383 F.Supp.2d 223 (2004) | Cited 6 times | D. Massachusetts | September 21, 2004


Plaintiff Terry Swack brings this putative class action againstCredit Suisse First Boston, its analyst Mark Wolfenberger, andhis manager Elliott Rogers under Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, and Securities ExchangeCommission Rule 10b-5.1 Swack alleges that Credit Suisse, through Wolfenberger, issued optimistic research reportsconcerning the stock of Razorfish, Inc. that were intentionallyfalse and misleading, and that those misleading reportsultimately caused Swack to suffer a loss as Razorfish'sartificially inflated stock price eventually came down toearth.2 Swack alleges that Defendants issued thesedisingenuously positive research reports, knowing that they wereunjustifiable, in order to generate more investment banking feesfor Credit Suisse and, consequently, bonuses for Wolfenberger andRogers.

Congress enacted the Private Securities Litigation Reform Actin part to deter baseless "strike" suits that were sometimesbrought on the theory that, if the stock crashed, anyone who everpromoted it must have been lying. The Act imposed a higherpleading standard under which plaintiffs risk dismissal if theydo not plead the alleged fraud with specificity. Rather,securities plaintiffs may not commence a securities action untilthey have amassed enough evidence to state their case with suchparticularity. With one exception, that is what happened in thiscase.

Defendants move to dismiss pursuant to Fed.R. Civ. P. 12(b)(6)for failure to state a claim, arguing that Swack's suit consistsof nothing more than generalized allegations about conflicts of interest. For the reasons set forth below, I willdeny the motions of Defendants Credit Suisse and Wolfenberger,but grant the motion of Defendant Rogers.


A. Facts3

1. Factual History

a. Credit Suisse's Coverage of Razorfish

In mid-1998, Frank Quattrone4 came to Credit Suisse tomanage their Tech Group. Compl. ¶ 29. Quattrone oversaw bothresearch analysts and sales personnel. Id. ¶ 30. Credit Suisse,through the Tech Group, was the lead manager for Razorfish's IPOon April 27, 1999, and afterwards continued to manage asubstantial portion of Razorfish's investment banking business.Id. ¶ 63. On May 24, 1999 Wolfenberger began research coverageof Razorfish stock with a "buy" rating. Id. ¶ 64. He issuedfurther research reports in June and July 1999 reiterating the"buy" rating. Id. ¶ 65.

In October 1999, Credit Suisse and Razorfish discussed asecondary stock offering by Razorfish, and Credit Suisse acted asan investment banker advising Razorfish on the acquisition ofInternational Integration Incorporated ("i-Cube") in exchange for Razorfish stock. Id. ¶ 66.

In subsequent months, numerous email interactions betweenWolfenberger and Dachis suggest close coordination of researchreports in order to boost Razorfish's stock price. For example,on October 29, 1999 Wolfenberger sent an email to Jeff Dachis,the CEO of Razorfish, concerning re-initiation of coverage ofRazorfish, in which he stated: I want your opinion on rating. We would have taken you to a strong buy but given the recent stock run, does it make sense for us to keep the upgrade in our back pocket in case we need it? Either way I don't care. You guys deserve it, I just don't want to waste it.Id. ¶ 76.

Dachis responded that "its [sic] getting hard to justify thevaluations," and requested that Wolfenberger "re-initiate with abuy and a higher price target and keep the upgrade for a littlewhile." Id. ¶ 77 (adding "[a]lthough its [sic] getting hard tojustify the valuations"). Dachis also stated: "[G]et thesecondary out above 100, and see how it goes . . . what do youthink?" Id. ¶ 81. On November 3, 1999 Wolfenberger issued aresearch report raising Razorfish's rating to "strong buy." Id.¶ 78.

On December 2, 1999 Wolfenberger issued another report ratingRazorfish as a "strong buy." Id. ¶ 68. In January 2000, theprice of Razorfish stock began to decline. Id. Nevertheless,Wolfenberger issued "strong buy" ratings from January through May2000 and set optimistic price targets. Id. During this timeperiod, Credit Suisse publicly maintained that its Tech Group was the "largest, most credible and insightful team on Wall Street"and were encouraged "to interpret [industry] information in afair and objective manner." Id. ¶ 47.

On March 3, 2000 — a day on which Wolfenberger issued another"strong buy" report for Razorfish — he sent an email to Dachisproposing a joint plan to boost Razorfish's price: "We'll workthe phones, you work the road show." Id. ¶ 86. Later that sameday, Wolfenberger sent another email to Dachis explaining that"[w]ith the call we made and the market and you on the road, thisstock should be higher than $5." Id. ¶ 87. As on many (thoughnot a majority) of the dates on which Wolfenberger issued hispositive research reports, Razorfish's stock price increased —over 11% for the day, well above the NASDAQ's overall increase of3.4%. Id. ¶ 86.

On June 14, 2000 Wolfenberger emailed Dachis to say "I'd liketo do a note before the quiet period to try and move the stock."Id. ¶ 88. He sent further emails in July 2000 explaining how hewas "working the stock" in the Midwest. Id. ¶ 89. In the summerand fall 2000, Wolfenberger continued to issue "strong buy"ratings for Razorfish. Dachis was grateful for the effort. Id.¶ 94 (writing in an email "You da man . . . I won't forget thiseffort . . . thank you."); Id. 96 (responding to a reportforwarded to him, Dachis thanked Wolfenberger by email for thefact that Razorfish — along with many other companies —maintained its "strong buy" while several other "informationtechnology service companies" had been downgraded). On October 6, 2000 Wolfenberger issued a report ratingRazorfish a "strong buy" and set a price target of $15 per share,even though it was then trading at $8.75 per share. Id. ¶ 98.That morning Dachis sent an email thanking Wolfenberger, stating"again you da man, we appreciate the continued support." Id. OnOctober 27, 2000 Wolfenberger finally lowered his rating to"buy," as Razorfish was trading at $4 per share. Id. ¶ 79.

Through the winter of 2000-01 Wolfenberger continued to rateRazorfish a "buy" and set target prices substantially higher thanthose of other research analysts. On March 20, 2001 Wolfenbergersent an internal email ("the 3/20/01 Email") in which he stated:"I think there is a risk of bankruptcy. . . . best case is deadmoney. Could be acquired but hard to call. Would considerreducing exposure." Id. ¶ 101. On March 21, 2001 another CreditSuisse analyst sent an email to Defendant Rogers recounting thatWolfenberger had stated that most of his IPOs should never havegone public, and that the companies had collapsed due tostructural problems, but nevertheless "we all got our bonuses fora good year." Id. ¶ 52.

Credit Suisse maintained its "buy" rating and $5 price targetfor Razorfish until May 4, 2001, when Razorfish was trading at$1.14 per share, and Wolfenberger finally reduced the rating to"hold." Id. ¶ 73.

b. The Massachusetts, SEC, and NASD Complaints

On September 12, 2002 Reuters News Service reported thatMassachusetts securities regulators had been investigating whether analysts' reports at Credit Suisse had been tainted bythe firm's desire to win investment banking business, andindicated that Credit Suisse analysts "may routinely havereceived compensation that was linked to specific investmentbanking transactions."5 Compl. ¶ 21. On April 28, 2003the Securities Exchange Commission ("SEC"), based on an independentinvestigation, filed a complaint (the "SEC Complaint") againstCredit Suisse in the United States District Court for theSouthern District of New York, alleging violations of federalsecurities laws.6 Id. ¶ 24. Credit Suisse entered intomultimillion dollar consent decrees to settle both theMassachusetts and SEC complaints. Id. ¶ 28.

On March 6, 2003 the National Association of Securities Dealersfiled a complaint against Quattrone in his role as manager ofCredit Suisse's Tech Group.7 Id. ¶ 107. In January 2002, CSFB settled "spinning" (improperly using allocation of IPOshares to obtain investment banking business) charges with theNASD and the SEC for $100 million. Id. ¶ 114.

2. Procedural History

On October 3, 2002 Swack filed the complaint in this case,alleging violations of Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t(a), and SEC Rule10b-5, 17 C.F.R. § 240.10b-5. Passing over intermediatedevelopments not relevant to this motion, Swack filed a SecondConsolidated Amended Complaint ("the Complaint") on October 20,2003. The Complaint alleged, first, that all Defendants knowinglyor recklessly violated § 10(b) and Rule 10b-5(a)-(c) via schemes,untrue statements and/or omissions of material facts, andpractices to defraud purchasers of Razorfish common stock; andsecond, that Defendants Credit Suisse and Rogers were separately liable under § 20(a) as "controlling person[s]" ofDefendant Wolfenberger.


A. Motion to Dismiss

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 infavor of the plaintiff. Watterson v. Page, 987 F.2d 1, 3 (1stCir. 1993). The court, however, need not credit "bald assertions,unsupportable conclusions, or opprobrious epithets." Chongris v.Bd. of Appeals, 811 F.2d 36, 37 (1st Cir. 1987). Dismissal underRule 12(b)(6) is only appropriate if the complaint, 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 todismiss, may properly consider the "relevant entirety of adocument integral to or explicitly relied upon in the complaint."Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.1996). Even if such documents are not attached to the complaint,the defendant may attach them to its motion to dismiss — and acourt may consider them — without turning the motion into one forsummary judgment. Id. This prevents a plaintiff from "excisingan 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."Id. B. Heightened Pleading Requirement

In 1995, Congress enacted the Private Securities LitigationReform Act ("PSLRA"), intended to curb abuse in privatesecurities litigation. 15 U.S.C. § 78u-4; see Greebel v. FTPSoftware, 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).

Before the PSLRA, a plaintiff who alleged a knowing orintentional falsehood had to meet the requirements ofFed.R.Civ. P. 9(b) by stating the circumstances constituting thefalsehood "with particularity."8 On the other hand, ifthe 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 at 1223.

Section 78u-4(b)(1) eviscerates the need to determine whether a complaint "sounds in fraud" because it imposes aheightened pleading requirement on all claims arising out ofalleged misrepresentations or omissions. Moreover, the PSLRA'spleading standard is "congruent and consistent with thepreexisting standards" of the First Circuit for Rule 9(b), whichhave been "notably strict and rigorous." Greebel,194 F.3d at 193. Thus, under the PSLRA, as before under Rule 9(b), aplaintiff must specify each allegedly misleading statement oromission, and additionally, "the plaintiff must not only allegethe time, place, and content of the alleged misrepresentationswith specificity, but also the factual allegations that wouldsupport a reasonable inference that adverse circumstances existedat the time of the offering, and were known and deliberately orrecklessly disregarded by defendants." Id. at 193-94 (internalquotation marks deleted).

Although the pleading requirements under the PSLRA are strict,they do not alter the underlying Rule 12(b)(6) standard ofreview. A court must still 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).


Defendants move to dismiss on five principal grounds: (1) thatthis action is time-barred; and that Swack has not pled (2) afalse or misleading statement or actionable omission, (3) thather losses were caused by Defendants' conduct, (4) scienter, or(5) that Credit Suisse or Rogers had "control person" liability for Wolfenberger's conduct.9

A. Statute of Limitations

The parties disagree as to which statute of limitationsapplies, and when it would begin to run.

1. Applicable Limitations Period

From 1991 to July 2002, all "[l]itigation instituted pursuantto § 10(b) and Rule 10b-5 [had to] be commenced within one year after the discovery of the facts constituting theviolation and within three years after such violation." Lampf,Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350,364 (1991). Section 804 of the Sarbanes-Oxley Act of 2002,however, provided a new limitations period under which an actioncould be timely filed within the earlier of two years after thediscovery of the facts constituting the violation, or five yearsafter the violation itself. See Pub.L. No. 107-204 § 804, 116Stat. 745, 801 (2002) (codified at 28 U.S.C. § 1658). Section 804also provided that "[t]he limitations period . . . added by thissection, shall apply to all proceedings addressed by this sectionthat are commenced on or after the date of enactment of thisAct," but that "[n]othing in this section shall create a new,private right of action." Pub.L. No. 107-204 §§ 804(b)-(c), 116Stat. at 801. The Sarbanes-Oxley Act became effective on July 30,2002, see 116 Stat. at 745, and the first complaint in thiscase was filed on October 3, 2002. There is, therefore, aquestion about whether § 804's lengthened limitations periodapplies here.10 For the reasons stated below, I conclude Plaintiff may pursue her claim regardless of the limitationsperiod imposed.

2. When the Period Began to Run

Swack filed her initial complaint on October 3, 2002.Defendants contend that the limitations period began to run nolater than September 2000, at which point Swack was on inquiry notice of the facts underlying her claims because (1) Razorfish'sstock price had plummeted to $8-$12 per share, (2) CreditSuisse's ratings of Razorfish remained positive despite theprecipitous drop in price, (3) allegations of Wall Street analystconflicts, including at Credit Suisse, were well known to themarket. Swack contends that she did not have sufficient facts tosupport a claim against Defendants until at least September 12,2002, when it was reported that investigators had uncoveredinternal e-mails showing that Credit Suisse analysts had beenpressured to recommend stocks to please investment bank clients.Swack further contends that the question of when she was oninquiry notice of her claim is a question of fact not resolvableon a motion to dismiss.

A complaint may be dismissed on statute of limitations grounds"only if `the pleader's allegations leave no doubt that anasserted claim is time-barred.'" Young v. Lepone, 305 F.3d 1, 8(1st Cir. 2002) (quoting LaChapelle v. Berkshire Life Ins. Co.,142 F.3d 507, 509 (1st Cir. 1998)). In the securities fraudcontext, the period "does not begin to run `until the time whenthe plaintiff in the exercise of reasonable diligence discoveredor should have discovered the fraud of which he complains.'"Young, 305 F.3d at 8 (quoting Cooperativa de Ahorro y CreditoAguada v. Kidder, Peabody & Co., 129 F.3d 222, 224 (1st Cir.1997)). "When telltale warning signs augur that fraud is afoot,however, such signs, if sufficiently portentous, may as a matterof law be deemed to alert a reasonable investor to the possibility of fraudulent conduct." Young, 305 F.3d at 8.

The First Circuit has a two step process for assessing suchwarning signs. First, the court determines, as an objectivematter, "whether a harbinger, or series of harbingers, shouldhave alerted a similarly situated investor that fraud was in thewind." Id. If such "storm warnings" were apparent, the courtthen determines whether "the investor probed the matter in areasonably diligent manner." Id.

The defendant has the initial burden of establishing theexistence of storm warnings. Id. at 9. With that said, "[t]hemultifaceted question of whether storm warnings were apparentinvolves issues of fact. . . . [and] [i]n the archetypical case,therefore, it is for the factfinder to determine whether aparticular collection of data was sufficiently aposematic toplace an investor on inquiry notice." Id.; Axler, 1999 WL1209512, at *4 (complaint should not be dismissed on statute oflimitations grounds because the question of when plaintiff was oninquiry notice is factual).

Defendants' primary argument is that it was widely known to themarket that Wall Street research analysts were excessively cozywith the investment bankers, and they cite numerous news articlesand speeches by SEC Chairman Levitt to establish this point. Onearticle even states that "Quattrone runs Credit Suisse FirstBoston's technology practice, one of the rare Wall Street shopsthat allows the research department to report directly to thehead of investment banking. No artifice here: Quattrone's outfit unabashedly combines aggressive banking withsupportive research." (Def. Ex. 38).11

None of this information, however, would have given rise to a §10(b) cause of action, particularly under the heightened pleadingstandards of the PSLRA. The articles do not disclose that analystcompensation was specifically tied to revenue from the companiesthey covered, that analysts solicited the opinion of coveredcompanies' executives as to what ratings to give them, that theyactively collaborated with clients to use research ratings toboost stock prices, or that they issued "Strong Buy" ratings evenwhen clients' executives admitted that it was "getting hard tojustify the valuations."

Had Swack filed solely based upon the news articles and publicinformation that Defendants claim put her on inquiry notice, hercase would have been quickly dismissed. See, e.g., Pheiffer v.Goldman, Sachs & Co., No. 02-6912, 2003 WL 21505876, at *6(S.D.N.Y. July 1, 2003) (dismissing complaint because"allegations about a general industry-wide conflict of interestfail[] to plead scienter with sufficient particularity"). Rather,she filed her complaint only after the Massachusettsinvestigation uncovered damaging e-mails that provide morespecific evidence to support her claims.

The discovery rule does not wait for the plaintiff to acquire facts sufficient to withstand a motion for summaryjudgment; "`storm warnings' of the possibility of fraud triggera plaintiff's duty to investigate." Cooperativa de Ahorro,129 F.3d at 224 (internal quotation marks omitted and emphasisadded). But "[i]t makes little sense from a policy perspective torequire specific factual allegations — on pain of dismissal incases of this sort — and then to punish the pleader for waitinguntil the appropriate factual information can be gathered bydismissing the complaint as time barred." Levitt v. Bear Stearns& Co., 340 F.3d 94, 104 (2d Cir. 2003) (reversing a districtcourt's dismissal of a securities fraud case as timebarred).

In a case remarkably similar for statute of limitationspurposes, Judge Rakoff held that the statute did not begin to rununtil the SEC disclosed the analyst's emails, thus givingplaintiffs specific evidence of scienter: Plaintiffs . . . could not bring suit at the point of [the] disclosures and losses . . . because they had no basis for believing that [the analyst] had intentionally lied when he issued his prior positive reports, and without evidence of such scienter no private action may be brought. . . . [Scienter] did not become known to plaintiffs, and even with the exercise of due diligence could not have become known to them, until the SEC disclosed [the analyst]'s emails to the public . . . shortly after which this suit was commenced.Demarco v. Lehman Brothers, Inc., 309 F. Supp. 2d 631, 637(S.D.N.Y. 2004). So too here.

For these reasons, I cannot find, on a motion to dismiss, thatSwack was on inquiry notice of her claims before September 12, 2002. I turn, therefore, to the merits.

B. Failure to plead a false or misleading statement oractionable omission

A major component of Swack's complaint is an allegation thatDefendants violated Rule 10b-5(b): It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce. . . . (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading[.]17 C.F.R. ¶ 240.10b-5.

To state a Rule 10b-5(b) claim, a plaintiff must demonstrate"(1) that defendants made a materially false or misleadingstatement or omitted to state a material fact necessary to make astatement not misleading; (2) that defendants acted withscienter; (3) that either plaintiffs or the market relied on themisrepresentation or omission; and (4) resultant injury." Geffonv. Micrion Corp., 249 F.3d 29, 34 (1st Cir. 2001).

Defendants argue that Swack has failed to allege a false ormisleading statement or omission. They argue that the complaintdoes not identify a specific false or misleading statement, norwhy such statements were misleading. See PSLRA,15 U.S.C. § 78u-4(b)(1); Greebel, 194 F.3d at 193.

Swack claims that the "Buy" and "Strong Buy" ratings thatWolfenberger issued were false and misleading because theyimplied that Wolfenberger actually believed them to be justified,when in reality he issued them as a quid pro quo forRazorfish's continued investment banking business, a portion of which wouldaugment his bonus. Swack's complaint can be fairly read to pleadthat Wolfenberger did not believe that those ratings werejustified. In the 3/20/01 Email, Wolfenberger stated: "I thinkthere is a risk of bankruptcy. . . . best case is dead money.Could be acquired but hard to call. Would consider reducingexposure." It is true that this email came after Wolfenberger'slast "buy" recommendation was issued, and a speaker has no "dutyto `correct' an optimistic report with negative informationacquired after the issuance of the report so long as the initialreport was `precisely correct' when issued and remained sothereafter." In re Biogen Sec. Litig., 179 F.R.D. 25, 34 (D.Mass. 1997) (Saris, J.) (quoting Backman v. Polaroid Corp.,910 F.2d 10, 16-17 (1st Cir. 1990) (en banc)). Secret negativereports, however, could support an inference that earlier, morebullish reports were false at the time they were made. SeeDemarco, 309 F. Supp. 2d 634-35. While this inference might notpersuade a jury, or perhaps even survive summary judgment, it isadequate for Rule 12(b)(6) purposes.12

Alternatively, the failure to disclose the conflict can beviewed as an omission of a material fact necessary in order to make the reports not misleading. See, e.g., Cyber Media Group,Inc. v. Island Mortgage Network, Inc., 183 F. Supp. 2d 559,572-73 (E.D.N.Y. 2002) (analyst's statement that a company was a"double your money stock" without disclosing conflict of interestwas adequate for requirement of pleading the materiality of afalse or misleading statement); In re Credit Suisse First BostonCorp. Sec. Litig., No. 97-4760, 1998 WL 734365, *6 (S.D.N.Y.Oct. 20, 1998) (where plaintiffs alleged that Credit Suisseissued negative stock research reports on two companies withoutdisclosing that it had a short position on those stocks, failureto disclose short positions was an actionableomission).13

Defendants respond with a "truth-on-the-market" defense: thatthe general problems of conflicts of interest among Wall Streetresearch analysts, and Credit Suisse's conflict regardingRazorfish specifically, were already disclosed. Indeed, theyprovide numerous articles concerning the general problems of analyst conflicts, and it was known to the market that CreditSuisse was the lead manager for Razorfish's IPO. Presented with acase alleging not much more than generally known conflicts, JudgePollack of the Southern District of New York granted a motion todismiss. See In re Merrill Lynch & Co., Inc. Research ReportsSec. Litig., 272 F. Supp. 2d 243, 250-52 (S.D.N.Y. 2003).

The pervasive corruption of the research analyst's role allegedat Credit Suisse, however, was not generally known, and theComplaint pleads allegations — e.g., that Wolfenberger directlysolicited Dachis's advice on what rating to issue, and that heissued ratings in order to "try and move the stock" — that themarket could not have known. Nor does Credit Suisse's boilerplatedisclosure of potential conflicts suffice as a matter of law whenWolfenberger and Credit Suisse knew of an actual, more specificconflict. La Grasta v. First Union Sec., Inc., 358 F.3d 840,850-51 (11th Cir. 2004) (reversing dismissal based on purportedactual notice, because boilerplate disclosures that analyst mightseek to do business with companies that it was covering were toogeneral and ambiguous to provide a warning that the ratings,recommendations, and target prices in the reports were not basedon analyst's unbiased real opinions, but rather deliberateattempts to inflate company's stock price and attract itsinvestment banking business); In re WorldCom, Inc. Sec. Litig.,294 F. Supp. 2d 392, 429-30 (S.D.N.Y. 2003) (boilerplatedisclosure in analyst reports that analyst's firm "may from timeto time perform investment banking or other services for, or solicit investment banking or other business from, any companymentioned in this report" did not, for purposes of motion todismiss, provide notice to the public of analyst's conflict ofinterest).

Defendants' truth-on-the-market defense faces the same problemas its statute of limitations argument: the market knew ofgeneral problems, but not the nature or extent of the conflict atCredit Suisse. Whether the extent of the market's knowledge aboutconflicts at Credit Suisse sufficed to render Wolfenberger'somissions immaterial is a fact-specific question that is rarelyan appropriate basis for dismissal. Ganino v. Citizens Utils.Co., 228 F.3d 154, 167 (2d Cir. 2000) (truth-on-the-marketdefense is "intensely fact-specific" and "rarely an appropriatebasis" for dismissal); Schaffer v. Timberland Co.,924 F. Supp. 1298, 1309 (D.N.H. 1996) ("find[ing] that thetruth on the market defense presented by the defendants necessarilyinvolves a fact-intensive inquiry which is ill-suited to a motion todismiss").14

For these reasons, I find that Swack has adequately pled falseor misleading statements and omissions against Wolfenberger andCredit Suisse for purposes of Rule 10b-5(b). She has not,however, adequately pled any against Rogers. None of theallegedly misleading research reports bore his name or have been attributed (even partially) to his authorship.15

C. Rule 10b-5(a) & (c) Claims

Swack has also alleged violations of Rules 10b-5(a) &(c).16 Unlike Rule 10b-5(b), these claims do not requirefalse or misleading statements. See In re Enron Corp. Sec.,Derivative, & ERISA Litig., 235 F. Supp. 2d 549, 577 (S.D. Tex.2002). Rather, plaintiffs must allege that "(1) they wereinjured; (2) in connection with the purchase or sale ofsecurities; (3) by relying on a market for securities; (4)controlled or artificially affected by defendant's deceptive ormanipulative conduct; and (5) the defendants engaged in themanipulative conduct with scienter." In re Initial Pub. OfferingSec. Litig., 241 F. Supp. 2d 281, 385 (S.D.N.Y. 2003) ("IPOSec. Litig.") (internal quotation marks and citationomitted).17 The conduct necessary to form a Rule 10b-5(a) or (c) violationcan vary widely, but presumably these sections are intended tocover different conduct than Rule 10b-5(b). See, e.g., SECv. Martino, 255 F. Supp. 2d 268, 287 (S.D.N.Y. 2003) (definingstock market manipulation broadly to include any "intentional orwillful conduct designed to deceive or defraud investors bycontrolling or artificially affecting the price of securities,"but delineating factors suggesting that manipulation is limitedto manipulating the market itself) (quoting Ernst & Ernst v.Hochfelder, 425 U.S. 185, 199 (1976)). If the claimed fraudulentschemes or practices consisted simply of misleading statementsand omissions, then they would fall entirely within the ambit ofRule 10b-5(b), and no separate (a) or (c) actions would lie. If,on the other hand, they were part of a broader fraudulent"scheme," "practice," or "course of business," then they mightallege something slightly different from a Rule 10b-5(b) claim,which could rest on a single misleading statement.

For instance, in Enron Corp. the district court held thatpromulgation of deceptively favorable research reports couldstate a manipulation claim if it was part of a larger scheme: Market manipulation, employment of a manipulative device, and engaging in manipulative schemes such as a scheme to artificially inflate or deflate stock prices, falsifying records to reflect non-existent profits, and creating and distributing false research reports favorably reviewing a company are other types of conduct prohibited by § 10(b) and Rule 10b-5 that do not fall within the category of misleading statements and omissions.235 F. Supp. 2d at 579 (emphasis added). There, however, the issuance of dubious analyst reports was just one small part ofseveral much broader schemes. See id. at 639-93.

Defendants question whether Swack has alleged a "scheme" or"course of business" at all. They rightly point out that theallegations of "spinning" leveled against Quattrone and CreditSuisse are not connected at all to Razorfish. Swack, however,need not rest on the "spinning" allegations. She has alleged notjust that Wolfenberger issued one or two misleading researchreports, but rather that over time he worked extensively withDachis to issue bullish research reports (and "work" Razorfishstock in conference calls and elsewhere) with the deliberate aimof boosting Razorfish's market price artificially. Thisadequately states a "scheme" and "course of business" under Rule10b-5(a) and (c).

C. Loss Causation

Defendants argue that, even if they made actionably false ormisleading statements or omissions, Swack has not adequately pledthat those statements or omissions actually caused her loss.

Swack has, of course, pled that the market price of Razorfishstock was artificially inflated when purchased, and attributedthis artificial inflation to Defendants' misrepresentations.Compl. ¶ 120. Indeed, she has specifically pled that Wolfenbergerused his prestige as a supposedly objective research analyst, andhis ability to affect market price by issuing ratings, tostrategically manage the price of Razorfish stock. Compl. ¶ 76(email from Wolfenberger to Dachis inquiring whether he should issue a "strong buy" recommendationnow, or "keep the upgrade in our back pocket in case we needit"), ¶ 86 (email from Wolfenberger coordinating effort withDachis to promote Razorfish stock), ¶ 88 (email from Wolfenbergeroffering to "do a note before the quiet period to try and movethe stock").

Defendants claim this pleading is insufficient for two reasons.First, the history of the stock prices shows that fewer than halfof Wolfenberger's optimistic Razorfish reports were followed byan increase in the stock price. Second, Razorfish declined invalue while Wolfenberger continued to maintain a positive rating,and when the conflicts were disclosed, no further declineoccurred.

A § 10(b) or Rule 10b-5 plaintiff must allege that her"reliance on the defendant's misstatement caused [her] injury."Shaw, 82 F.3d at 1217. But what precisely the plaintiff mustallege is a subject of some division among courts, and a topic onwhich the First Circuit has not clearly spoken.

It is beyond dispute that the plaintiff must adequately pleadthat, due to Defendants' misrepresentations, she purchased stockat an artificially inflated price. See, e.g., Broudo v. DuraPharms., Inc., 339 F.3d 933, 938-39 (9th Cir. 2003), cert.granted, 124 S. Ct. 2904 (2004). Defendants argue thatWolfenberger's ratings had little or no discernible effect on thestock price. See Defs.' Reply at 16 (excerpting from Def. Ex.7). Between June 14, 1999 and February 9, 2001 Wolfenberger issued 16 allegedly fraudulent reports. On only seven of those 16days did Razorfish's closing stock price increase from the priorday's close; on eight it decreased, and on one day it didn'tchange at all. Furthermore, on specific days where one mightexpect to see a particular effect, one does not. On June 14,1999, when Credit Suisse began coverage of Razorfish with a "buy"rating, the stock price declined. On November 3, 1999, whenWolfenberger upgraded his rating to "strong buy," the pricedeclined again. On October 27, 2000, when he finally downgradedit back to "buy," there was no change. And on May 4, 2001, whenhe finally downgraded it to "hold" — presumably, the correctrating for some time — it actually increased. Finally, of theseven occasions that the price increased on the same day as apositive research report was issued, four were also days on whichRazorfish released positive news either that day or after theclose of trading the day before. See Def. Exs. 40-43.

This history of stock price movements makes plaintiff's casedifficult, because it leads to the suspicion that perhapsWolfenberger — for all his "working the phones" and attempts totime his reports strategically — didn't actually have very muchinfluence on the market. Cf. In re Segue Software, Inc. Sec.Litig., 106 F. Supp. 2d 161, 171 (D. Mass. 2000) (Stearns, J.)(dismissing complaint and asking "if [CEO]'s statement was somarket-positive, why did the price of Segue shares drop nearly $5a share the next day?"); In re Fidelity/Apple Sec. Litig.,986 F. Supp. 42, 48 (D. Mass. 1997) (Stearns, J.) (dismissingcomplaint for failure to allege that alleged misrepresentation in fact hadan effect on the market, because plaintiff "concede[d] that nosignificant rise (or fall) in the price of Apple shares wasprecipitated by the publication of [defendant]'s statements").

The market history, however, does not lead ineluctably to theconclusion of lack of influence. Stock prices rise and fall forcombinations of many different reasons. Defendants' conduct couldhave tempered a drop in price that would otherwise have occurred,or resulted in a greater increase than the stock would otherwisehave enjoyed, absent the deceptive analyst reports. The questionfor Rule 12(b)(6) purposes is whether Swack must now plead thespecific mechanisms by which this occurred, or whether that canawait a later stage of the litigation, when she has had a chanceto develop expert testimony. Several district courts have heldthat, under the heightened pleading standards of the PSLRA, theplaintiff must make the connection in the complaint: Plaintiffs in eToys fail to plead in any adequate form that it was the rating, as opposed to the unchallenged content of the report or other external factors, that caused the decline. Indeed, plaintiffs in all actions ignore completely the fact that contrary to their allegations of price inflation, the prices of the securities at issue sometimes increased when Merrill Lynch downgraded its rating, sometimes decreased when Merrill Lynch upgraded its rating, and often showed wide fluctuations even when Merrill Lynch issued no reports at all.In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig.,289 F. Supp. 2d 416, 421-22 (S.D.N.Y. 2003) ("Merrill LynchIII") (emphases in original); accord Glaser,303 F. Supp. 2d at 751 (dismissing complaintfor failure to allege loss causation where "[p]laintiffs allege[d] decreases in market price during certainperiods and on certain days; however, they [made] no effort toshow how any of the alleged misrepresentations had any effect onthe market price during those periods").

Other courts have declined to draw such inferences from markethistory at the pleading stage. Judge Scheindlin of the SouthernDistrict of New York refused to consider, in the 12(b)(6)posture, defendants' arguments that the stock prices wereaffected by causes other than their conduct: It is typically inappropriate, however, to look to supervening causes when examining whether a complaint has adequately pled loss causation. Unless a plaintiff pleads decisive supervening causes for its loss and thus pleads itself out of court, the requirement that a court draw all factual inferences in favor of a plaintiff at the motion to dismiss stage will usually preclude any finding of a supervening cause. . . . While plaintiffs' losses may not be attributed to the instances of misconduct they have broadly alleged, I am unable to conclude that they cannot be attributed to the alleged fraud.IPO Sec. Litig., 241 F. Supp. 2d at 374 n. 77 (internalquotation marks and citations omitted) (emphasis added inoriginal). These courts have emphasized the fact-intensive natureof the comparison between alleged misstatements and stock pricemovements. See e.g., Gebhardt v. ConAgra Foods, Inc.,335 F.3d 824, 831-32 (8th Cir. 2003) (declining "to attachdispositive significance to the stock's price movements absentsufficient facts and expert testimony, which cannot be consideredat this [12(b)(6)] procedural juncture, to put this informationin its proper context"); Tracinda Corp. v. DaimlerChrysler AG, 197 F. Supp. 2d 42, 67-68 (D. Del. 2002) (refusing to dismiss on basisof stock price movements because "these arguments are factintensive matters usually requiring expert testimony concerningthe state of the financial markets and the like").

I find the latter set of decisions more persuasive. Evidencethat the stock price changed in particular ways on particulardays in a manner apparently inconsistent with a plaintiff'stheory is powerful evidence. But it is just that — evidence. Atthis stage, my task is to examine the formal sufficiency of thepleadings, not to determine whether there is evidence sufficientto support a jury verdict in plaintiff's favor. In another casewhere I found that "an ambivalent market response" to thedefendant's statements would "pose a serious challenge" to theplaintiff's claims, and was "skeptical" that the plaintiff'sclaims could "survive detrimental reliance inquiry given themarket history," I nonetheless declined to dismiss on the basisof dubious market history: I am unwilling at this stage to draw conclusions regarding market reliance from ambiguous market history. In order to reject plaintiffs' market reliance allegations at this stage, I must engage in my own projections about likely market movement had there not been a failure of disclosure. There must be actual factfinding, including perhaps expert testimony about general market trends in the NASDAQ Small Cap Market, to draw appropriate conclusions about the market impact of non-disclosure. While on initial review, the market seems to have been largely indifferent to the actionable misrepresentations I have found adequately alleged here, I cannot say with the requisite decisiveness that this is so on a motion to dismiss record.Blatt v. Muse Techs., Inc., No. 01-11010 (DPW), 2002 WL31107537, at *14-15 (D. Mass. Aug. 27, 2002).

So too here. Razorfish's market history makes Swack's burdensteep; to survive summary judgment, she must offer a crediblecounterfactual case that, but for Wolfenberger's unduly bullishratings, price increases would have been smaller and decreaseswould have been greater. But this is not a basis for dismissal.Her complaint can be fairly read, even under the heightenedpleading standards of the PSLRA, to allege that the stock pricewas, at least on some of the dates and at least in part, affectedby Wolfenberger's misleading ratings, because investors use suchratings as a factor — surely not the only factor, and perhaps nota predominant one — in making decisions. No more must be pled.

I turn now to the related question of whether plaintiff mustspecifically plead that, upon corrective disclosure of the truth,the artificial inflation was removed — i.e., the stock pricedeflated to an appropriate value. Of course, here Razorfish'sstock price actually increased on the day that Wolfenbergerdowngraded it to "hold," so Swack cannot so plead. Defendantsargue that this deficiency is fatal.

The Eighth and Ninth Circuits hold that a plaintiff may, forpurposes of Rule 12(b)(6), plead loss causation by allegingsimply that he purchased the stock at an artificially inflatedprice. See Broudo, 339 F.3d at 938-39 (reversing dismissal ongrounds of failure to plead stock price drop after correctivedisclosure, and holding that "loss causation does not require pleading a stock price drop following a corrective disclosure orotherwise," and may be pled by simply alleging "1) that thestock's price at the time of purchase was overstated and 2)sufficient identification of the cause for this overvaluation");Gebhardt, 335 F.3d at 832 ("[P]laintiffs were harmed when theypaid more for the stock than it was worth. This is a sufficientallegation.").

In contrast, the Third, Seventh, and Eleventh Circuits seem torequire a stock price decline after disclosure. See Semerenkov. Cendant Corp., 223 F.3d 165, 185 (3d Cir. 2000) ("Where thevalue of the security does not actually decline as a result of analleged misrepresentation, it cannot be said that there is infact an economic loss attributable to that misrepresentation. Inthe absence of a correction in the market price, the cost of thealleged misrepresentation is still incorporated into the value ofthe security and may be recovered at any time simply by resellingthe security at the inflated price."); Robbins v. Kroger Props.,Inc., 116 F.3d 1441, 1448 (11th Cir. 1997) (reversing districtcourt's denial of Rule 50 motion before jury returned plaintiff'sverdict, and "explicitly requir[ing] proof of a causal connectionbetween the misrepresentation and the investment's subsequentdecline in value."); Bastian v. Petren Resources Corp.,892 F.2d 680, 684 (7th Cir. 1990) (Posner, J.) (requiring allegationof a post-purchase decline in price), cert. denied,496 U.S. 906 (1990). The Second Circuit, after some uncertainty, nowappears to lean towards the position of these circuits. SeeEmergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189,198 (2d Cir. 2003) ("Plaintiff's allegation of a purchase-timevalue disparity, standing alone, cannot satisfy the losscausation pleading requirement.").

The First Circuit has not yet resolved this issue. In Lucia v.Prospect St. High Income Portfolio, Inc., 36 F.3d 170, 174 n. 7(1st Cir. 1994), it "expressly decline[d] to address the districtcourt's `loss causation' analysis, and its use of Bastian. . ."18 In Shaw, the First Circuit explained that inthe typical fraud on the market case, misleading statements causeinjury "if at all, . . . [w]hen the truth is disclosed and themarket self-corrects, [and] investors who bought at the inflatedprice suffer losses." 82 F.3d at 1218.

I am not convinced that there is much conflict in the cases,because I do not read the majority view always to require a stockprice decline after the corrective disclosure. For example, theSemerenko court notes: "In the absence of a correction in themarket price, the cost of the alleged misrepresentation is stillincorporated into the value of the security . . ."223 F.3d at 185. It does not explicitly require that the correction come fromthe defendant, or that it come all at once, or that it come afteran official announcement. Similarly, Shaw holds that the lossoccurs "[w]hen the truth is disclosed and the market self-corrects, [and] investors who bought at the inflated pricesuffer losses." 82 F.3d at 1218. It does not require that thetruth be disclosed overtly, or by the defendant.

The point to be pled and proven is that the stock pricedeclined as the market learned the truth; the amount of declineattributable to the market's change from deceived to knowing isthe measure of the plaintiff's loss. But the cases cited areperfectly consistent with the possibility that the market learnedthe truth gradually, and in advance of the defendant's eventualdisclosure. See, e.g., Fogarazzo v. Lehman Bros., Inc., No.03 Civ. 5194, 2004 WL 1151542, at *11-13 (S.D.N.Y. May 21, 2004)(Schiendlin, J.) (finding that "[p]laintiffs here have alleged anumber of events that operated, essentially, as disclosures ormarket corrections" with the ultimate dropping of coverage by thedefendants being "the ultimate disclosure"). The reality is thatstock prices sometimes self-correct in advance of the final overtdisclosure. In some cases, of course, information that could onlybe known by the company (such as internal accounting problems)comes to light suddenly, precipitating a dramatic selloff. Inother cases — of which analysts' public ratings may be a goodexample — the misleading information is one factor in a soup ofother publicly available data.19 At one point, data thatseem inconsistent with the analyst's rating may be discounted bythe market on the theory that the analyst — who after all studies the company as his full-time job and is supposedly partof a "credible and insightful team" that is encouraged "tointerpret [industry] information in a fair and objective manner"— has good reason to believe that the company's prospects arebetter than the data indicate. As the gap between rating andreality widens, however, the analyst's ratings gradually losecredibility and the market values them less and less. By the timethe analyst bows to reality and adjusts his rating (and/ordiscloses the conflict that led to the misleadingly bullishrating), the market may not be paying much attention, havingalready recognized the truth.20

The purpose of painting this picture is to explain why I willnot apply a standard that would simply assume the market can onlycorrect after an overt curative disclosure, and to the extentthat the majority view cases require such an assumption — which Idoubt — I decline to adopt them. But neither will I apply a standard by which the plaintiff suffers a loss at theinstant she has purchased stock at an inflated price; asSemerenko notes, unless and until the truth emerges and themarket corrects, she could sell it to another unknowing investorwithout suffering a loss attributable to fraud. See223 F.3d at 185.

Therefore, I will not dismiss Swack's complaint on the basisthat she has failed to plead that the price of Razorfish stockdropped after Wolfenberger downgraded his rating to "hold." Theanalysis must be more nuanced than that. The plaintiff must,indeed, plead that the price declined as the truth emerged, butshe need not allege that it happened on a single day. Here Swacksatisfied her pleading burden.

To be sure, the implications of this more nuanced analysis arenot all favorable to Swack. Just as it is simplistic to assumethat the plaintiff cannot have suffered any loss if the stockprice didn't drop when the rating was downgraded, it is alsosimplistic to assume that the price was artificially inflatedsimply because it increased when a positive rating was issued.Similarly, if Razorfish's price had already declined beforeWolfenberger's downgrade to "hold" because his ratings hadgradually lost their credibility as the market came to know thetruth anyway, then Swack must labor hard to prove that the laterratings actually inflated the price at all. Furthermore, she mustprove not only at what price she would have bought the stockabsent Wolfenberger's reports, but also at what price she would have sold the stock absent those reports. These are difficultburdens, but they are all fact problems for another stage inthese proceedings.

D. Scienter

To state a § 10(b) claim, the complaint must "state withparticularity facts that give rise to a `strong inference' ofscienter rather than merely a reasonable inference." CabletronSys., 311 F.3d 11, 28 (1st Cir. 2002) (citing Greebel,194 F.3d at 194) (quoting 15 U.S.C. § 78u-4(b)(2)). Scienter means"`a mental state embracing intent to deceive, manipulate, ordefraud.'" Greebel, 194 F.3d at 194 (quoting Ernst & Ernst v.Hochfelder, 425 U.S. 185, 193 n. 12 (1976)). In this circuit,scienter includes "a narrowly defined concept of recklessnesswhich does not include ordinary negligence, but is closer tobeing a lesser form of intent." Greebel, 194 F.3d at 188. Wherethe plaintiff chooses to plead scienter by intent, she may notmerely allege that the defendant knew his statements werematerially false, but rather must "set[] forth specific factsthat make it reasonable to believe that defendant knew that astatement was false or misleading." Maldonado v. Dominguez,137 F.3d 1, 9 (1st Cir. 1998) (citation and quotation marks omitted).If she chooses to plead scienter by recklessness, she "still mustallege, with sufficient particularity, that defendants had fullknowledge of the dangers of their course of action and chose notto disclose those dangers to investors." Id. at 9 n. 4.

The combination of motive and opportunity can, but need not, support the "strong inference" of scienter: We have specifically rejected the contention that facts showing motive and opportunity can never be enough to permit the drawing of a strong inference of scienter. The plaintiff may combine various facts and circumstances indicating fraudulent intent — including those demonstrating motive and opportunity — to satisfy the scienter requirement. However, "catch-all allegations" which merely assert motive and opportunity, without something more, fail to satisfy the PSLRA.Cabletron Sys., 311 F.3d at 39 (internal citations andquotation marks omitted). "[E]vidence of conscious wrongdoing. . . may provide the `something more' necessary to provescienter." Id.

Here, Swack has pled a comprehensive scheme at the Tech Groupwhereby: analysts were rewarded for providing favorable coverageand punished for providing unfavorable coverage, and clients werepromised favorable coverage in exchange for investment bankingbusiness. See, e.g., Compl. ¶¶ 33-41, 43-46, 49-52, 54-62.Swack has adequately pled Wolfenberger's motive for fraudulentreports: his continued employment and his compensation. Hisopportunity is undisputed; Razorfish was not unambiguously anobjective "strong buy" throughout the Class Period, so for mostof that period he (like any other analyst) had an opportunity toboost the stock price (even if only slightly) with falselyfavorable coverage.

What remains is whether Swack has specifically pled the"something more" required for scienter on Wolfenberger's part. Ifind that she has. She has pled that Wolfenberger: (1) solicitedDachis's opinion on how to rate Razorfish, and offered to rate the company however Dachis wanted; (2) rated Razorfish a "strongbuy" even though Dachis himself told him that it was "gettinghard to justify the valuations"; (3) offered to coordinatepromotional efforts with Dachis to boost the price of Razorfishstock; (4) requested a meeting with Dachis to discuss a researchreport that Wolfenberger apparently had not yet written becauseWolfenberger wanted to "do a note . . . to try and move thestock"; (5) reported to Dachis that he was "[w]orking the stock"to try to boost the price; (6) was repeatedly thanked orcongratulated by Dachis for his research reports ("we appreciatethe continued support"; "Thanks for the continued support. Wewill remember your help.") and did not dissociate himself,indicating that he did not disagree with Dachis's understandingthat they were favors to Razorfish rather than objectiveassessments; (7) and privately acknowledged "a risk ofbankruptcy" with a "best case [of] dead money" and "consider[ed]reducing exposure" as early as six weeks before downgrading hispublic rating from "buy" to "hold." Compl. ¶¶ 76-78, 82, 86,88-92, 94, 96-99, 101-03.

For these reasons, I find that Swack has adequately pledscienter against Wolfenberger. She has not pled scienter againstRogers. The Complaint — which hardly mentions Rogers at all —only alleges that Rogers received certain emails on March 21,2001 and May 30, 2001. Compl. ¶¶ 45, 52. This is not sufficientto establish scienter or even negligence on Rogers's part.

E. Control Person Liability Defendant Rogers argues — as does, less credibly, Credit Suisse— that Swack has not adequately pled "control person" liabilityunder § 20(a).21

Control person liability requires that the defendant "must notonly have the general power to control the company, but must alsoactually exercise control over the company." Aldridge v. A.T.Cross Corp., 284 F.3d 72, 85 (1st Cir. 2002) (affirmingdismissal of claim against trust shareholders because they had"no direct control over the management and operations of thecompany" and the "most the evidence pled is that the trustdefendants are controlling shareholders"). Thus, a plaintiff mustmake "two distinct factual allegations: [1] that the `status' ofthe controlling entity gave it `general' power over thecontrolled entity; and [2] that the controlling entity did, infact, exercise such power." In re Lernout & Hauspie Secs.Litig., 230 F. Supp. 2d 152, 175 (D. Mass. 2002) (Saris, J.)(dismissing control person claims against British subsidiary ofmultinational because plaintiff had not alleged that it exercisedcontrol, either in theory or in practice, over Belgian subsidiarythat had misstated audit; mere fact that British entity"substantially participated in conducting audits published under" Belgian entity's name was insufficient).22

Of course, Swack has adequately pled that Rogers was in amanagerial position with the power to control Wolfenberger, andit is undisputed that Credit Suisse as a whole had such power.Swack's Complaint is also replete with allegations that, underQuattrone, various unnamed investment bankers, managers, and evenCredit Suisse's General Counsel exercised various forms ofcontrol over analysts in general, potentially includingWolfenberger. But nowhere does she allege that Rogers actuallyexercised control over Wolfenberger, at least to the extent ofcontrolling the contents of his research reports and/orcommunications with Dachis. While it might be reasonable to soassume, the PSLRA and Rule 9(b) require more: she must plead it.

Therefore, I find that Swack has adequately pled control personliability against Credit Suisse, but not against Rogers.


For the reasons set forth above, I find that Swack hasadequately pled Count I (primary liability under § 10(b) and Rule10b-5) against both Credit Suisse and Wolfenberger, and Count II ("control person" liability under § 20(a)) against Credit Suisse,but that she has failed to plead either against Rogers.

Therefore, it is ORDERED as follows: 1. Credit Suisse's motion to dismiss is DENIED. 2. Wolfenberger's motion to dismiss is DENIED. 3. Rogers's motion to dismiss is GRANTED.

1. Plaintiff Terry Swack, a resident of Massachusetts,purchased shares of the common stock of Razorfish, Inc. betweenMay 24, 1999 and May 4, 2001 (the "Class Period"). She seeks torepresent all other persons or entities that purchased Razorfishstock during the Class Period. Credit Suisse First Boston LLC ("Credit Suisse") is a leadingglobal financial services company headquartered in Switzerlandbut with offices in Boston, Massachusetts. It provides investmentresearch to clients and the general public and also underwritessecurities offerings. It managed the initial public offering("IPO") of Razorfish. Mark Wolfenberger was a research analyst in Credit Suisse'sGlobal Technology Group ("Tech Group") who provided researchreports on Razorfish during the Class Period. Elliott Rogers wasa research analyst, Head or Deputy Head of research in the TechGroup, and thus Wolfenberger's superior at Credit Suisse.

2. Razorfish is not a party to this action.

3. For purposes of the motion to dismiss, I "take theallegations in the complaint as true and must make all reasonableinferences in favor of the plaintiffs." Watterson v. Page,987 F.2d 1, 3 (1st Cir. 1993). Citations to the Complaint refer tothe Second Consolidated Amended Class Action Complaint in thiscase.

4. Quattrone is not a party to this action.

5. On October 21, 2002 the Massachusetts Securities Division'sEnforcement Section filed an Administrative Complaint (the"Massachusetts Complaint") against Credit Suisse alleging inpart: [Tech Group] [a]nalysts disseminated biased, subjective, and compromised research favorable to CSFB investment banking clients, which resulted in the Tech Group producing millions of dollars in investment banking fees for CSFB. CSFB purposely misled investors by disseminating into the marketplace fraudulent misstatements of fact concerning the companies covered by the analysts. Moreover, CSFB failed to disclose any of the analysts' conflicts of interest to investors.Compl. ¶ 23. The Massachusetts Complaint alleged that explicitly orimplicitly, analysts were instructed that their primary objectivewas not to provide objective, unbiased advice concerning thestocks they covered, but rather to increase investment bankingrevenue. Investment bankers could control hiring, firing,promotion, and bonuses paid to analysts, which were based largelyon the analyst's willingness and ability to provide researchreports that would boost the covered company's stock price.Technology research coverage, purportedly issued for the guidanceof investors, was instead used to attract and retain investmentbanking business. Id. ¶¶ 33-45. According to the Massachusetts Complaint, Tech Group investmentbankers imposed an unwritten rule on analysts that "if you can'tsay something positive [about a company], don't say anything atall." Id. ¶ 44. On May 30, 2001 one analyst (not alleged to beWolfenberger) wrote this rule in an email and forwarded it toDefendant Rogers. According to the Massachusetts Complaint, theanalyst was then summoned to meet with Credit Suisse's GeneralCounsel, who "told the analyst to delete all copies of the e-mailbecause he would hate to see [it] appear in the Journal." Id. ¶45. The Massachusetts Complaint concluded that Credit Suisse usedits research to fraudulently benefit its investment bankbusiness: . . . CSFB touted `independent research' and instead used its research to market its investment banking business. . . . This was hidden from the public, who relied on the research information. Thus, CSFB perpetrated fraud by the disseminated material misstatements of facts into the marketplace.Id. ¶ 46.

6. The SEC Complaint alleged that from 1998 through December2001, Credit Suisse used its research analysts to "solicit andconduct" investment banking business with potential investmentbanking clients. Compl. ¶ 24. It alleged that research analystswere compensated mainly on their contribution to Credit Suisseinvestment banking deals, and cited an email from Quattrone toanalysts requesting that they "submit a list of banking deals inwhich you participated in a lead or supporting role" in order forthe management team to determine analyst compensation. Id. ¶51. According to the SEC, analysts were involved in Credit Suisse'sinvestment banking business as early as the sales pitch to aprospective new client. In a "pitch book" presented to onecompany, Credit Suisse "highlighted that its research analystsmaintained a `strong buy' rating even though the companyannounced results below estimates." Id. ¶ 61. This pitch bookincluded a page titled "CSFB Stands by its Clients," in which itcontrasted its own record of providing "strong buy" ratings forIPO clients despite disappointing earnings announcements, withcompetitors' lower (apparently honest) ratings. Id. CreditSuisse "implied and at times implicitly promised [to potentialclients] that CSFB would provide positive research if awarded theinvestment banking business." Id.

7. It alleged much of the same misconduct: The Tech Group sought to induce issuers to become investment banking clients . . . by holding out the prospect of CSFB's issuing favorable research about them. . . . Quattrone created a powerful incentive for the analysts to initiate and maintain favorable coverage on investment banking clients by linking their annual bonuses — which sometimes amounted to $10 million or more and represented far and away the largest part of their compensation — to investment banking revenues generated by the Tech Group. . . . Quattrone encouraged investment bankers to participate in the research analysts' annual performance evaluations and supported the investment bankers' efforts to pressure analysts into initiating and maintaining coverage of investment banking clients. . . . All of these practices compromised the independence and objectivity of the Tech Group's analysts.Id. ¶ 109.

8. Rule 9(b) states in full: "In all averments of fraud ormistake, the circumstances constituting fraud or mistake shall bestated with particularity."

9. Before delving into these questions, however, I mustaddress a procedural issue that recurs throughout Defendants'motion to dismiss. Defendants have attached some 35 exhibits to their motion todismiss, and eight more to their reply memorandum. The ordinaryrule is that "any consideration of documents not attached to thecomplaint, or not expressly incorporated therein, is forbidden,unless the proceeding is properly converted into one for summaryjudgment under Rule 56." Watterson, 987 F.2d at 3. However, "acourt may properly consider the relevant entirety of a documentintegral to or explicitly relied upon in the complaint, eventhough not attached to the complaint, without converting themotion into one for summary judgment." Shaw, 82 F.3d at 1220.Courts may also make "narrow exceptions for documents theauthenticity of which are not disputed by the parties; forofficial public records; for documents central to plaintiffs'claim; or for documents sufficiently referred to in thecomplaint," Watterson, 987 F.2d at 3-4, or "`matters of publicrecord,'" In re Colonial Mortgage Bankers Corp., 324 F.3d 12,15-16 (1st Cir. 2003) (quoting Boateng v. InterAmerican Univ.,210 F.3d 56, 60 (1st Cir. 2000)). Most of the exhibits submitted fall into one or more of theseexceptions. Exhibits 2-4, however, do not. Exhibit 2 is acomplaint filed by Swack in another action; Exhibit 3 is anopposition memorandum filed by a defendant in that action (not aparty here); and Exhibit 4 is a complaint filed by plaintiff'scounsel in an unrelated action. While these documents are mattersof public record, the court may not consider "pleadings,submitted by the plaintiffs in a separate case, against differentdefendants, to which the plaintiffs have not referred in theiramended complaint in the instant case." Axler v. Sci. EcologyGroup, Inc., No. 98-10161, 1999 WL 1209512, at *3 (D. Mass. May21, 1999) (Wolf, J.). Therefore, I decline to take judicialnotice of Exhibits 2-4. With this procedural matter resolved, I now turn to the meritsof the motion to dismiss.

10. Defendants argue that the Sarbanes-Oxley Act did notrevive claims that were time-barred before its passage; Swackcontends that it did. The general rule is that "congressionalenactments . . . will not be construed to have retroactive effectunless their language requires this result." Landgraf v. USIFilm Products, 511 U.S. 244, 264 (1994) (internal quotationmarks deleted). Congressional intent to make an act retroactive"will not be inferred where the statute `lacks "clear, strong,and imperative" language requiring retroactive application.'"Brown v. Hot, Sexy & Safer Productions, Inc., 68 F.3d 525, 538(1st Cir. 1995) (quoting Landgraf, 511 U.S. at 269) (quotingUnited States v. Heth, 7 U.S. (3 Cranch) 399, 413 (1806)(opinion of Paterson, J.)). The Supreme Court has only foundretroactive effect in "`statutory language that was so clear thatit could sustain only one interpretation.'" INS v. St. Cyr,533 U.S. 289, 316-17 (2001) (internal quotation marks deleted). Almost all courts considering whether the Sarbanes-Oxley Act'sextended limitations period applies retroactively have decidedthat it does not. See generally In re ADCTelecommunications, Inc. Securities Litig., No. 03-1194, 2004 WL1898469 (D. Minn May 17, 2004) (reviewing the debate regardingSarbane-Oxley's effect on the limitations period in securitiescases and concluding that it does not revive time-barred causesof action); see also In re WorldCom, Inc. SecuritiesLitig., No. 02-CV-3288, 02-CV-9499, 2004 WL 1435356, at *7(S.D.N.Y. June 28, 2004) ("Sarbanes-Oxley does not revivepreviously time-barred private securities fraud claims."); In reEnron Corp. Sec., Derivative & ERISA Litig., No. MDL-1446,H-01-3624, 2004 WL 405886, at *17 (S.D. Tex. Feb. 25, 2004)(holding that § 804's provision that longer limitations periodwould apply to proceedings commenced on or after Act's effectivedate applies to actions that had accrued but were not time-barredon July 30, 2002, and not to actions that were alreadytime-barred when Sarbanes-Oxley Act passed); In re Enter.Mortgage Acceptance Co. Sec. Litig., 295 F. Supp. 2d 307, 316(S.D.N.Y. 2003) (same); Glaser v. Enzo Biochem, Inc.,303 F. Supp. 2d 724, 734 (E.D. Va. 2003) (same); In re Heritage BondLitig., 289 F. Supp. 2d 1132, 1148 (C.D. Cal. 2003) (same).But see Roberts v. Dean Witter Reynolds, Inc., No.02-2115-T-26, 2003 WL 1936116, at *3-4 (M.D. Fla. Mar. 31, 2003)(concluding, based on legislative history, that Congress intendedlonger limitations period to apply retroactively). If the question were simply whether the statute and legislativehistory supported a colorable argument that Congress intended torevive moribund actions, this would present a close case. Sincethe standard is far stricter, however, I cannot find thatCongress intended § 804 of the Sarbanes-Oxley Act to apply toactions that were time-barred on July 29, 2002. As the followingdiscussion makes clear, however, I need not decide this issue forpurposes of this case.

11. Defense exhibits 36-43 are attached to the SupplementalAffidavit of Lawrence J. Portnoy in Further Support ofDefendants' Motion to Dismiss the Complaint.

12. Similarly, I decline to accept Credit Suisse's invitationto rule as a matter of law that various research reports, takenas a whole, could not be misleading because of various cautionarynotes inserted therein alongside the positive rating, or becausethey can be read harmoniously with Wolfenberger's emails. Even ifI could draw such an inference at summary judgment — which Idoubt, on these facts — I cannot on a motion to dismiss.

13. In a similar (though somewhat more egregious) case, JudgeCote of the Southern District of New York found that analystreports were actionable for failure to disclose analogousconflicts: The SSB Defendants' analyst reports . . . were false and misleading not only because they misrepresented WorldCom's financial condition, but also because they failed to disclose key information regarding the nature and extent of an illicit quid pro quo arrangement that existed between the SSB Defendants and WorldCom. Had that self-serving arrangement been adequately disclosed, it would have been apparent that [the analyst's] positive reports about WorldCom and recommendations to buy WorldCom were not reliable advice from an independent analyst and trustworthy brokerage house.In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392, 404(S.D.N.Y. 2003).

14. Indeed, it is rarely appropriate even for summaryjudgment. In re Biogen Sec. Litig., 179 F.R.D. 25, 37 (D. Mass.1997).

15. The complaint does refer to Rogers receiving certain ofthe relevant emails discussing CSFB's coverage of Razorfish.See, e.g., Compl. §§ 52-53. These references alone are notsufficient to survive the heightened pleading requirements towhich PSLRA cases are subjected.

16. "It shall be unlawful for any person . . . (a) To employany device, scheme, or artifice to defraud, . . . [or] (c) Toengage in any act, practice, or course of business which operatesas a fraud or deceit upon any person, in connection with thepurchase or sale of any security." 17 CFR § 240.10b-5.

17. The parties occupy themselves at some length debatingwhether the PSLRA's pleading standard or the ordinary Rule 9(b)standard applies to Rule 10b-5(a) & (c) actions. Since the"PSLRA's pleading standard is congruent and consistent with thepre-existing standards of this circuit," which was "notablystrict and rigorous in applying the Rule 9(b) standard insecurities fraud actions" even before the PSLRA, Greebel v. FTPSoftware, Inc., 194 F.3d 185, 193 (1st Cir. 1999), this debateis largely unnecessary.

18. In the decision below, Judge Mazzone had adopted Bastianfor the proposition that fraud on the market, standing alone,does not establish loss causation. See Miller v. New Am. HighIncome Fund, 755 F. Supp. 1099, 1108 (D. Mass. 1991).

19. Such data could include insider selling and failure tomeet earnings goals.

20. Two judges of the Northern District of Illinois have forthis reason refused to dismiss complaints on loss causationgrounds. See Danis v. USN Communications, Inc.,73 F. Supp. 2d 923, 943 (N.D. Ill. 1999) (Conlon, J.) ("As plaintiffs note,simply because the price of USN stock had dropped below $1.00 pershare by the time of the November 1998 disclosures does not meanthat defendants' misstatements did not cause the loss. . . .According to plaintiffs, the market responded to and `corrected'the price of USN stock over the better part of a year as bits andpieces of negative information became available and it becameapparent that USN was not capable of performing as originallyrepresented."); Retsky Family Ltd. Partnership v. PriceWaterhouse LLP, No. 97-7694, 1998 WL 774678 (N.D. Ill. Oct. 21,1998) (Coar, J.) (market corrected in advance of 1997 disclosurethat 1994-95 revenues had been overstated, because 1996 revenueswere accurately stated and therefore much lower than stated1994-95 revenues; Bastian was satisfied even though stock pricedid not further drop after 1997 disclosure).

21. "Every person who, directly or indirectly, controls anyperson liable under any provision of this title or of any rule orregulation thereunder shall also be liable jointly and severallywith and to the same extent as such controlled person to anyperson to whom such controlled person is liable, unless thecontrolling person acted in good faith and did not directly orindirectly induce the act or acts constituting the violation orcause of action." 15 U.S.C. § 78t(a).

22. Swack argues that merely having the power to controlsuffices for control person liability, and cites Bray v. R.W.Tech., Inc., No. 88-0470, 1990 WL 44084, at *3 (D. Mass. Apr. 3,1990) (Zobel, J.) (entering judgment after bench trial). ButSwack misreads Bray. After establishing as a legal propositionthat "plaintiff must show that the defendant actuallyparticipated in, or exercised control over, the operations of thecorporation in general and had the power to control the specifictransaction in question," Judge Zobel found that a defendant"actually participated in and had the power to control, asPresident, the operations of the company." Id. at *1, *3(emphasis added).

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