# In Re Intelligroup Securities Litigation

> District Court, D. New Jersey · November 13, 2007 · 527 F. Supp. 2d 262

URL: https://www.frixlaw.com/law-library/cases/2369689

## Case

- **Full name:** In Re INTELLIGROUP SECURITIES LITIGATION
- **Court:** District Court, D. New Jersey
- **Decided:** November 13, 2007
- **Citations:** 527 F. Supp. 2d 262; 2007 U.S. Dist. LEXIS 83780; 2007 WL 3376743
- **Precedential status:** Published
- **Opinion:** Opinion by Brown
- **Judges:** Brown
- **Cited by:** 62 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2369689

## How later opinions describe it (automated extraction)

- stating that SOX certifications establish scienter only if the complaint asserts facts indicating that, at the time of certification, the defendants actually knew or at least turned a “blind eye” to information indicating that the certifications were erroneous
- applying the Schiller rationale, and holding that neither Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), nor Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), “provide[d] th[e] Court with …
- noting that courts give weight to GAAP violations “only where the provisions of GAAP so coincide with conclusions obvious to any business person ... that a violation of this type ... equates to a self-evident business nonsensicality which cannot be made by a defendant with a n…
- holding that “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”

## Opinion text

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
*270
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-
*273
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
*274
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
*275
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
*276
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
*277
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
*278
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
*280
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
*282
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
*283
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,
*284
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”).
*285
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
*300
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 th

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2369689. Public record. Not legal advice.