with specificity.26 See Bryant v. Avado Brands.Inc., 187 F.3d at 1282 ("[I]t is clear after the [PSLRA] that scientercan no longer be averred generally.").
The Supreme Court has defined the level of scienter necessary tosupport a Rule 10b-5 claim as a "mental state embracing intent todeceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder,425 U.S. 185, 194 n. 12 (1976). The Eleventh Circuithas construed this definition, after the PSLRA, to encompass allegationsof "severe recklessness."27 See Bryant v. Avado Brands, Inc., 187F.3d at 1282-84. As the former Fifth Circuit explained, in the securitiescontext: Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. Apr. 17,1981) (en banc).28 In order to comply with the heightened pleadingrequirement of the PSLRA, the amended class action complaint mustdescribe how the defendants acted with severe recklessness in relation tothe alleged material misrepresentations and omissions.29
In the present case, the amended class action complaint fails to allegethat the Underwriters acted with severe recklessness. The only allegationbearing upon state of mind with respect to the Underwriters is that their"due diligence" investigation of Unicapital was inadequate. See Amend.Compl. at ¶ 23. At most, this amounts to inexcusable negligence,which, as noted above, does not constitute severe recklessness. See In reLason, Inc. Sec. Litigation, No. 99-76079,143 F. Supp.2d 855, 2001 WL604287, at *4 (E.D. Mich. May 10, 2001). The Exchange Act claim (CountIV) is therefore dismissedwith respect to the Underwriters. The dismissal of this claim against theUnderwriters is without prejudice to its amendment to state a viableclaim (i.e., allege facts sufficient to establish severe recklessness)within ten days of this order.
As for the Individual Defendants, the allegations of the amended classaction complaint, when viewed in the light most favorable to Plaintiffs,sufficiently allege severe recklessness.30 As discussed above, thegravamen of the amended class action complaint is that the IndividualDefendants knew that the ANCA would render Unicapital's fleet of aircrafteffectively useless as of December 31,1999. Plaintiffs allege that,despite the Individual Defendants' knowledge of the ANCA's loomingdeadline for phasing out stage 2 aircraft, and the devastating effectthis would have upon Unicapital, they omitted this information from allSEC filings and public statements. Moreover, Plaintiffs assert that theIndividual Defendants substantially misrepresented the value ofUnicapital's fleet, by valuating the stage 2 aircraft to have a usefullife of up to 40 years. The alleged omissions and misrepresentations bythe Individual Defendants are analogous to those found by the SecondCircuit to support a strong inference of fraudulent intent in Cosmas v.Hassett, 886 F.2d 8 (2d Cir. 1989).31
The Cosmas case arose from the decline of Inflight Services, Inc., acorporation that was largely dependent upon sales to the Peoples Republicof China (the "PRC") for its viability. See id. at 9. In 1985, the PRCimposed import restrictions that significantly impacted upon InflightServices, Inc.'s sales. See id. at 9-10. As a result of its lost sales,Inflight Services, Inc. was forced to take a $2.5 million write down ofits inventory in 1986, and to file subsequently for bankruptcy. See id.at 10-11. On appeal, the Second Circuit reversed the dismissal of asecurities fraud action, finding that, where it was alleged that thedirectors (a) had knowledge of the PRC's trade restrictions and (b)failed to disclose the detrimental impact such restrictions would haveupon Inflight Services, Inc.'s sales, the complaint adequately pleadedscienter through severe recklessness. See id. at 13; see also Novak, 216F.2d at 308 (discussing when severe recklessness is established byallegations that the defendants had "knowledge of facts or access toinformation contradicting their public statements"). Similarly, it isalleged in the present case that the Individual Defendants had (a)knowledge of the detrimental effect that the ANCA's December 31, 1999drop-dead date would have upon Unicapital and (b) failed to disclose thatinformation and failed to account for it in their SEC filings and publicstatements. These allegations rise to the level of severe recklessness.Thus, the PSLRA's scienter pleading requirement is satisfied with respectto the Individual Defendants.
2. Truth on the Market
The motions to dismiss argue that the Rule 10b-5 claim is barred underthe truth on the market defense.32 Under this doctrine (a corollaryto the fraud on the market theory), an omission or "a misrepresentationis immaterial if the information is already known to the market becausethe [omission or] misrepresentation cannot then defraud the market."Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 (2d Cir. 2000).In their motions to Dismiss, the Individual Defendants argue that,because the ANCA is a federal statute, the market must be deemed to havehad knowledge of the December 31, 1999 drop-dead date for stage 2 aircraftand, therefore, the failure to account for the effect of the drop-dead dateis immaterial. This argument misses the mark as to what was allegedlynot disclosed or accounted for by Unicapital. What was germane, and whatthe Individual Defendants allegedly failed to disclose, was not merelythe existence of the ANCA, but the adverse impact it would have uponUnicapital's fleet of aircraft and, consequently, its operations.This specific information was not available to the public. Hence, thetruth on the market defense is inapplicable.
3. Safe Harbor
As noted above, the PSLRA codified a version of the bespeaks cautiondoctrine in what is referred to as the safe-harbor provision. See15 U.S.C. § 78u-5; see alsoBryant v. Avado Brands, Inc., 187 F.3d at1276 n. 7 (describing the bespeaks caution doctrine as "the safe harbor'sjudicially created counterpart, [which] operates similarly, protectingstatements in the nature ofprojections that are accompanied by meaningfulcautionary statement and specific warnings of the risks involved"). Underthis provision, certain forward-looking statements are immune fromliability if they are accompanied by appropriate cautionary language.33See 15 U.S.C. § 78u-5(c)(1)(A)(i). The theory for exempting suchstatements from liability is that the cautionary language renders anymisrepresentation or omission immaterial. See In re Donald J. TrumpCasino Sec. Litigation, 7 F.3d 357, 371 (3d Cir. 1993). Of particularimportance to the issues in this case, though, certain categories ofstatements are ineligible for protection under the safe-harborprovision, including: (1) statements made in connection with a roll-uptransaction; (2)statements contained in a registration statement orotherwise issued by an investment company; (3) statements made inconnection with an initial public offering; and (4) financial statementsprepared in accordance with generally accepted accounting principles. See15 U.S.C. § 78u-5(b)(1)(D), 78u-5(b)(2)(A), (B), (D). Thus, theprimary statements and omissions at issue in this case (i.e., thevaluation statements in theregistration statement, the prospectus, and the 10-Q and 10-K filings)are not protected by the PSLRA's safe-harbor provision.
The statements in the amended class action complaint that are eligiblefor the safe-harbor provision's protection are quotations from variousUnicapital press releases. See generally Amend. Compl. at ¶¶ 88-164.In determining whether these statements are protected from liability, the"threshold question is whether . . . [they] constitute . . . forwardlooking statement[s] subject to the PSLRA safe-harbor." Ehlert, 245 F.3dat 1316. A forward-looking statement is something "in the nature of [an]economic forecast." Bryant v. Avado Brands, Inc., 187 F.3d at 1276 n.7; see also15 U.S.C. § 78u-5 (i)(1) (listing the types of forwardlooking statements). The vast majority of the segments from the pressreleases quoted in the amended class action complaint are not forecasts;they are comments on and analyses of Unicapital's past performance. Asthe Eleventh Circuit has explained, however, in assessing whetherstatements are subject to the forward-looking safe-harbor provision, aline or paragraph referenced in a complaint must be viewed in the contextin which it was made, rather than standing alone as presented in thecomplaint. See Harris v. Ivax Corp, 182 F.3d 799, 806-07 (11th Cir.1999), reh'g and reh'g en banc denied, 209 F.3d 1275 (11th Cir. 2000). Ifa review of the entire statement, as opposed to an isolated line or two,reveals that it is a mixed statement (i.e., it contains both historicalobservations and prognostications based upon those observations) theentire statement qualifies as forward-looking for purposes of the PSLRA'ssafeharbor provision. See id. When viewed in their entirety, the pressreleases quoted in the amended class action complaint are mixedstatements;34 thus, they must be considered forward-lookingstatements eligible for the safe-harbor provision.
As for these forward-looking statements, it must be determined whetherthey are shielded from liability by the safe-harbor provision. SeeEhlert, 245 F.3d at 1318 ("After having determined that the statement isforward looking, and thus the safe-harbor provision applies, the nextstep in the analysis is to determine whether the statement is protectedby the safe-harbor."). To be exempt from liability the press releasesmust have been (1) identified as forward-looking and (2) accompanied bymeaningful cautionary language identifying factors that could materiallyaffect the prognostications. See 15 U.S.C. § 78u-5 (c)(1)(A)(i). Toqualify as "meaningful cautionary" language, a statement's warning mustadvise investors of "risks of a significance similar to that actuallyrealized." Ivax, 182 F.3d at 807. This does not require a directconnection between the disclaimer and the events that subsequently leadto the company's decline; however, there needs to be some correlationbetween the disclaimer and the subsequent events. See Kline v. First W.Gov't Sec., Inc., 24 F.3d 480, 489 (3d Cir. 1994) ("Not just anycautionary language willtrigger application of the [bespeaks caution] doctrine. Instead,disclaimers must relate directly to that on which the investors claim tohave relied].") 35 In other words, the warning need not explicitlydescribe the particular happenings that ultimately come to pass, but itmust be sufficient to put a reasonable investor on notice of thepotential that something similar to those happenings could occur. Toprovide immunity, a warning effectively needs to render anymisrepresentation or omission immaterial.
Here, the warnings contained in Unicapital's press releases containedlittle more than generic, boilerplate language. For example, theJuly 10, 1998 press release provides: Certain statements made in this press release (including, without limitation, statements regarding the possible implementation and timing of our e-business initiatives and the effects of such initiatives on our business, the possible parties with which we may partner or agree to pursue any e-business initiatives, and possible future lease originations) may be deemed to be forward-looking statements that involve risks and uncertainties. . . . Those risk factors include the absence of combined operating history for the Company and its subsidiaries, risks associated with the Company's acquisition strategy and the financing of acquisitions, risks related to internal growth and operating strategies, risks related to the need for additional capital, interest rate risks, risks related to fluctuations in quarterly operating results, risks related to consummating securitization transactions and other risks. These risks and other factors could cause actual results to differ materially from those expressed or implied in any forward looking statements contained in this press release. . .There is no mention of the risk that a then existing federal statute, theANCA, could dramatically and negatively impact upon the operations ofUnicapital and the value of its assets. Nor is there any factor listedthat could provide reasonable notice of such a risk. The effect of theANCA's December 31, 1999 drop-dead date for stage 2 aircraft, and thefailure to account for or disclose it, is the gist of Plaintiffs' theoryof securities fraud in this case. Unicapital's press releases containedno warning or disclaimer providing notice of a risk of a significancesimilar to that allegedly realized in this case — the detrimentaleffect of the ANCA.36 Thus, the safe-harbor provision does notimmunize the press releases.
4. Controlling Person Claim
In addition to the Rule 10b-5 claim, Count V of the amended classactioncomplaint asserts a claim for controlling person liability under§ 20(a) of the Exchange Act against the Individual Defendants. Asnoted above, vicarious liability under § 20(a) of the Exchange Act ismeasured by the same standard as vicarious liability under § 15 ofthe Securities Act. See supra Note 22. Count V adequately pleads a claimfor controlling person liability against the Individual Defendants undersec; 20(a) of the Exchange Act; i.e., its alleges (1) a Rule 10b-5violation by Unicapital (the controlled person) and (2) that theIndividual Defendants exercised control over Unicapital and had the powerto control the Rule 10b-5 violation.
As explained above, the Exchange Act claim (Count IV) of the amendedclass action complaint is due to be dismissed against the Underwriters.That claim and the controlling person liability claim, though, willproceed against the Individual Defendants.
At the center of this securities case is the allegation that thestructure of Unicapital was, from the start, a sham. More specifically,the amended class action complaint asserts that Unicapital's principalsand directors intentionally turned a blind eye to the reality that thefleet of aircraft they acquired would become obsolete as of December 31,1999, by operation of the ANCA. The failure to account for thisanticipated event allegedly resulted in Unicapital's precipitous declineand ultimate demise, when the economic reality of the ANCA's impact wasrevealed on May 15, 2000. As set forth above, the allegations of theamended class action complaint are sufficient to (1) state claims under§§ 11 and 12(a)(2) of the Securities Act against the Underwriters; (2)state a direct claim under § II of the Securities Act against theIndividual Defendants, as well as a controlling person liability claimunder § 15 of the Securities Act against Robert New and JonathanNew; and (3) state a direct claim pursuant to § 10(b) of the Exchangeand SEC Rule 10b-5, as well as a controlling person liability claim under§ 20(a) of the Exchange Act, against the Individual Defendants.
In accordance with the rulings set forth in this order, it is herebyORDERED that the motions to dismiss are GRANTED IN PART and DENIED TN PART,as follows: (1) Count II is DISMISSED with respect to theIndividual Defendants;
(2) Count III is DISMISSED with respect to Stuart Cauff
(3) Count III is DISMISSED to the extent that is seeks to impose vicarious liability upon Robert New and Jonathan New for the Underwriters' alleged violation of § 12(a)(2);
(4) Count IV is DISMISSED with respect to theUnderwriters;
(5) Plaintiffs have leave to amend Count IV within ten days of this order to state a viable claim against the Underwriters;
(6) Defendants shall file their answers within fifteen days after the date allowed for Plaintiffs to amend Count IV;
(7) the separate motions to dismiss are DENIED in allother respects; and
(8) all requests for oral argument are DENIED.A status conference in this matter will be set by separate order.
DONE AND ORDERED in Chambers at Miami, Florida, this 29th day of June,2001.
1. On March 29, 2001, Robert New was killed in an airplane crash nearAspen, Colorado. Pursuant to Rule 25 of the Federal Rules of CivilProcedure, the personal representative of his estate, Monica New, wassubstituted as a party on June 8, 2001. For purposes of continuity, thisorder refers to Robert New, rather then Monica New.
2. Unless otherwise noted, the factual information concerning thefornmtion and structure of Unicapital that follows is derived from (I)the amended class action complaint and (2) publicly filed documentssubmitted in conjunction with the motions to dismiss. In securitieslitigation, it is appropriate to take judicial notice of publicly fileddocuments at the motion to dismiss stage. See Bryant v. Avado Brands,Inc., 187 F.3d 1271, 1275-81 (11th Cir. 1999).
3. See Emtec, Inc. v. Condor Tech. Solutions, Inc., No. CIV. A. 97-6651998 WL 834097, at *1 ("A roll-up is a process whereby one corporatestructure acquires other companies, generally within a similar field ofbusiness, while at the same time stock in the acquiring corporation isoffered to the public through an initial public offering ("IPO').")
4. See 15 U.S.C. § 77f-g, 77j. Unicapital's prospectus wasincorporated, in its entirety, into the registration statement. Forpurposes of convenience, this order cites only to page numbers of theprospectus.
5. Pro forma financial statements are "one[s] prepared on the basis ofassumptions as to future events." Herman & MacLean v. Huddleston,459 U.S. 375, 378 n. 1 (1983). In the case of Unicapital's pro formafinancial statements, the future events were the acquisitions of thetargeted companies. All twelve of the targeted companies were successfullyacquired contemporaneously with the 1998 public offering.
6. In their memorandum of law, the Underwriters explain Unicapital'sbusiness plan in plainer English: "Unicapital was formed to offer"one-stop' shopping for companies seeking to lease manufacturingequipment, computers, aircraft, and other expensive equipment."Underwriters Mem. of Law at 1 see also Gregg Fields, Unicapital Execs outAmid Losses, Stock Drop, Miami Herald, July 26, 2000, at 1C, 10C("Unicapital's core business is equipment leasing: It buysequipment— — ranging from computers to jet engines—— and then leases it to companies.").
7. The Court will hereinafter also utilize the term Big TicketDivision.
8. See Gregg Fields, Unicapital Execs out Amid Losses, Stock Drop,Miami Herald, July 26, 2000, at 1C (charting decline in Unicapital'sstock price).
9. SeeDocket Entry No. 34 (Notice of Bankruptcy). The filing forbankruptcy has stayed this action with respect to Unicapital. SeeII U.S.C.§ 362.
10. Eight separate actions were filed in the United States DistrictCourt for Southern District of Florida. In accordance with Local Rule3.9(C), which 1)rovides for the consolidation of similar actions before asingle judge, all of the cases were transferred to the undersigned'sdocket. The cases were then consolidated into a single proceeding.
11. Unicapital is also named as a defendant. As noted earlier, thisaction is currently stayed with respect to Unicapital by operation of theBankruptcy Code's automatic stay provision. See supra Note 9.
12. Stage 1 aircraft were effectively phased out of use in the UnitedStates prior to enactment of the ANCA. See Phase-out Provisions, 4 FordhamEiivtl. L.R. at 86-89.
13. A "hushkit" essentially is a muffler for an airplane engine. SeeIn re Viscount Air Sers, Inc., 232 B.R. 416, 431 (Bankr. D. Ariz.1998).
14. To the extent that the parties' arguments encompass identicalrequirements under both the Securities Act and the Exchange Act, theCourt's discussion under a particular act shall be deemed applicable tothe other.
15. To arrive at these percentages, the Court has utilizedUnicapital's goodwill of $470,215,00.00 and total assets of$1,174,400,000.00 as of March 31, 1998, as reported in the pro formafinancial statement in the prospectus and registration statement.seeProspectus at F-6; see also supra Part I(A)(1).
16. This is not to say that either of the above noted allegations willultimately be proven or found material by the trier of fact. However, atthe motion to dismiss stage they suffice to state a claim. See CreditSuisse First Boston Corp. v. Arm Fin. Group, No. 99 CIV 1 1046 Fed. Sec.L. Rep. (CCH) 91 363 201 WL 300733, at *9 (S.D.N.Y. Mar. 28, 2001).
17. At the time of the Pinterdecision, § 12(a)(1) was numbered as§ 12(1) and § 12(a)(2) was numbered § 12(2).
18. The Court is cognizant that, in Pinter, the Supreme Court reservedon the question of whether or not the identical "offers or sells"language in the two subsections of § 12 should be given the sameinterpretation. See486 U.S. at 643 n. 20. The Eleventh Circuit, though,subsequently adopted the Pinter offeror\seller definition for §12(a)(2) claims. See Ryder Int'l Corp. v. First Am. Nat'l Bank,943 F.2d 1521, 1526-30 (11th Cir. 1991).
19. As the Supreme Court noted in Pinter, though, a claimant is limitedto seeking recourse from those involved in the actual sale of thesecurities to him. See486 U.S. at 644 n. 21 ("[L]iability [is imposed]on only the buyer's immediate seller; remote purchasers are precludedfrom bringing actions against remote sellers. Thus, a buyer cannotrecover against his seller's seller.").
20. Robert New signed the registration statement for himself onMay 14, 1998. Additionally, he signed the registration statement forUnicapital's other directors, including Jonathan New, pursuant topowers of attorney filed with the registration statement.
21. The prospectus, which was incorporated into the registrationstatement, provided: "Stuart Cauff, the President of Cauff Lippman willbecome President and CEO of Unicapital's Big Ticket Leasing Division andwill enter into a three-year employment agreement with the Company and asubsidiary of the Company that will operate the Cauff Lippman businessafter the Merger. . . ." Prospectus at 103. Moreover, the amended classaction complaint alleges that Stuart Cauff became a director ofUnicapital shortly after the acquisition of the targeted companies. SeeAmend. Compl. at ¶ 13. Under these circumstance, Stuart Cauffqualifies as someone named in the registration statement about to becomea person performing similar functions to a director, as contemplated by15 U.S.C. § 77k(a)(3).
22. Brown v. Enstar Group, Inc., in which the Eleventh Circuitannounced the test for controlling person liability to be applied in thiscircuit, involved controlling person liability under § 20(a) of theExchange Act, rather than § 15 of the Securities Act. The controllingperson analysis under § 15 of the Securities Act and § 20(a) ofthe Exchange Act, however, is identical. See Pharo v. Smith, 621 F.2d 656,673 (5th Cir.) ("Section 20(a) is an analogue of section 15 of theSecurities Act. Therefore, we give the two sections the sameinterpretation.") (citation omitted), amended by 625 F.2d 1226 (5th Cir.1980); see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578(9th Cir. 1990) ("Although § 15 is not identical to § 20(a). thecontrolling 1)5O13 analysis is the same.").
23. The key variable in the controlling person inquiry — whetheran individual defendant can be said to have the requisite controlover the corporation — is a fact intensive issue. SeeHarvey M. Jasper Retirement Trust v. Ivax Corp., 920 F. Supp. 1260, 1268(S.D. Fla. 1995).Thus, the disposition of controlling person liability ismost appropriate at the summary judgment stage. See id.
24. With respect to this claim, Unicapital does not satisfy therequirements for primary liability, since it was not an offeror or sellerof the securities. See supraNote 19.
25. Cauff cites some district court authority to support his positionthat § 11, like § 12(a)(2), provides a cause of action only forthose claimants who purchased the securities in the initial publicoffering. see, e.g., In re Summit Medical Sys. . Inc. Sec. Litigation,10 F. Supp.2d 1068 (D. Mm. 1998). Those cases, however, are at odds withthe courts of appeal that have considered the issue and have uniformlyrecognized the broader statutory language of § 11. See Joseph v.Wiles, 223 F.3d 1155 (10th Cir. 2000); Hertzberg v. Dignity Partners,Inc., 191 F.3d 1076; Versyss Inc. v. Coopers & Lybrand, 982 F.2d 653 (1stCir. 1993). Indeed, there is authority from the former Fifth Circuit,whose decisions represent binding precedent in this circuit, that iscontrary to the position advanced by Cauff. See Columbia Gen. Inv. Corp.v. S.E.C., 265 F.2d 559, 652 (5th Cir. 1959). Interestingly, Cauff failedto disclose the existence of any of the appellate authorities contrary tohis position. In support of his position, Cauff also cited generally andwithout discussion the Supreme Court's Gustafon v. Alloyd Co., Inc.,513 U.S. 561 (1995), decision. Gustafon, though, is inapposite because itaddressed whether secondary purchasers may assert a claim Linder §12(a)(2), not § 11 the more broadly worded statute.
26. In other words, the complaint must now not only allege the who,what, when, where, and how of the fraud, but also the why of thefraud.
27. Prior to passage of the PSLRA, every circuit to address the issue"held that a showing of recklessness was sufficient to allege scienter." Bryant v. Avado Brands. Inc., 187 F.3d at 1284. Following the PSLRA,the courts of appeal have reached various conclusions as to what issufficient to plead scienter under § 78u-4(b)(2). See Bryant v. AvadoBrands. Inc., 187 F.3d at 1282-83 (discussing the various interpretationsof the PSLRA given by the courts of appeals);Scott H. Moss, Comment,The Private Securities Litigation Reform Act: the Scienter Debacle, 30Seton Hall L. Rev. 1279 (2000) (same).
28. In Bonner v. City of Pritchard, 661 F.2d 1206 (11th Cir. 1981)(en banc), the Eleventh Circuit adopted as binding precedent all decisionsof the former Fifth Circuit handed down before october 1, 1981.
29. As discussed above with respect to the Securities Act claims, theamended class action complaint sufficiently pleads materialmisrepresentations and omissions concerning the value of Unicapital'sgoodwill and the useful life of its fleet of aircraft. The amended classaction complaint further alleges that the misrepresentations andomissions continued in (1) Unicapital's quarterly 10-Q and annual 10-Kfilings with the SEC, seeAmend Compl. at ¶¶ 94, 104, 111, 123, 132,148, 151, 152, and (2) press releases and shareholder reports. See,e.g., id. at ¶¶ 88, 98-101. Those allegations are sufficient toestablish the who, what, when, where, and how of the alleged fraud and tosatisfy Rule 9(b)'s requirement. See Arral Indus. . Inc. 2000 WL 141269,at *3 ("Rule 9(b) is satisfied when the complaint alleges fraud withsufficient particularity to permit the person charged with fraud to havea reasonable opportunity to answer the complaint and adequate informationto frame a response.") (internal quotation marks and alterationsomitted). The alleged misrepresentations and omissions that followed theprospectus and registration statement are of particular import withrespect to the Rule 10b-5 claim against Defendant Stuart Cauff. Mr. Cauffwas not a director at the time the registration statement was signed andthe prospectus was issued; thus, he could not be directly liable, underRule 10b-5, for the alleged misrepresentations and omissions contained inthose documents. He was, however, a director at the time of the later,alleged misrepresentations and omissions. In fact, several of theallegedly fraudulent statements are attributable to Mr. Cauff.
30. It is important to observe that the PSLRA, although mandating moreparticular pleading, in no way altered the standard of review applicableto the well pleaded allegations of a complaint under Rule 12(b)(6) of theFederal Rules of Civil Procedure (i.e., the allegations are viewed in thelight most favorable to the plaintiff). See Hewling, 2001 WL 578541, at *9(discussing the interplay of the PSLRA's heightened pleading requirementsand Rule 12(b)(6)).
31. Cosmasis a pre-PSLA case. The Second Circuit's pre-PSLRA pleadingrequirements, though, included the pleading of scienter withparticularity in securities fraud cases; therefore, Cosmasis still goodlaw as to what must be pled to establish scienter through severerecklessness. See Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.2000).
32. Because the Court finds that the truth on the market defense isinapplicable, it need not decide wether it is a viable defense to theSecurities Act claims, as well as the Exchange Act claim.
33. Forward-looking statements may also be immunized from liability ifthey (1) are immaterial or (2) the plaintiff fails to prove that themaker of the statement knew it was false when made. See15 U.S.C. § 78u-5 (c)(1)(A)(ii),(B). As discussed above, the allegedmisrepresentations and omissions at issue here are material. With respectto the Individual Defendants' knowledge, the amended class actioncomplaint sufficiently alleges that the lndividual Defendants hadknowledge of the ANCA and the effect it would have upon Unicapital'sfleet of aircraft at the time of the alleged misrepresentations andomissions.
34. Not all of the press releases quoted in the amended class actioncomplaint have been furnished to the Court by the parties. The Courtcould not consider whether the press releases that the parties failed toprovide are eligible for the PSLRA's safe harbor. In any event, it appearsthat allof Unicapital's press releases contained the same warnings,which, as discussed in the text, the Court finds inadequate to immunizethe statements. With respect to the press releases not furnished to theCourt, the Individual Defendants are free to raise the safe-harbordefense at the summary judgment stage, if appropriate.
35. The Eleventh Circuit's standard for "meaningful cautionary"language, as articulated in Ivax, is unquestionably somewhat more lement(i.e., easily satisfied) than the standard employed by the ThirdCircuit. See generally In re Columbia Labs., Inc. Sec. Litigation, No.00-21 12-CIV-KING, 144 F. Supp.2d 1362 2001 WL 527155, at *4 (S.D.Fla. May 9, 2001) (noting the "more liberal approach" the EleventhCircuit has taken with respect to the term "meaningful"). Even under theEleventh's Circuit's standard, though, there must be some similaritybetween the nature of the disclaimer and the hazzard that ultimatelybefalls the company. See id.
36. To the extent that the motions to dismiss rely upon the bespeakscaution doctrine as distinct from the PSLRA's safe-harbor provision,the statements do not qualify for protection under that doctrine for thesame reason (i.e., the warnings provided no notice of the hazzard).See Semerenko v. Cendant Corp., 223 F.3d 165, 182-83 (3d Cir. 2000),cert. denied, ___ U.S. ___, 121 S.Ct. 1091 (2001).