Opinion

In Re Initial Public Offering Securities Litigation

241 F. Supp. 2d 281
2003 WL 358003

Court: District Court, S.D. New York
Filed: Feb 19, 2003
Status: Published
Author: Scheindlin
On the bench: Scheindlin
Cited by: 195 cases
Authority: More cited than 96.3%

stating “Section 15 claims need only be pleaded under Rule 8; a defendant is only entitled to notice that she allegedly controlled an entity that violated Section 11” and “Section 20(a) must therefore be pleaded only in accordance with Rule 8(a). Neither the PSLRA (because scienter is not an essential element), nor Rule 9(b) (because fraud is not an essential element), apply to a Section 20(a) claim”

How later courts described this case

stating “Section 15 claims need only be pleaded under Rule 8; a defendant is only entitled to notice that she allegedly controlled an entity that violated Section 11” and “Section 20(a) must therefore be pleaded only in accordance with Rule 8(a). Neither the PSLRA (because scienter is not an essential element), nor Rule 9(b) (because fraud is not an essential element), apply to a Section 20(a) claim”
holding that group pleading doctrine applied to outside director who was founder of company and held 3% of company’s shares, because he “was more akin to a ‘corporate insider’ with a special relationship to the Company, rather than an outside director”
finding scienter “not an essential element of a Section 20(a) claim ... [r]ather, a plaintiff need only prove scienter if a defendant presents the affirmative defense that it acted in good faith”
noting that the Evolve Software, Inc. Complaint pled motive on the part of the Issuer Defendant by alleging the announcement of a stock-based acquisition, which may have never actually been consummated, where Evolve would use the alleged inflated value of its shares in the exchange

Written by the judges who cited it.

The opinion

OPINION AND ORDER

SCHEINDLIN, District Judge.

This Document Relates To: All Cases

TABLE OF CONTENTS

†

INTRODUCTORY MATERIAL

I. INTRODUCTION.293

II. SYNOPSIS OF HOLDINGS.295

III.SECURITIES LAW, HOT ISSUES MARKETS AND TIE-IN AGREEMENTS .298

*291

A. General Background on the Securities Act and Exchange Act. OO 05 03

B. Hot Issues Markets, Market Manipulation and Tie-in Agreements 05 Oj 03

1. Hot Issues Market of 1959-1962. O CO

2. Hot Issues Market of 1967-1971 . C3 OO

3. Hot Issues Market of 1979-1983. lO 05 CO

4. Hot Issues Market of 1998-2000 .;.

05 CO

IV. THE COMPLAINTS.. CO o OO

A. Individual Complaints. . OO o CO

1. Factual Allegations and Allegation of Market Manipulation . CO o OO

2. The Registration Statement’s Misleading Statements and Omissions . O t-H CO

3. Claims . t — I 00

B. Part I of Master Allegations. ^ t — i CO

1. Tie-in Allegations and Undisclosed Compensation. i — 1 CO

2. Statistical Analysis. OO i — I CO

3. Matrix Illustrating Various Relationships Among Underwriters 05 r — 4 CO

4. Analyst Allegations.. 05 t-H CO

5. Motivations of the Underwriters, Issuers and Individual Defendants . 03

C. Part II and Part III of the Master Allegations. 03

GOVERNING LEGAL PRINCIPLES

V. PLEADING UNDER THE FEDERAL RULES OF. CIVIL PROCEDURE CO CO

A. Rule 8(a).. CO CO

B. Rule 9(b).. CO N>

1. Why Rule 9(b) Requires Particularity. CO to

2. How Particularity Deters Claims of Fraud. CO to

3. Rule 9(b) Must Be Read in Harmony with Rule 8. CO to

VI. PLEADING SECURITIES FRAUD. CO CO

A. Securities Fraud Before 1995 . CO CO

B. Pleading Securities Fraud After the PSLRA. CO DO

1. Paragraph (b)(1) . CO CO

2. CO CO

VII. PRELIMINARY ISSUES. r-H CO CO

A. Standard of Review. 7 — t CO CO

1. The Court Must Take the Pleadings as True and Draw All Inferences In Plaintiffs’ Favor .:. CO CO

2. Both Defendants and the Court Must Accept the Complaints As Pled... 03 CO CO

3. Clarity of Pleadings Is Not a Factor in Dismissal. CO CO CO

B. The Pleading Standards for Some of the Claims Are Governed by the PSLRA; Others are Governed by Both the PSLRA and the Federal Rules .. CO CO CO

1. The Differences Between the Scope of the PSLRA’s Pleading Requirements and Rule 9(b). CO CO CO

2. The Federal Rules Still Apply to Certain Types of Securities Fraud Claims. CO CO ^

3. Summary.... CO CO CR

APPLICATION OF LEGAL PRINCIPLES

VIII. SECTION 11 CLAIMS.. CO CO 05

A. The Section 11 Claims Have Been Properly Pled. CO CO 05

1. The PSLRA’s Pleading Standards Do Not Apply to Claims Brought Under the Securities Act. CO CO -q

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2. Rule 8(a) Applies to Section 11 00 CO CO

3. Plaintiffs Need Not Plead Reliance in Order to State Certain of Their Section 11 Claims. 04 CO

4. Plaintiffs Need Not Plead that the Issuers and Individual Defendants Had Knowledge in Order to State Section 11 Claims Against Those Defendants. 04 CO

B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief May Be Granted. ^ CO

1. Plaintiffs Have Standing. ^ CO

2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent With Their Claims. CO

3. Those Plaintiffs Who Sold Securities Above the Offering Price Have No Damages and Therefore No Claim Upon Which Relief Can Be Granted. CO

IX. SECTION 15 CLAIMS.351

X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND INDIVIDUAL DEFENDANTS . CO oi co

A. The Rule 10b-5 Claims for Material Misstatements Have Been Properly Pled. CO cn co

1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of the PSLRA — Particularity. CO cn co

a. Paragraph (b)(l)’s First Two Requirements Have Been Satisfied. CO cn co

b. Paragraph (b)(l)’s Last Requirement Has Been Satisfied ... CO oí ^

2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter. lO CO

a. Allocating Underwriters. CO CO

b. Non-Allocating Underwriters. (O CO

c. Individual Defendants. CD CO

i. The Motive Allegations Are Sufficient as to Sixty-Four Defendants. CO o 05

ii. The Motive Allegations Are Insufficient as to 161 Defendants. CO CO CO

d. Issuers. 00 CO CO

i. The Motive Allegations Are Sufficient as to 185 Issuers o t> CO

ii. The Motive Allegations Are Insufficient as to 116 Issuers. O E> CO

e. Summary. 1-i t> CO

3. The Material Misstatement Claims Adequately Plead the Remaining Elements of a Rule 10b-5 Claim: Transaction Causation, Loss Causation, Reliance and Damages. CO DO

a. Transaction Causation. CO «<1

b. Loss Causation and Damages. CO

B. Plaintiffs Have Stated Rule 10b-5 Claims For Material Misstatements and Omissions Upon Which Relief May Be Granted .... CO ~C| 00

1. The Misstatements and Omissions Are Material. co “-3 CO

2. All Defendants Had a Duty to Disclose. CO CO O

XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST THE ALLOCATING UNDERWRITERS.384

A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter.384

B. The Market Manipulation Claims Adequately State Claims Upon Which Relief May Be Granted.385

1. Plaintiffs Adequately Plead “Deceptive or Manipulative Conduct”.387

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College Bound II

Is Not the Law..390

XII. SECTION 20 CLAIMS.392

CONCLUDING MATERIAL

XIII. LEAVE TO REPLEAD.397

XIV. CONCLUSION.399

TABLE OF AUTHORITIES

APPENDICES

Al. LIST OF CONSOLIDATED CASES .... C£> H T*

A2. SECTION 11. tH (M

A3. SECTION 15. 03 (M ^

A4. RULE 10b-5 CLAIMS AGAINST INDIVIDUAL DEFENDANTS CQ (M

A5. RULE 10b-5 CLAIMS AGAINST ISSUERS

*£>

(M ^

A6. SECTION 20. CO

INTRODUCTORY MATERIAL

These cases allege a vast scheme to defraud the investing public. The scheme — characterized by Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, and concealed by misrepresentations and omissions — was aimed at fraudulently driving up the price of stock in hundreds of companies in the immediate aftermarket of their initial public offerings (“IPOs”). Plaintiffs allege that investment banks routinely required substantial investors to participate in the scheme in order to receive allotments of these valuable IPOs. The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell their individual holdings at enormous gains. The investment banks profited by receiving kickbacks from the investors who received the IPO allocations. To hide the scheme from the investing public, the investment banks, companies, and officers violated the securities laws by making misleading statements in offering documents and by manipulating the market. Thousands of ordinary investors, who are. Plaintiffs in these cases, allege that the value of their holdings plummeted as a result of this unlawful conduct.

I. INTRODUCTION

From January 1998 to December 2000, over 460 high technology and Internet-related companies raised capital by selling ownership of their company to the public.

Prior to going public, each company hired a group of investment banks to underwrite their IPO. Some, but not all, of the Underwriters allocated the IPO stock for distribution to initial purchasers (“Allocating Underwriters”). On the day of the IPO, the Allocating Underwriters sold the stock directly to those customers, usually institutional investors. The price of the stock was predetermined and set forth in a registration statement filed with the Securities and Exchange Commission (“SEC”). In general, the Underwriters received 7% of the gross proceeds (or some other fixed

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amount) as compensation for their services, and the Issuer received the remaining capital.

See MDCM Holdings, Inc. v. Credit Suisse First Boston Corp.,

216 F.Supp.2d 251, 253 (S.D.N.Y.2002). After the offering, those who purchased on the IPO could profit by selling their stock in the aftermarket,

ie.,

on a stock exchange such as the Nasdaq. Indeed, from 1998 to 2000, customers who bought IPO stock often made large profits as the price of the stock dramatically surged in the aftermarket.

Plaintiffs who bought stock in the aftermarket for 309 of these high-technology and Internet-related stocks allege that the Allocating Underwriters required their customers to enter into agreements to buy additional shares of the Issuer in the aftermarket as a condition of receiving the right to purchase the IPO stock. In some instances, these customers were also required to make those purchases at predetermined escalating prices. As a result of these “Tie-in Agreements,” the Allocating Underwriters created an artificial demand for the company’s stock and caused the price of the stock to rise. In addition, the Underwriters used this scheme to enrich themselves by requiring customers to pay them a portion of the profits they made by selling the IPO shares in the aftermarket.

Spurred by newspaper and government investigations into the IPO allocation practices of various investment banks,

Plaintiffs filed over 1,000 Complaints in this district from January 11 to December 6, 2001, each alleging that the Underwriters perpetrated this scheme in connection with 309 IPOs.

See Makaron v. VA Linux Sys., Inc.,

No. 01 Civ. 242 (first action filed January 11, 2001);

Genduso v. Internap Network Servs. Corp.,

No. 01 Civ. 11247 (last action filed December 6, 2001).

Plaintiffs are suing three groups of defendants in each IPO case; the Underwriters of the IPO, the company that issued the stock (“Issuer” or “Issuer Defendant”), and the company’s officers (“Individual Officers” or “Individual Defendants”). In total, Plaintiffs are suing fifty-five Underwriters, 309 Issuers, and thousands of Individual Defendants.

In an effort to coordinate the lawsuits and avoid taxing the limited judicial resources of this district, the Assignment Committee of the Southern District of New York directed that all of the actions be transferred to this Court for “coordination and decision of pretrial motions, discovery and related matters other than trial.” Order,

In re Initial Public Offering Sec. Litig.,

21 MC 92 (Aug. 9, 2001). This Court subsequently consolidated the lawsuits by Issuer

{e.g., In re Cacheflow Securities

Litigation), thereby resulting in 309 consolidated cases that are being coordi

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nated in the above-captioned litigation.

The Underwriters, Issuers, and Individual Defendants now move to dismiss these actions in their entirety.

In broad terms, the Defendants put forward two grounds for dismissal.

First,

they argue that each of the 309 Complaints fails to comply with the pleading requirements of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

Second,

they contend that even if the allegations are properly pled and assumed to be true, the Complaints must be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). For the reasons that follow, these motions are granted in part and denied in part.

II. SYNOPSIS OF HOLDINGS

It is axiomatic that when deciding a motion to dismiss, a court must accept as true the factual allegations of a complaint. Indeed, the court must draw every reasonable inference from those factual allegations in favor of the party bringing suit. It is against this backdrop that the many rulings contained in this Opinion must be understood.

The general requirements for pleading a complaint are found in the Federal Rules of Civil Procedure unless a specific statute sets forth a different pleading standard. Rule 8 requires, only a “short and plain statement of the claim showing that the pleader is entitled to relief.” When pleading fraud, under Rule 9, however, “the circumstances constituting fraud [must] be stated with particularity.”

In addition, in the field of securities law, the PSLRA imposes a heightened pleading standard with respect to some causes of action by adding two more requirements.

First,

when pleading that a defendant has made a material misstatement or omission on which the investing public relies, the complaint must specify each statement alleged to have been misleading, the reason the statement is misleading, and, if the misstatement is alleged on information and belief, the facts on which that belief is formed.

Second,

when a securities fraud claim requires that a defendant act with fraudulent intent, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”

Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in Plaintiffs’ favor, Plaintiffs have alleged one coherent scheme to defraud, the entire purpose of which was to artificially drive up the price of the securities. This scheme offends the very purpose of the securities laws, namely “to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing.”

Where insiders con

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spire to frustrate the efficient function of securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered up that manipulation with lies and omissions. When investors have been injured by these frauds, those insiders may be liable under the securities laws.

Plaintiffs bring six claims against various Defendants. All Defendants are alleged to have made false statements in the registration statement and prospectus related to a particular IPO, in violation of Section 11 of the Securities Act of 1933 (First Claim). The Individual Defendants are alleged to have controlled the Issuers who made those false statement in violation of Section 15 of the 1933 Act (Second Claim). All Defendants are alleged to have made false statements in the registration statement and prospectus with the intent to deceive the investing public, in violation of Section 10(b) of the Exchange Act of 1934 (Third and Fourth Claims). The Allocating Underwriters are also alleged to have engaged in a scheme to manipulate the securities markets in violation of Section 10(b) of the 1934 Act (Fifth Claim). Lastly, the Individual Defendants are alleged to have controlled the Issuers who violated Section 10(b) of the 1934 Act, in violation of Section 20 of that Act (Sixth Claim).

Because these cases are of great importance to the public, and because this Opinion is lengthy and highly technical, a synopsis of its holdings is warranted. The following constitutes, in summary form, the rulings of the Court.

Section 11 Claims

Section 11 was designed to hold those who prepare registration statements in connection with IPOs — such as the Underwriters, Issuers, and Individual Defendants here — to a stringent standard of liability for

any

material misrepresentations contained in those statements, although certain Defendants may raise their due diligence as an affirmative defense at trial. Pleading under Section 11 is governed solely by Rule 8 because fraud is not an element of a Section 11 claim. Plaintiffs have sufficiently pled, under the standard of Rule 8, that all those who signed the registration statement or prospectus violated Section 11 because those documents failed to disclose the fraudulent scheme— specifically, the Tie-in Agreements and the Undisclosed Compensation. Moreover, on the secondary offerings, the registration documents also failed to disclose that the analyst reports were prepared by analysts employed by the Underwriters, who consistently issued recommendations tainted by undisclosed conflicts of interest. However, those Plaintiffs who sold their shares above the offering price have no damages as a matter of law, and their claims must be dismissed.

Section 15 Claims

Section 15 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 11. Pleading a Section 15 claim is also governed by Rule 8, and thus only requires an allegation that the defendant controlled a person or entity that violated Section 11. Here, the Individual Defendants are alleged to have controlled the Issuers who violated Section 11. While the Individual Defendants may raise lack of knowledge as an affirmative defense at trial, Plaintiffs need not plead that the Section 15 Defendants acted with the intent to defraud. Thus, the Section 15 claims are dismissed only in those cases where the Section 11 claims have been dismissed for lack of damages.

Section 10(b) Claims for Material Misstatements and Omissions

Section 10(b) —the general “securities fraud” provision in the 1933 and 1934

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Acts — was designed to punish intentionally manipulative or deceptive practices employed as part of a scheme to defraud. One prohibited practice is intentionally making materially false or misleading statements concerning publicly traded securities. In such a case, a plaintiff must comply with either the PSLRA or Rule 9, depending on the particular element, because Section 10(b) claims are claims of fraud. Thus, Plaintiffs jnust plead the misleading statements themselves, the basis to believe those statements are misleading, and the Defendants’ intent to defraud investors under the PSLRA. Plaintiffs must also plead that those misstatements and omissions were material, and that those Defendants had a duty to disclose the information. Finally, Plaintiffs must plead, under Rule 9, that they purchased the stock _ after relying on those material misstatements and were damaged as a result.

Plaintiffs have successfully pled that all of the Underwriters (both Allocating and Non-Allocating) made material misstatements and omissions, which they had a duty to disclose, with the intent to defraud the investing public. Plaintiffs have also alleged, with the required particularity, that they purchased stock based on their falsely inflated market price, and that the misrepresentations caused a significant disparity between the price of the securities and their real value, resulting in significant financial damages.

Nonetheless, Plaintiffs have failed to plead that

some

of the Issuers and Individual Defendants acted with the required intent to defraud. Specifically, when an Issuer exploited the inflated value of the company to engage in a merger or acquisition, or to raise even more money through further stock offerings, the intent requirement has been satisfied. Likewise, when an Individual Defendant sold large amounts of her shares at a significant profit relatively close in time to the IPO, the requisite intent has been demonstrated. In all other instances, the pleading of intent to defraud is inadequate and therefore the claims against those Issuers and Individual Defendants must be dismissed.

Section 10(b) Claim for Market Manipulation

In addition to punishing material misstatements and omissions, Section 10(b) was designed to prohibit

any

intentional conduct that deceives or defrauds investors by controlling or artificially affecting the price of securities. Such claims are typically described as “market manipulation” claims. Plaintiffs’ pleading obligations for the market manipulation claims are identical to those for the material misstatements claims except, because there are no alleged misstatements, the PSLRA only governs the pleading of intent to defraud. Thus, Plaintiffs must plead with particularity the manipulative scheme itself, the intent to defraud the investing public, reliance on the integrity of the market (ie., that they believed it was

not

manipulated) and resulting damages.

Plaintiffs have succeeded in pleading a market manipulation claim against the Allocating Underwriter Defendants. They have alleged that these Defendants acted with the requisite intent because they required their customers to engage in Tie-in Agreements and to pay Undisclosed Compensation in order to receive an initial allocation of stock. Subsequent purchases, at escalating prices, falsely inflated the price of the shares. This very conduct evinces a strong inference that Defendants intended to defraud the investing public. Plaintiffs also have alleged that these Defendants engaged in deceptive or manipulative conduct because Defendants’ conduct was “designed to deceive or defraud investors by controlling or artificially af

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fecting the price of securities.”

Finally, Plaintiffs have alleged the remaining elements of these claims with the required specificity.

Section 20 Claims

Section 20 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 10(b). The pleading of a Section 20 claim is governed solely by Rule 8, because such claims do not necessarily require proof of scienter, nor is fraud an essential element of such claims. Thus a plaintiff must allege only that a defendant controlled a person or entity who violated Section 10(b). At trial, a plaintiff must also show that the defendant was a “culpable participant” in the underlying

fraud-

— ie., took some action (or inaction) that furthered the underlying fraud. A defendant may then offer proof that the culpable participation was done in good faith. Because Plaintiffs have adequately alleged control, the Section 20 claims survive against those Individual Defendants who controlled Issuers liable under Section 10(b), and are dismissed only against those Individual Defendants who controlled an Issuer as to whom the Section 10(b) claims have been dismissed.

In sum, Plaintiffs have pled a coherent scheme by Underwriters, Issuers, and their officers to defraud the investing public. As such, these lawsuits may proceed.

III. SECURITIES LAW, HOT ISSUES MARKETS, AND TIE-IN AGREEMENTS

A. General Background of the Securities Act and Exchange Act

In the aftermath of the bull market of the 1920s, the 1929 stock market crash, and the subsequent Great Depression, Congress held extensive hearings to investigate the practices underlying securities trading.

See generally Legislative History of the Securities Act of 1933 and Securities Exchange Act of 193J(

(J.S. Ellenber-ger & Ellen P. Mahar eds.1973). During these investigations, Congress repeatedly discovered instances of market manipulation and deception, which it concluded had contributed to the market’s collapse. For example, Professor Steve Thel has written:

Before [President] Roosevelt was even inaugurated, [Chief Counsel of the Senate Banking and Currency Committee Ferdinand] Pécora revealed fabulous excesses in investment, commercial banking, and the financing of public utilities. Among other things, he showed that in the years before the crash, some respected bankers had controlled the market price of securities in which they held an interest by effecting huge purchases or sales as the situation required. Instances of such manipulative trading were uncovered repeatedly throughout the course of the hearings.

Steve Thel,

The Original Conception of Section 10(b) of the Securities Exchange Act,

42 Stan. L.Rev. 385, 412 (1990) (footnotes omitted). Likewise, a 1934 Act Senate Committee report explained, albeit in more muted tones, how the market was manipulated:

Several devices are employed for the purpose of artificially raising or depressing security prices.... Among such practices are fictitious “wash” sales; “matched” orders, or orders for the purchase and sale of the same security emanating from a common source for the purpose of recording operations on the tape and thereby creating a false appearance of activity; and other transactions specifically designed to manipulate the price of a security.

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S.Rep. No. 73-792, at 7-8 (1934). (“1934 Senate Report”).

In order to protect the integrity of the market and combat such practices, Congress enacted the Securities Act of 1933 (“Securities Act”)

and the Securities Exchange Act of 1934 (“Exchange Act”).

In general, the Securities Act regulates the initial offering of securities,

see Gustafson v. Alloyd Co.,

513 U.S. 561, 571-72 , 115 S.Ct. 1061 , 131 L.Ed.2d 1 (1995), while the Exchange Act regulates post-distribution purchases and trading,

see Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,

511 U.S. 164, 171 , 114 S.Ct. 1439 , 128 L.Ed.2d 119 (1994).

The Securities Act “was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing.”

Ernst & Ernst,

425 U.S. at 195, 96 S.Ct. 1375 (citing H.R.Rep. No. 73-85, at 1-5). The Exchange Act “was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges.”

Id.

(citing 1934 Senate Report at 1-5). “A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of

caveat em/ptor

and thus to achieve a high standard of business ethics in the securities industry.”

SEC v. Capital Gains Research Bureau,

375 U.S. 180, 186 , 84 S.Ct. 275 , 11 L.Ed.2d 237 (1963) (footnote omitted).

see also

15 U.S.C. § 77k.

Second,

that NeSmith, Malcom and Johnson are liable under Section 15 of the Securities Act, which holds a controlling person liable for a company’s Section 11 violation.

See

Cacheflow Compl. ¶¶ 69-75;

see also

15 U.S.C. § 77o.

Third,

that the Allocating Underwriter Defendants

(ie.,

all of the underwriters except J.P. Morgan (H

Q)) violated Section 10(b) of the Exchange Act and Rule 10b-5 by manipulating the market with Tie-in Agreements and by requiring customers to pay Undisclosed Compensation.

See

Cacheflow Compl. ¶¶ 84-92;

see also

15 U.S.C. § 78j(b); 17 C.F.R. § 240 .10b-5.

Fourth,

that all Underwriter Defendants violated Section 10(b) and Rule ÍOb-5 by making material misrepresentations and omissions for the purpose of securing and concealing the Tie-in Agreements, Undisclosed Compensation, the conflicts of interest between the Underwriter Defendants and the analysts who reported on Cacheflow’s stock or some combination thereof.

See

Cacheflow Compl. ¶¶ 93-103;

see also

15 U.S.C. § 783 (b); 17 C.F.R. § 240 .10b-5.

Fifth,

that Cacheflow, NeSmith, Malcom, and Johnson violated Section 10(b) and Rule 10b-5 by carrying out a scheme to artificially inflate the price of the company’s stock by making material misrepresentations and omissions to conceal the Underwriters’ behavior.

See

Cacheflow Compl. ¶¶ 111-20;

see also

15 U.S.C. § 783 (b); 17 C.F.R. § 240 .10b-5.

Sixth,

that NeSmith, Malcom and Johnson are liable under Section 20(a), which holds a controlling person liable for a company’s Section 10(b) and Rule 10b-5 violations.

See

Cacheflow Compl. ¶¶ 121-24;

see also

15 U.S.C. § 78t(a).

The following chart summarizes these claims:

Claim Underwriters Issuers_Individuals

1._Section 11_Section 11_Section 11

2.__ Section 15

3. Rule 10b-5 for manipulative practices (only against Allocating _Underwriters)__

4. Rule 10b-5 for false statements _and omissions_

5. Rule 10b-5 Rule 10b-5 for false for false statements statements _and omissions and omissions

6.Section 20(a)

B. Part I of Master Allegations

There are essentially three parts to the Master Allegations. Part I outlines factual allegations against the Defendants. Part II provides relevant details about twenty-two of the fifty-five Underwriter Defendants. Part III contains a brief description of each Underwriter Defendant and the number of shares received for each IPO. Part I will be the discussed in the greatest detail because it contains the most relevant factual allegations.

1. Tie-in Allegations and Undisclosed Compensation

Part I of the Master Allegations is 114-pages long and its most important paragraphs are 14-17 and 34.

Paragraphs 14-17 set forth the Plaintiffs’ alle

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gations about the alleged Tie-in Agreements and Undisclosed Compensation:

14. The Underwriter Defendants set about to ensure that there would be large gains in aftermarket trading on shares following initial public offerings by improperly creating artificial aftermarket demand. They accomplished this by conditioning share allocations in initial public offerings upon the requirement that customers agree to purchase, in the aftermarket, additional shares of stocks in which they received allocations, and, in some instances, to make those additional purchases at pre-arranged, escalating prices (“Tie-in Agreements”).

15. These Tie-in Agreements did not always require that the investors receiving allocations in initial public offerings actually purchase shares in the aftermarket, although often they did. The Tie-in Agreements were designed to ensure ready demand for shares in the event the Underwriter Defendants so desired.

16. By extracting agreements to purchase shares in the aftermarket, the Underwriter Defendants created artificial demand for aftermarket shares, thereby causing the price of the security to artificially escalate as soon as the shares were publicly issued.

17. Not content with record underwriting fees obtained in connection with new offerings, the Underwriter Defendants sought, as part of their manipulative scheme, to further enrich themselves by improperly sharing in the profits earned by their customers in connection with the purchase and sale of IPO securities. The Underwriter Defendants kept track of their customers’ actual or imputed profits from the allocation of shares in the IPOs and then demanded that the customers share a material portion of the profits obtained from the sale of those allocated IPO shares through one or more of the following types of transactions: (a) paying inflated brokerage commissions; (b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or (c) purchasing equity offerings underwritten by the Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the Underwriter Defendants’ unlawful scheme (Transactions “(a)” through “(c)” above will be, at varying times, collectively referred to hereinafter as “Undisclosed Compensation”).

MA ¶¶ 14-17.

“For example,” according to paragraph 34, “customers who received allocations of IPO shares in the following listed IPOs fulfilled their commitments to purchase shares in the aftermarket pursuant to Tie-in Agreements, netting the Underwriter Defendants and other underwriters of the referenced offerings substantial additional trading revenue and commissions and substantially and artificially increasing the demand for the issuer’s shares[.]”

Id.

¶ 34. The statement made in the Master Allegations with respect to Cacheflow’s IPO is representative of the allegations repeatedly made in paragraph 34:

One customer, in order to obtain shares of the Cacheflow IPO from Morgan Stanley, was required or induced to and did purchase from Morgan Stanley in the aftermarket, at prices substantially

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above the IPO price, thousands of additional Cacheflow shares.

Id.

¶ 34, at 16.

While paragraph 34 makes similar allegation with respect to almost every IPO— from Aclara Biosciences to Z-Tel Technologies — and fills over 71 pages of the Master Allegations,

see id.

¶ 84 at 8-80, these allegations are not duplicative. The allegations in paragraph 34 differ in three significant ways.

First,

each allegation varies with respect to the Underwriter from whom that particular unnamed customer bought the IPO stock. For example, the allegations involving Autoweb and Backweb Technologies state:

One customer, in order to obtain shares of the Autoweb IPO

from CSFB,

was required or induced to and did purchase

from CSFB

in the aftermarket, at prices substantially above the IPO price, about twice the number of Autoweb shares allocated to that customer in the IPO. * * * * * *

One customer, in order to obtain shares of the Backweb Technologies IPO

from Goldman Sachs,

was required or induced to and did purchase

from Goldman Sachs

in the aftermarket, at prices substantially above the IPO price, more than three times the number of Back-Web Technologies shares allocated to that customer in the IPO.

Id.

¶ 34 at 13-14 (emphasis added).

Second,

the allegations differ as to the amount of stock that the customer was required or induced to buy in the aftermarket. For instance, while one customer was required or induced to purchase “thousands of additional Intersil shares,”

id.

¶ 34 at 37, another customer was required or induced to purchase, “more than three times the number of Liberate shares allocated to that customer in the IPO,”

id.

¶ 34 at 40.

Third,

in forty-seven of the 309 cases, Plaintiffs allege at least two examples of customers who were required or induced to buy stock in the aftermarket from a particular Underwriter.

For example, the allegations with respect to PSI Technologies state:

a) One customer, in order to obtain shares of the PSI Technologies IPO from J.P. Morgan (H & Q), was required or induced to and did purchase from J.P. Morgan (H & Q) in the aftermarket, at prices substantially above the IPO price, as many PSI Technologies shares as

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that [sic] allocated to that customer in the IPO.

b) One customer, in order to obtain shares of the PSI Technologies] IPO from Soundview Technologies] (E*Trade), was required or induced to and did purchase from Soundview Technologies] (E*Trade) in the aftermarket, at prices substantially above the IPO price, four times the number of PSI Technology shares allocated to that customer in the IPO.

c) One customer, in order to obtain shares of the PSI Technologies] IPO from Goldman Sachs, was required or induced to and did purchase from Goldman Sachs in the aftermarket, at prices substantially above the IPO price, thousands of additional PSI Technology shares.

Id.

¶ 34 at 59.

Paragraphs 35-56 further supplement these allegations in three ways.

First,

these paragraphs provide more details about the types of Undisclosed Compensation that customers paid to the investment banks. Paragraphs 41-43 state:

41. One form of Undisclosed Compensation involved the payment of inflated brokerage commissions. In that regard, investors were instructed or made to understand that allocations of IPO shares would be awarded to customers that paid per share commission rates well in excess of the ordinary and customary commission rates for these accounts, as well as the rules and regulations governing the securities industry.

42. The Underwriter Defendants also sought and received Undisclosed Compensation from customers in the form of commissions paid on trades of highly liquid securities made solely for the purpose of generating commissions. Sometimes these trades were executed in stocks for which the Underwriter Defendants were market makers and which they wanted to actively support. These trades were akin to “churned” sales or “wash” transactions, generated for the main purpose of creating financial benefits for the Underwriter Defendants.

43.The Underwriter Defendants also sought and received Undisclosed Compensation in the form of compensation earned by forcing customers to buy shares of offerings, including undesired add-on offerings, with the understanding that customers would receive IPO allocations only if they purchased such shares.

Id.

¶¶ 41-43.

Second,

the paragraphs provide further detail as to how the investment banks enforced their scheme with their customers:

45. With regard to retail accounts, firms (including, for example, Morgan Stanley and Paine Webber) typically utilized a grid (or index) system whereby allocations were made to individual brokers, to then be awarded to clients, based on point totals. The higher the points, the more likely it was for a broker to be awarded an allocation of shares in an initial public offering.

46. Brokers earned points on the grid by allocating shares to clients who were required or induced to buy, and in fact bought, shares of the issuer in the aftermarket, typically at multiples of the initial shares allocated and at prices above the offering price. Brokers also earned points by selling customers

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shares in add-on offerings. These offerings typically were not favored investments by customers as they offered scant investment returns. However, underwriters earned large fees on add-on offerings and received sizeable commissions on sales of such shares.

47. The Underwriter Defendants’ misconduct in connection with [the] initial public offerings was so pervasive and uniform from underwriting firm to underwriting firm, that retail sales personnel relocating to new firms were able to transfer their “grid” scores to new firms.

Id.

¶¶ 45-47.

Third,

paragraphs 35-56 refer to various newspaper articles that have reported on the government’s investigation into the IPO allocation practices of investment banks during the same time period. For example, the Master Allegations quote a May 11, 2001, New York Times article reporting on the federal grand jury testimony of hedge fund trader Walter Scott Bruan that states:

Mr. Bruan has contended that investment banks manipulated the trading of I.P.O.’s by lining up commitments from investors to buy more shares at specific prices above the offering prices. That practice, known as laddering, would help to ensure that the price of a new stock would rise on its first day of trading, fueling demand from other investors who wanted a piece of a hot stock, Mr. Bruan has said.

Id.

¶ 36 (quoting Patrick McGeehan,

Hedge Fund Managers Said to Talk to Grand Jury,

N.Y. Times, May 11, 2001, at Cl). Likewise, the Master Allegations have similar quotations from other investigative reports on IPO allocation practices.

See id.

¶ 37 (quoting from 5/25/01 USA Today article);

id.

¶ 40 (quoting from 12/7/00 Wall Street Journal article);

id.

¶¶ 49-52 (quoting from Red Herring articles that were published in a seven-part series beginning on 5/2/01);

id.

¶ 53 (quoting from 6/29/01 Wall Street Journal article);

id.

¶ 55 (quoting from 6/24/00 Wall Street Journal article).

2. Statistical Analysis

Paragraphs 57-65 fall under a heading entitled “Statistical Analysis Of The Coordinated Litigation Confirms the Misconduct Alleged Herein.”

Id.

at 87. These paragraphs compare various data from the IPOs at issue in this coordinated litigation with other data from other IPOs during the same time period or from previous years. Specifically, Plaintiffs allege:

(1) the IPO Litigation Offerings “had the highest average first day market gain [almost 140%] of any initial public offering market of any period measured

[ie.,

1980-1999],”

id.

¶ 58,

(2) “although average first day gains were also higher for all IPOs during the Class Period [ ] (just over 60%), the first day aftermarket gains of the IPO Litigation Offerings (almost 140%) were far more dramatic,”

id.

¶ 59,

(3) “[w]hereas in the Prior Period IPO Market [from Jan. 1980 — June 1998], approximately one out of every ten initial public offerings fell below 10% of the offering price within three years,” this happened to “more than 50% of the initial public offerings comprising the IPO Litigation Offerings,”

id.

¶ 60,

(4) “whereas on average the number of shares traded in the first five days after the IPO was equal to 85% of the shares offered in the Prior Period IPO Market [Oct.l982-June 1998], the number of shares traded on average in the first five days after

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the IPO Litigation Offerings was equal to over 350% of the shares issued,”

id.

¶ 61,

(5) “part of the Underwriter Defendants’ motivation for engaging in the misconduct [] was to conduct secondary offerings at a much higher price ... [and] the percentage of IPOs that were followed by a subsequent equity offering within 6 months increased dramatically for the IPO Litigation Offerings [when compared with IPOs from 1980-June 1998],”

id.

¶ 62,

(6) “[i]n the Prior Period IPO Market [January 1980-June 1998], secondary offerings followed initial public offerings on average less than 3.5% of the time ... [while] the IPO Litigation Offerings were followed by secondary offerings within six months almost five times as often (16%),” and “[a]ll Offerings were followed by secondary offerings within six months of the IPO only slightly more than 8% of the time,”

id.

¶ 63,

(7) “[t]he IPO Litigation Offerings showed substantial price increases on average around the end of the quiet period, whereas initial public offerings in the Prior Period IPO Market [Jan.l989-June 1998] showed very little price increase on average,”

id.

¶ 64,

(8) “[t]he IPO Litigation Offerings also contrasted markedly with All Offerings during the 1998-2000 IPO Market,”

id.

¶ 65.

Each of these allegations is followed by a four-colored graph illustrating the allegation.

3. Matrix Illustrating Various Relationships Among Underwriters

Paragraphs 66-85 fall under a heading entitled “Matrix.” This six-page illustration shows “the relationships between the lead underwriters (‘book runners’) of the IPO Litigation Offerings and the underwriters who participated in such offerings.”

Id.

¶ 66. For example, a representative allegation states:

In the 41 IPO Litigation Offerings in which Robertson Stephens was the book-runner (or co-book-runner), the following underwriters participated in the number of IPO Litigation Offerings set forth next to their names: Bear Stearns (7); H & Q (14); SG Cowen (7); Piper Jaffray (12); Prudential (8); SureTrade (7); Weisel (7); First Albany (8); Dain Rauscher (16); CE Unterberg (8); E*Trade (16); and Needham & Co. (10).

Id.

¶ 70. The matrix illustrates the relationship that each of the twenty-one investment banks that served as book-runners or co-book-runners in the IPO Litigation Offerings had with the other investment banks.

See id.

¶ 66.

4. Analyst Allegations

Paragraphs 86-108 contain the Plaintiffs’ allegations that the Underwriter Defendants used their analysts “to artificially inflate and maintain the aftermarket price of [the IPO] securities.”

Id.

¶ 86. “[T]he Underwriter Defendants utilized their analysts to recommend such stocks at their first opportunity, typically at the end of the so-called ‘quiet period,’ 25 days following the offering.”

Id.

“Between 1998 and 2000, 97% of analyst initiations at the expiration of the quiet period were by managing underwriters of the initial public offering. Virtually all such coverage was positive.”

Id.

¶ 108. “In many instances the favorable recommendations were accompanied by unrealistic price targets, frequently reiterated throughout the relevant class periods.”

Id.

¶ 86. Not only did “analysts employed by the Underwriter Defendants [know] that a negative recom

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mendation would likely lead to fewer investment banking opportunities,”

id.

¶ 89, but they have been “confronted with enormous pressure to issue favorable recommendations regarding shares underwritten by the various Underwriter Defendants,”

id.

¶ 107.

The Master Allegations allege three types of perceived conflicts. “[M]any, if not most, of the Underwriter Defendants tied their analysts’ compensation to the performance of the investment banking section of the Underwriter Defendants so that the winning of new investment bank business would directly inure to the pecuniary benefit of the analyst.”

Id.

¶ 88. “Many analysts also suffered from conflicts of interest due to their ownership of stock in companies they were recommending.”

Id.

¶ 90. Finally, “analysts frequently had equity interests in entities including venture capital funds and partnerships which had investment interests in these issuers.”

Id.

¶ 104.

5. Motivations of the Underwriters, Issuers and Individual Defendants

The last four paragraphs of Part I,

see id.

¶¶ 109-12, allege the motivations that the various Defendants had in carrying out these Tie-in Arrangements. In addition to receiving various forms of Undisclosed Compensation,

see id.

¶¶ 41-43, “the Underwriter Defendants were [also] able to parlay the spectacular increase in market capitalization attendant to each offering into additional and highly lucrative investment banking opportunities for themselves,”

id.

¶ 109. “Examples of these additional opportunities include the underwriting of add-on offerings such as secondary and tertiary equity offerings (for which the Underwriter Defendants typically were paid a fixed percentage of the offering price), the underwriting and sales of debt and convertible offerings and advisory services including financial consulting and advising on mergers and acquisitions.”

Id.

Likewise, during the late 1990s, “the Underwriter Defendants marketed themselves by emphasizing the prospect of substantial market gains, including the first day gains, of IPO Offerings to entice potential clients to retain those underwriters.”

Id.

¶ 110.

The last paragraph contains the only reference to the alleged motivation of the Issuers and the Individual Defendants to participate in this scheme.

See id.

¶ 112. “The Issuers, as new publicly held corporations, benefitted financially from the misconduct as the run up of their respective stock prices afforded them with substantial opportunities to utilize their stock as currency in connection with corporate acquisitions, and to raise even more money through add-on offerings.”

Id.

As far as the Individual Defendants are concerned, “[they] were motivated to and did benefit financially as a result of the sharp appreciation in value of the respective Issuer’s stock price.”

Id.

C. Part II and Part III of the Master Allegations

Although the second and third part of the Master Allegations fill hundreds of pages, they are easily summarized. Part II has twenty-two sections, each of which is tabbed to one particular Underwriter Defendant.

All of the sections contain

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(1) background information on that Underwriter, (2) quotations from various newspaper articles reporting on perceived abuses in the IPO allocations by that investment bank, and (3) a list of the IPOs and their offering price that the Underwriter led or co-led, First Day High Price, and the percentage increase that the First Day High represents when compared to the IPO price. In addition, the twenty-one page section on CSFB restates facts revealed from the government’s investigation into the IPO allocation practices of that bank as well as its subsequent settlement with the SEC.

Part III is marked with two tabs. After Tab A, Plaintiffs have listed each of the fifty-five investment banks and provided several paragraphs of information about the bank’s corporate structure. After Tab B, Plaintiffs have listed the IPOs the Underwriter participated in, the IPO price and the number of shares that investment bank was allocated in that IPO. In addition, Plaintiffs have included estimates as to the amount of additional compensation that customers were required to pay in order to receive the IPO stock. For example, one summary reads:

Banc of America

IPO Shares

IPO Price Allocated

Apropos $22.00 2,000

Digital Insight $15.00 2,000

Dígitas $24.00 4,000

DrKoop.com $ 9.00 20,000

High Speed Access $13.00 8,000

Modem Media $16.00 1,000

NetRatings $17.00 2,000

Oni Systems $25.00 2,000

Repeater Technologies $ 9.00 1,000

Saba Software $15.00 1,000

Ticketmaster Online-City Search, Inc. $14.00 9,000

Utstarcom $18.00 2,000

In order to receive the above listed and other IPO allocations of securities from Banc of America, the recipients of such allocations were required or induced to pay in excess of $3.7 million in commissions to Banc of America during 1999 and 2000. These commissions were generated from trades that would not have occurred but for the allocations, and which were created predominately for the purpose of compensating Banc of America for the allocations received. All of these commissions are referred to herein as “Undisclosed Compensation”.

Id.

Sect. Ill, Tab B, at 1. A similar chart and allegation follows the listing of each Underwriter.

GOVERNING LEGAL PRINCIPLES

V. PLEADING UNDER THE FEDERAL RULES OF CIVIL PROCEDURE

The individual Complaints average more than thirty pages each, comprising a total of nearly 11,355 pages. Defendants have challenged these Complaints as insufficient. The parties have submitted over 500 pages of legal briefing along with thousands of additional pages of attachments, appendixes and letters to support their arguments. Given the seriousness of these allegations, the extent of the briefing, and the fact that there are more than one thousand parties, a thorough discussion of the pleading requirements of the

*322

Federal Rules of Civil Procedure and the PSLRA is in order.

A. Rule 8(a)

Under the Federal Rules it is remarkably easy for a plaintiff to plead a claim: Unless the claim falls into one of the two exceptions set forth in Rule 9, a plaintiff must simply provide “(1) a short and'plain statement of the grounds upon which the court’s jurisdiction depends ... (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks.” Fed.R.Civ.P. 8(a). Almost five decades ago, in

Conley v. Gibson,

355 U.S. 41 , 78 S.Ct. 99 , 2 L.Ed.2d 80 (1957), the Supreme Court first considered the argument that a plaintiff must also “set forth specific facts to support [the complaint’s] general allegations.”

Id.

at 47 , 78 S.Ct. 99 . The Supreme Court responded unanimously:

The decisive answer to this is that the Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is “a short and plain statement of the claim” that will give the defendant fair notice of what the plaintiffs claim is and the grounds upon which it rests.... Such simplified “notice pleading” is made possible by the liberal opportunity for discovery and the other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues.

Id.

at 47-48 , 78 S.Ct. 99 . “The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits.”

Id.

at 48 , 78 S.Ct. 99 .

Leathennan v. Tarrant County Narcotics Intelligence & Coordination Unit,

507 U.S. 163 , 113 S.Ct. 1160 , 122 L.Ed.2d 517 (1993), the Supreme Court rebuked the lower courts for imposing a more demanding rule of pleading on certain types of cases that are sometimes disfavored by the courts (e.g., section 1983 claims against municipalities, prisoner litigation, and civil rights cases). The Court (again unanimous) reaffirmed its previous decision by stating:

“In Conley v. Gibson,

we said in effect that the Rule meant what it said.”

Leathennan,

507 U.S. at 168 , 113 S.Ct. • 1160 (citation omitted). Moreover, as if to warn the lower courts not to stray from the Rules, the Court held that heightened pleading “is a result which must be obtained by the process of amending the Federal Rules, and not by judicial interpretation. In the absence of such an amendment, federal courts and litigants must rely on summary judgment and control of discovery to weed out unmeritorious claims sooner rather than later.”

Id.

at 168-69 , 113 S.Ct. 1160 .

Nonetheless, last term in

Swierkiewicz v. Sorema N.A.,

534 U.S. 506 , 122 S.Ct. 992 , 152 L.Ed.2d 1 (2002), the Supreme Court found occasion to again remind the lower courts not to raise the bar for pleading. This time reversing a case that originated from this district, the Court (still unanimous) reiterated that “Rule 8(a)’s simplified pleading standard applies to

all

civil actions, with limited exceptions.”

Id.

at 513 , 122 S.Ct. 992 (emphasis added). “This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed

*323

facts and issues and to dispose of unmeri-torious claims.”

Id.

at 512 , 122 S.Ct. 992 . “Given the Federal Rules’ simplified standard for pleading, ‘[a] court may dismiss a complaint

only

if it is clear that no relief could be granted under

any

set of facts that could be proved consistent with the allegations.’”

Id.

at 514 , 122 S.Ct. 992 (quoting

Hishon v. King & Spalding,

467 U.S. 69, 73 , 104 S.Ct. 2229 , 81 L.Ed.2d 59 (1984)) (emphasis added). “Rule 8(a) establishes a pleading standard without regard to whether a claim will succeed on the merits.”

Swierkiewicz,

534 U.S. at 515 , 122 S.Ct. 992 .

While the meaning of “a short and plain statement of the claim” is clear on its face, Fed.R.Civ.P. 8(a)(2), the drafters removed any conceivable ambiguity by including more than a dozen sample complaints in the Appendix.

See

Fed.R.Civ.P.App. Forms 3-18. According to Rule 84, “[t]he forms contained in the Appendix of Forms are sufficient under the rules and are intended to indicate the simplicity and brevity of statement which the rules contemplate.”

Fed.R.Civ.P. 84. It is worth emphasizing that not one of these exemplar complaints is more than half a page in length.

“For example, Form 9 sets forth a complaint for negligence in which plaintiff simply states in relevant part: ‘On June 1, 1936, in a public highway called Boylston Street in Boston, Massachusetts, defendant negligently drove a motor vehicle against plaintiff who was then crossing said highway.’ ”

Swierkiewicz,

534 U.S. at 513 n. 4, 122 S.Ct. 992 (quoting Fed.R.Civ. P.App. Form 9). As the Supreme Court recognized in

Swierkiewicz ,

one clearly written

sentence

can satisfy Rule 8(a)(2).

See id.; see also Walker v. Thompson,

288 F.3d 1005 , 1011 n. 2 (7th Cir.2002). If the complaint also includes statements “of the grounds upon which the court’s jurisdiction depends” and “the relief the pleader seeks,” the plaintiff has satisfied Rule 8.

Fed.R.Civ.P. 8(a)(1), (3).

Rule 8(a) does not require plaintiffs to plead the legal theory, facts or elements underlying their claim. There is

nothing

in Form 9, for example, to support plaintiffs accusation of negligence. “It does not say, for example, whether the hypothetical defendant was speeding, driving without lights, or driving on the wrong side of the road.”

Atchinson v. District of Columbia,

73 F.3d 418, 423 (D.C.Cir.1996). Nor does it outline the four elements of negligence and explain how each is satisfied. “Form 9 thus treats the

mere allegation

of negligence as sufficient.”

Id.

(emphasis -added). Form 9’s allegations are wholly conclusory: by simply describing the claim in a short and plain fashion, Form 9 satisfies the Federal Rules.

See

Fed.R.Civ.P. 84.

“A complaint that complies with the federal rules of civil procedure cannot be dismissed on the ground that it is conclusory or fails to allege facts.”

Higgs v.

*324

Carver,

286 F.3d 437, 439 (7th Cir.2002). “The courts keep reminding plaintiffs that they don’t have to file long complaints, don’t have to plead facts, don't have to plead legal theories.”

Id.

(quotation marks and citation omitted). To comply with Rule 8, plaintiffs need not provide anything more than sufficient notice to permit defendant to file an answer.

In this regard, Form 9 is the definition of short and plain: “It can be read in seconds and answered in minutes.”

McHenry v. Renne,

84 F.3d 1172, 1177 (9th Cir.1996).

Indeed, plaintiffs who want to provide something more than

short complaint should be cautious because “[a] party’s assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding.”

Bellefonte Re Ins. Co. v. Argonaut Ins. Co.,

757 F.2d 523, 528 (2d Cir.1985).

Plaintiffs may even plead themselves out of court at the outset of their lawsuit by pleading information that defeats their legal claim, thereby “thwarting what might, for all we know, have been a fruitful program of pretrial discovery for the plaintiff.”

Conn v. GATX Terminals Corp.,

18 F.3d 417, 419 (7th Cir.1994) (citing exam-pies).

See also Stone Motor Co. v. General Motors Corp.,

293 F.3d 456, 464 (8th Cir.2002) (“[A] dismissal under Rule 12(b)(6) should be granted only in the unusual case in which a plaintiff includes allegations that show, on the face of the complaint, that there is some insuperable bar to relief.”) (quoting

Schmedding v. Tnemec Co.,

187 F.3d 862 , 865 (8th Cir.1999)).

Given these incentives, it is no surprise that courts “continue to be puzzled why lawyers insist on writing prolix complaints that can only get them into trouble.”

Hammes v. AAMCO Transmissions, Inc.,

33 F.3d 774, 778 (7th Cir.1994). Plaintiffs would do well to remember that in law, as in life: “He who guards his mouth and his tongue keeps himself from calamity.”

Proverbs

21:23 (New International Version).

B. Rule 9(b)

“Rule 9(b) does impose a particularity requirement in two specific instances.”

Leatherman,

507 U.S. at 168 , 113 S.Ct. 1160 . It states in full: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated

*325

with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.” Fed. R.Civ.P. 9(b). Of these two exceptions, fraud is far more important — courts and commentators rarely discuss the failure to plead a claim of mistake with particularity (much less dismiss a case for that reason).

See Bankers Trust Co. v. Old Republic Ins. Co.,

959 F.2d 677, 682 (7th Cir.1992).

1. Why Rule 9(b) Requires Particularity

There are two main reasons why fraud claims must be pled with particularity: notice and deterrence.

With respect to the former, general accusations of fraud are thought to be too amorphous to provide defendants with sufficient notice to permit a response.

See Novak v. Kasaks,

216 F.3d 300, 314 (2d Cir.2000) (“ ‘The primary purpose of Rule 9(b) is to afford defendant fair notice of the plaintiffs claim and the factual ground upon which it is based.’ ”) (quoting

Ross v. Bolton,

904 F.2d 819, 823 (2d Cir.1990)). “Fraud ... embrace[s] such a wide variety of potential conduct that a defendant needs a substantial amount of particularized information about plaintiffs claim in order to enable him to understand it and effectively prepare his response.”

5 Charles Alan Wright & Arthur R. Miller,

Federal Practice and Procedure

(“Fed.Prac.”) § 1296 (“Pleading the Circumstances of Fraud or Mistake— History and Purpose”).

Requiring particularity may also deter plaintiffs from filing frivolous fraud claims. Courts and commentators have offered several explanations for why fraud claims require more deterrence than other claims. One of the most common is that lawsuits based on fraud are more likely to harm a defendant’s reputation than a typical lawsuit. “Accusations of fraud,” even if proven to be untrue, “can do serious damage to the goodwill of a business firm or a professional person.”

Bankers Trust Co.,

959 F.2d at 683 . In addition, fraud claims should be deterred because “assertions of fraud ... often are involved in attempts to reopen completed transactions or set aside previously issued judicial orders.” 5 Fed. Prac. § 1296. Because finality has value, courts will not lightly reexamine completed transactions because one party has claimed fraud.

See Ackerman v. Northwestern Mut. Life Ins. Co.,

172 F.3d 467, 469 (7th Cir.1999) (citing

Stearns v. Page,

48 U.S. (7 How.) 819, 828-30 , 12 L.Ed. 928 (1849));

see also Chamberlain Mach. Works v. United States,

270 U.S. 347, 348-49 , 46 S.Ct. 225 , 70 L.Ed. 619 (1926).

Another explanation is that fraud claims deserve more deterrence than other law

*326

suits because plaintiffs frequently file fraud claims for the wrong reasons.

See generally

5 Fed. Prac. § 1297. For example, some fraud claims are nothing more than “strike suits” — that is, attempts by plaintiffs to extract settlements from defendants who would rather pay the plaintiff than face the cost of discovery and trial.

Plaintiffs may also sue defendants in order to conduct “fishing expeditions” where a party files a complaint containing general allegations of fraud in hopes that subsequent discovery will uncover enough evidence to substantiate allegations.

Finally, “fraud is frequently charged irresponsibly by people who have suffered a loss and want to find someone to blame for it.”

Ackerman,

172 F.3d at 469 (citing

Denny v. Barber,

576 F.2d 465, 470 (2d Cir.1978) (Friendly, J.) (coining the phrase “fraud by hindsight”)).

2. How Particularity Deters Claims of Fraud

Rule 9(b) deters plaintiffs from filing fraud claims in two ways.

First, by

requiring plaintiffs to state their claim with particularity, the Rule creates a disincentive to the filing of claims for an improper reason. For example, the claim’s particularity narrows the potential scope of discovery. Likewise, because pleadings are binding judicial admissions,

see supra

note 43, plaintiffs cannot easily change their claims based on what they discover during litigation. Thus, requiring plaintiffs to state their claims with particularity has a certain salutary effect.

Second,

particularity increases the cost of filing the complaint by forcing a plaintiff to conduct a more substantial investigation of the grounds for her claim before bringing suit.

See Ackerman,

172 F.3d at 469 . Because “factual contentions [must] have evidentiary support,” Fed.R.Civ.P. 11(b)(3), claims that are stated with particularity will necessarily require the plaintiffs to make inquiries that are more extensive than usual.

see also

Fed.R.Civ.P. 10(c).

In addition to Rule 12, the PSLRA provides an alternate basis for dismissal: “the

*332

court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs [ (b) ](1) and [ (b) ](2) are not met.” 15 U.S.C. § 78u-4(b)(3)(A). “Although the pleading requirements under the PSLRA are strict, they do not change the standard of review for a motion to dismiss. Even under the PSLRA, the district court, on a motion to dismiss, must draw all reasonable inferences from the particular allegations in the plaintiffs favor, while at the same time requiring the plaintiff to show a strong inference of scienter.”

Aldridge v. A.T. Cross Corp.,

284 F.3d 72, 78 (1st Cir.2002) (citations omitted) (citing

Helwig v. Vencor, Inc.,

251 F.3d 540, 553 (6th Cir.2001) (en banc)).

2. Both the Defendants and the Court Must Accept the Complaints as Pled

Throughout their briefs, the Defendants refashion and redraft much of the Complaints, then argue for the dismissal of claims that are not in those Complaints. For example, the Underwriters’ third and fifth briefs are respectively entitled “Memorandum in Support of the Underwriter Defendants’ Motion to Dismiss

Undisclosed Compensation

Claims,” 3 Und. Mem. (emphasis added), and “Memorandum in Support of the Underwriter Defendants’ Motion to Dismiss All

Analyst

Claims,” 5 Und. Mem. (emphasis added).

These briefs then argue that these “claims” should be dismissed.

A plain reading of the Complaint shows that there are no such claims. For example, the Cacheflow Complaint

explicitly

alleges six claims and even highlights the claims with headings that are bolded, underlined and capitalized. The third cause of action in the Cacheflow Complaint has the following heading:

“THIRD CLAIM (FOR VIOLATIONS OF SECTION 10(b) AND RULE 10b-5 THEREUNDER AGAINST THE ALLOCATING UNDERWRITER DEFENDANTS BASED UPON DECEPTIVE AND MANIPULATIVE PRACTICES IN CONNECTION WITH THE IPO)”.

Cacheflow Compl. at 23. In similar fashion, each claim brought by the Plaintiffs in Cache-flow relates to alleged statutory violations committed by the Defendants; each claim contains a heading that removes any ambiguity.

See supra

Part IV.A.3.

While it is perfectly proper to use shorthand phrases to describe these claims, the Defendants have rewritten the Complaints in a way that they believe favors dismissal. It must be remembered, however, that Plaintiffs are the master of their complaint and “neither this Court nor the defendant have the right to redraft the complaint to include new claims.”

MDCM Holdings,

216 F.Supp.2d at 258 .

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Defendants must take the Complaints as they are written.

3. Clarity of Pleadings Is Not a Factor in Dismissal

The Defendants also argue at great length that the Complaints should be dismissed because they are “incomprehensible,” “too vague” and “meaningless.” 1 Und. Mem. at 18-31. This argument has no merit. The Complaints are written in plain English and are well drafted by competent counsel. No one should have any trouble understanding what has been alleged.

See supra

Part IV (summarizing the Complaints). Moreover, this failure, if it exists, is not a ground for Rule 12(b)(6) dismissal. If the Defendants were truly perplexed by the Complaints, they should have filed a motion under Rule 12(e), which states:

If a pleading to which a responsive pleading is permitted is so vague or ambiguous that a party cannot reasonably be required to frame a responsive pleading, the party may move for a more definite statement before interposing a responsive pleading. The motion shall point out the defects complained of and the details desired. If the motion is granted and the order of the court is not obeyed within 10 days after notice of the order or within such other time as the court may fix, the court may strike the pleading to which the motion was directed or make such order as it deems just.

Fed.R.Civ.P. 12(e).

“Perhaps tellingly,” the Defendants “made no such motion here,”

Langadinos,

199 F.3d at 73 n. 6 (discussing Rule 12(e)), nor would such motion have been granted.