In Re Intelligroup Securities Litigation

OPINION

BROWN, Chief Judge.

This matter is before the Court on Defendants’ motions (collectively “Motions”) to dismiss the Plaintiffs’ Third Amended Consolidated Class Action Complaint (“Complaint”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 (“Reform Act” or “PSLRA”), 15 U.S.C. §§ 78u-4, et seq. For the reasons discussed below, Defendants’ Motions are GRANTED, and Plaintiffs’ Complaint is DISMISSED WITH PREJUDICE.

TABLE OF CONTENTS

I. PROCEDURAL BACKGROUND...........................................271

II. FACTUAL BACKGROUND................................................272

III. JUDICIAL NOTICE.......................................................272

IV. PLEADING REQUIREMENTS OF A 10b-5 CLAIM.........................274

A. Elements of a 10b-5 Claim ............................................274

1. Elements Subject to Heightened Pleading Requirements.............275

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2. Elements Subject to Rule 8 Pleading Requirements..................277

B. Pleading a Class 10b-5 Claim..........................................279

C. Pleading a Derivative Claim Against Controlling Persons................280

V. PLEADING SPECIFIC ELEMENTS OF A 10b-5 CLAIM....................281

A. Pleading the “False and Misleading Statement” Element................281

1. Pleading an Affirmative Misrepresentation..........................281

2. Pleading Misrepresentation Based on Failure to Disclose............281

B. Pleading the “Scienter” Element ......................................282

1. Pleading Intentional or Recklessness State of Mind..................282

2. Pleading Scienter by Inference.....................................283

a. Inferring Scienter from Defendant’s “Motive and Opportunity” ...............................................283

b. Inferring Scienter from Circumstantial Evidence................285

i. Inferring Scienter from GAAP Violations...................285

ii. Inferring Scienter from SOX Certifications.................287

3. Pleading Scienter by Relying on Confidential Information ...........290

C. Pleading the “Materiality” Element....................................291

D. Pleading the “Reliance” Element......................................291

1. Two Methods to Plead Reliance....................................292

2. Pleading Reliance on Inferred Technical Facts......................293

E. Pleading the “Causation” Element.....................................295

VI. DISCUSSION.............................................................298

A. Transactional Causation..............................................298

1. Deficiencies Contained in Plaintiffs’ Second Complaint..............298

2. “Fraud-on-the-market” Allegations Based on Intelligroup’s Financials......................................................301

3. 2001 Period.......................................................302

4. 2004 Period.......................................................304

5. Periods Reflected in the Table .....................................305

a. Plaintiffs’ Allegations.........................................305

b. Legal Precedents Examining Financial Matters.................306

i. IPO Cases................................................306

ii. Basic v. Levinson.........................................309

iii. Other District Court Cases................................310

c. Financial Theories and Calculations............................311

6. Alternative Allegations of Reliance.................................316

B. Loss Causation.......................................................318

1. Relevant Facts....................................................319

a. Intelligroup’s Publications.....................................319

b. Chart of Intelligroup’s Stock Price .............................320

2. Deficiencies Contained in Plaintiffs’ Second Complaint..............321

3. Plaintiffs’ Instant Allegations......................................322

a. Interrelat ion-Among-the-Press-Release-Announcements

Claim......................................................322

b. Lack-of-Interrelation-Among-the-Announcements Claim........327

i. Marsden v. Select Med. Corp...............................327

ii. Other District Court Cases................................329

c. Miscellaneous Claims..........................................333

i. Contentions About Implied Disclosure......................334

ii. Contentions About the Post-Release Recovery..............337

C. Scienter..............................................................340

1. Motive and Opportunity...........................................340

2. Circumstantial Evidence...........................................342

a. Resignations as Evidence of Scienter ...........................343

i. Resignations of Defendants Valluri and Visco..............344

ii. Resignation of Intelligroup’s Auditor.......................348

b. Violations of GAAP as Evidence of Scienter.....................349

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c. SOX Certifications as Evidence of Scienter......................352

i. Impact of the Statements Made in the Restatement .........353

ii. The Fact of SOX Certifications............................355

iii. The Language of SOX Certifications.......................357

d. Undisclosed Witnesses.........................................358

i. UW-1....................................................359

ii. UW-2....................................................360

iii. UW-3....................................................361

iv. UW-4....................................................362

v. UW-5....................................................366

vi. UW-6....................................................367

e. Internet Posting by an Anonymous Witness .....................368

3. Totality of Evidence Analysis ......................................370

4. SeraNova Allegations..............................................373

a. Allegations Based on Intelligroup’s 10-K........................375

b. Allegations Based on the Fact of Non-collectability..............377

D. Derivative Liability of Visco and Valluri................................377

E. Leave to Amend......................................................378

1. General Rule.....................................................378

2. Entry of Binding Precedent Clarifying Applicable Pleading

Standard.......................................................379

3. Repeated Failure to Cure Deficiencies and Futility of

Amendment....................................................382

VII. CONCLUSION ...........................................................384

I. PROCEDURAL BACKGROUND

Plaintiffs, investors who purchased the common stock of Defendant Intelligroup (“Intelligroup” or “Company,” or “Issuer”) during forty months between May 1, 2001, through and including September 24, 2004 (“Class Period”), brought this securities fraud class action alleging that Defendants defrauded them by artificially inflating the value of the stock through false and misleading statements disseminated into the investing community.

See

Compl. (Docket Entry No. 53) at 1.

The litigation was initiated on October 12, 2004,

see

Docket Entry No. 1, when the first of six class action complaints was filed with the Court. On August 10, 2005, all six actions were consolidated into the instant action.

See

Docket Entry No. 24. On October 10, 2005, Plaintiffs filed their joint Amended Complaint (“Original Complaint”) against the Issuer and four former officers of the Issuer, two of whom were Defendants Valluripalli (“Valluri”) and Vis-co (“Visco”).

See

Docket Entry No. 31. On December 5, 2005, certain Defendants filed their motion to dismiss Plaintiffs’ Original Complaint.

See

Docket Entry No. 3. On February 10, 2006, Plaintiffs’ Second (Amended) Complaint (“Second Complaint”) was filed against the Issuer and Defendants Valluri and Visco, with all claims against the other two officers being dismissed.

See

Docket Entry No. 39. On March 27, 2006, Defendants filed their motions to dismiss the Second Complaint,

see

Docket Entries Nos. 40 and 42, and Plaintiffs filed their brief in Opposition to the Motions on May 11, 2006.

See

Docket Entry No. 43. On November 2, 2006, this matter was transferred to the undersigned.

See

Docket Entry No. 50.

On December 20, 2006, this Court issued an Order and accompanying Opinion (“December Opinion”) dismissing the Second Complaint without prejudice.

See

Docket Entries Nos. 51 and 52. On January 25, 2007, Plaintiffs filed the instant Third Amended Complaint.

See

Docket Entry No. 53. On March 5, 2007, Defendants filed their Motions to dismiss the Com

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plaint.

See

Docket Entries Nos. 64 and 65. On April 13, 2007, Plaintiffs filed their Opposition to Defendants’ Motions (“Opposition”).

See

Docket Entry No. 68. On May 3, 2007, Defendants filed their replies to Plaintiffs’ Opposition (“Replies”),

see

Docket Entries Nos. 69 and 70, and supplemented the Replies by a letter filed on May 23, 2007 (“Letter”).

See

Docket Entry No. 71.

Except for the instant Motions, no other applications are currently pending in this action.

II. FACTUAL BACKGROUND

Intelligroup is a publicly traded company incorporated in the State of New Jersey with its principal office at 499 Thornall Street, Edison, New Jersey.

See

Compl. ¶ 28. “Intelligroup assists a variety of companies with setting up and maintaining various kinds of software for e-commerce.”

Id.

Much of Intelligroup’s work is sent offshore to the Company’s subsidiary in India.

See id.

Intelligroup’s stock was traded on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”).

See

Opposition at 13.

Defendant Valluri served as the Company’s CEO, President and Chairman of the Board during the Class Period, and Defendant Visco served as the Company’s CFO from November of 2000 to November of 2003.

See

Compl. ¶ 5.

On September 24, 2004, Intelligroup issued a press release (“Press Release”) announcing, inter alia, that Intelligroup was expecting to restate its financial statements issued and filed with the United States Securities and Exchange Commission (“SEC”) during 2001, 2002, 2003 and the first quarter of 2004 (“Statements”).

See id.

¶ 5. In the same Press Release, the Company made two other announcements, one about Intelligroup’s anticipated private placement and another about Intelligroup’s default on — and potential loss of — revolving credit.

See

Opposition at 30-31. On September 27, 2004, the first day after the Press Release, the stock began falling and fell $0.52 per share.

1

See

Compl. ¶ 4. The restatement of the Company’s financials (“Restatement”) was made on October 24, 2005, more than one year after the issuance of the Press Release.

See id.

¶ 13.

Plaintiffs now assert that Defendants’ issuance of the Statements containing a host of accounting errors inflated the market value of Intelligroup securities and amounted to a violation of (a) Section 10(b) of the Securities Exchange Act of 1934 (“'34 Act”), 15 U.S.C. §§ 78a-78kk (1994 & Supp. IV 1998), and (b) Rule 10b-5 ensuing from the '34 Act.

See id.

¶ 14. In addition, Plaintiffs maintain Defendants Valluri and Visco are liable for Plaintiffs’ injuries as controlling persons, since these Defendants knew about or recklessly disregarded the falsity of accounting data contained in Intelligroup’s Statements.

Id.

¶ 129.

III. JUDICIAL NOTICE

Defendants’ Motions are accompanied by Defendants’ request for judicial notice of the following documents: (a) the Press Release; (b) Intelligroup’s Form 8-K dated January 28, 2005, filed which was with the SEC and announced that the SEC had commenced a formal investigation into the matters related to the Restatement (“SEC Investigation Notice”); (c) a letter from SEC Assistant Director to Intelli-

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group’s counsel, dated January 31, 2006, notifying the counsel that the investigation by the SEC was terminated and no enforcement action was recommended by the SEC (“SEC No-action Letter”); (d) Plaintiffs’ Original and Second Complaints; (e) transcript of Intelligroup’s “Second Quarter 2004 Update” Conference Call of October 5, 2004 (“10/05/04 Transcript”); and (f) a financial stock chart published by Yahoo! Finance and showing the adjusted closing price of Intelligroup’s stock during the Class Period (“Stock Chart”).

See

Docket Entries Nos. 65-3 and 65-5 to 65-6-12. Although Plaintiffs’ Opposition to Defendants’ Motions is effectuated through a memorandum of law titled “Lead Plaintiffs’ Memorandum of Law in Opposition to Motions to Dismiss Third Amended Complaint and in Partial Opposition to Request for Judicial Notice,”

see

Docket Entry No. 68, neither the Table of Contents nor the body of the Opposition clearly identify or even suggest the nature of Plaintiffs’ partial opposition to Defendants’ request for judicial notice.

See generally, id.

Rule 201(b), Federal Rules of Evidence permits a district court to take judicial notice of facts that are “not subject to reasonable dispute in that [they are] either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Rule 201(b). Under Rule 201(d), Federal Rules of Evidence, a district court must take judicial notice “if requested by a party and supplied with the necessary information.” Rule 201(d).

In re NAHC, Inc. Sec. Litig.,

306 F.3d 1314 , 1331 (3d Cir.2002) (finding that judicial notice was properly taken with respect to “three different categories of documents [which] included: (1) documents relied upon in the Complaint ([including] Company's] press releases); (2) documents filed with the SEC; and (3) stock price data compiled by [a reliable financial] news service”). Since Plaintiffs’ Complaint relies on the statements made in the Press Release, the 10/05/04 Transcript and Intelli-group’s Restatement and 10-K 2004 Form, plus the SEC Investigation Notice was duly filed by Intelligroup with the SEC, and, in as much as the a stock price chart compiled by Yahoo! Finance appears to provide this Court with stock price data compiled by a rehable financial news service, this Court takes judicial notice of items (a), (b), (e) and (f) listed

supra,

as well as of Intelligroup’s Restatement and 10-K 2004 Form. In addition, the Court takes limited judicial notice of the statements made by Plaintiffs in their Original and Second Complaint, that is, item (d) listed

supra,

solely for the purpose of examining whether Plaintiffs’ factual assertions in the instant Complaint contradict those made in Plaintiffs’ earlier pleadings.

See Jackson v. Broad. Music, Inc.,

2006 WL 250524 , at *7, 2006 U.S. Dist. LEXIS 3960 , at *18 (S.D.N.Y. Jan. 31, 2006) (“the court may take judicial notice of public records and of ‘admissions in pleadings and other documents in the public record filed by a party in other judicial proceedings that contradict the party’s factual assertions in a subsequent action’ without converting the motion into one for summary judgment”) (quoting

Harris v. New York State Dep’t of Health,

202 F.Supp.2d 143, 173 (S.D.N.Y.2002), and citing

Munno v. Town of Orangetown,

391 F.Supp.2d 263, 268 (S.D.N.Y.2005)), compare

Young v. Dreiblatt,

234 F.3d 1279 , 2000 WL 1170142 , at *1 (9th Cir.2000) (amended complaint supersedes previous complaint in the sense that it constitutes waiver of claims in previous complaint). Finally, since this Court may take judicial notice of a fact “capable of accurate and ready de

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termination by resort to sources whose accuracy cannot reasonably be questioned,” Rule 201(b), the Court “ ‘may take judicial notice of records and reports of administrative bodies,’ such as notices and opinion letters.”

Wible v. Aetna Life Ins. Co.,

375 F.Supp.2d 956, 965 (C.D.Cal.2005) (taking judicial notice of a notice and opinion letter issued by the Department of Justice and citing,

inter alia, Interstate Natural Gas Co. v. Southern California Gas Co.,

209 F.2d 380, 385 (9th Cir.1953));

see also Toth v. Automobile Club of California Long Term Disability Plan,

2005 WL 1877150 , 2005 U.S. Dist. LEXIS 40746 (C.D.Cal.2005) (same). Therefore, this Court takes judicial notice of the SEC No-action Letter for the limited purpose of acknowledging that the SEC investigation of the matters related to Intelligroup’s Restatement was terminated without any enforcement action by the Commission or by a government agency having the power to instigate a prosecutorial action against In-telligroup upon the SEC’s referral.

2

IV. PLEADING REQUIREMENTS OF A 10b-5 CLAIM

A. Elements op a 10b-5 Claim

Congress passed the '34 Act, 15 U.S.C. §§ 78a-78kk, to assure the disclosure of full and fair information to the investing public.

See

H.R.Rep. No. 73-1383, at 1-2 (1934) (describing the legislation’s purposes). In relevant part, Section 10(b) of the '34 Act proscribed the “use or employ[ment], in connection with the purchase or sale of any security, ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). The ensuing Rule 10b-5, 17 C.F.R. § 240 .10b-5, emerged in 1943.

See Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 737 , 95 S.Ct. 1917 , 44 L.Ed.2d 539 (1975). Like Section 10(b), Rule 10b-5 prohibits “any act ... which operates or would operate as a fraud or deceit upon any person” and makes it illegal “[t]o 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 ... in connection with the purchase or sale of any security.” 17 C.F.R. § 240 .10b-5(b). Under this Rule, “the basic elements [of a private federal securities fraud action] include: (1) a material misrepresentation ...; (2) scienter, i.e., [defendant’s] wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to ... as ‘transactional causation’; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.”

Dura Pharm., Inc. v. Broudo (“Dura”),

544 U.S. 336, 341 , 125 S.Ct. 1627 , 161 L.Ed.2d 577 (2005) (citing 15 U.S.C. § 78u-4(b)(4);

Basic Inc. v. Levin-son,

485 U.S. 224, 231-232, 248-249 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988);

Ernst & Ernst v. Hochfelder,

425 U.S. 185, 197, 199 , 96 S.Ct. 1375 , 47 L.Ed.2d 668 (1976);

Blue

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Chip,

421 U.S. at 730-731 , 95 S.Ct. 1917 ;

Thomas Lee Hazen, Law of Securities Regulation,

¶¶ 12.11[1], [3] (5th ed.2002)). Plaintiffs pleading requirements, however, are different with respect to different elements of a 10b-5 claim.

1. Elements Subject to Heightened Pleading Requirements

The general standard of review triggered by a defendant’s motion to dismiss under Rule 12(b)(6) is well-settled, i.e., the court must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party.

See Scheuer v. Rhodes,

416 U.S. 232, 236 , 94 S.Ct. 1683 , 40 L.Ed.2d 90 (1974), overruled on other grounds,

Harlow v. Fitzgerald,

457 U.S. 800 , 102 S.Ct. 2727 , 73 L.Ed.2d 396 (1982);

Allegheny Gen. Hosp. v. Philip Morris, Inc.,

228 F.3d 429, 434-35 (3d Cir.2000). The Rule 12(b)(6) standard of review is, however, altered by Rule 9(b), which imposes a heightened pleading requirement of factual particularity with respect to allegations of fraud. Rule 9(b) states: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed.R.Civ.P. 9(b). “This particularity requirement has been rigorously applied in securities fraud cases.”

Burlington Coat Fact. Sec. Litig.,

114 F.3d 1410, 1417 (3d Cir.1997) (citations omitted). Therefore, a plaintiff averring securities fraud claims must specify “ ‘the who, what, when, where, and how: the first paragraph of any newspaper story.’ ”

Advanta Corp. Sec. Litig.,

180 F.3d 525, 534 (3d Cir.1999) (quoting

DiLeo v. Ernst & Young,

901 F.2d 624, 627 (7th Cir.1990)). The Court of Appeals for the Third Circuit clarified:

[although Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.”

Rockefeller Ctr. Props. Sec. Litig.,

311 F.3d 198, 216 (3d Cir.2002) (quoting

Nice Sys., Ltd. Sec. Litig.,

135 F.Supp.2d 551, 577 (D.N.J.2001)). Moreover, a “stringent” reading of the requirements set forth in Rule 9(b) is expressly applicable to two elements of a securities fraud claim, i.e., scienter and material misrepresentation, because of the analogous heightened pleading requirements contained in the Reform Act.

3

See

15 U.S.C. § 78u-4(b)(1) and (b)(2).

Therefore, when stating “falsity,” i.e., “material misrepresentation” element of his/her 10b-5 claim, a securities fraud plaintiff must “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)(Z), (2). Similarly, with respect to the scienter element of the plaintiffs 10b-5 claim, the

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Reform Act requires that “the complaint shall ... state with particularity [all] facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2);

Winer Family Trust v. Queen,

503 F.3d 319, 326 (3d Cir.2007) (noting that “[t]he Supreme Court has mandated a uniform construction of the strong inference standard in light of the objectives of the PSLRA” and citing

Key Equity Investors, Inc. v. Sel-Leb Marketing, Inc.,

246 Fed.Appx. 780 (3d Cir.2007), and

Globis Capital Partners, L.P. v. Stonepath Group, Inc.,

241 Fed.Appx. 832 (3d Cir.2007), in support of the conclusion that “[the] scienter pleading requirement is a significant bar to litigation”);

see also Higginbotham v. Baxter Int’l, Inc.,

495 F.3d 753, at 756-57 (7th Cir.2007). In sum, Rule 9(b) and the Reform Act modified the traditional Rule 12(b)(6) analysis for the purposes of pleading “misrepresentation” and “scienter” elements.

see id.; see also Digital Island Sec. Litig.,

357 F.3d 322 , 328 (3d Cir.2004) (“The Reform Act requires a ‘strong inference’ of scienter, and accordingly, alters the normal operation of inferences under Rule 12(b)(6)”);

Rockefeller,

311 F.3d at 224 (noting that “whereas under Rule 12(b)(6), [the court] must assume all factual allegations in the complaint are true, ... under the Reform Act, [the court would] disregard ‘catch-all’ or ‘blanket’ assertions that do not live up to the particularity requirements of the statute,” quoting

Florida State Bd. of Admin. v. Green Tree Fin. Corp.,

270 F.3d 645 , 660 (8th Cir.2001));

Advanta,

180 F.3d at 531 (unambiguously explaining that a securities plaintiffs failure to meet the heightened pleading requirements would result in dismissal of the complaint);

accord Greebel v. FTP Software, Inc.,

194 F.3d 185, 196 (1st Cir.1999) (“A mere reasonable inference is insufficient to survive a motion to dismiss”).

In its recent decision in

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

—— U.S. -, 127 S.Ct. 2499 , 168 L.Ed.2d 179 (2007), the Supreme Court elaborated on the issue of what factual allegations satisfy plaintiffs obligation to plead “strong inference” of fraud. The majority opinion stated that, to qualify as a “strong” inference, the facts alleged “must be cogent and compelling, thus strong in light of other explanations. A complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”

Id.

at 2510 . Moreover, the Supreme Court expressly guided that the district court shall dismiss as insufficient those factual allegations “from which an inference of scienter [only]

could

be drawn.”

Id.

(emphasis in original). Rather, the court should consider

all

facts alleged and “must take into account [all] plausible opposing inferences.”

Id.

at 2509-10 . Although a sufficient fraudulent inference need not be “irrefutable,” nor need it be the “most plausible of competing inferences,” it must be

at least as strong as any other inferences

that could be drawn in favor of defendants.

Id.

at 2510 (defining “strong” as “[p]ersuasive, effective, and cogent [and p]owerful to demonstrate or convince,” and defining “inference” as “a conclusion [drawn] from known or assumed facts or statements” or “reasoning from something known or assumed to something else which follows from it”) (citations omitted). The Court of Appeals for the Third Circuit emphasized this requirement.

See Winer Family Trust,

at 328-29 n. 3 (collecting relevant decisions by various courts of appeals and citing

Higginbotham,

495 F.3d at 755 , for the proposition that a plaintiffs factual pleading of scienter must yield an inference at least as compelling as any compet

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ing inference,

Cent. Laborers’ Pension Fund v. Integrated Elec. Servs.,

497 F.Bd 546, 550 (5th Cir.2007), in order to stress that the courts must consider both culpable and non-eulpable explanations,

ATSI Communications, Inc. v. Shaar Fund, Ltd.,

493 F.3d 87, 104 (2d Cir.2007), to observe that, where a plausible non-culpable explanation is more likely than any guilty inference, the court must find that plaintiffs failed to establish scienter, and

Belizan v. Hershon,

495 F.3d 686, 690 (D.C.Cir.2007), to state that a district court’s failure to conduct a comparison of alleged culpable and plausible non-culpable explanation warrants remand of the case).

2. Elements Subject to Rule 8 Pleading Requirements

It appears that the heightened pleading requirements of PSLRA are inapplicable to the remaining elements of a 10b-5 claim.

See Dura,

544 U.S. at 346 , 125 S.Ct. 1627 (“[The Court] assume[s], at least for argument’s sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss”). In view of the fact that only the first two Subsections of 15 U.S.C. § 78u-4(b) require investors to specify falsity and plead facts supporting a strong inference of scienter, while the remaining Subsections appear to apply only after the heightened pleading standards of 15 U.S.C. § 78u-4(b)(1) and (2) have been met, this Court presumes that the remaining elements of any 10b-5 claim are subject to ordinary notice-pleading standards set forth in Rule 8.

See

15 U.S.C. 78u-4(b)(3);

accord Dura,

544 U.S. at 346 , 125 S.Ct. 1627 (“[T]he Federal Rules of Civil Procedure require only ‘a short and plain statement of the claim showing that the pleader is entitled to relief”) (quoting Fed.R.Civ.P. 8(a)(2)).

But, even so, the “short and plain statement” must provide the defendant with “fair notice of what the plaintiffs claim is and the grounds upon which it rests.”

Conley v. Gibson,

355 U.S. 41, 47 , 78 S.Ct. 99 , 2 L.Ed.2d 80 (1957). [The Court recognizes] that ordinary pleading rules are not meant to impose a great burden upon a plaintiff. [See]

Swierkiewicz v. Sorema N. A,

534 U.S. 506, 513-15 , 122 S.Ct. 992 , 152 L.Edüd 1 (2002). But it should not prove burdensome for a plaintiff ... to provide a defendant with some indication of the [facts] that the plaintiff has in mind.... [Allowing a plaintiff to forgo giving any indication of the [facts] that the plaintiff has in mind would bring about harm of the very sort the [Reform Act] seek[s] to avoid.

Cf.

H.R. Conf. Rep. No. 104-369, p. 31 (1995) (criticizing “abusive” practices including “the routine filing of lawsuits ... with only a faint hope that the discovery process might lead eventually to some plausible cause of action”). It would permit a plaintiff “with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence.”

Blue Chip,

421 U.S. at 741 , 95 S.Ct. 1917 . Such a rule would tend to transform a private securities action into a partial downside insurance policy.

See

H.R. Conf. Rep. No. 104-369, at 31;

see also Basic,

485 U.S. at 252 , 108 S.Ct. 978 ....

Dura,

544 U.S. at 347 , 125 S.Ct. 1627 ;

accord Burlington,

114 F.3d at 1429 (courts are not required to credit bald assertions or legal conclusions improperly alleged in the complaint);

Nice,

135 F.Supp.2d at 565 (legal conclusions draped in the guise of factual allegations may not

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benefit from the presumption of truthfulness).

Recently, the Supreme Court further elaborated on the requirements associated with the relaxed notice-pleading standard of Rule 8.

See Bell Atlantic Corp. v. Twombly,

— U.S. -, 127 S.Ct. 1955 , 167 L.Ed.2d 929 (2007). In this seven-to-two opinion, the Court explained that Rule 8 pleadings must provide “enough factual matter” to suggest that the alleged event took place,

see id.

at 1965 . While the Supreme Court left it to the district courts to determine, on a case-by-case basis, how much factual matter is “enough,” the Court unambiguously indicated that represented litigants alleging wrongs other that violations of their civil rights cannot satisfy Rule 8 pleading requirements by invoking the overly lenient regime of “pure notice” originated in

Conley,

355 U.S. 41 , 78 S.Ct. 99 , 2 L.Ed.2d 80 , a case decided half a century ago.

4

In fact, the Court explicitly disavowed the oft-quoted statement in Conley of “ ‘the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief ” stating that the “no set of facts” language “has earned retirement” and “is best forgotten.”

Bell Atlantic,

127 S.Ct. at 1968 -69 (quoting

Conley,

355 U.S. at 45-46 , 78 S.Ct. 99 ).

Moreover, the Court, using a variety of phrases, indicated that more than notice of a claim is needed to allege a commercial violation. For example, the Court required “enough facts to raise a reasonable expectation that discovery will reveal evidence of [the alleged claim],” “facts that are suggestive enough to render [plaintiffs allegations] plausible,” “allegations plausibly suggesting (not merely consistent with) [plaintiffs allegations],” a “plain statement” with “enough heft” to show entitlement to relief, and “enough facts to state a claim to relief that is plausible on its face.”

Id.

at 1969-74. Finally, the Court refused to entertain a plaintiffs far-fetched flights of fancy by unambiguously stating that the line “between the factually neutral and the factually suggestive ... must be crossed [by allegations made in plaintiffs pleadings] to enter the realm of plausible liability,”

id.

at 1966 n. 5, and stated that no “reassurances of plaintiffs’ counsel” that discovery would soon flesh out plaintiffs claim, which is currently pled so that it is “just shy of a plausible entitlement,” can prevent Rule 12(b)(6) dismissal.

Id.

at 1967 n. 6 (referring to

id.

at 1975 (Stevens, J., dissenting)). In sum, while a securities plaintiff setting forth allegations of those 10b-5 elements that are subject to Rule 8 pleading requirements need not state with particularity all facts giving rise to a strong inference that the elements are present, plaintiffs complaint will survive dismissal only if it contains “enough [factual] heft” rather than plaintiffs conjecture and self-serving interpretations of actual events.

5

See Bell Atlantic,

127 S.Ct. at

*279

1965-69;

Dura,

544 U.S. at 347 , 125 S.Ct. 1627 .

B. Pleading a Class 10b-5 Claim

In order for Plaintiffs’ action to remain viable as a class action, Plaintiffs must continuously comply with the four prerequisites of Rule 23(a), that is, numer-osity, commonality, typicality and adequacy, and must also satisfy the requirements of Rule 23(b)(3).

6

See Baby Neal v. Casey,

43 F.3d 48 (3d Cir.1994). Commonality does not require an identity of claims or facts among class members.

See Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.Sd

154, 183 (3d Cir.2001) (citing

Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions,

148 F.3d 283, 310 (3d Cir.1998), and

Baby Neal,

43 F.3d at 56 ). “Commonality under Rule 23(a)(2) is met where, notwithstanding some factual differences, the class action claims are based on a ‘common course of conduct’ of misrepresentations, omissions, or other wrongdoing affecting all class members in the same manner.”

Yadlosky v. Grant Thornton L.L.P.,

197 F.R.D. 292, 298 (E.D.Mich. 2000) (citing

Computer Memories Sec. Litig., 1

11 F.R.D. 675 , 684 (N.D.Cal.1986)). Within the setting of a securities action, a plaintiff alleging a certain source of stock price inflation has to allege that the source of inflation was common to every purchaser.

See Blackie v. Barrack, 524 F.2d

891 (9th Cir.1975),

cert. denied,

429 U.S. 816 , 97 S.Ct. 57 , 50 L.Ed.2d 75 (1976). By

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contrast, the pleading of such plaintiff are insufficient if the pleading indicate that either the plaintiff or other members of the class purchased fairly priced or price-deflated stock, or bought stock inflated by another source.

Cf. Shamrock Assocs. v. Moraga Corp.,

557 F.Supp. 198, 206 (D.Del.1983). Similarly, with respect to typicality, “factual differences will not render a claim atypical if the claim arises from the same event or practice or course of conduct that gives rise to the claims of the class members.”

Newton,

259 F.3d at 183. However, within the realm of securities law, a plaintiff alleging that statements of defendants caused the market price of a corporation’s stock to be inflated above its true value through a class action must state facts indicating that the price inflation was present at every point throughout period,

see Aboudi v. Daroff

65 F.R.D. 388, 391 (S.D.N.Y.1974), and cannot satisfy the pleading requirements by alleging inflation of the stock price during only certain parts of the class period rather than the entire span of time.

7

See Richland v. Cheatham,

272 F.Supp. 148 (S.D.N.Y.1967).

C. Pleading a Derivative Claim Against Controlling Persons

Section 20(a) of the 1934 Act, 15 U.S.C. § 78a, states that “[e]very person who, directly or indirectly, controls any person liable [for securities fraud] shall also be liable jointly and severally with and to same extent as such controlled person.” 15 U.S.C. § 78t(a). Thus, for a controlling person to be liable, the person over whom control was exercised must have committed a primary violation of the securities laws.

See Merck & Co. Sec. Litig.,

432 F.3d 261 (3d Cir.2005);

Digital Island,

357 F.3d at 337;

Shapiro v. UJB Fin. Corp.,

964 F.2d 272 , 279 (3d Cir.1992). To establish a prima facie case that the defendant was a controlling person, the plaintiff must show that: (1) the defendant had actual power or influence over the controlled person; and (2) the defendant actually participated in the alleged illegal activity.

8

See

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Kersh v. General Council of the Assemblies of God,

804 F.2d 546 , 548 (9th Cir.1986);

Rochez Bros., Inc. v. Rhoades,

527 F.2d 880, 885 (3d Cir.1975);

MobileMedia Secs. Litig.,

28 F.Supp.2d 901, 940 (D.N.J.1998);

Klein v. Boyd,

949 F.Supp. 280 (E.D.Pa.1996),

aff'd in part, rev’s on other grounds,

1998 U.S.App. LEXIS 2004 (3d Cir. Feb. 12, 1998);

Gordon v. Diagnostek, Inc.,

812 F.Supp. 57 (E.D.Pa.1993).

V. PLEADING SPECIFIC ELEMENTS OF A 10b-5 CLAIM

A. Pleading the “False and Misleading Statement” Element

1. Pleading an Affirmative Misrepresentation

When a securities plaintiff challenges a statement made by a defendant, plaintiffs mere usage of catchwords or bold assertions that defendant’s statement was false or misleading because the defendant knew or must have known it to be false or misleading cannot lend support to plaintiffs claim.

See, e.g., GSC Partners CDO Fund v. Washington,

368 F.3d 228, 239 (3d Cir.2004) (“[I]t is not enough for plaintiffs to merely allege that defendants ‘knew' their statements were fraudulent or that defendants ‘must have known’ their statements were false”);

accord Tellabs,

127 S.Ct. at 2509-10. “[Plaintiffs] mere second-guessing of [defendant’s] calculations will not suffice; [the plaintiff] must show that [the defendant’s] judgment — at the moment exercised — was sufficiently egregious such that a reasonable [person] reviewing the facts and figures should have concluded that [these facts or figures] were misstated and [in addition,] that ... the public was likely to be misled. [Securities] ‘law does not expect clairvoyance.’ ”

IKON Office Solutions, Inc.,

277 F.3d 658, 673 (3d Cir.2002) (quoting

Denny v. Barber,

576 F.2d 465, 470 (2d Cir.1978);

see also DiLeo,

901 F.2d at 627 ) (“[P]rof-fer[ing a] different financial statement [is not sufficient.] Investors must point to some facts suggesting that the difference is attributable to fraud”);

Suprema Spe-cialities, Inc. Sec. Litig. ("Suprema-Dis

trict”), 334 F.Supp.2d 637 , 647 (D.N.J.2004) (“Allegations that a company’s later financial difficulties imply that earlier financial statements were untrue or misleading are ‘fraud by hindsight’ and do not state a claim”) (citations omitted),

rev’d on other grounds, Suprema Specialties, Inc. Sec. Litig. (“Suprema-Appellate

”), 438 F.3d 256 (3d Cir.2006).

2. Pleading Misrepresentation Based on Failure to Disclose

“When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak [since a] duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.”

Chiarella v. United

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States,

445 U.S. 222, 235 , 100 S.Ct. 1108 , 63 L.Ed.2d 348 (1980). As the Third Circuit explained,

“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”

Basic,

485 U.S. [at] 239 n. 17, 108 S.Ct. 978 ...;

see also Burlington,

114 F.3d at 1432 (“Except for specific periodic reporting requirements ... there is no general duty on the part of a company to provide the public with all material information”). Such a duty to disclose may arise [only] when there is [an incident of] insider trading, [or presence of] a statute requiring disclosure, or [there was] an inaccurate, incomplete or misleading

prior

disclosure [requiring a corrective statement].

See Glazer v. Formica Corp.,

964 F.2d 149, 157 (2d Cir.1992);

Bachman v. Polaroid Corp.,

910 F.2d 10, 12 (1st Cir.1990) (en banc);

General Motors Class E Stock Buyout Sec. Litig.,

694 F.Supp. 1119, 1129 (D.Del.1988).

Oran v. Stafford,

226 F.3d 275, 286-87 (3d Cir.2000) (emphasis supplied);

see also Galati v. Commerce Bancorp, Inc.,

220 Fed.Appx. 97 (3d Cir.2007) (reiterating the standard and dismissing plaintiffs’ allegations that “[defendants made several ... false and misleading [statements] by virtue of their failure to speak fully and accurately about the illegal bid-rigging and kickback scheme” in view of defendants lack of duty to disclose those facts, which plaintiffs qualified as indicators of “illegal schemes”). Explaining the rationale for the rule, the Court of Appeals for the Sixth Circuit noted that

this set of requirements preserves the healthy limits on a public corporation’s “duty to disclose all information ...” because corporations might otherwise “face potential second-guessing in a subsequent disclosure suit,” a regime that would threaten to “deluge investors with marginally useful information, and would damage corporations’ legitimate needs to keep some information non-public.”

City of Monroe Emples. Ret. Sys. v. Bridgestone Corp.,

399 F.3d 651, 669 (6th Cir.2005) (quoting

Digital Island,

357 F.3d at 329 n. 10);

see also, Burlington,

114 F.3d at 1432 (“[Management’s] possession of material nonpublic information alone does not create a duty to disclose it”) (quoting

Time Warner Sec. Litig.,

9 F.3d 259, 267 (2d Cir.1993), and citing

Shaw v. Digital Equip. Corp.,

82 F.3d 1194, 1202 (1st Cir.1996), and

Roeder v. Alpha Indus., Inc.,

814 F.2d 22, 26 (1st Cir.1987));

Milton v. Van Dorn Co.,

961 F.2d 965 (1st Cir.1992) (where plaintiffs bought the stock of a subsidiary company of the parent corporation and, after the sale was completed, another of the parent corporation’s subsidiaries announced plans to produce a competing product, nondisclosure of the other subsidiary’s production plans was immaterial).

B. Pleading the “Scienter” Element

1. Pleading Intentional or Recklessness State of Mind

The term “scienter” means “a mental state [of] intent to deceive, manipulate or defraud.” (quoting

Ernst,

425 U.S. at 193 n. 12, 96 S.Ct. 1375 ). To successfully plead scienter, a securities plaintiff must plead “conscious misbehavior or recklessness.”

GSC,

368 F.3d at 236 ;

see also SEC v. Infinity Group Co.,

212 F.3d 180, 192 (3d Cir.2000),

cert. denied,

532 U.S. 905 , 121 S.Ct. 1228 , 149 L.Ed.2d 138 (2001). The requirement to allege defendants’ intentional state of mind, that is, defendants’ “conscious misbehavior,” sets forth a very high pleading standard.

See IKON,

277 F.3d at 667 . Moreover, in securities matters, the term “recklessness” is not interpreted lightly. The Court of

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Appeals instructed that the term “recklessness” means a

“highly unreasonable (conduct), involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, ... which presents a danger of misleading [the parties to the transaction] that is either known to the defendant or is so obvious that the actor must have been aware of it.”

Id.

(quoting

Ernst,

425 U.S. at 193 n. 12, 96 S.Ct. 1375 );

see also Advanta,

180 F.3d at 535 . Therefore, when assessing the sufficiency of plaintiffs pleading alleging a reckless violation of Rule 10b-5, courts are expected to be mindful of the fact that, in securities matters,

“recklessness is a lesser form of intent rather than a greater degree of negligence ____Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care.”

Hollinger v. Titan Capital Corp.,

914 F.2d 1564, 1569 (9th Cir.1990),

cert. denied,

499 U.S. 976 , 111 S.Ct. 1621 , 113 L.Ed.2d 719 (1991) (quoting

Sundstrand Corp. v. Sun Chem. Corp.,

553 F.2d 1033, 1044-45 (7th Cir.),

cert. denied,

434 U.S. 875 , 98 S.Ct. 224 , 54 L.Ed.2d 155 (1977)).

2. Pleading Scienter by Inference

Since scienter is based on the defendant’s state of mind and, as such, may be difficult to prove with direct evidence, courts are willing to permit an inference that the defendant acted with the requisite scienter.

See, e.g., Fine v. Am. Solar King Corp.,

919 F.2d 290 (5th Cir.1990),

cert. dismissed,

502 U.S. 976 , 112 S.Ct. 576 , 116 L.Ed.2d 601 (1991). However, such inferences are not to be made lightly.

See, e.g., Rothman v. Gregor,

220 F.3d 81 (2d Cir.2000) ($1.6 million dollar profit from inside trading was not sufficiently unusual to provide an inference of scienter). To withstand the scrutiny imposed by the Reform Act, the inference of scienter must be both strong and based on the facts with particularity.

See

15 U.S.C. § 78u-4(b)(1) and (2) (the plaintiff shall state “particular [ ] facts giving rise to a strong inference that the defendant acted with the required state of mind”);

Tellabs,

127 S.Ct. at 2510 (“A complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged”);

see also Higginbotham,

495 F.3d 753 (affirming dismissal of the complaint for failure to properly allege scienter with respect to restatement of a corporation’s earnings during the preceding three years);

Alpharma Sec. Litig.,

372 F.3d 137, 150 (3d Cir.2004); The End of the Unbearable Lightness of Pleading, 48 UCLA L.Rev. 973 (2001).

A plaintiff may establish the requisite strong inference of fraudulent intent in one of two ways: (1) by alleging facts “establishing a motive and an opportunity to commit fraud”; or (2) “by setting forth facts that constitute circumstantial evidence of either recklessness or conscious behavior.”

Advanta,

180 F.3d at 534 ;

see also Burlington,

114 F.3d at 1418 . Both methods are equally acceptable and, “[w]hile it is true that motive can be a relevant consideration, and personal financial gain may weigh heavily in favor of a scienter inference,” the Supreme Court has said that “the absence of a motive allegation is not fatal.”

Tellabs,

127 S.Ct. at 2511 .

a.

Inferring Scienter from Defendant’s “Motive and Opportunity”

If the plaintiff desires to employ the “motive and opportunity” method,

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the plaintiff should demonstrate a logical connection between the alleged fraud and motive in order to establish a reasonable inference of fraud: plaintiffs’ allegations as to defendants’ motive to defraud investors with respect to a certain matter cannot be matched with plaintiffs’ facts that defendants committed fraud with respect to another matter.

See Glickman v. Alexander & Alexander Servs.,

1996 WL 88570 , at *12, 1996 U.S. Dist. LEXIS 2325 , at *36 (S.D.N.Y. Feb. 27, 1996) (“[There should be a] coherent nexus between the alleged fraudulent conduct and its alleged purpose”);

ef. Glessner v. Kenny,

952 F.2d 702, 714 (3d Cir.1991) (pleading a “complaint is not a mix and match game”). Furthermore, there must be more than conclusory allegations of motive and opportunity,

see, e.g., Mortensen v. Ameri-Credit Corp.,

123 F.Supp.2d 1018 (N.D.Tex.2000);

Livent, Inc. Sec. Litig.,

78 F.Supp.2d 194 (S.D.N.Y.1999), or a mere set of assertions “from which an inference of [motive and opportunity] rationally

could

be drawn.”

Tellabs,

127 S.Ct. at 2510 (emphasis in original). Rather, a strong inference of motive and opportunity may arise only if the complaint sufficiently alleges that the defendants: (1) “benefit-ted in a concrete and personal way from the purported fraud”; (2) “engaged in deliberately illegal behavior”; (3) “knew facts or had access to information suggesting that their public statements were not accurate”; or (4) “failed to check information they had a duty to monitor.”

Novak v. Kasaks,

216 F.3d 300, 311 (2d Cir.2000);

see Wilson v. Bernstock,

195 F.Supp.2d 619, 633 (D.N.J.2002) (“Motive entails allegations that the individual corporate defendants stood to gain in a concrete and personal way from one or more of the allegedly false or misleading statements and wrongful nondisclosures.... [M]otive and opportunity ‘like all other allegations of scienter must now be supported by facts stated with particularity and must give rise to a strong inference of scienter’ ”) (quoting

Advanta,

180 F.3d at 535 );

Cybershop.com Sec. Litig.,

189 F.Supp.2d 214 (D.N.J.2002).

Under this pleading standard, a plaintiff may not rely on facts indicating that the defendant had certain goals or aspirations (or sought to engage in the industry practices) common to the law-abiding business community, since such goals or practices cannot amount to a valid motive for the purposes of showing scienter.

See GSC,

368 F.3d at 237 (“ ‘Motives that are generally possessed by most corporate directors and officers do not suffice’ ”) (quoting

Kalnit v. Eichler,

264 F.3d 131, 139 (2d Cir.2001)) (lack of capitalization restored);

San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc.,

75 F.3d 801, 814 (2d Cir.1996) (“[A] company’s desire to maintain a high bond or credit rating is an insufficient motive for fraud because such motive could be imputed to any company. If scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions”);

Tuchman v. DSC Communications Corp.,

14 F.3d 1061, 1068 (5th Cir.1994) (“[I]ncentive compensation can hardly be the basis on which an allegation of fraud is predicated”) (citation omitted);

Nice,

135 F.Supp.2d at 584 (“[T]he allegation that [defendants made false and misleading statements to secure market share is ... insufficient to demonstrate that [defendants had a motive to commit fraud”);

Boeing Sec. Litig.,

40 F.Supp.2d 1160, 1175 (W.D.Wash.1998) (“[T]he desire to remain profitable] is a generic motive that fails to satisfy the heightened pleading standards for scienter under the PSLRA”).

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b.

Inferring Scienter from Circumstantial Evidence

If the plaintiffs choose to use the other method of establishing scienter, that is, by-asserting circumstantial evidence of intent or recklessness, “the strength of the circumstantial allegations must be [even] greater.”

Kalnit,

264 F.3d at 142 ;

see Oran,

226 F.3d at 288-89 . In that situation, the plaintiffs must support their allegations by detailing, with particularity, “the who, what, when, where and how” of the events at issue and present clear facts verifying plaintiffs deductions with respect to defendant’s state of mind.

Burlington,

114 F.3d at 1422 (citing

DiLeo,

901 F.2d at 627 );

see also Ronconi v. Larkin,

253 F.3d 423, 437 (9th Cir.2001) (finding that a temporal proximity of events is insufficient circumstantial evidence). Moreover, the totality of circumstantial facts alleged must give rise to inference of scienter “at least as compelling as any opposing inference one could draw from the facts.”

Tellabs,

from which an inference of at 2510.

i.

Inferring Scienter from GAAP Violations

The seminal case addressing the issue of inferring scienter from violations of Generally Accepted Accounting Principles (“GAAP”) is the Third Circuit’s decision examining so-called “positive portrayals,” that is, public statements that were alleged to have been inaccurate.

See Advanta,

180 F.3d 525 . The complaint in Advanta alleged that defendants had publicly made certain “positive portrayals” of the corporation that were materially misleading.

see id.

at 538 (Since Advanta’s annual report included the following statement regarding the quality of the company’s credit portfolio: “While we added substantially to our account base, our credit quality remained excellent,” Advanta plaintiffs alleged that this and similar statements were materially false “because they failed to disclose the deterioration in [Ad-vanta’s] credit” during the time when Ad-vanta “implemented policies relaxing its underwriting and monitoring procedures”). With respect to the scienter element, plaintiffs made “conclusory assertions that the defendants acted ‘knowingly’ [or] must have been aware of the [true facts] by virtue of their positions within the company.”

Id.

at 539 . Affirming the dismissal of the complaint, the Third Circuit explained that scienter must “not rest on a bare inference that a defendant ‘must have had’ knowledge of the facts.”

Id.

(citing

Maldonado v. Dominguez,

137 F.3d 1, 10 (1st Cir.1998);

Greenstone v. Cambex Corp.,

975 F.2d 22, 26 (1st Cir.1992)). In other words, knowledge of the falsity of publicly made statements generally will not be imputed to defendants, absent particular factual allegations supporting a strong inference that they knew or must have known of the falsity of their statements at the time they were made.

9

To explain its rationale, the Third Circuit distinguished Advanta from a district court case,

Ancor Communs., Inc. Sec. Litig.,

22 F.Supp.2d 999 (D.Minn.1998), in which the company had announced a $30 million supply contract for one of its products, resulting in a dramatic increase in the price of its stock. Later, the contract was cancelled due to product incompatibility, causing the company’s share price to plummet. As in Advanta, the Ancor complaint alleged that defendants were (or

*286

should have been) aware that the product would likely prove incompatible as of the time the company entered into the supply contract at issue and, therefore, the public announcement was false or misleading when made.

See Ancor,

22 F.Supp.2d at 1004-05 . But, unlike in Advanta, two salient facts permitted the “unusually strong inference” to be drawn in the Ancor case: (1) the complaint alleged that the supply contract was by far the most significant contract in Ancor’s history and, therefore, Ancor defendants should have been intimately aware of its provisions, and (2) the complaint pointed to some other extrinsic evidence of the defendants’ knowledge, such as discussions among officers regarding the incompatibility problem, and the fact that there was an escape clause in the contract governing possible incompatibility.

See Advanta,

180 F.3d at 539 . As neither of these types of facts was alleged in Advanta, the Court of Appeals would not make the inferential leap that Advanta plaintiffs there invited, namely, that Ad-vanta defendants “must have known” their statements were false when made. The Court of Appeals ruled that, without some persuasive particulars to support this allegation, the Advanta complaint failed to allege a strong inference of the necessary scienter under the PSLRA.

See id.

at 539 .

The differences between Advanta and Ancor illustrate an important point about the substantive meaning of recklessness in the securities fraud context, namely, that — in a case involving inaccurate public statements — simply alleging that defendants “knew or should have known” is not enough and, “where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.”

Novak,

216 F.3d at 309 (citing

San Lean-dro,

75 F.3d at 805 ).

Since cases involving allegations that defendants violated GAAP present nothing but a sub group of the inaccurate public statement category of securities cases, the courts have uniformly held that allegations of scienter based on GAAP violations do not create the requisite strong inference of scienter unless plaintiffs’ complaint alleges “more.”

See Wyser-Pratte Mgt. Co. v. Telxon Corp.,

413 F.3d 553, 563 (6th Cir.2005);

Ferris, Baker Watts, Inc. v. Ernst & Young, L.L.P.,

395 F.3d 851, 855 (8th Cir.2005);

Saxton, Inc. Sec. Litig.,

156 Fed.Appx. 917 , 920 (9th Cir.2005);

PR Diamonds, Inc. v. Chandler,

364 F.3d 671, 694 (6th Cir.2004);

Kushner v. Beverly Enter.,

317 F.3d 820 , 831 (8th Cir.2003);

Pirraglia v. Novell, Inc.,

339 F.3d 1182, 1192 (10th Cir.2003);

Abrams v. Baker Hughes, Inc.,

292 F.3d 424, 432 (5th Cir.2002);

Navarre Corp. Sec. Litig.,

299 F.3d 735 , 745 (8th Cir.2002);

DSAM Global Value Fund v. Altris Software, Inc.,

288 F.3d 385, 390 (9th Cir.2002);

City of Philadelphia v. Fleming Cos.,

264 F.3d 1245, 1261 (10th Cir.2001);

Ziemba v. Cascade Int’l, Inc.,

256 F.3d 1194 , 1208 (11th Cir.2001);

Novak,

216 F.3d at 309 ;

Greebel,

194 F.3d at 203-04 ;

Comshare, Inc. Sec. Litig.,

183 F.3d 542, 553 (6th Cir.1999);

Stevelman v. Alias Research, Inc.,

174 F.3d 79, 84-85 (2d Cir.1999);

Carter-Wallace, Inc. Se. Lit.,

150 F.3d 153 (2d Cir.1998);

Chill v. GE.,

101 F.3d 263 , 270 (2d Cir.1996);

Worlds of Wonder Sec. Litig.,

35 F.3d 1407 , 1426 (9th Cir.1994);

Malone v. Microdyne Corp.,

26 F.3d 471, 479 (4th Cir.1994);

Fine,

919 F.2d at 297. The decisions rendered in this Circuit are no exception.

See Alpharma,

372 F.3d 137 ;

Advanta,

180 F.3d 525 ;

Westinghouse Sec. Litig.,

90 F.3d 696 (3d Cir.1996).

Although the decisions which held that GAAP violations or restated financials, without more, do not create the requisite strong inference of scienter do not provide an exhaustive list of the “more” that satis-

*287

fíes the pleading requirements (and have left the matter to be assessed on a case-by-case basis), it appears that the

“more”

envisioned by the courts consists of the panoply of such facts which could sufficiently indicate that defendants had clear reasons to doubt the validity of the issuer’s financials but, nonetheless, kept turning a blind eye to all such factual “red flags.”

See Rothman,

220 F.3d 81 (plaintiffs did not adequately plead scienter where the complaint alleged that defendants’ policy of expensing prepaid royalties was contrary to GAAP, resulting in nearly $ 74 million in royalties continuing to be reported as assets long after they should have been expensed);

Comshare,

183 F.3d at 553 (plaintiffs failed to plead scienter properly — although plaintiffs’ allegations combined both GAAP violations and claims of failure to adequately monitor relevant information — since plaintiffs did not allege specific facts to show that defendants knew or could have known about the accounting errors, “or that their regular procedures should have alerted them to the errors sooner than they did”); compare

Novak,

216 F.3d at 312 (discussing

Cosmas v. Hassett,

886 F.2d 8 (2d Cir.1989), and

Goldman v. Belden,

754 F.2d 1059 (2d Cir.1985), two pre-PSLRA cases involving inaccurate public statements that the No-vak court selected as examples of cases in which defendants “knew facts or had access to information suggesting that their public statements were not accurate.” In

Cosmas ,

just as in Ancor, the plaintiffs alleged that the sales to China promised by defendants were not viable under the then-existing trade restrictions of which defendants were actually aware, and in Goldman plaintiffs alleged that defendants were actually informed about the facts making their statements untrue but elected to ignore the unfavorable information);

accord Health Mgt. Sec. Litig.,

970 F.Supp. 192 (E.D.N.Y.1997) (a strong inference of recklessness is sufficiently pled where the complaint alleges that defendant was actually advised of but ignored “red flags”).

ii. Inferring Scienter from SOX Certifications

Section 302 of the Sarbanes-Oxley Act (“SOX”) required the SEC to implement rules under which principal executive and financial officers of public companies certify to the general truthfulness of the company’s quarterly and annual reports.

See

15 U.S.C. § 78m, 78o(d); 17 C.F.R. § 240 .13a-14(b)(2). The certification requirement obligates officers to state that, based on their knowledge, the report does not contain any material misrepresentations or omit any material fact otherwise necessary to make the other disclosures not misleading.

See

116 Stat. at 777; 17 C.F.R. § 240 .13a-14(b)(2). Additionally, the report has to identify the officer’s basis for making the certification and each officer must certify that he or she and other officers are “responsible for establishing and maintaining” disclosure controls and procedures.

See

116 Stat. at 777; 17 C.F.R. § 240 .13a-14(b)(4). Moreover, the certifying officers must also certify to having “evaluated the effectiveness of the issuer’s internal controls” and procedures within the previous ninety days and have “presented in the report their conclusions about the effectiveness” of the disclosure controls and procedures.

See id.

However, since neither Section 302 nor its implementing regulations make any reference to the creation of a private cause of action or indicate an intent to modify securities fraud pleading requirements under the PSLRA, including the requirement to plead strong inference of scienter,

see Kogan v. Robinson,

432 F.Supp.2d 1075, 1076 (S.D.Cal.2006);

Neer v. Felino,

389 F.Supp.2d 648, 657 (E.D.Pa.2005);

BISYS

*288

Group, Inc. Derivative Action,

396 F.Supp.2d 463, 464 (S.D.N.Y.2005);

Whitehall Jewellers, Inc. S’holder Derivative Litig.,

No. 05-C-1050, 2006 WL 468012 , at *7 (N.D.Ill. Feb. 27, 2006); Harold S. Bloomenthal, Sarbanes-Oxley Act in Perspective § 74 (2002), it appears that the test applicable to erroneous SOX certifications mirrors that coined for public statements in general and for GAAP violations in particular, i.e., (a) erroneous SOX certifications automatically encompassing all above-listed requirements cannot, without “more,” create the requisite strong inference of scienter; and (b) plaintiffs must allege facts indicating that certifying defendants had clear reasons to doubt the validity of financials being certified but kept turning their blind eye to all “red flags.”

See WatchGuard Sec. Litig. (“WatchGuard II”),

2006 WL 2927663 , 2006 U.S. Dist. LEXIS 74269 (W.D.Wash. Oct. 12, 2006);

Invision Techs., Inc. Sec. Litig.,

2006 WL 538752 (N.D.Cal. Jan. 24, 2006). Both cases are quite instructive.

In

WatchGuard,

plaintiffs brought their 10b-5 claim in the wake of WatchGuard’s financial restatement, which: (a) implicitly admitted errors in applying GAAP; (b) expressly admitted errors in income classification, revenue recognition and calculation of liabilities ensuing from customer-rebate obligations; and (c) revealed the falsity of all Sarbanes-Oxley certifications containing assurances that the stated financial results were adequate, and that the certifying officers had designed adequate financial controls, evaluated those controls, and disclosed any material weaknesses.

See WatchGuard II,

2006 WL 2927663 , at *1, 2006 U.S. Dist. LEXIS 74269 , at *3. Assessing plaintiffs’ challenges based on violations of GAAP and erroneous SOX certifications, the WatchGuard court reminded plaintiffs of the “truism” that “[f]alse statements are an insufficient basis for a securities fraud claim, [and] culpability arises only when a defendant makes a false statement with scienter,” and dismissed the complaint reasoning as follows:

[plaintiffs must show that the Sar-banes-Oxley certifications accompanying [the erroneous] results were culpably false.... The court assumes for present purposes that better “controls” would have revealed the ground-level problems at issue. This assumption is not without controversy. Although WatchGuard admitted to material weaknesses in its controls when it issued the ... restatement, it did not reveal which controls were inadequate. Under these circumstances, it is not obvious what “controls” would have ameliorated the problems that [plaintiffs identify. It appears that [defendants should have had better awareness of the sales practices and returns processing practices at issue, but there is no indication that “controls” would have provided that awareness. The court shelves those concerns, however, and assumes that better controls would have, at the very least, led Watch-Guard to discover these problems sooner.

Even under the assumption that WatchGuard’s misstated earnings are the result of shoddy controls, the court finds no strong inference of scienter as to [defendants’ inaccurate Sarbanes-Oxley certifications. For many of the reasons that the court has already discussed [in its previous opinion], there are no allegations that create a strong inference that [defendants knew Watch-Guard’s controls were inadequate, or were deliberately reckless regarding those controls. Plaintiffs’ allegations suggest that WatchGuard took steps to assess its controls during the class period, and acted to improve its controls when it discovered those problems. They do not raise a strong inference

*289

that any [defendant acted culpably in designing those controls, assessing them, or certifying them under the Sar-banes-Oxley Act. That the controls were inadequate is perhaps an indication of incompetence, but incompetence, even gross incompetence, is no basis for a securities fraud claim.

Id.

at 2006 WL 2927663 , at *9-10, 2006 U.S. Dist. LEXIS 74269 , at *32-33;

see also WatchGuard Sec. Litig. (“WatchGuard I”),

2006 WL 2038656 , at *9-10, 2006 U.S. Dist. LEXIS 27217 , at *29-31 (W.D.Wash. Apr. 21, 2006) (the opinion dismissing the original complaint of the WatchGuard plaintiffs, which noted that, in view of WatchGuard’s previous errors necessitating the financial restatement, any SOX certification of WatchGuard’s officers as to the correctness of original financial data or as to adequacy of reporting controls would be, by definition, untrue, since — had these certifications been true— plaintiffs would have no case, but not every erroneous SOX certification is a culpable one).

The court in InVision reached the same conclusion. In

Invision,

plaintiffs challenged InVision’s merger announcement stating that “acquisition [was] subject to normal closing conditions including customary regulatory approval,” even though InVision was undergoing investigations by the United States Department of Justice and the SEC with respect to InVision’s possible violations of the Foreign Corrupt Practices Act.

See Invision,

2006 WL 538752 , at *1. The InVision plaintiffs alleged that defendants acted with requisite scienter in view of defendants’ SOX certification stating that InVision’s officers designed, established, maintained and evaluated the effectiveness of InVision’s internal control over financial reporting and related control procedures.

See id.

at *2. Dismissing plaintiffs’ complaint, the court in InVision: (a) observed that defendants’ certification merely stated that defendants crafted the control system defendants believed to be adequate and disclosed all weaknesses or lack thereof that defendants were aware of at the time of certification, (b) refused to interpret the sole fact that defendants’ beliefs were erroneous or knowledge was limited as an indication that defendants were either aware of these shortcomings or intentionally overlooked them, and (c) directed plaintiffs to plead the facts indicating actual culpability — rather than mere ignorance — on the part of defendants at the time of SOX certification.

See id.

at *6-7.

Notably, both the WatchGuard and In-Vision courts contrasted the facts of their cases with the case where plaintiffs properly alleged SOX violation together with “more” evidence, i.e., that defendants improperly changed accounting journal entries in order to artificially inflate revenue and then executed a SOX certification while being well aware of the impropriety of the change.

See WatchGuard II,

2006 WL 2927663 , at *9, 2006 U.S. Dist. LEXIS 74269 , at *32 (discussing

Lattice Semiconductor Corp. Sec. Litig.,

2006 WL 538756 , 2006 U.S. Dist. LEXIS 262 (D.Or. Jan. 3, 2006), a case presenting “markedly different circumstances” in view of the fact that the SOX certification in Lattice was made after the Lattice defendants “cooked the books”);

Invision,

2006 WL 538752 , at *7 n. 3 (making the same observations as to the fact pattern in Lattice and making the distinctions analogous to the ones noted in

WatchGuard).

In sum, while the issue of what impact a Sarbanes-Oxley certification has on a 10b-5 claim is a relatively novel question, the above-discussed holdings indicate that — as with allegations that defendants violated GAAP — allegations based on defendants’

*290

erroneous SOX certification cannot establish the requisite strong inference of scien-ter unless the complaint asserts facts indicating that, at the time of certification, defendants knew or consciously avoided any meaningful exposure to the information that was rendering their SOX certification erroneous.

10

3. Pleading Scienter by Relying on Confidential Information

Even though all allegations relating to the falsity of a defendant’s statement must be pled with particularity,

see

15 U.S.C. § 78u-4(b)(Z) and (2), a plaintiff in securities fraud actions can support a complaint by reliance on information attributed to confidential sources.

See Novak,

216 F.3d at 313-14 (holding that, while the PSLRA “may compel revelation of confidential sources under certain circumstances,” there was no per se requirement of disclosure if the plaintiff states sufficient facts to support plaintiffs allegations). However, statements from undisclosed confidential sources can be used only in two situations: (1) if the complaint sets forth other factual allegations, such as documentary evidence, which are sufficient alone to support a fraud allegation,

see id.

at 314 ;

Royal Dutch/Shell Transp. Sec. Litig.,

380 F.Supp.2d 509 (D.N.J.2005) (finding sufficient corroboration in specific notes, memoranda, emails and presentation materials); compare

Barnum v. Millbrook Care Ltd. Partnership,

850 F.Supp. 1227, 1232-33 (S.D.N.Y.1994) (if the allegations are contradicted by the documents, the documents control),

aff'd,

43 F.3d 1458 (2d Cir.1994); or (2) when the confidential sources are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the [confidential] source would possess the information alleged.

See Royal Dutch,

380 F.Supp.2d 509 .

Elaborating on the latter scenario, the Court of Appeals explained that the complaint must disclose: (1) the time period that the confidential source worked at the defendant-company, (2) the dates on which the relevant information was acquired, and (3) the facts detailing how the source obtained access to the information.

See Cal. Pub. Emples’. Ret. Sys. v. Chubb Corp.,

394 F.3d 126 , 146 (3d Cir.2004);

Freed v. Universal Health Servs.,

2005 WL 1030195 , 2005 U.S. Dist. LEXIS 7789 (E.D.Pa. May 3, 2005);

Portal Software, Inc. Secs. Litig.,

2005 WL 1910923 , at *9, 2005 U.S. Dist. LEXIS 20214 , at *28 (N.D.Cal. Aug. 10, 2005) (“[Plaintiffs must describe the job title, job description, duties, and dates of employment for the controller’s sources before this information can be deemed reliable”). Moreover, in

Chubb,

the Court of Appeals held that allegations attributed to the information obtained from a confidential source must contain specific details regarding the basis for the source’s personal knowledge and describe supporting events in detail, see

id.; see also Northpoint Communs. Group, Inc., Sec. Litig.,

184 F.Supp.2d 991, 999-1000 (N.D.Cal.2001);

U.S. Aggregates, Inc. Sec. Litig.,

235 F.Supp.2d 1063, 1074 (N.D.Cal.2002);

Ramp Networks, Inc.,

201 F.Supp.2d 1051, 1067 (N.D.Cal.2002). Failure to meet these requirements with respect to each and every confidential source the plaintiff relies upon, renders that source irrelevant for the purposes of plaintiffs allegations.

See Chubb,

394

*291

F.3d at 146. “The sheer volume of confidential sources cited cannot compensate for these inadequacies.... Cobbling together a litany of inadequate allegations does not render those allegations particularized in accordance with Rule 9(b) or the PSLRA.”

Id.

at 155;

see also Am. Bus. Fin. Servs., Inc. Sec. Litig.,

413 F.Supp.2d

378,

391-92 (E.D.Pa.2005) (finding statements from five insufficiently identified confidential sources inadequate).

C. Pleading the “Materiality” Element

The test of materiality depends not upon the literal truth of statements but upon the ability of reasonable investors to become accurately informed.

See McMahan & Co. v. Wherehouse Entertainment, Inc.,

900 F.2d 576, 579 (2d Cir.1990),

cert. denied,

501 U.S. 1249 , 111 S.Ct. 2887 , 115 L.Ed.2d 1052 (1991). This is sometimes referred to as the mosaic representation thesis.

See TSC Indus., Inc. v. Northway, Inc.,

426 U.S. 438, 449 , 96 S.Ct. 2126 , 48 L.Ed.2d 757 (1976);

Genentech, Inc. Sec. Litig.,

1989 WL 137189 (C.D.Cal.1989). Thus, a finding of materiality is based on the total mix of information available,

see Ieradi v. Mylan Labs., Inc.,

230 F.3d 594 (3d Cir.2000), and the concept of materiality cannot bé distilled into a bright-line test,

see Basic,

485 U.S. 224 , 108 S.Ct. 978 , 99 L.Ed.2d 194 ,

see also Shapiro,

964 F.2d at 281 ;

Ganino v. Citizens Util. Co.,

228 F.3d 154 (2d Cir.2000), short of stating that an alleged misrepresentation cannot be deemed material to an investor if the general public has access to correct information.

See Basic,

485 U.S. at 231-32 , 108 S.Ct. 978 ;

Wallace v. Systems & Computer Tech. Corp.,

1997 WL 602808 , at *10-11, 1997 U.S. Dist. LEXIS 14677 , at *42-44 (E.D.Pa. Sept. 22, 1997).

Since materiality is determined in context, a purchaser or seller of securities is not necessarily entitled to all information relating to each of the circumstances surrounding the transaction.

See Acito v. IMCERA Group,

47 F.3d 47 (2d Cir.1995) (deficiencies found by FDA inspectors at one of many business locations were not material);

Wilensky v. Digital Equip. Corp.,

903 F.Supp. 173 (D.Mass.1995),

aff'd in part, rev’d in part on other grounds,

82 F.3d 1194 (1st Cir.1996) (failure to disclose details of new marketing strategy, was immaterial);

accord Press v. Quick & Reilly, Inc.,

218 F.3d 121 (2d Cir.2000) (intermediary’s conflict of interest is immaterial). Therefore, it is not sufficient to show that a shareholder might have found the information to be of interest: the plaintiff has to establish importance of the particular piece of information to a reasonable investor in order to plead a material misstatement.

See Burlington,

114 F.3d at 1432 (“ ‘[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact’ ”) (quotation omitted).

D. Pleading the “Reliance” Element

A securities plaintiff must plead both “transactional” and “loss causation,” where the former is an assertion that the plaintiff relied on defendant’s false or misleading statement to purchase the stock in question.

See Emergent Capital Inv. Mgmt. v. Stonepath Group, Inc.,

343 F.3d 189, 197 (2d Cir.2003). The “transactional causation” requirement, also known as the “reliance” element, is a corollary of materiality.

See Semerenko v. Cendant Corp.,

223 F.3d 165, 180 (3d Cir.2000). As under common law, the reliance requirement applies in securities fraud cases, and reliance is an element of a private claim under Rule 10b-5.

See List v. Fashion Park, Inc.,

340 F.2d 457, 462 (2d Cir.1965),

cert. denied,

382 U.S. 811 , 86 S.Ct. 23 , 15 L.Ed.2d 60 ,

reh’g denied,

382 U.S. 933 , 86

*292

S.Ct. 305, 15 L.Ed.2d 344 (1965). Thus, if a duty to disclose is established, and the misrepresentation is deemed material, the plaintiff must still demonstrate reliance by showing a causal link between the misrepresentation and the plaintiffs entry into the transaction which eventually harmed the plaintiff.

11

See Basic,

485 U.S. at 243 , 108 S.Ct. 978 . “There is, however, more than one way to demonstrate the causal connection.”

Id.

1. Two Methods to Plead Reliance

“In face-to-face transactions, [an] inquiry into an investor’s reliance ... is [the inquiry] into the subjective pricing ... by that investor.”

Basic,

485 U.S. at 244 , 108 S.Ct. 978 (quoting

LTV Sec. Litig.,

88 F.R.D. 134, 143 (N.D.Tex.1980)). In a face-to-face transaction, an investor has no reason to rely on the integrity of an offered price because the price may not reflect available information.

See Gariety v. Grant Thornton, LLP,

368 F.3d 356, 367 (4th Cir.2004) (citing

Basic,

485 U.S. at 243-44 , 108 S.Ct. 978 ).

For face-to-face transactions, the reliance requirement serves to ensure that the plaintiffs who would not have acted differently if the true information were known cannot recover. The requirement guarantees, in other words, that information that does not affect a buyer’s or seller’s view of the merits of a transaction cannot form the basis of a cause of action.

Id.

(citations omitted). Therefore, a securities plaintiff asserting individualized, that is, direct actual reliance is required to plead that the plaintiff was

actually aware of

and misled by an alleged misrepresentation.

See Semerenko,

223 F.3d at 178 (citing

Peil v. Speiser,

806 F.2d 1154 , 1160 (3d Cir.1986), for discussion of various theories of reliance).

Since proving reliance could be hard in view of the nature of modern securities markets, federal courts fashioned a “fraud-on-the-market” presumption for proving reliance based on the Efficient Capital Market Hypothesis, i.e., the premise that, if the market is efficient, the information disclosed by issuers, issuers’ agents and analysts is both available to and swiftly absorbed by the market.

See Basic,

485 U.S. 224 , 108 S.Ct. 978 , 99 L.Ed.2d 194 ;

Hayes v. Gross,

982 F.2d 104 (3d Cir.1992).

The fraud on the market theory of reliance is, in essence, a theory of indirect actual reliance under which a plaintiff is entitled to three separate presumptions in attempting to establish the element of direct reliance.

See Zlotnick v. TIE Communications,

836 F.2d 818, 822 (3d Cir.1988). Under the fraud on the market theory of reliance, the court presumes (1) that the market price of the security actually incorporated the alleged misrepresentations, (2) that the plaintiff actually relied on the market price of the security as an indicator of its value, and (3) that the plaintiff acted reasonably in relying on the market price of the security.

See id.

Semerenko,

223 F.3d at 178-79 .

In

Cammer v. Bloom,

711 F.Supp. 1264 , 1276 n. 17 (D.N.J.1989),

appeal dismissed,

993 F.2d 875 (3d Cir.1993), the Court set out the following key terms for an efficient market that enables plaintiffs usage of the fraud on the market theory: (1) an open market is one in which anyone, or at least

*293

a large number of persons, can buy or sell; (2) a developed market is one which has a relatively high level of activity and frequency, and for which trading information (e.g., price and volume) is widely available, e.g., a secondary market in outstanding securities which usually has continuity, liquidity and the ability to absorb a reasonable amount of trading with relatively small price changes; (3) an efficient market is one which rapidly reflects new information in price; and (4) these terms are cumulative in the sense that a developed market will almost always be an open one, and an efficient market will almost invariably be a developed one.

Accord Enron Corp. Sec. Derivative & “ERISA” Litig.,

2006 WL 4381143, at *26 , 2006 U.S. Dist. LEXIS 43146, at *95 (S.D. Tex. June 5, 2006) (relying on Cammer).

2. Pleading Reliance on Inferred Technical Facts

While it is correct that setting forth allegations of fraud-on-the market reliance provides a securities plaintiff with a presumption that there is a causal link between the misrepresentation and plaintiffs entry into the transaction,

12

see Basic,

485 U.S. at 243 , 108 S.Ct. 978 , the presumption that the market price “incorporated” the misrepresentations does not, by itself, indicate that the transaction was unfavorable to the plaintiff, since the market’s “incorporation of the misrepresentation” may have affected the market price of the security either negatively or positively, depending on the content of misrepresentation, thus subjecting the plaintiff to an overcharge or availing him or her to a bargain. The issue of plaintiffs’ reliance, therefore, could be relevant only if the plaintiff asserts facts indicating that the alleged misrepresentation affected the market price in a fashion unfavorable to the plaintiff at the time when plaintiffs entered into the transaction: a plaintiff who alleges facts indicating that, through the working of the issuer’s alleged misrepresentation, the plaintiff obtained a favorable bargain has, by definition, no claim based on such misrepresentation.

13

The

*294

issue of how the market price of securities was affected by the alleged misrepresentation presents, however, a technical financial question.

See

generally, L. Elizabeth Chamblee, Between “Merit Inquiry” and “Rigorous Analysis”: Using

Daubert

to Navigate the Gray Areas of Federal Class Actions, 31 Fl. St. U.L.Rev. 1041, 1051-54 (Summer 2004).

Generally, a securities plaintiff cannot plead an element of plaintiffs claim in terms of plaintiffs hope to prevail in a battle of technical experts,

see

H.R. Conf. Rep. 104-369, at 37, rather, the plaintiff must plead actual facts.

Accord Burlington,

114 F.3d at 1429 . However, plaintiffs conclusions distilled from a mosaic of technical data could be transformed into valid factual allegations, provided that the plaintiff effectuates such transformation by sifting the technical data through reliable scientific methods.

Cf.

Fed.R.Evid. 702 (plaintiffs expert may opine on plaintiffs facts, so long as the expert uses “reliable principles and methods”);

Holbrook v. Lykes Bros. S.S. Co.,

80 F.3d 777, 781 (3d Cir.1996) (scientific, technical, or other specialized knowledge might be needed to determine a technical fact). Two Supreme Court decisions,

Daubert v. Merrell Dow Pharmaceuticals, Inc.,

509 U.S. 579 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 (1993), and

Kumho Tire Co. v. Carmichael,

526 U.S. 137 , 119 S.Ct. 1167 , 143 L.Ed.2d 238 (1999), suggest the foundation for such conclusion. In

Daubert ,

the Court required trial judges to act as “gatekeepers” by excluding unreliable testimony,

see

509 U.S. at 589 , 113 S.Ct. 2786 , while in

Kumho Tire,

526 U.S. at 147 , 119 S.Ct. 1167 , the Court expanded the rule holding that judicial gatekeeping obligations apply to all technical testimony. To aid the courts in their gatekeeping function, the Supreme Court provided a non-exclusive checklist of five factors to use in assessing reliability of the technical testimony, with the fifth factor being the inquiry into whether the method has been generally accepted in the scientific community.

See Kumho Tire,

526 U.S. at 149 , 119 S.Ct. 1167 (quoting

Daubert,

509 U.S. at 592 , 113 S.Ct. 2786 ). The Supreme Court’s guidance, applied to a securities claim, indicates that plaintiffs conclusions with respect to operations of financial markets (including the issue of whether or not the market price of the security constituted an overcharge at the time when the plaintiff executed the challenged transaction) can be transformed into a valid fact for the purposes of defendant’s motion to dismiss if the plaintiff reaches his or her conclusions by distilling the alleged technical data through a theory generally accepted in the financial community. Conversely, financial conclusions unprovable under a generally accepted methodology presents nothing more than bald assertions subject to dismissal upon Rule 12(b)(6) motion.

Cf. Burlington,

114 F.3d at 1429 (for the purposes of Rule 12(b)(6) motion, courts are not required to credit bald assertions);

Nice,

135 F.Supp.2d at 565 (conclusions draped in the guise of factual allegations cannot survive motion to dismiss);

McNamara v. Bre-X Minerals, Ltd.,

2002 WL 32076175 , at *5-6, 2002 U.S. Dist. LEXIS 27473 , at *20-22 (E.D.Tex. Sept. 30, 2002) (dismissing plaintiffs’ conclusion that defendants’ purportedly misleading statements were incorporated into a company’s stock price where the conclusion was based on the “random walk” statistical analysis, that is, a financial model inapplicable to the type of financial inquiry posed by plaintiffs’ claim);

SEC v. Lipson,

46 F.Supp.2d 758 (N.D.Ill.

*295

1998) (striking financial testimony which did not use generally accepted financial principles but rather was tailored to support the litigant’s position);

Buffets Sec. Litig.,

906 F.Supp. 1293, 1295-96 (D.Minn.1995) (discussing the technicalities of pleadings and noting that insufficient early judicial scrutiny of unprovable claims results in “a cost to the system, because parties with fanciful or unprovable claims, if not encouraged, at least are not deterred from commencing litigation in hope of a recovery by way of settlement. If settlement may be compelled in ‘strike suits,’ it encourages more such suits, and [this cycle] invites disrespect for the judicial process”) (citing

Surowitz v. Hilton Hotels Corp.,

383 U.S. 363, 371 , 86 S.Ct. 845 , 15 L.Ed.2d 807 (1966)).

E. Pleading the “Causation” Element

The requirement of “loss causation,” also known as the “causation” element, refers to plaintiffs burden to plead a “causal link between the disclosure of alleged fraud and the economic harm ultimately suffered by the plaintiff.”

14

Emergent Capital,

343 F.3d at 197 . In other words, the plaintiff is required to plead that the decline in the stock price was caused by the market’s discovery of defendant’s fraud.

15

see id.

at 189 ;

Bastian v. Petren Res. Corp.,

892 F.2d 680 (7th Cir.1990);

Robbins v. Koger Properties, Inc.,

116 F.3d 1441 (11th Cir.1997).

This proposition was expressly upheld by the Supreme Court in Dura.

See Dura,

544 U.S. 336 , 125 S.Ct. 1627 , 161 L.Ed.2d 577 . Reversing the Ninth Circuit’s holding that an inflated purchase price by itself sufficiently establishes loss causation,

see Broudo v. Dura Pharm., Inc.,

339 F.3d 933, 937 (9th Cir.2003), the Supreme Court ruled that defrauded investors must plead that the

very misrepresentation at issue

proximately caused them an economic loss.

See Dura,

544 U.S. at 345 , 125 S.Ct. 1627 .

In Dura, investors that purchased Dura Pharmaceuticals (“Dura”) securities during the ten months of class period (“Dura Period”) filed a suit alleging that Dura made misleading statements that fraudulently inflated the market value of Dura securities purchased by plaintiffs during the Dura Period.

See Dura,

544 U.S. at 339 , 125 S.Ct. 1627 . According to the Dura plaintiffs, the statements were to the effect that

*296

Dura was developing a new key product which was highly likely to be approved for sale by the relevant government agency, and expected sales of this key product would yield enormous earnings.

See id.

The Dura plaintiffs further alleged that, when Dura finally announced that a government agency refused approval of Dura’s new key product, Dura’s share price suffered a sharp decline (but almost fully recovered within one week).

See id.

Since the pleadings of the Dura plaintiffs were void of any factual allegations that they suffered any economic loss as a result of Dura’s misrepresentations, the presiding district court dismissed plaintiffs’ complaint holding that plaintiffs had not sufficiently pled loss causation and economic loss despite plaintiffs pleading of decline in Dura’s stock price.

16

See Dura Pharms., Inc. Secs. Litig.,

2000 WL 33176043 , 2000 U.S. Dist. LEXIS 15258 (S.D.Cal. July 11, 2000). After plaintiffs appealed, the Court of Appeal for the Ninth Circuit reversed by finding that loss causation should have been deemed established “at the time of the transaction [since it] is at this time that damages are to be measured” by comparing the market price the investor paid in actuality to the hypothetical market price that would have existed had the truth been known at the time of the purchase.

Broudo,

339 F.3d at 938 . The Supreme Court granted certiorari and reversed the appellate decision explaining as follows:

[A]n inflated purchase price [does] not ... constitute or proximately cause the relevant economic loss.

[T]he logical link between the inflated share purchase price and any later economic loss is not invariably strong. Shares are normally purchased with an eye toward a later sale. [So,] if ... the purchaser sells the shares ... before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. [Moreover, if] the purchaser sells ... after the truth makes its way into the market place, an initially inflated purchase price

might

mean a later loss. But that is far from inevitably so [since] that lower price [at the time of sale] may reflect not [the result of truth leaking out about] the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price....

Other things being equal, the longer the time between purchase and sale, the more likely that this is so, i.e., the more likely that other factors caused the loss.

Given the tangle of factors affecting price, ... the higher purchase price ... may prove to be a necessary condition of [an economic] loss, ... but, even if ... so, it is [not sufficient in and by itself since it is] not [the] cause [of the economic] loss. [T]he Ninth Circuit’s approach overlooks an important securities law objective. The securities statute [ ] ... make[s private] actions available not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations

actually

cause.... The statute ... permit[s] ... recovery where, but only where, plaintiffs

adequately allege and prove the traditional elements of causation and loss.

[Where] plaintiffs’ lengthy corn-

*297

plaint contains only one statement that ... can [be] fairly read as describing the loss [and that] statement says that the plaintiffs “paid artificially inflated prices for [the issuer’s] securities” and suffered “damages,” [the] complaint contains nothing that suggests [either a loss causation or an actual economic loss].

Dura,

544 U.S. at 343-48 , 125 S.Ct. 1627 (emphasis supplied, citations omitted, original brackets removed).

17

Hence, the holding of Dura makes it clear that, in order “[t]o establish loss causation, ‘a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause of the actual loss suffered,’ i.e., that the misstatement or omission

concealed something from the market that, lohen disclosed, negatively affected the value of the

security.”

18

Winstar Communs.,

2006 WL 473885 , at *13, 2006 U.S. Dist. LEXIS 7618 , at *42 (S.D.N.Y. Feb. 24, 2006)

(discussing Dura and quoting Lentell v. Merrill Lynch & Co., Inc.,

396 F.3d 161, 173 (2d Cir.2005)) (quoting, in turn,

Suez Equity Investors, L.P. v. Toronto-Dominion Bank,

250 F.3d 87, 95 (2d Cir.2001)) (emphasis supplied).

If the price of a security declines after the purchase for reasons unrelated to the fraud, or if the circumstances of the decline are such that the investor’s economic loss is bound to be speculative, the investor has no right to recovery.

See

H.R. Conf. Rep. No. 104-369, at 31 (1995) (noting that plaintiffs failure to trace a measurable loss to defendant’s wrongful conduct should allow the defendant to obtain dismissal of claims that rest on speculative theories);

Dura, 544

U.S. at 346 , 125 S.Ct. 1627 ;

see also Huddleston v. Herman & MacLean,

640 F.2d 534 , 549 n. 25 (5th Cir.1981). Moreover, while a securities plaintiff need not plead facts indicating that disclosure of the alleged fraud “was the sole reason for the investment’s decline in value,”

see, e.g., Daou Sys.,

411 F.3d 1006, 1025 (9th Cir.2005) (quoting

Robbins,

116 F.3d at 1447 n. 5 (original lack of emphasis restored)), in order to survive defendants’ motion to dismiss, the complaint must contain facts sufficient to indicate that disclosure of the alleged fraud “directly and proximately caused” the investment’s decline in value or, at the very least, “substantially contributed to] the damages sustained” by the plaintiff.

See McCabe v. Ernst & Young, LLP,

2006 WL 42371 , at *8, 2006 U.S. Dist. LEXIS 524 , at *25 (D.N.J. Jan. 6, 2006) (citing

EP

*298

MedSystems, Inc. v. EchoCath, Inc.,

235 F.3d 865, 871 (3d Cir.2000) (citing, in turn,

Semerenko,

223 F.3d at 186 )).

VI. DISCUSSION

Although Plaintiffs re-shuffled some of their previous statements, the instant Complaint differs from its predecessors in form but not in substance, since it effectively recites the very same

facts

that had been set forth in Plaintiffs’ Second Complaint; the difference between these two pleadings is limited to Plaintiffs’ legal or financial conclusions.

19

See

Docket Entry No. 65-12 to 65-15 (Brief, Ex. A, redlining the language of Plaintiffs’ instant Complaint against that of the Second Complaint). However, in view of the consequences to Plaintiffs ensuing from the granting of the Motions, this Court will: (1) re-examine each of Plaintiffs’ factual allegations; and (2) consider all Plaintiffs’ legal conclusions

de novo. See Young,

234 F.3d 1279 , 2000 WL 1170142 at *1.

A. Transactional Causation

I. Deficiencies Contained in Plaintiffs’ Second Complaint

In order to plead transactional causation, Plaintiffs have to assert facts indicating that they purchased Intelligroup securities at inflated prices.

See Dura,

544 U.S. at 343 , 125 S.Ct. 1627 (“the higher purchase price [is] a necessary condition of [establishing an economic] loss”);

see also Basic,

485 U.S. at 243 , 108 S.Ct. 978 . Invoking the fraud-on-the-market presumption,

see

Second Complaint (Docket Entry No. 39), ¶¶ 105-07, Plaintiffs alleged that Intelligroup’s Statements filed with the SEC contained materially false and misleading information, which caused the stock market to overprice Intelligroup common stock.

See id.

¶¶ 14; 107; 119. Identifying such false information, Plaintiffs comprised technical data they deemed pertinent into a table consisting of twelve blocks, where each block: (a) represented a fiscal reporting period, either a quarterly or a yearly one, and (b) was subdivided into four columns that compared the figures originally reported by Intelligroup to those reported in the Restatement and six rows titled “Total Assets,” “Total Liabilities” “Accumulated Deficit,” “Shareholder Equity,” “Revenues” and “Net Income (loss).”

See id.

at 8. While the Class Period spanned forty months, the data included into the table provided information covering only twenty seven months,

see id.,

and the remainder of the Second Complaint did not fill this void.

See

generally, Second Complaint.

The table indicated that, in seven out of the twelve Statements reflected in the table, Intelligroup

understated

its net income, that is, depicted the profitability of its business operation less favorably than it actually was, sometimes painting the picture more than sixty five times worse than the reality.

See id.

at 8;

see

also December Opinion at 21-22

(Intelligroup,

468 F.Supp.2d at 686-87). In addition, the table indicated that, in these twelve State

*299

ments: (a) the assets reported by Intelli-group were invariably slightly overstated, (b) the liabilities reported were invariably slightly understated; (c) the revenues reported were either slightly overstated or understated; (d) the shareholders’ equity was invariably overstated, usually about by one-third but sometimes even more than twice; and (e) the accumulated deficit was either overstated, sometimes by almost one third, or understated, sometimes twice, and contained transformations of figures inexplicable by any accounting practice.

See id.; see also

December Opinion at 22 n. 16 and at 25 n. 19

(Intelli-

group, 468 F.Supp.2d at 687-88).

Evaluating Plaintiffs’ factual allegations in the Second Complaint, this Court concluded in its December Opinion that the facts set forth by Plaintiffs did not lend support to Plaintiffs’ claim that Intelli-group stock kept invariably trading at inflated prices, that is, throughout the Class Period.

See id.

at 29-30 (Intelligroup, 468 F.Supp.2d at 690-91). The Court concluded that financial data provided in the table: (a) sufficiently indicated that Intel-ligroup stock was overpriced only with respect to five quarters out of the thirteen comprising the Class Period, and (b) either suggested that Intelligroup stock was underpriced, hence availing Plaintiffs to a bargain and suggesting that Plaintiffs had no factual grounds to claim transactional causation, or did not provide this Court with any facts, hence preventing this Court from intelligibly assessing whether the stock price was inflated.

See id.

and n. 20

(Intelligroup;

468 F.Supp.2d at 689-91). Sifting out the dense strings of financial figures contained in the Second Complaint, the Court pointed out to Plaintiffs the following seven key shortcomings:

(1)Plaintiffs’ claims with respect to overstatements or understatements of In-telligroup’s revenues were not useful in assessing Intelligroup’s business success without Plaintiffs setting forth detailed allegations about Intelligroup’s costs, since profitability of a business operation is defined as the difference between the revenues and the costs involved in the evaluated operation, and such difference cannot be determined if the list of variables included only the minuend, that is, the revenue, but omitted the subtrahend, i.e., the costs, because lower revenues could, nonetheless, indicate higher profitability, if such lower revenues are accompanied by even lower costs. That is why the net income is the best indicator of business profitability.

See id.

at 21 n. 15 (Intelligroup, 468 F.Supp.2d at 686).

(2) Plaintiffs’ claims with respect to Intel-ligroup’s misstatements of accumulated deficit could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced since the facts alleged by Plaintiffs in support of such claim: (a) revealed that eight of Intelligroup’s Statements were erroneously indicating an accumulated deficit while, in reality, Intelligroup was either enjoying budget surplus or experiencing a notably less burdensome deficit, i.e., actually had business prospects better than those depicted to the stock market by these eight Statements; and (b) contained errors apparent from the face of the Complaint and rendering Plaintiffs’ allegations unreliable.

See id.

at 22 n. 16 (Intelligroup, 468 F.Supp.2d at 687).

(3) There are two key models employed by the financial community for assessing the value of a stock.

See id.

at 23 (Intelligroup, 468 F.Supp.2d at 687). One model (“Terminal Value Model”) is pertinent during the very earliest or very latest stages of a public corporation’s life; it basically determines the price of a stock by dividing the share

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holders’ equity (which is the difference in value between total corporate assets and total corporate liabilities) by the number of outstanding shares.

See id.

at 23 and n. 17;

see also id.

at 29, n. 19

(Intelligroup,

468 F.Supp.2d at 687-88). The other model (“Dividend Model”) is pertinent to securities traded on secondary markets; it (a) correlates, through a mathematical formula, corporate business profitability, as reflected in the corporation’s reported earnings, to projected stream of dividends the company is likely to declare, and the projected stream of dividends to the price of the corporation’s stock,

see id.

at 23-25 and n. 18

(Intelligroup,

468 F.Supp.2d at 687-88), while (b) taking into consideration other assessments of profitability of the corporation’s business, e.g., rate of return on common equity (“ROE”).

See id.

at 25, n. 18

(Intelligroup,

468 F.Supp.2d at 688) (providing the formula for ROE). In view of these financial models:

a.Plaintiffs’ claims with respect to In-telligroup’s overstatements of assets and understatements of liabilities could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced by the stock market since the deviations in assets and liabilities were: (i) too slight to be material; and (ii) either had no bearing on assessment of Intelligroup’s profitability under the Dividend Model or presented Intelli-group’s ability to generate net profit per each dollar of actual assets less favorably than Intelligroup’s actual ability, potentially giving the market a reason to underprice, rather than overprice, Intelligroup’s stock.

See id.

at 25, n. 19

(Intelligroup,

468 F.Supp.2d at 688).

b. Under the Dividend Model, Plaintiffs’ claims with respect to Intelli-group’s misstated net income could lend support to Plaintiffs’ claim that Intelligroup’s securities were overpriced only if the Statements presented Intelligroup’s earnings more favorably than the reality warranted. Since Intelligroup’s net income was understated, rather than overstated, in seven Statements, the market was likely to underprice In-telligroup’s securities during the periods affected by these seven Statements, hence availing Plaintiffs of a bargain during substantial parts of the Class Period.

See id.

at 26-29

(Intelligroup,

468 F.Supp.2d at 689-90).

c. Intelligroup’s understatements of net income during the periods other than those affected by these seven Statements could not be used to lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced, since: (i) the working of the Efficient Market Hypothesis precludes factoring any “residual effect” into stock pricing, and (ii) even if the Efficient Market Hypothesis did not so preclude, the cumulative residual effect of all In-telligroup’s net income misstatements (be it calculated directly or through a regressive analysis) indicated that Plaintiffs kept purchasing Intelligroup stock at a bargain at least throughout two-thirds of the Class Period.

See id.

at 22, n. 23

(Intelligroup,

468 F.Supp.2d at 691).

d. Under the Dividend Model, Plaintiffs’ claims with respect to Intelli-group’s misstatements of shareholders’ equity could be related to profitability of Intelligroup’s business and, thus, lend support to

*301

Plaintiffs’ claim that Intelligroup’s securities were overpriced, only if the analysis reflects on the future profitability of the business, e.g., if ROE analysis factoring in the actual shareholders’ equity indicates that Intelligroup’s business operations were less profitable than what was reported in the Statements.

See id.

at 27-28, nn. 21 and 22 (Intelligroup, 468 F.Supp.2d at 690).

e. Under the Dividend Model, Plaintiffs’ claims with respect to Intelligroup’s misstatements that are not directly related to profitability of Intelligroup’s business could not lend support to Plaintiffs’ claim that Intelligroup’s securities were invariably overpriced.

See id.

at 29, n. 23 (Intelligroup, 468 F.Supp.2d at 691).

In view of these shortcomings, the Court dismissed Plaintiffs’ Second Complaint for failure to plead transactional causation.

See id.

at 29-30

(Intelligroup,

468 F.Supp.2d at 690-91). The Court’s discussion unambiguously indicated to Plaintiffs that, in the event Plaintiffs were to file an amended complaint, such amended pleading had to include: (a) facts enabling the Court to assess Plaintiffs’ transactional causation claim with respect to the entire Class Period, rather than certain phases of the Class Period,

see id.

at 19-30; and (b) if Plaintiffs’ facts were to be distilled from Intelligroup’s misstatements of financial data, Plaintiffs would have to accompany their financial conclusions with explanations enlightening this Court as to how Intelligroup’s misstatements could have caused overpricing — rather than underpricing or fair pricing — of Intelligroup’s securities by the stock market.

See id.

at 20; at 22, n. 16; at 25, n. 19; at 26, n. 20; at 29, n. 23, and at 29-30 (Intelligroup, 468 F.Supp.2d at 684-91).

2. “Fraud-on-the-market” Allegations Based on Intelligroup’s Fi-nancials

The factual assertions in Plaintiffs’ instant Complaint are reduced to a table (“Table”) similar to that presented by Plaintiffs in their Second Complaint. Compare Compl. at 11 to Second Compl. at 8. The Table differs from its predecessor in three respects: (a) it is executed in not-exaetly-reader-friendly “Point-5” font; (b) it has twenty six financial figures previously designated as negatives transformed into positives, equal to the original ones in their absolute value;

20

and (c) it substitutes a few previously stated ealculative figures with “n/a” entries.

21

See id.

Just as its predecessor, the Table: (a) is silent as to what errors were contained in Intelli-group’s Statements during each fiscal quarter of 2001; and (b) verifies that Intel-ligroup did not file any financial statements after its first quarterly Statement in 2004 (“1Q04”), hence providing no information for two spans of time included in the Class Period, with one span running from May 1, 2001, to March 29, 2002, that is, the

*302

date of first filing reflected in the Table (“2001 Period”), and another span running from May 17, 2004, that is, the date of filing of 1Q04 (“2004 Period”), to September 24, 2004.

See

Compl. at 11 and ¶ 70 (providing the dates of Intelligroup’s filings). The sum of these two spans of time totals a bit over fifteen months (out of the forty months comprising the entire Class Period) hence, leaving this Court without any financial data with respect to almost a third of Plaintiffs’ transactional causation claim.

3. 2001 Period

Lack of financial data notwithstanding, Plaintiffs suggest that the Complaint adequately alleges Plaintiffs’ transactional causation with respect to the Unaccounted Periods. With respect to the 2001 Period, Plaintiffs prompt this Court to presume that Intelligroup’s stock was invariably traded at inflated prices because (a) the Press Release issued in 2004 — as well as Intelligroup’s Restatement filed in 2005— included the phrase that Intelligroup’s financial Statements “for the quarterly periods beginning January 1, 2001, ... should no longer be relied upon,” Compl. ¶¶ 7, 13; Opposition at 25, Press Release at 1; and (b) the Restatement of Intelligroup’s financials reflecting the company’s position at the end of the year 2001 indicates overstatement of assets, shareholders’ equity and net income.

See

Compl. ¶ 15; Opposition at 25. Plaintiffs assert that lack of actual information about Intelligroup’s financial position is irrelevant to the Court’s inquiry about Plaintiffs’ reliance so long as Intelligroup “conceded the falsity of prior financials.”

See

Opposition at 25-27 (citing

Aldridge v. A.T. Cross Corp.,

284 F.3d 72 (1st Cir.2002);

Sipex Corp. Sec. Litig.,

2005 WL 3096178 , 2005 U.S. Dist. LEXIS 30854 (N.D.Cal. Nov. 17, 2005);

Fleming Cos. Secs. & Derivative Litig.,

2004 WL 5278716 , 2004 U.S. Dist. LEXIS 26488 (E.D.Tex. June 10, 2004);

Tut Sys. Sec. Litig.,

2002 U.S. Dist. LEXIS 27092 (N.D.Cal. Aug. 15, 2002)). The Court disagrees.

While recognizing the general rule that an issuer’s statement to the effect that the issuer’s previous financials should not be relied upon should not be treated lightly, the Court cannot ignore the unique peculiarity of the facts presented by the instant case, namely, the fact that Intelligroup’s financials were habitually misstated in a way that likely caused

underpricing

of Intelligroup’s securities more often than overpricing. Indeed, as the Restatement revealed, Intelligroup’s notice that Intelli-group’s financial Statements “should no longer be relied upon” did not necessarily mean bad news for all investors who purchased Intelligroup’s stock relying on the “unreliable” Statements, since Intelli-group’s actual financial position was frequently better, in some key respects, than that actually reported, and the investors probably obtained a bargain. Granted In-telligroup’s sporadic “good-news-bad-news” record, this Court has no reason to believe that the phrase “financial Statements ‘should no longer be relied upon’ ” necessarily indicates that Intelligroup’s actual financial position during each quarter of 2001 was worse than that reported: it could have been better during some quarters and worse during the others, thus supplying transactional causation to some investors but not to others.

For this very reason, Plaintiffs’ argument based on Intelligroup’s restated filing for the year 2001 fares no better. For instance, Intelligroup’s restated net income for the year 2001 was 28.4% less than originally reported.

See

Compl. at 11, Opposition at 25. However, the Restatement of Intelligroup’s financial for the four periods of 2002 indicates that the actual net income was understated first by 3,390.9%, then understated by $9,473,000 (or by

*303

1,106.5% in comparative difference), and then overstated by $1,779,000 (or by 13,-685%), and finally overstated by $970,000 (or 1,796%).

See

Compl. at 11. Being presented with Plaintiffs’ pleadings unambiguously indicating that Intelligroup managed to twice understate and twice overstate its key financial figure by thousands of times while filing merely four reports, and did it within the fiscal year that immediately followed Intelligroup’s 2001 yearly filing, this Court has no reason to conclude that Intelligroup did not make a single understatement of its income — or another misrepresentation painting a financial picture more favorable than the reality — during the year 2001. Indeed, read in light of Plaintiffs’ entire Table, the fact that Intel-ligroup’s yearly net income for the year 2001 was overstated by 28.4% does not preclude this Court from hypothesizing that Intelligroup’s net income was overstated during the first quarter of 2001 by 50% (imposing an overcharge on the investors), then understated during the second quarter by 21.6% (providing the investors with a bargain), and even that Intelligroup, accidently, got the correct figures during the third and forth quarters (not affecting investors either positively or negatively).

22

*304

In sum, Plaintiffs’ pleadings based on the overstatements contained in Intelligroup’s 2001 end-of-year report and the phrase “financial Statements ‘should no longer be relied upon’ ” cannot suffice as factual allegations supporting Plaintiffs’ claim that Intelligroup’s stock was invariably overpriced during each quarter of 2001.

See Bell Atlantic,

127 S.Ct. at 1965 (Rule 8 pleadings must provide “enough factual matter” to suggest that the alleged event took place). While Plaintiffs’ theory is not inconsistent with the existing facts, it provides this Court with no facts “suggesting ([rather than] merely consistent with)” Plaintiffs allegations.

Id.

at 1969-74 . The Court concludes that Plaintiffs’ allegations failed to cross the necessary line “between the factually neutral and the factually suggestive,”

id.

at 1966 n. 5, and, instead of including in the Complaint “enough [factual] heft,” offered this Court Plaintiffs conjecture and self-serving interpretations of actual events.

See Bell Atlantic,

127 S.Ct. at 1965-69 ;

Dura,

544 U.S. at 347 , 125 S.Ct. 1627 .

4. 2004 Period

It appears that both Plaintiffs and Defendants misread the observation the Court made in its December Opinion with respect to insufficiency of Plaintiffs’ pleadings made in the Second Complaint for the purpose of establishing market reliance of those investors who purchased Intelli-group’s stock during the end of the Class Period, namely, the second and third quarter of 2004.

See

Docket Entry No. 65 (Intelligroup’s Brief) (referring to this observation);

accord

Opposition at 28 (an “assertion that there can be no artificial inflation in the second and third quarters of 2004 because Intelligroup did not report its financials for those quarters ... ignores Plaintiffs’ core claim ... that it was Intelligroup’s false and misleading statement [released to the market] that ... inflated the price of Intelligroup’s stock”). However, this observation as to what Plaintiffs

did not

plead, i.e., that “Plaintiffs expressly acknowledge that Intelligroup’s financial statements for the second and third quarter of 2004 (the last two quarters of the Class Period) were not filed — or otherwise disseminated into the market— during the Class Period,” December Opinion at 20

(Intelligroup,

468 F.Supp.2d at 685), should be considered in conjunction with this Court’s evaluation of what Plaintiffs

did

plead. The latter read as follows:

The last Statement filed by Defendants during the Class Period was [first quarterly report of 2004. That Statement] provided grounds for underpricing [of Intelligroup’s securities, since that Statement understated Intelligroup’s earnings by 35.5%, and these underpricing] tendencies lasted from the date of [the] filing [of that Statement] and throughout the remainder of the Class Period.

December Opinion at 29

(Intelligroup,

468 F.Supp.2d at 690).

Indeed, the sole reason why Intelli-group’s failure to file financial statements

*305

during the second and third quarter of 2004 is pertinent is because Intelligroup’s %o%-dissemination of any financial information into the market could not serve as an intervening event capable of altering the market’s pricing tendencies.

See id.

The Court agrees with Plaintiffs that, in all other respects, the fact of Intelligroup’s lack of filings during the last two quarters of the Class Period is largely irrelevant.

Accord

Opposition at 28. Consequently, if the last Statement that Intelligroup publicized during the Class Period provided the market with grounds to underprice Intelli-group’s securities, and Intelligroup did not later disseminate any intervening information that could alter the market tendency to underprice Intelligroup’s securities, the underpricing would continue throughout the remainder of the Class Period.

See

December Opinion at 29 (Intelligroup, 468 F.Supp.2d at 690). Therefore, the sufficiency of Plaintiffs’ factual allegations with respect to Plaintiffs’ disadvantageous reliance on the market’s pricing of Intelli-group stock during the 2004 Period could be assessed only on the basis of the facts alleged by Plaintiffs with respect to Intelli-group’s last Statement filed at the end of the first fiscal quarter of 2004.

23

See

Compl. at 11.

5. Periods Reflected in the Table

a.

Plaintiffs’ Allegations

Intelligroup’s financial position during the parts of the Class Period other than the 2001 and 2004 Periods discussed

supra

are reflected in Plaintiffs’ Table.

See

Compl. at 11. Relying on the information in the Table, Plaintiffs — in a fashion similar to that they employed in their Second Complaint — -allege that they purchased Intelligroup stock at inflated prices throughout the Table period because Intelligroup’s (a) “accumulated deficit [was] materially overstated in all [fiscal] quarters,” (b) “assets [were] materially overstated in all [fiscal] quarters,” (c) “liabilities [were] materially overstated in all [fiscal] quarters,” (d) “shareholder^’] equity [was] materially overstated in all [fiscal] quarters,” and (e) “net income [was] materially misstated in all [fiscal] quarters.” Opposition at 20. Apparently taking issue with this Court’s finding that Intelligroup’s stock could have been overpriced by the market only during the periods that followed Intelligroup’s filing of financial Statements overstating Intelligroup’s net income,

See

Opposition at 21 (referring to December Opinion at 21

(Intelligroup,

468 F.Supp.2d at 687)), Plaintiffs allege that the finding is “simply ... contrary to the law.”

See

Opposition at 21. Plaintiffs discuss

Cent. Laborers’ Pension Fund v. Sirva, Inc.,

2006 U.S. Dist. LEXIS 73375 (N.D.Ill. Sept. 22, 2006), and cite

Basic,

485 U.S. 224 , 108 S.Ct. 978 , 99 L.Ed.2d 194 ,

Kaltman v. Key Energy Servs.,

447 F.Supp.2d 648 (W.D.Tex.2006),

Parmalat Sec. Litig.,

375 F.Supp.2d 278 (S.D.N.Y.2005),

Unicapital Corp. Sec. Litig.,

149 F.Supp.2d 1353 (S.D.Fla.2001),

Craftmatic Sec. Litig. v. Kraftsow,

890 F.2d 628 (3d Cir.1989), and

Alna Capital

Assocs.

v. Wagner,

532 F.Supp. 591 (S.D.Fla.1982),

aff'd in part, rev’d in part,

758 F.2d 562 (11th Cir.1985). These legal citations and discussion appear to be provided in support of Plaintiffs’ conclusion that Intelligroup’s

*306

securities were priced by the market above them actual value even during the periods when the market believed that the profitability of Intelligroup’s business operations was much lower than what it was in reality because the market relied on overstatements of Intelligroup’s assets and shareholders’ equity and understatements of Intelligroup’s liabilities and accumulated deficit.

See

Opposition at 21 (citing Benjamin Graham, David L. Dodd, Sidney Cottle, Security Analysis — Principles and Techniques 42-43 (1962)). In addition, Plaintiffs seem to suggest that the issue of how the stock market prices a traded security is a question assessable not through the prism of established financial formulas but rather through that of Plaintiffs’ opinion.

See id.

at 24 (“A jury could most certainly find that these misstatements [of assets, liabilities, shareholders’ equity and accumulated deficit] are among the most important facts that investors rely upon when purchasing a stock”). Finally, Plaintiffs appear to rely on the above-listed case law in order to allege that Plaintiffs themselves overvalued Intelligroup’s securities at the time when Plaintiffs executed the purchases.

See

Compl. ¶ 113 (“Defendants’ materially false and misleading statements regarding such financial information as, inter alia, assets, liabilities and accumulated deficit ... caused ... Plaintiffs ... to purchase Intelligroup ... stock ... at artificially inflated prices”). The Court addresses each of these issues seriatum.

b.

Legal Precedents Examining Financial Matters

The nature of Plaintiffs’ claim that the Court’s focus on understatements of Intel-ligroup’s net income (for the purpose of determining whether Plaintiffs disadvantageously relied on the market’s price of Intelligroup’s securities) was “simply ... contrary to the law” resembles a motion for reconsideration.

24

The law, however, has never devised any formulas to assess the market’s pricing of a security, leaving this issue to the area of finance. The legal decisions relied upon by Plaintiffs do not contain any statements altering this conclusion.

i.

IPO Cases

The sole case extensively discussed by Plaintiffs is

Sirva,

2006 WL 2787520 , 2006 U.S. Dist. LEXIS 73375 .

See

Opposition at 21-22. From the language of Sirva, Plaintiffs select part of a sentence and quote it in support of their proposition that the issue of “whether ‘cumulative net income is the only figure an investor would find important in making the decision to invest ... is a factual question that cannot be resolved on a motion to dismiss.’ ”

See id.

(quoting

Sirva,

2006 WL 2787520 , at *6, 2006 U.S. Dist. LEXIS 73375 , at *26). Plaintiffs explain their conclusion that the holding of Sirva is relevant to the inquiry

*307

at bar by pointing out that the court in Sirva denied defendants’ motion to dismiss, although net income of the Sirva defendants was overstated during 2001 but understated during 2002.

See id.

(quoting

SIRVA

2006 WL 2787520 , *6, 2006 U.S. Dist. LEXIS 73375 , at *26). It appears that Plaintiffs misunderstand both the facts of Sirva and the reasoning of the Sirva court.

In Sirva, Plaintiffs were a class of investors who purchased SIRVA stock between November 25, 2003, and January 31, 2005.

See Sirva,

04-7644, Docket Entry No. 39 (“Sirva Compl.”) ¶ 1. The Sirva Defendants consisted of SIRVA (an issuer), the issuer’s underwriters and the issuer’s executives.

See id.

¶¶ 13-14, 18-19, 30, 91-92. SIRVA, organized by its eventual underwriter in 1998,

see id.

at 31, sold its common shares to investors in an initial public offering (“IPO”) on November 25, 2003, and in a second public offering (“SPO”) on June 10, 2004.

25

See id.

¶¶ 34-35. The Sirva plaintiffs alleged that they were defrauded by the statements made by the issuer and underwriters in SIRVA’s IPO and SPO prospectuses disseminated in 2003 and 2004 because the prospectuses: (a) omitted discussion of the problems experienced by SIRVA’s European divisions, (b) offered knowingly false projections with respect to SIRVA’s net income in 2004, (c) understated the insurance reserves needed to conduct SIRVA’s future operations, and (d) provided false information about SIRVA’s pre-IPO (and, obviously, pre-SPO) net-income.

See generally, id.

The Sirva defendants moved for dismissal of the Sirva Complaint arguing, inter alia, that contention (d),

supra,

made by the Sirva plaintiffs was without merit because overstatements of SIRVA’s net income during 2001 could not have affected the market’s assessment of SIRVA’s part performance in view of the fact that SIR-VA understated its net income in 2002, and the

cumulative

effect of both 2001 overstatement and 2002 understatement was a positive figure, which should have prompted — rather than dissuaded — the investors to purchase the stock during both the IPO and SPO.

See Sirva,

04-7644, Docket Entry No. 105, at 28-29. The Sirva court disagreed explaining that:

[t]he [underwriters’ argument assumes that

cumulative

net income is the only

*308

figure an investor would find important in making the decision to invest. Whether that is true is a factual question that cannot be resolved on a motion to dismiss. Moreover, the increase in cumulative net income notwithstanding, the impact of the [errors in] SIRVA’s financials was not wholly positive. Though the [errors] effected [an] increase in SIRVA’s net income for 2002, [they] effected a [higher] loss ... in 2001.

SIRVA,

2006 WL 2787520 , at *6-7, 2006 U.S. Dist. LEXIS 73375 , at *26-27 (emphasis supplied, citations to pleadings omitted). Inexplicably omitting the term “cumulative” (pivotal to the Sirva’s court’s decision), Plaintiffs quote the second half of the Sirva’s court’s first sentence in support of their proposition that this Court should focus on misstatements of Intelli-group’s assets and liabilities rather than on Intelligroup’s net income. Notably — even though the IPO fact pattern in Sirva was entirely different from that presented here — no party in Sirva suggested that the Sirva court should focus on a financial item other than net income when evaluating the impact of SIRVA’s past financials.

26

In view of the foregoing, Plaintiffs’ reliance on Sirva is wholly misplaced. It appears obvious that the

SIRVA

court: (a) recognized that the valuation conducted by the stock market at the IPO stage involves analysis qualitatively different from that applicable to securities traded on a secondary market; (b) concluded that the market’s valuation of an IPO calls, inter alia, for an examination of the issuer’s entire history (since there is no secondary market in existence to provide the investors with on-going assessment), including the issue of stability of business performance; and (c) refused to ignore SIRVA’s business history in the name of positive

cumulative

net income.

27

In sum, the inquiry by the Sirva’s court into the history of the issuer’s performance for the purposes of determining the market’s pricing of the issuer’s IPO is inapposite to the pricing analysis of a security traded on a secondary market and assessable under the Efficient Capital Market Hypothesis.

See Gruber v. Price Waterhouse,

776 F.Supp. 1044, 1052 (E.D.Pa.1991) (“[T]he ‘fraud on the market’ theory can not apply to initial public offerings. In an initial public offering it cannot be assumed price reflects value because there is simply no open and developed market,” which is a prerequisite to plaintiffs establishing reliance on the basis of the “fraud on the market” theory).

Plaintiffs make the same error by relying on two other IPO case,

Unicapital,

149 F.Supp.2d 1353 , and

Craftmatic,

890 F.2d 628 . The circumstances of Unicapital present a set of facts even less applicable to the case at bar, since the case involved an IPO and later bankruptcy of a company which had no business performance record prior to the public offering,

see Unicapital,

00-2054, Docket Entry No. 25 (Complaint), at 2-3, and advertised its future business

*309

prospects to the investing community by overstating, inter alia, the assets that were to be used in UniCapital’s operations. Evaluating such overstatement of assets, the Unicapital court determined that Uni-Capital’s stock was introduced to the market at inflated prices since “it cannot be said that no reasonable investor would attach importance to a $ 100 million, or 8%, overstatement of the assets in Unicapital’s [IPO] prospectus.”

Unicapital,

149 F.Supp.2d at 1364 (emphasis supplied). While Plaintiffs quoted this determination of the Unicapital court, they failed to note that the Unicapital court neither addressed the issue of overstatement or understatement of UniCapital’s net income nor could have addressed it simply because there was no net income to assess.

28

In sum, Plaintiffs’ reliance on Sirva, Unicapital and Craftmatic for the purpose of alleging that this Court should focus on Intelligroup’s misstatements of assets and liabilities rather than net income for the purpose of determining whether Plaintiffs sufficiently pled reliance under the “fraud-on-the-market” theory is wholly misplaced, since IPO cases fall outside the presumption of reliance enunciated in

Basic v. Levinson. See Gruber,

776 F.Supp. at 1052 ; Merritt B. Fox, Symposium: Robert Clark’s Corporate Law: Twenty Years of Change: After

Dura :

Causation in Fraud-on-the-Market Actions (“After

Dura

”), 31 Iowa J. Corp. L. 829, 875 (2006) (IPO cases cannot be subject to the “fraud-on-the-market” theory due to lack of efficient markets).

ii.

Basic v. Levinson

In

Basic v. Levinson,

485 U.S. at 243 , 108 S.Ct. 978 , the Supreme Court established a presumption of causal connection between a misstatement and an injury (in the form of the misstatement’s effect on the market’s price of a security) sustained by a plaintiff at the time when the plaintiff entered into the transaction. The purpose of this “fraud-on-the-market” doctrine is to “recognize [and] encompass the economic realities of modern securities markets,”

DeMarco v. Robertson Stephens Inc.,

228 F.R.D. 468, 472 (S.D.N.Y.2005), namely, the fact that “most publicly available information is reflected in market price.”

Id.

(citing

Basic,

485 U.S. at 247 , 108 S.Ct. 978 ). The Basic presumption, therefore, applies only to “suits by ... purchasers in cases of falsely positive statements, and by ... sellers in cases of falsely negative statements,”

see

After

Dura ,

31 Iowa J. Corp. L. at 875, and the investors who fared better because of the misstatement cannot assert reliance through the working of the theory.

In view of the foregoing, the Court notes that, while Plaintiffs cite Basic for the proposition that “a statement is material if there is a ‘substantial likelihood’ that a ‘reasonable investor’ would view it as significantly altering ‘the total mix of information made available,’ ” Opposition at 23 (citing

Basic,

485 U.S. at 231-32 , 108 S.Ct. 978 ), one must consider the two keys points of the Supreme Court’s teaching: (a) different types of information affect the market’s price to a different degree, and (b) the economic realities of modern securities markets are such that a “total mix” of information consisting of both a weak negative piece of news and a strong positive one yields a net effect equal to a

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positive influence, hence, causing an increase in the stock price. Conversely, an issuer’s simultaneous concealment of two pieces of information: (a) one, which is not commonly factored in by the stock market and — if factored — has the potential of causing only a slight negative price effect, and (b) another one, which has the potential of causing a very strong positive price effect and, in addition, would necessarily be factored into the price by the stock market, presents the market with such “total mix” of information that causes an underpricing of the security, thus, making the “fraud-on-the-market” theory of reliance unavailable to a purchaser who obtained the security during the period of such concealment and resulting deflation of the price. Since Plaintiffs plead facts unambiguously indicating that, during certain parts of the Class Period, Intelli-group’s securities were traded at deflated prices, Plaintiffs can use the “fraud-on-the-market” theory of

Basic v. Levinson

to satisfy their pleading requirements only with respect to those parts of the Class Period when the price of the securities was inflated, but not with respect to the Class Period in its entirety.

iii.

Other District Court Cases

The other district court cases relied upon by Plaintiffs similarly offer no support to Plaintiffs’ proposition that, “under the law,” this Court should find that Intelligroup’s securities were traded at inflated prices during the periods when Intelligroup’s liabilities were slightly understated, assets were slightly overstated, and net income was understated dramatically. For instance, Plaintiffs cite Parmalat, 375 F.Supp.2d 278 , as a case “involving a drop in securities price after disclosure of a fraud that understated [issuer’s] debt and overstated its assets,” prompting the Court to “center [ ] around false and misleading statements of financial [entries] other than net income.” Opposition at 23. However, contrary to Plaintiffs’ interpretation of the case, the court in Parmalat focused on misstatements in issuer’s net income figures.

See Parmalat,

375 F.Supp.2d at 307 and n. 189 (noting that the Parmalat plaintiffs “contended] that [issuer’s financial] statements ... overstated ... EBITDA of approximately ... 948 million [euro] by at least 538 million” euro, that is, by 157%, and explaining that “ ‘EBITDA’ stands for earnings before [deduction of] interest, taxes, depreciation and amortization,” i.e., net income before deduction of costs associated with continuous business). Similarly, Plaintiffs’ reliance on

Alna,

532 F.Supp. 591 ,

see

Opposition at 24, is misplaced.

29

As in

Parmalat ,

the court in Ala concentrated on misstatements of issuer’s net income.

30

See Alna,

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532 F.Supp. at 595 (discussing two consecutive drops of issuer’s earnings-per-share).

In sum, Plaintiffs cited no case (and this Court is aware of none) where the court examining a security traded on secondary market focused on issuer’s misstatements of assets and liabilities while sliding issuer’s misstatements of net income to the periphery of its attention. While the courts in Parmalat and Ala, and other courts, took notice of misstatements of items other than net income, it appears that all these courts were presented with a typical scenario where all financial entries were misstated

coherently,

i.e., in a way sending same type of signal to the stock market because both assets and net income were invariably overstated, while liabilities were invariably understated. Neither the court in Parmalat nor that in Ala, nor any other tribunal of which this Court is aware, faced the situation where a purchaser buys a security at a distorted price after an issuer’s financials sent

opposite signals of dramatically different importance

to the stock market. Since this very issue is presented by the case at bar, the Court is not persuaded by Plaintiffs’ argument that concentration on dramatically misstated financial figures mainly used by the stock market to determine the price of a security is “simply contrary to the law.”

c.

Financial Theories and Calculations

As noted above, the Court’s December Opinion: (a) employed the Dividend Model for the purpose of determining whether Intelligroup’s stock was likely to be overpriced throughout the Class Period in its entirety; and (b) reached the conclusion that frequent understatements of Intelli-group’s net income that, most likely, provided the stock market with information causing frequent underpricing of Intelli-group’s securities, which availed Plaintiffs of a bargain and eliminated factual support from Plaintiffs’ reliance claim based on the “fraud-on-the-market” theory enunciated in

Basic v. Levinson. See

December Opinion at 19-30

(Intelligroup,

468 F.Supp.2d at 687) (detailing the financial theories and mathematical calculations). Plaintiffs, however, contend that this Court erred and should have focused on Intelligroup’s misstatement of items other than Intelligroup’s income.

See

Opposition at 25-29. Moreover, Plaintiffs’ Complaint is drafted with apparently distinct concentration on each of these items, i.e., Plaintiffs allege that Intelligroup’s Statements misrepresented the corporate assets and liabilities and, in addition, misrepresented Intelligroup’s accumulated deficit and, moreover, misrepresented the corporation’s shareholders’ equity.

See

Compl. at 11 (itemizing each type of errors); Opposition at 20 (itemizing each type of misstatement). Consequently, the Complaint leaves an unsophisticated reader with the impression that Intelligroup kept fabricating, anew, entry after entry.

See

Opposition at 1 (“[V]irtually every line of Intelli-group’s financial statements ... was false”). Such Plaintiffs’ statements, read in light of Plaintiffs’ argument that the Court should consider, separately, mis

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statements of Intelligroup’s assets, liabilities, accumulated deficit and shareholders’ equity,

see id.

at 21-24, appear to confuse the nature and interrelations of these basic accounting items. Therefore, the Court believes it would be useful to clarify the matter.

The term “asset” means an economic benefit; examples of assets include cash, equipment, buildings and land.

See

Charles Horngren, Gary Sundem, John Elliott, Introduction to Financial Accounting (“Introduction”) 50-51 (9th ed.2002). A “liability” is an obligation which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future; examples of liabilities include wages, taxes, accounts pay-ables, accrued pensions and warranties, as well as obligations ensuing from issued bonds, signed notes and leases.

See id.

at 382-439. The so-called “accounting equation” creates the mathematical structure of the balance sheet and relates corporate assets, liabilities and shareholders’ equity as follows: shareholders’ equity equals the difference between total assets and total liabilities.

31

See id.

at 51-53. Therefore, a misstatement of any liability item, by definition, results in a misstatement of total liabilities which, in turn, results in a misstatement of shareholders’ equity (same as any misstatement of corporate assets produces erroneous shareholders’ equity). In other words, a single accounting error by an issuer, by definition: (a) causes the issuer to misstate a multitude of other accounting items related to the original error through the mathematics governing the balance sheet, and (b) ensures that, in the event of issuer’s restatement of finan-cials, a multitude of lines, if not “virtually every line of [the issuer’s] financial statements, [would have to be restated to correct the original] false” entry. Consequently, this Court will examine Plaintiffs’ arguments based on Intelligroup’s assets, accumulated deficit, liabilities and shareholders’ equity by referring to shareholders’ equity since, as the foregoing illustrates, an error in shareholders’ equity reflects cumulative impact of errors made with respect to assets, liabilities and accumulated deficit.

Elaborating on their assertion that this Court erred in focusing on understatements of Intelligroup’s net income rather than on overstatements of Intelligroup’s shareholders’ equity, Plaintiffs allege that “markets rely on assortment of factors to determine the price of a public company’s shares.” Plaintiffs do not provide the Court with any specific financial theory correlating corporate assets to the market’s price of a stock, so the Court could consider an alternative to the Dividend Model, which correlates the price of a stock to corporate earnings, i.e., net income, through assessment of the future stream of dividends. Rather, Plaintiffs: (a) enter their own generic observation that “a variety of factors, including a company’s assets, capital structure, possible and profitable changes in volume, price and costs, company’s management and reputation and other factors are all considered by the market when establishing the price of a company’s shares”; and (b) to support this proposition by citing to Benjamin Graham, David L. Dodd, Sidney Cot-tle, Security Analysis-Principles and Techniques 42-43 (4th ed., 1962) (“Securities Analysis”).

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Almost seventy years old' — -and having its forth edition (relied upon by Plaintiffs) published more than twenty-five years before the issuance of

Basic v. Levinson,

which enunciated the transactional causation theory that Plaintiffs aim to employ— Security Analysis still enjoys the status of a classic conservative treatise on finance and valuation.

32

In Security Analysis, Graham and Dodd divided stockholders into two types. On one side of the spectrum, they placed those who “play” on the market by looking for quick upsides; Graham and Dodd named such players “speculators.”

33

They contrasted speculators with “true investors” who look for safe income streams, and pointed out that investors do not operate on behavioral biases but rather rely on the intrinsic soundness of the investment. Elaborating on how a prudent investor — and the market comprised of such investors-should determine the intrinsic value of a stock, Graham and Dodd explained:

The

most important single factor

determining a stock’s value is now held to be the indicated average future earning power [of the stock], i.e., the estimated average earnings for a future span of years [in other words, the stream of future dividends]. Intrinsic value would then be found by first forecasting this earning power [of the stock] and then multiplying that prediction by an appropriate “capitalization factor” [that is, the financial formula enabling an investor to determine the present value of a known future capital.]

34

Security Analysis at 28 (emphasis supplied).

Since this Court, in its December Opinion, relied on the Dividend Model basing such reliance upon the observation that “[t]he corporate finance theory unvaryingly holds that the ... stock price reflects the market’s estimation of the future stream of dividends, discounted back to its present value,” December Opinion at 23

(.Intelligroup,

468 F.Supp.2d at 687), it appears that this Court and the financial source relied upon by Plaintiffs are in complete agreement as to the conclusion that the stock price depends on the future stream of dividends (which, in turn, is determined on the basis of the corporation’s earnings). Therefore, this Court concludes that the Securities Analysis treatise verifies the propriety of this Court’s reliance on the Dividend Model, but lends no support to Plaintiffs’ claim that the market concentrates on corporate assets for the purpose of determining the price of the corporation’s stock.

35

Since Plaintiffs offer

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no sound financial theory in support of their contentions, the Court can neither ignore actual financial considerations of the stock market nor shift the Court’s attention from these considerations to the misstatement of Intelligroup’s shareholders’ equity solely because Intelligroup’s misstatements of this accounting item yields a conclusion more favorable to Plaintiffs’ position than that ensuing from the net income.

The Court cannot accept pleadings based on Plaintiffs’ self-serving conjecture in view of the Supreme Court’s guidance in Bell Atlantic and Dura. Since Plaintiffs should plead “enough facts to raise a reasonable expectation that discovery will reveal evidence of [the alleged claim]” and set forth factual “allegations plausibly suggesting (not merely consistent with)” Plaintiffs’ claims,

Bell Atlantic,

127 S.Ct. at 1969-74 ;

see also Dura,

544 U.S. at 347 , 125 S.Ct. 1627 , this Court cannot conclude that an allegation consisting of technical data could be reduced to a conclusion if such conclusion defies actual financial considerations of the stock market, same as the Court cannot accept, as plausible, technical allegations proffered in support of a litigant’s conclusion that the Earth is flat.

Cf. Kumho Tire,

526 U.S. at 149 , 119 S.Ct. 1167 . Therefore, this Court cannot deem plausible Plaintiffs’ allegations that the market overpriced Intelligroup’s securities on the basis of those overstatements of shareholders’ equity that were made in conjunction with dramatic understatements of Intelligroup’s net income, since no method generally accepted in the financial community supports such conclusion.

See id.

During certain parts of the Class Period, Intelligroup stock was overpriced by the market. By way of an example, during the last fiscal quarter of 2002, Intelligroup simultaneously overstated its shareholders’ equity by 53% and its net income by 1,796%.

See

Compl. at 11. Both of these overstatements sent coherent signals to the stock market depicting Intelligroup’s financial position more favorably than it was in actuality, hence causing an unwarranted inflation of Intelligroup’s securities.

Accord

December Opinion at 30

(Intelli-group,

468 F.Supp.2d at 691) (similarly finding that Plaintiffs sufficiently alleged transactional causation with respect to four non-consecutive phases of the Class Period). By contrast, during the third fiscal quarter of 2003, Intelligroup simultaneously overstated its shareholders’ equity by 31% but understated its net income by a whopping 6,535%. Since “the most important single factor” in assessment of Intelli-group stock’s value was a derivative from Intelligroup’s statement — in this case, understatement — of the corporation’s net income,

see Security Analysis

at 28, the facts offered by Plaintiffs do not plausibly suggest that Intelligroup stock was overpriced during the period that followed such disclosure.

36

See Bell Atlantic,

127 S.Ct.

*315

at 1974. In view of Plaintiffs’ failure to plead facts indicating grounds for reliance during certain parts of the Class Period, this Court is constrained to find that Plaintiffs failed to meet their pleading burden as to the transactional causation element of their 10b-5 claim, notwithstanding apparent sufficiency of Plaintiffs’ reliance pleading with respect to other parts of the Class Period. Plaintiffs averred that the claims set forth in the Complaint are typical and common to all members of the class.

37

See

Docket Entry No. 17-2, at 8-

*316

11. However, Plaintiffs’ pleading of technical data indicating that certain members of Plaintiffs’ class obtained Intelligroup stock at a bargain equals to Plaintiffs’ failure to plead transactional causation with respect to the entire class.

38

See Richland,

272 F.Supp. at 148 (failure to assert the applicable element with respect to part of the class period nullifies the entire claim);

accord Blackie,

524 F.2d 891 ;

Yadlosky,

197 F.R.D. at 298 ;

Shamrock,

557 F.Supp. at 206 ;

Computer Memories,

111 F.R.D. at 684.

6. Alternative Allegations of Reliance

Although barely fleshed out, Plaintiffs make two other reliance-type allegations that appear to differ from Plaintiffs’ core reliance claim, which is based directly on misstatements in Intelligroup’s financial data and the “fraud-on-the-market” presumption.

The first of these assertions is reduced to Plaintiffs’ statement that “Defendants’ materially false and misleading statements regarding such financial information as, inter alia, assets, liabilities and accumulated deficit ... caused ... Plaintiffs ... to purchase

Intelligroup

... stock ... at artificially inflated prices.” Compl. ¶ 113. Since this statement does not refer in any way to the market’s assessment of Intelli-group’s stock but rather concentrates on the information that Plaintiffs themselves seemingly considered pertinent to their decision to purchase Intelligroup’s stock, the Court entertains this statement as Plaintiffs’ attempt to plead individualized reliance.

As the Court pointed out

supra,

reliance may be established in either of two ways: by showing individualized reliance (sometimes referred to as “actual” or common law reliance) on the material in question, or by showing facts which justify the presumption of reliance. To prove actual reliance, a securities plaintiff must assert facts showing that the disclosure materials the plaintiff read contained a material misrepresentation or failed to disclose a material fact upon which they relied.

See, e.g., List,

340 F.2d 457 ;

Globus v. Law Research Serv., Inc.,

418 F.2d 1276 (2d Cir.1969);

Schlick v. Penn-Dixie Cement Corp.,

507 F.2d 374 (2d Cir.1974),

cert. denied,

421 U.S. 976 , 95 S.Ct. 1976 , 44 L.Ed.2d 467 (1975);

Huddleston,

640 F.2d at 549 (listing the cases in the order of doctrinal evolution). In the instant case, however, the Complaint is silent as to Plaintiffs’ familiarity with the content of Intelligroup’s Statements that Plaintiffs challenge.

See

generally, Compl. Such silence enables this Court to presume that not a single Plaintiff actually familiarized himself or herself with the content of any of Intelligroup’s Statements, moreover with the content of all Statements issued during the forty months of the Class Period.

Accord Gruber,

776 F.Supp. at 1046-48 (dismissing the complaint where plaintiffs tried but failed to allege common law reliance and reliance based on the “fraud-on-the-market” presumption). Moreover,

*317

it is unclear from the face of the Complaint whether the Lead Plaintiffs know, with any degree of certainty, even the number of other Plaintiffs in the class.

39

Therefore, this Court has no reason to conclude that Plaintiffs properly plead actual reliance, regardless of Plaintiffs’ assertion that they executed their purchases of In-telligroup stock while relying on misstatements of Intelligroup’s assets, liabilities, accumulated deficit and equity.

The other reliance allegation could be gleaned from Plaintiffs’ argument based on certifications of Intelligroup’s executives with respect to Intelligroup’s measures of internal reporting and control. (Being sporadically articulated by Plaintiffs, the nature of these allegations is not entirely clear in view of the fact that the claim is well developed by Plaintiffs with respect to their allegations of the scienter and loss causation elements but is entirely omitted from those paragraphs in the Complaint, and corresponding arguments in Plaintiffs’ Opposition, which address the issue of transactional causation, i.e., the reliance element.) The allegation ensues from the language of certifications entered by Intel-ligroup’s executives into the Statements, pursuant to the SOX requirement for such a certification.

See

Compl. ¶¶ 77-82; Opposition at 46. The language employed in these certifications was either

[t]he information contained in the [Statement] fairly presents, in all material respects, the financial condition and results of operations of [Intelligroup,]

Compl. ¶¶ 77-79 (certifications issued on August 14, 2002; November 12, 2002; March 28, 2003; May 15, 2003; August 14, 2003; and November 14, 2003; March 30, 2004, and May 17, 2004), or

[Intelligroup’s executives] are responsible for establishing and maintaining disclosure controls and procedures ... and internal controls over financial reporting ... for [Intelligroup,] and [they] have ... designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under [their] supervision, to provide reasonable assurance regarding the reliability of financial [Statements for [general public] in accordance with [GAAP, and] evaluated the effectiveness of [Intelligroup’s] disclosure control and procedures.

Compl. ¶ 80; Opposition at 46 (emphasis removed) (certifications issued on March 30, 2004, and May 14, 2004).

Plaintiffs appear to allege that the investors purchased Intelligroup’s securities because the investors were relying on these certifications as assurances.

See

Compl. ¶ (“[executives] of the company ... misled the investing public that the company’s financial statements were accurate and ... the company had adequate internal control”); Opposition at 2-4 (quoting the language of certifications and concluding that “[p]ublic investors, ... relying on the illusory nature of Intelligroup’s financial results, purchased Intelligroup stock”). However, since Plaintiffs may establish transactional causation only by asserting that they purchased Intelligroup stock at inflated prices, the sole fact of misstatement is insufficient to plead reliance.

See Dura,

544 U.S. at 343 , 125 S.Ct. 1627 (“the

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higher purchase price [is] a necessary condition of [establishing an economic] loss”);

WatchGuard II,

2006 WL 2927663 , at *1, 2006 U.S. Dist. LEXIS 74269 , at *4 (“False statements are an insufficient basis for a securities fraud claim. This truism received substantial attention in the court’s prior order dismissing Plaintiffs original complaint”). Because inflation of the price requires support in financial figures, the fact of Intelligroup’s SOX certifications cannot alter the outcome ensuing from In-telligroup’s Statements, i.e., the fact that, during certain parts of the Class Period, the market was likely to underprice rather than overprice Intelligroup’s stock.

Moreover, this Court finds any assertion that SOX certifications were the component which provided Intelligroup’s Statements with an aura of reliability counterproductive to Plaintiffs’ cause since, taken to its logical conclusion, such assertion suggests that the Statements unaccompanied by SOX certifications were likely to be perceived by the public as unreliable. Consequently, for the purposes of establishing the reliance element of 10b-5, Plaintiffs’ emphasis on SOX certifications read as an indication that Plaintiffs had less reasons — or no reason whatsoever — to rely on Intelligroup’s Statements during the initial fifteen and a half months, since the Class Period selected by Plaintiffs began to run on May 1, 2001, but the first Intelligroup’s Statement accompanied by SOX certification was issued only on August 14, 2002.

See

Compl. ¶ 77.

In sum, neither the facts provided by Plaintiffs in support of their core reliance allegation nor other forms of reliance arguments that this Court could fathom on the basis of the facts set forth in Plaintiffs’ Complaint indicate that Intelligroup stock was invariably traded at inflated prices throughout the entire Class Period. Since the Complaint does not contain “enough [factual] heft” to amount to “allegations plausibly suggesting (not merely consistent with)” Plaintiffs’ conclusions with respect to the reliance element,

Bell Atlantic,

127 S.Ct. at 1969-74 ,

accord Dura,

544 U.S. at 347 , 125 S.Ct. 1627 , and this Court should not credit Plaintiffs’ bald assertions and mere conclusions as facts,

see Burlington,

114 F.3d at 1429 ;

Nice,

135 F.Supp.2d at 565 , Plaintiffs’ Complaint will be dismissed for failure to allege facts satisfying the transactional causation requirement.

B. Loss Causation

While, as discussed

supra,

Plaintiffs’ Complaint is deficient in view of Plaintiffs’ failure to sufficiently plead transactional causation and, in spite of this Court’s detailed guidance to the same effect with respect to Plaintiffs’ Second Complaint, Plaintiffs elected not to amend their pleading so to exclude the parts of the Class Period during which Intelligroup stock was likely to be a bargain, the Court cannot ignore the possibility that Plaintiffs still may piece together a 1 Ob-5 claim supported by sufficient facts to satisfy the reliance requirement, e.g., by moving for (a) re-certification of subclasses of plaintiffs who purchased Intefligroup’s securities during those parts of the Class Period when Intelligroup stock price was inflated, and (b) re-designation of corresponding lead plaintiffs. Therefore — as with respect to Plaintiffs’ Second Complaint — the Court does not limit its inquiry to the matters of transactional causation but rather proceeds with examination of Plaintiffs’ pleading to determine whether Plaintiffs sufficiently plead the element of loss causation to support their claim.

Accord

December Opinion at 31

(Intelligroup,

468 F.Supp.2d at 692) (“Even if Plaintiffs’ Complaint contained valid pleadings as to Plaintiffs’ purchases of Intelligroup stock at inflated prices during the entire Class Period ..., Plaintiffs’ Complaint would

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still have to be dismissed since Plaintiffs failed to assert any facts indicating [loss causation]”).

1. Relevant Facts

There are two groups of facts that appear to be pertinent to the inquiry into the sufficiency of Plaintiffs’ pleading of loss causation. One group of facts involves the publications made by Intelligroup, while another group consists of data reflecting the pricing of Intelligroup’s securities.

a.

Intelligroup’s Publications

Clearly, the most relevant publication is the Press Release that, on September 24, 2004, disseminated the information which, allegedly, caused Plaintiffs’ losses. The Press Release included, inter alia, the following three announcements:

[Intelligroup] has been undertaking a comprehensive review of its 2004 second quarter results [which] resulted in a number of accounting adjustments to prior period[s and the] financial statements [issued during 2001, 2002 and 2003].... Adjustments identified to date are expected to reduce ... net income by approximately $0.9 million (or $0.05 per share) for the year ended December 31, 2003. In addition, there are certain historical intercompany adjustments totaling approximately $1.2 million that affect periods prior to 2001. The impact of these historical adjustments are expected to increase the accumulated deficit account for the years ... 2003, 2002 and 2001. There is also a remaining unreconciled difference of approximately $0.6 million in [Intelligroup’s] intercom-pany accounting records that has yet to be fully investigated, which may result in additional adjustments.... Reconciliation of this difference [is] the primary reason for the ... delay in filing [financial report for the second fiscal quarter of 2004]. (“First Announcement”)

[Intelligroup] entered into a definitive agreement pursuant to which [two entities] will purchase [Intelligroup’s] common stock in a private placement ... for a total purchase price of $15,000,000.... [Intelligroup’s] determined, after evaluating alternatives that this transaction was necessary because [Intelligroup’s] cash position and relative cash availability under its $15 million revolving credit facility had become inadequate to fund ongoing operations.... The transaction will violate [the stock market’s] listing rules [since it is being undertaken without shareholders approval required by the stock market’s rules,] and, as a result, [Intelligroup] might be delisted from the ... Stock Market. (“Second Announcement”)

In addition, [Intelligroup] is in default under its revolving credit facility as a result of the failure to file its [financial report for the second fiscal quarter of 2004].... [Intelligroup] is working ... to obtain waivers of such defaults [but, if Intelligroup] cannot obtain such waivers, the indebtedness ... under [the] revolving credit ..'. could be accelerated. (“Third Announcement”)

Press Release.

In addition, Intelligroup made two other publications. One publication was made on May 4, 2004, slightly more than five and a half months prior to Intelligroup’s publication of the Press Release, and advised the investing community about Intelli-group’s “earning shortfall” (“Earnings Announcement”).

See

Compl. ¶ 5. The other publication was made a month and a half prior to Intelligroup’s publication of the

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Press Release

40

and notified the investors that Intelligroup’s external auditing firm resigned (“Auditor Announcement”).

41

See id.

¶ 6.

b.

Chart of Intelligroup’s Stock Price

Defendants’ Exhibit G sets forth the actual prices at which Intelligroup’s securities were traded during the period from March 1, 2004, to December 31, 2004.

See

Stock Chart (Docket Entry No. 65-12).

42

The data in the Stock Chart depicts the following twenty spans of the chart-line:

(1) The stock price was at its highest on March 1, 2004, when the stock traded at $9.95 per share.

(2) From this point on, the price declined, first modestly, then sharply, over two weeks, until it fell to $6.82 per share on March 16, 2004, losing $3.17 per share (“First Drop”).

(3) Over the next three weeks, the price slowly rose to $8.64 per share, which was reached on April 7, 2004, gaining back $1.82 per share (“First Recovery”).

(4) After that, the price steadily dropped and, on May 3, 2004, fell to $5.79 per share, thus losing $2.85 per share (“Second Drop”).

(5) On May 4, 2004, the day of the Earnings Announcement, the price plummeted from $5.79 to $3.90, losing $1.81 per share (“Earnings Drop”).

(6) For two weeks after the day of the Earnings Announcement, the price kept slowly sliding down until, on May 18, 2004, it reached $3.18 per share, thus losing another $0.72 per share (“Post-Earnings Drop”).

(7) After that dip, the price began to climb and did so rather steadily for about seven weeks, reaching $5.30 per share on July 2, 2004, thus gaining $2.12 per share (“Second Recovery”).

(8) Over the next five weeks, the price declined again and, by August 10, 2004, dropped to $2.78 per share, i.e., losing $2.52 per share (“Post-Second Recovery Drop”).

(9) On August 11, 2004, that is, the day of the first part of the Auditor Announcement, the price fell to $2.10 per share, thus, losing another sixty-eight-cents-per-share (“Auditor Drop”).

(10) The price continued falling and, on August 16, 2004, went down another dime to $2.00 per share.

(11) On August 17, the day of the second part of the Auditor Announcement, the price went down another three cents to $1.97 per share.

(12) Over the next ten days, the price kept fluctuating up and down, but finally dropped to $1.67 per share on August 27, 2004, losing another thirty-cents-per-share(“Post-Auditor Drop”).

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(13) From this point on, the price began a slow climb up and, on September 13, 2004, reached $2.32 per share, i.e., gaining $1.35 per share (“Posh-Auditor Recovery”).

(14) The next ten days were marked by a steady decline and, on September 24, the day which ended with Intelli-group’s airing of the Press Release, fell to $1.65 per share, that is, suffering another sixty-seven-cents-per-share decline (“Pre-Release Drop”).

(15) On September 27, the first trading day after the Press Release, the price dropped to $1.13 per share, losing another fifty-two-cents-per-share (“Press Release Drop”).

(16) During the following week, the price began climbing and, on October 4, 2004, reached $1.79 per share, gaining back sixty-six-eents-per-share (“Posh-Release Recovery”).

(17) Over the next three weeks, the price dropped and reached its lowest point on October 26, 2004, landing at $0.95 per share (“Post-Release Drop”).

(18) From that lowest point, the price began to rise and, two weeks later, reached $1.49 per share on November 9, 2004, thus, achieving the gain of fifty-four-cents-per-share (“Second Post-Release Recovery”).

(19) For the next eight weeks, the price declined while going through a relatively small up-and-down fluctuation and, on December 30, 2004, dropped to $1.15 per share, i.e., losing thirty-six-cents-per-share (“Final Drop”).

(20)The year 2004 ended with a minor rise to $1.20 per share, that is, a five-cents-per-share gain.

Thus, the image of the chart-line resulting from the data set forth in the Stock Chart could be reduced to the following see-saw-like sequence: First Drop — First Recovery — Second Drop — Earnings Drop — Post-Earnings Drop — Second Recovery — Post-Second Recovery Drop— Auditor Drop — Posh-Auditor Drop — Post-Auditor Recovery — Pre-Release Drop— Press Release Drop — Post-Release Recovery — Post-Release Drop — Second Post-Release Recovery — Final Drop.

2. Deficiencies Contained in Plaintiffs’ Second Complaint

In their Second Complaint, Plaintiffs alleged, inter alia, that the Press-Release Drop and all followings drops (but not recoveries) were a direct result of the First Announcement, which — according to Plaintiffs — disclosed to the investing public “the false ... nature of Defendants’ [Statements.”

43

See

Second Complaint ¶¶ 105-08. In support of this assertion, Plaintiffs: (a) relied on the temporal proximity between the Press Release and Press-Release Drop, (b) read the information disclosed by Intelligroup in its Restatement into the language of the First Announcement, and (c) alleged that the Post-Release Recovery should be ignored as a mere market “fluke.”

See id.

In addition, Plaintiffs contended that, although the Second and Third Announcement did not cause the Press Release Drop, the very fact that Intelligroup made the Second and Third Announcements should be perceived as supporting Plain

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tiffs’ assertion that the Press Release Dr

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