In re Intelligroup Securities Litigation

527 F.Supp.2d 262

In re INTELLIGROUP SECURITIES LITIGATION.

Civil Action No. 04-1980 (GEB).

United States District Court, D. New Jersey.

November 13, 2007.

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Joseph J. Depalma, Esq., Lite, Depalma, Greenberg & Rivas, LLC, Newark, NJ, and Gary S. Graifman, Esq., Kantrowitz, Goldhamer & Graifman, Esqs., Montvale, NJ, and Lisa J. Rodriguez, Esq., Trujillo, Rodriguez & Richards, LLP, Haddonfield, NJ, and Jean-Marc Zimmerman, Esq., Zimmerman, Levi & Korsinsky LLP, Westfield, NJ, and Steven J. Toll, Esq., Daniel S. Sommers, Esq., Joseph Helm, Esq., and Matthew K. Handley, Esq., Cohen, Milstein, Hausfeld & Toll, PLLC, Washington, DC, for Plaintiffs Lydia Garcia, Senthilnathan Narayanan, Robert Farber and the class of all others similarly situated, as well as Consolidated Plaintiffs Vijayan Bhadrakshan, Ron G. Pecunia, Joseph Ackerman, Rudina I. Sihweil, George E. Amos, Isa S. Sihweil and the class of all others similarly situated.

Dennis J. Drasco, Esq. and Kevin J. O'Connor, Esq., Lum, Danzis, Drasco & Positan, LLC, Roseland, NJ, and Darryl W. Simpkins, Esq. and Victoria Curtis Bramson, Esq., Simpkins & Simpkins, LLC, Hillsborough, NJ, and Donald A. Robinson, Esq., Robinson & Livelli, Esqs., Newark, NJ, and J. Allen Maines, Esq., Summer B. Joseph, Esq., and Albert M. Myers, Esq., Paul, Hastings, Janofsky & Walker, LLP, Atlanta, GA, and Grant Fondo, Esq., William S. Freeman, Esq., and Richard D. North, Esq., Cooley Godward Kronish, LLP, Palo Alto, CA, for Defendants Intelligroup, Arjun Valluripalli (also known as Arjun Valluri), Nicholas Visco, Edward Carr and David J. Distel.

OPINION

BROWN, Chief Judge.

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

TABLE OF CONTENTS
I. PROCEDURAL BACKGROUND....................................................271
II. FACTUAL BACKGROUND.......................................................272
III. JUDICIAL NOTICE..........................................................272
IV. PLEADING REQUIREMENTS OF A 101b-5 CLAIM..................................274
A. Elements of a 10b-5 Claim.............................................274
1. Elements Subject to Heightened Pleading Requirements...............275

2. Elements Subject to Rule 8 Pleading Requirements...................277
B. Pleading a Class 10b-5 Claim..........................................279
C. Pleading a Derivative Claim Against Controlling Persons...............280
V. PLEADING SPECIFIC ELEMENTS OF A 10b-5 CLAIM..............................281
A. Pleading the "False and Misleading Statement" Element.................281
1. Pleading an Affirmative Misrepresentation..........................281
2. Pleading Misrepresentation Based on Failure to Disclose............281
B. Pleading the "Scienter" Element.......................................282
1. Pleading Intentional or Recklessness State of Mind.................282
2. Pleading Scienter by Inference.....................................283
a. Inferring Scienter from Defendant's "Motive and
Opportunity"..................................................283
b. Inferring Scienter from Circumstantial Evidence.................285
i. Inferring Scienter from GAAP Violations.....................285
ii. Inferring Scienter from SOX Certifications..................287
3. Pleading Scienter by Relying on Confidential Information...........290
C. Pleading the "Materiality" Element....................................291
D. Pleading the "Reliance" Element.......................................291
1. Two Methods to Plead Reliance......................................292
2. Pleading Reliance on Inferred Technical Facts......................293
E. Pleading the "Causation" Element......................................295
VI. DISCUSSION...............................................................298
A. Transactional Causation...............................................298
1. Deficiencies Contained in Plaintiffs' Second Complaint.............298
2. "Fraud-on-the-market" Allegations Based on Intelligroup's
Financials.......................................................301
3. 2001 Period........................................................302
4. 2004 Period........................................................304
5. Periods Reflected in the Table.....................................305
a. Plaintiffs' Allegations.........................................305
b. Legal Precedents Examining Financial Matters....................306
i. IPO Cases...................................................306
ii. Basic v. Levinson...........................................309
iii. Other District Court Cases..................................310
c. Financial Theories and Calculations.............................311
6. Alternative Allegations of Reliance................................316
B. Loss Causation.........................................................318
1. Relevant Facts......................................................319
a. Intelligroup's Publications......................................319
b. Chart of Intelligroup's Stock Price..............................320
2. Deficiencies Contained in Plaintiffs' Second Complaint..............321
3. Plaintiffs' Instant Allegations.....................................322
a. Interrelat ion-Among-the-Press-Release-Announcements
Claim..........................................................322
b. Lack-of-Interrelation-Among-the-Announcements Claim..............327
i. Marsden v. Select Med. Corp..................................327
ii. Other District Court Cases...................................329
c. Miscellaneous Claims.............................................333
i. Contentions About Implied Disclosure.........................334
ii. Contentions About the Post-Release Recovery..................337
C. Scienter...............................................................340
1. Motive and Opportunity..............................................340
2. Circumstantial Evidence.............................................342
a. Resignations as Evidence of Scienter.............................343
i. Resignations of Defendants Valluri and Visco.................344
ii. Resignation of Intelligroup's Auditor........................348
b. Violations of GAAP as Evidence of Scienter.......................349

c. SOX Certifications as Evidence of Scienter........................352
i. Impact of the Statements Made in the Restatement..............353
ii. The Fact of SOX Certifications................................355
iii. The Language of SOX Certifications............................357
d. Undisclosed Witnesses.............................................358
i. UW-1..........................................................359
ii. UW-2..........................................................360
iii. UW-3..........................................................361
iv. UW-4..........................................................362
v. UW-5..........................................................366
vi. UW-6..........................................................367
e. Internet Posting by an Anonymous Witness..........................368
3. Totality of Evidence Analysis........................................370
4. Serallova Allegations................................................373
a. Allegations Based on Intelligroup's 10-K..........................375
b. Allegations Based on the Fact of Non-collectability...............377
D. Derivative Liability of Visco and Valluri...............................377
E. Leave to Amend..........................................................378
1. General Rule.........................................................378
2. Entry of Binding Precedent Clarifying Applicable Pleading
Standard............................................................379
3. Repeated Failure to Cure Deficiencies and Futility of
Amendment..........................................................382
VII. CONCLUSION...............................................................384

I. PROCEDURAL BACKGROUND

Plaintiffs, investors who purchased the common stock of Defendant Intelligroup ("Intelligroup" or "Company," or "Issuer") during forty months between May 1, 2001, through and including September 24, 2004 ("Class Period"), brought this securities fraud class action alleging that Defendants defrauded them by artificially inflating the value of the stock through false and misleading statements disseminated into the investing community. See Compl. (Docket Entry No. 53) at 1.

The litigation was initiated on October 12, 2004, see Docket Entry No. 1, when the first of six class action complaints was filed with the Court. On August 10, 2005, all six actions were consolidated into the instant action. See Docket Entry No. 24. On October 10, 2005, Plaintiffs filed their joint Amended Complaint ("Original Complaint") against the Issuer and four former officers of the Issuer, two of whom were Defendants Valluripalli ("Valluri") and Visco ("Visco"). See Docket Entry No. 31. On December 5, 2005, certain Defendants filed their motion to dismiss Plaintiffs' Original Complaint. See Docket Entry No. 3. On February 10, 2006, Plaintiffs' Second (Amended) Complaint ("Second Complaint") was filed against the Issuer and Defendants Valluri and Visco, with all claims against the other two officers being dismissed. See Docket Entry No. 39. On March 27, 2006, Defendants filed their ...