Lalor v . Omtool, et a l . CV-99-469-M 12/14/00 UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
John Lalor and John Heck, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs
v. Civil N o . 99-469-M Opinion N o . 2000 DNH 260 Omtool, Ltd, Robert L . Voelk, Darioush Mardan, Martin A . Schultz and Bruce E . Evans, Defendants
O R D E R
John Lalor and John Heck, on behalf of themselves and all
similarly situated individuals, bring this securities litigation
against Omtool, Ltd. and various officers and directors of the
company. Pursuant to Rules 9(b) and 12(b)(6) of the Federal
Rules of Civil Procedure, defendants move to dismiss the amended
complaint. Plaintiffs object.
Standard of Review
A motion to dismiss under Fed. R. Civ. P. 12(b)(6) is one of
limited inquiry, focusing not on “whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer
evidence to support the claims.” Scheuer v . Rhodes, 416 U.S.
232, 236 (1974). In considering a motion to dismiss, “the
material facts alleged in the complaint are to be construed in
the light most favorable to the plaintiff and taken as admitted.”
Chasan v . Village District of Eastman, 572 F.Supp. 5 7 8 , 579
(D.N.H. 1983). See also The Dartmouth Review v . Dartmouth
College, 889 F.2d 1 3 , 15 (1st Cir. 1989). “[D]ismissal is
appropriate only if ‘it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would
entitle him to relief.’” Roeder v . Alpha Industries, Inc., 814
F.2d 2 2 , 25 (1st Cir. 1987)(quoting Conley v . Gibson, 355 U.S.
4 1 , 45-46 (1957)).
Background
Viewed in the light most favorable to plaintiffs, the
material facts appear as follows. Omtool, Ltd. designs,
develops, markets, and supports open client/server facsimile
software, which automates and integrates fax communications. On
August 8 , 1997, Omtool became a publicly owned company by means
2 of an initial public offering (“IPO”) of its stock. Through the
underwriters of the IPO, Omtool and defendants Voelk, Schultz,
and Evans sold a total of approximately 4.6 million shares of
Omtool common stock at $9 per share.
Eleven months later, after the market closed on July 8 ,
1998, Omtool warned that its revenues for the second quarter of
1998 would fall below analysts’ projections. The press release
attributed the anticipated shortfalls “primarily . . . to several
significant corporate contracts that were not completed on a
timely basis.” Exhibit 4 to defendants’ memorandum. The
following day, Omtool’s stock fell over forty percent ( 4 0 % ) .
Approximately two weeks later, Omtool announced its actual
revenue for the second quarter and again pointed to its failure
to complete several corporate contracts as one of the primary
reasons for its disappointing earnings. See Exhibit 5 to
defendants’ memorandum. Again, the stock market reacted
negatively, and Omtool’s stock continued to decline.
3 On October 6, 1998, the end of the class period, the stock
closed at $2.50 per share. After the close of the market, Omtool
announced that it anticipated its third quarter results would
fall below expectations. Although the company reported that it
was “able to finalize several significant corporate contracts
during the quarter,” it attributed revenue shortfalls to
“extended sales cycles and changes in the buying patterns of our
customers.” Exhibit 6 to defendants’ memorandum. The following
day, the stock again dropped substantially and closed at $1.6875.
Thus, during the class period, the stock traded at a high of
$14.75 per share and, at the end of the class period, fell to
$2.50 per share - a decline of more than eighty percent ( 8 0 % ) .
In the ninety days following the close of the class period,
however, the stock rebounded slightly and traded at an average
price of approximately $2.85 per share.
The amended complaint appears to focus on two allegedly
unlawful courses of conduct. First, plaintiffs claim that the
Registration Statement and Prospectus prepared and distributed by
defendants in connection with the IPO contained material
4 misstatements and omissions. Specifically, plaintiffs challenge
the accuracy of financial statements relating to the year ending
December 3 1 , 1996, and the six month period ending June 3 0 , 1997,
both of which were incorporated into the Prospectus. See Amended
complaint, counts 1 and 2 . Next, they say defendants engaged in
fraud by knowingly recognizing improper revenue, “stuffing”
distribution channels, making fictitious sales, and failing to
maintain corporate accounting statements in accordance with
generally accepted accounting principles. See Amended complaint,
counts 3 and 4 .
Plaintiffs’ complaint advances three basic claims. Count 1
alleges violations of Section 11 of the Securities Act of 1933
(“Securities Act”), 15 U.S.C. § 77k. Count 2 alleges violations
of Section 12 of the Securities Act, 15 U.S.C. § 77l. Both
counts relate to allegedly material false statements contained in
the Prospectus. Counts 3 and 4 , on the other hand, relate to
defendants’ allegedly fraudulent conduct following the IPO.
Count 3 alleges violations of Section 10(b) of the Securities and
Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and
5 Rule 10b-5 promulgated thereunder. And, although pled as a
separate claim, Count 4 simply alleges that various individual
defendants named in Count 3 are “controlling persons” of Omtool,
within the meaning of Section 20(a) of the Exchange Act, 15
U.S.C. § 78t, and are, therefore, individually liable to
plaintiffs for alleged violations of Section 10(b) and Rule 10b-
5. See, e.g., Shaw v . Digital Equipment Corp., 82 F.3d 1194,
1216 n.29 (1st Cir. 1996) (noting that “Section 20(a) provides
for derivative liability of persons who ‘control’ others found to
be primarily liable under the Exchange Act.”).
Discussion
In support of their motion to dismiss, defendants advance
four arguments. First, they say that the fraud in which they are
alleged to have engaged did not cause the losses plaintiffs claim
to have suffered. Second, they assert that plaintiffs’ claims
are barred by the statute of limitations. Next, defendants
assert that plaintiffs’ claims under section 12(a)(2) of the
Securities Act must be dismissed for lack of privity. Finally,
6 defendants say the amended complaint fails to plead the alleged
fraud with sufficient specificity.
I. Loss Causation.
Defendants say that “Plaintiffs’ complaint was dead on
arrival when filed because it does not allege that Defendants’
supposed fraud scheme caused Plaintiffs any loss. While
investors who bought Omtool shares during the class period may
have lost money, the Complaint confirms that it was not the
allege fraud scheme that caused those losses.” Defendants’
motion to dismiss at 1 (emphasis in original).
To state a prima facie claim under § 10(b) of the Exchange
Act, a plaintiff “must allege two types of causation, both loss
causation - that the misrepresentations or omission caused the
economic harm - and transaction causation - that the violations
in question caused the plaintiff to engage in the transaction in
question.” Citibank, N.A. v . K-H Corp., 968 F.2d 1489, 1494 (2d
Cir. 1992) (citation and internal quotation marks omitted). See
also 15 U.S.C. § 78u-4(b)(4) (“In any private action arising
7 under this chapter, the plaintiff shall have the burden of
proving that the act or omission of the defendant alleged to
violate this chapter caused the loss for which the plaintiff
seeks to recover damages.”). To properly allege “loss
causation,” a plaintiff must allege that the defendant’s
misrepresentations were the reason the plaintiff’s stock purchase
turned out to be a losing one. In other words, “loss causation”
is simply another name “for the standard rule of tort law that
the plaintiff must allege and prove that, but for the defendant’s
wrongdoing, the plaintiff would not have incurred the harm of
which he complaints.” Bastian v . Petren Resources Corp., 892
F.2d 6 8 0 , 685 (7th Cir. 1990). See also Robbins v . Koger
Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997) (“To prove
loss causation, a plaintiff must show that the untruth was in
some reasonably direct, or proximate, way responsible for his
loss. . . . In other words, loss causation describes the link
between the defendant’s misconduct and the plaintiff’s economic
loss.”) (citations and internal quotation marks omitted). As to
claims under § 11 and 12 of the Securities Act, “loss causation”
is not an essential element of a viable cause of action. It i s ,
8 however, an affirmative defense that may be raised by a
defendant. See 15 U.S.C. § 77l(b). See also 15 U.S.C. § 77k(e).
Here, plaintiffs have adequately alleged that, but for
defendants’ wrongful conduct, they would not have suffered the
losses of which they complain. Specifically, the amended
complaint alleges that the market price of Omtool stock was
artificially inflated due to defendants’ material
misrepresentations concerning various financial aspects of the
company. Had defendants accurately reported the company’s
financial status and had the company employed proper accounting
principles in reporting income and losses, say plaintiffs, the
price at which they purchased shares of the stock would have been
substantially lower. And, when the market finally saw an
accurate picture of the company’s financial health (following the
press releases in July and, more specifically, in October of
1998), the value of the stock declined precipitously, causing the
losses of which plaintiffs complain. Assuming those allegations
to be true - as the court must at this juncture - they are
sufficient to plead “loss causation.” See, e.g., Semerenko v .
9 Cendant Corp., 223 F.3d 165, 184 (3rd Cir. 2000) (“where the
claimed loss involves the purchase of a security at a price that
is inflated due to an alleged misrepresentation, there is a
sufficient causal nexus between the loss and the alleged
misrepresentation to satisfy the loss causation requirement.”);
Miller v . New America High Income Fund, 755 F. Supp. 1099, 1108
(D.Ma. 1991) (holding that to adequately plead loss causation,
plaintiffs “must allege that they were injured because the risks
that materialized were the risks of which they were unaware as a
result of defendants’ misleading statements, not the risks of
which they were fully aware.”).
Defendants suggest that because Omtool never admitted (or
revealed to the public) any instances of fraudulent or improper
accounting practices, such alleged fraud could not have caused
the stock’s precipitous decline. Consequently, say defendants,
plaintiffs have failed to adequately plead a causal connection
between the allegedly fraudulent accounting practices and the
losses plaintiffs sustained. In short, defendants seem to be
saying that if the public was never aware of the alleged fraud,
10 it could have had no impact on the value of Omtool stock. While
that argument has some logical appeal, at least one circuit court
of appeals has rejected precisely such a claim.
The district court concluded that Deloitte met this burden by showing that WOW never disclosed to the market the fact that the 1987 financial statements contained material errors. This analysis was, quite simply, far too narrow.
Loss causation exists where “the misrepresentation touches upon the reasons for the investment’s decline in value.” The district court’s application of section 11(e) ignores the broad nature of the “loss causation” determination. Indeed, the plaintiffs rightly note that, if correct, “the district court’s interpretation would eviscerate the statute. Companies and their auditors could immunize themselves from § 11 liability for false and even fraudulent financial statements simply by refusing to admit their falsity (or refusing to include in the adverse public disclosures information that would ‘clue in the market’ to their falsity) prior to the time a § 11 suit is filed.”
In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1422-
23 (9th Cir. 1994) (citations omitted) (emphasis in original).
Finally, defendants say that since the price of Omtool’s
stock increased in the 90 days following the October, 1998 press
release, plaintiffs cannot demonstrate that the fraud of which
11 they complain (which they also allege was revealed in that press
release) actually caused the stock’s price to decline. In fact,
say defendants, the market responded to the October press release
by assigning a higher value to Omtool’s stock.
Notwithstanding defendants’ claims to the contrary, however,
that Omtool’s stock rebounded slightly in the 90 days following
the October, 1998, press release is of no substantial legal
significance. One might reasonably posit that, after having
artificially inflated the stock’s value in the months following
the IPO (as plaintiffs allege), defendants, mindful of their
wrongdoing, eased the stock back down into a more accurate and
realistic trading range by issuing a series of negative (but not
entirely accurate) press releases designed to accomplish that
goal, without risking the liability which would surely follow
revelation of the true reason behind the stock’s diminished
value. In other words, if they unlawfully inflated the value of
Omtool’s stock, defendants knew that sooner or later the market
would catch up with them. And, in such circumstances, one
plausible option might be to slowly lower the stock’s price by
12 issuing a series of negative but seemingly ordinary earnings
reports and press releases – done in a manner gradual enough not
to attract unwanted attention to the allegedly improper sales and
bookkeeping practices, but deliberate enough to get the stock
trading in an “appropriate” range given its true value. Then,
defendants could claim, as they d o , that the market took the
stock downward for reasons wholly unrelated to any allegedly
unlawful sales or bookkeeping practices.
Plaintiffs do claim that the press releases issued following
the IPO were consistent with such a scheme. Plaintiffs say that
defendants materially overstated Omtool’s net income and
earnings, at least arguably to avoid any precipitous decline in
the value of Omtool’s stock and, in so doing, disguised
defendants’ earlier unlawful conduct. The fact that the stock
price actually moved upward slightly in the 90 days following the
October press release might mean little more than that defendants
succeeded in guiding the stock’s price down into a more
reasonable trading range without ever having to acknowledge their
alleged unlawful conduct and the stock’s concomitant inflated
13 price. And, according to plaintiffs, it was only in the wake of
that October, 1998, press release that the public had sufficient
information about Omtool’s sales and accounting practices to be
put on reasonable notice that the company might have engaged in
unlawful conduct in the months leading up to and following the
IPO.
The difference in the parties’ positions i s , not
surprisingly, stark. Plaintiffs claim that the decline in value
of Omtool’s stock was caused by, among other things, defendants’
improper and, at times, fraudulent sales and bookkeeping
practices. Defendants, on the other hand, suggest that the
stock’s decline was caused by market factors wholly unrelated to
any alleged wrongful conduct on their part. At this stage of the
litigation, however, the court must accept plaintiffs’ factual
allegations as true. Doing s o , it is apparent that plaintiffs
have adequately alleged a causal connection between defendants’
alleged wrongdoing and plaintiffs’ claimed losses.
14 II. Statute of Limitations.
Actions for violations of §§ 11 or 12 of the Securities Act
must be brought “within one year after the discovery of the
untrue statement or the omission, or after such discovery should
have been made by the exercise of reasonable diligence.” 15
U.S.C. § 77m. The same is true with regard to plaintiffs’ claims
under § 10(b) of the Exchange Act. See Lampf, Pleva, Lipkind,
Prupis & Petigrow v . Gilbertson, 501 U.S. 3 5 0 , 364 (1991).
Plaintiffs filed their complaint on October 5 , 1999, just
less than one year after defendants’ October 6, 1998 press
release. In support of their claim that plaintiffs’ complaint is
time barred, defendants say that nothing novel was disclosed in
the October 6 press release. Instead, they say, all pertinent
information (including projections about future earnings
shortfalls) was fully disclosed in the warning and subsequent
earnings report, both of which were issued earlier, in July.
Thus, defendants argue, “if, as Plaintiffs claim, the October 6
press release ‘announced the bad news’ and revealed the fraud,
then so too did the earlier combination of the July press
15 releases which disclosed the same information and the 42% stock
drop that followed more than a year before filing suit.”
Defendants’ memorandum, at 1 1 . Consequently, defendants assert
that plaintiffs were on notice of their potential claims in July
of 1998, yet failed to file suit within one year of that date.
Plaintiffs disagree, noting first that any determination of
when the statute of limitations began to run is most
appropriately made in the context of summary judgment o r , if
there are disputed and material factual issues, following an
evidentiary hearing. See, e.g., Olcott v . Delaware Flood Co., 76
F.3d 1538, 1549 (10th Cir. 1996). The court is inclined to
agree, particularly since determining when the statute began to
run first requires finding when plaintiffs learned o r , in the
exercise of reasonable diligence, should have learned of their
potential cause(s) of action and because the press releases in
question are not part of plaintiffs’ complaint and, at least
arguably, are not properly part of the record the court may
consider in ruling on defendants’ motion to dismiss. See
generally Watterson v . Page, 987 F.2d 1 , 3 (1st Cir. 1993)
16 (“Ordinarily, of course, any consideration of documents not
attached to the complaint, or not expressly incorporated therein,
is forbidden, unless the proceeding is properly converted into
one for summary judgment under Rule 5 6 . However, courts have
made narrow exceptions for documents the authenticity of which
are not disputed by the parties; for official public records; for
documents central to plaintiffs’ claim; or for documents
sufficiently referred to in the complaint.”).
Nevertheless, even if the court were to consider those press
releases, resolution of defendants’ motion to dismiss would be no
different. Notwithstanding defendants’ arguments to the
contrary, the July press releases and the October press release
do not appear to have disclosed identical information. As noted,
the July press releases attributed Omtool’s revenue shortfalls to
its inability to complete corporate contracts on a timely basis.
Three months later, however, the October press release
represented that the company had been “able to finalize several
significant corporate contracts.” Having apparently addressed
its inability to finalize customer contracts (the problem
17 identified in the July press releases), the company attributed
revenue shortfalls in the most recent quarter to “further
extended sales cycles and changes in the buying patterns of our
customers.”
At a minimum, whether the July press releases were
sufficient to put plaintiffs on notice of defendants’ allegedly
wrongful conduct would seem to be a disputed, material fact. If,
as plaintiffs allege, they did not have sufficient information to
recognize their potential claims until after the October press
release was issued, their suit was filed in a timely manner.
This is particularly true since, as defendants point out, Omtool
never revealed any fraud to the public. Thus, from plaintiffs’
perspective, they were forced to piece together evidence of
defendants’ allegedly secret and unlawful practices and, only
upon reviewing the October, 1998, press release, were they armed
with sufficient information to realize that they had been had.
In light of the foregoing, the court is precluded from
granting defendants’ motion to dismiss on limitations grounds.
18 III. Privity and Who is a “Seller”.
As to count 2 of the complaint, defendants say it fails to
state a viable claim since none of the named defendants is a
“seller” of securities for purposes of § 12(a)(2) of the
Securities Act. Specifically, defendants point out that the
Omtool IPO was made pursuant to a “firm commitment” underwriting
and, therefore, all sales of Omtool shares were made by the
underwriters (not named as defendants), rather than Omtool or its
officers or directors. In response, plaintiffs say that they
have adequately pled a viable claim, insofar as they have alleged
that: (1) defendants “solicited” the sale of Omtool common stock
in the August 1997 IPO and were motivated by financial gain to
sell shares of Omtool in that offering; (2) defendants were
involved in the preparation of the Prospectus; and (3) defendants
were the primary beneficiaries of the stock offering. See
Amended complaint, at para. 3 8 . Thus, say plaintiffs, they have
adequately alleged that defendants are “sellers,” as that term is
used in section 12(a) of the Securities Act.
19 The Court of Appeals for the First Circuit recently
addressed this issue in detail in an opinion that undermines
plaintiffs’ claims. See Shaw v . Digital Equipment Corp., 82 F.3d
1194 (1st Cir. 1996). The Shaw court first observed that, in a
firm commitment offering, there is a material distinction between
an “issuer” and a “seller” of stock:
In a firm commitment underwriting, the issuer of the securities sells all of the shares to be offered to one or more underwriters, at some discount from the offering price. Investors thus purchase shares in the offering directly from the underwriters (or broker- dealers who purchase from the underwriters), not directly from the issuer.
Id., at 1215. Such was the case here: although defendants were
plainly “issuers” of the stock in question, plaintiffs do not
allege that they purchased shares of Omtool directly from any one
or more of the defendants.
Given the manner in which a “firm commitment” offering is
structured, the Shaw court concluded that, at least ordinarily,
corporate officers and directors are not “sellers” under section
12(a).
20 Because the issuer in a firm commitment underwriting does not pass title to the securities, [the corporate defendant] and its officers cannot be held liable as “sellers” under Section 12(2), unless they actively “solicited” the plaintiffs’ purchase of securities to further their own financial motives, in the manner of a broker or a vendor’s agent. Absent such solicitation, [the corporate defendant] can be viewed as no more than a “seller’s seller,” whom plaintiffs would have no right to sue under Section 12(2).
Id.
In an effort to save count 2 of the amended complaint from
dismissal, plaintiffs claim that defendants “solicited” their
purchases of Omtool stock by virtue of having participated in the
preparation of the Prospectus. The Shaw court, however, rejected
just such an argument, reasoning that “neither involvement in
preparation of a registration statement or prospectus nor
participation in ‘activities’ relating to the sale of securities,
standing alone, demonstrates the kind of relationship between
defendant and plaintiff that could establish statutory seller
status.” Id., at 1216 (emphasis in original) (citing Pinter v .
Dahl, 486 U.S. 6 2 2 , 650-51 (1988)).
21 While the amended complaint asserts that defendants
“solicited the sale of Omtool common stock” and were “motivated
by financial gain” to sell those shares, id., at para. 3 8 , such
general and conclusory assertions are insufficient to state a
viable claim against defendants under section 12(a)(2). To
impose liability on defendants, plaintiffs must plead and
demonstrate that defendants acted as something more than simply a
“seller’s seller.” Shaw, 82 F.3d at 1215. That is to say,
plaintiff’s must point to more than simply defendants’ sale of
stock to the underwriters of the IPO: they must demonstrate that
there was some sort of relationship between plaintiffs and
defendants and that defendants “actively solicited” plaintiffs’
purchases of Omtool common stock. The amended complaint fails to
allege such “active solicitation.” There are, for example, no
allegations that plaintiffs had any contact whatsoever with any
of the defendants, or received any “solicitations” from them
(apart from the Prospectus). Consequently, count 2 of the
amended complaint fails to state a viable claim against
defendants under section 12(a)(2) of the Securities Act.
22 IV. Pleading Requirements and Allegations of Fraud.
Finally, defendants assert that plaintiffs’ amended
complaint fails to plead allegations of fraud under section 10(b)
of the Exchange Act with sufficient specificity. And, while they
acknowledge that fraud is not an element of claims under either
section 11 or 12(a)(2) of the Securities Act, they say that
because plaintiffs’ claims under those sections “sound in fraud,”
they are subject to the more rigorous pleading standards
applicable to fraud claims.
Rule 9(b) of the Federal Rules of Civil Procedure provides
that “[i]n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity.” In the securities fraud context, the complaint
must also “set forth specific facts that make it reasonable to
believe that defendant[s] knew that a statement was materially
false or misleading. The rule requires that the particular
times, dates, places or other details of the alleged fraudulent
involvement of the actors be alleged.” Serabian v . Amoskeag Bank
Shares, Inc., 24 F.3d 3 5 7 , 361 (1st Cir. 1994) (citation and
23 internal quotation marks omitted). See generally 15 U.S.C.
§ 78u-4(b)(1) (“In any private action arising under this chapter
in which the plaintiff alleges that the defendant [engaged in
fraud] . . . , the complaint shall specify each statement alleged
to have been misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is
formed.”). The Court of Appeals for the First Circuit “has been
notably strict and rigorous in applying the Rule 9(b) standard in
securities fraud actions.” Greebel v . FTP Software, Inc., 194
F.3d 185, 193 (1st Cir. 1999). Consequently, it has held that
“inferences of scienter survive a motion to dismiss only if they
are both reasonable and ‘strong’ inferences.” Id., at 195-96.
Here, the amended complaint alleges fraud with sufficient
specificity to meet the rigorous pleading standards imposed by
Rule 9(b) and 15 U.S.C. § 78u-4. For example, the amended
complaint contains detailed and specific claims regarding sales
that Omtool made to “Customer Three” that were, allegedly,
24 fictitious and with regard to which Customer Three had no payment
obligations. See Amended complaint, paras. 61-66. The amended
complaint also alleges that a fictitious sale of $250,000 was
made to Customer Four, based upon false statements that Omtool
had a “hot order” for a substantial purchase from the Social
Security Administration. That sale (apparently to be consummated
through Customer Four) never materialized and plaintiffs allege
that when Customer Four subsequently attempted to confirm the
order with the Social Security Administration, it was told that
the Administration was “not aware of any such order.” Amended
complaint, para. 7 4 . The amended complaint alleges that
nevertheless, Omtool improperly recognized $250,000 in revenue as
a result of that “transaction.” Amended complaint, para. 7 6 .
To be sure, the court of appeals has, under somewhat similar
circumstances, concluded that a complaint like plaintiffs’,
alleging “channel stuffing” and deviations from generally
accepted accounting principles (“GAPP”), failed to plead fraud
with sufficient specificity. See Greebel, supra. In this case,
however, the allegedly improper sales and accounting practices:
25 (1) are alleged with greater specificity; and, if true, (2) had a
far more substantial impact on the company’s bottom line.
According to plaintiffs’ complaint, those improprieties caused
Omtool to overstate its net income by as much as 69% for the
quarter ending December 3 1 , 1997, and by as much as 338% for the
quarter ending June 3 0 , 1998. See Amended complaint at paras. 52
and 7 6 . Compare Greebel, 194 F.3d at 206 (“At best, plaintiffs’
additional evidence supports an inference that [defendant]
improperly recognized from $416,000 to $1.55 million in revenue
in the third quarter of 1995. Because [defendant] reported
overall revenue during the quarter of $37.1 million, these
transactions do not support a strong inference of scienter. It
is equally possible to conclude that [defendant] made some
incorrect accounting decisions regarding a limited number of
transactions.”). In this case, however, the magnitude of the
allegedly improper accounting practices (as a percentage of
Omtool’s total revenue) undermines the reasonableness of any
inference that Omtool simply “made some incorrect accounting
decisions regarding a limited number of transactions,” id., and,
instead, supports a strong inference of scienter. See generally
26 Schaffer v . Timberland Co., 924 F. Supp. 1298, 1318-22 (D.N.H.
1996).
Conclusion
In light of the foregoing, defendants’ motion to dismiss
(document n o . 34) is granted in part and denied in part. Count 2
of plaintiffs’ amended complaint (alleging violations of section
12(a)(2) of the Securities Act) is dismissed for failing to
adequately allege that defendants were “sellers” of securities.
In all other respects, however, defendants’ motion is denied.
SO ORDERED.
Steven J. McAuliffe United States District Judge
December 1 4 , 2000
cc: David P. Slawsky, Esq. Janine R. Azrilliant, Esq. Richard B . Drubel, Esq. Francis J. Farina, Esq. James P. Bassett, Esq. Patricia R. Ray, Esq.