In re Intelligroup Securities Litigation

468 F.Supp.2d 670

In Re INTELLIGROUP SECURITIES LITIGATION

No. CIV.A. 04-4980(GEB).

United States District Court, D. New Jersey.

December 20, 2006.

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Joseph J. Depalma, Esq., Lite, Depalma, Greenberg & Rivas, LLC, Newark, NJ, Gary S. Graifman, Esq., Kantrowitz, Goldhamer & Graifman, Esqs., Montvale, NJ, Lisa J. Rodriguez, Esq., Trujillo, Rodriguez & Richards, LLP, Haddonfield, NJ, Jean-Marc Zimmerman, Esq., Zimmerman, Levi & Korsinsky LLP, Westfield, NJ, 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 Bliadrakshan, 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, Darryl W. Simpkins, Esq. and Victoria Curtis Bramson, Esq., Simpkins & Simpkins, LLC, Hillsborough, NJ, Donald, A. Robinson, Esq., Robinson & Livelli, Esqs., Newark, NJ, J. Allen Maines, Esq., Summer B. Joseph, Esq., and Albert M. Myers, Esq., Paul, Hastings, Janofsky & Walker, LLP, Atlanta, GA, Grant Fondo, Esq., William S. Freeman, Esq., and Richard D. North, Esq., Cooley Godward Kronish, LLP, Palo Alto, CA, for Defendants Intelligroup, Inc., 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' Second 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 without prejudice.

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. 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 and 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, the instant Complaint was filed against the Issuer and Defendants Valluripalli and Visco; with all claims against the other two officers being dismissed. See Docket Entry No. 39. On March 27, 2006, Defendants filed their instant Motions, see Docket Entries Nos. 40 and 42, and Plaintiffs filed their brief in opposition ("Opposition") to the Motions on May 11, 2006. See Docket Entry No. 43. Defendants filed their reply ("Reply") on June 9, 2006. See Docket Entry No. 44.

This matter was transferred to the undersigned on November 2, 2006. See Docket Entry No. 50. Except for the instant Motions, no other applications are currently pending in this action.

LEGAL FRAMEWORK

I. Elements of a 106-5 Claim

Congress passed the Securities Exchange Act of 1934 ("`34 Act"), 15 U.S.C. §§ 78a-78kk (1994 & Supp. IV 1998), assuring the disclosure of full and fair information to the investing public. See H.R.Rep. No. 73-1383, at 1-2 (1934) (describing the legislation's purposes). In relevant part, Section 10(b) of the '34 Act proscribed the "use or employ[ment], in connection with the purchase or sale of any security, . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). The ensuing Rule 10b-5, 17 C.F.R. § 240.10b-5, emerged in 1943 as a small legislative acorn that ultimately developed into a full-blown judicial oak.<sup>1</sup> See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (where Justice Rehnquist presented this well-known metaphor). Like Section10(b), Rule 10b-5 prohibits "any act . . . which operates or would operate as a fraud or deceit upon any person" and makes it illegal "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). Under this Rule, "the basic elements [of a private federal securities fraud action] include: (1) a material misrepresentation . . .; (2) scienter, i.e., [defendant's] wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to . . . as `transaction causation'; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss." Dura Pharm Inc. v. Broudo ("Dora"), 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (citing 15 U.S.C. § 78u-4(b)(4); Basic Inc. v. Levinson, 485 U.S. 224, 231-232, 248-249, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps, 421 U.S. at 730-731, 95 S.Ct. 1917; Thomas Lee Hazen, Law of Securities Regulation, ¶¶ 12.11[1], [3] (5th ed.2002)).

II. Pleading Requirements of a 10b-5 Claim

Plaintiff's pleading requirements are different with respect to different elements of a 10b-5 claim. The general standard of review triggered by defendant's motion to dismiss under Rule 12(b)(6) is well-settled, i.e., the court must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party.² See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), overruled on other grounds, Harlow v. Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982); Allegheny Gen. Hosp. v. Philip Morris, Inc., 228 F.3d 429, 434-35 (3d Cir.2000). Therefore, dismissal is not appropriate unless it appears beyond doubt that the plaintiff can prove no set of facts in support of plaintiff's claim which would entitle him to relief. See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 240, 346 (3d Cir.2001) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

A. Heightened Pleading Requirements

The Rule 12(b)(6) standard of review is, however, altered by Rule 9(b), which imposes a heightened pleading requirement of factual particularity with respect to allegations of fraud. Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R.Civ.P. 9(b). "This particularity requirement has been rigorously applied in securities fraud cases." Burlington Coat Fact. Sec. Litig., 114 F.3d at 1417 (citations omitted). Therefore, a plaintiff averring securities fraud claims must specify " the who, what, when, where, and how: the first paragraph of any newspaper story.'" Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.1999) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)).

The Third Circuit clarified:

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

Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 216 (3d Cir.2002) (quoting Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d at 577). Moreover, a "stringent" reading of the requirements set forth in Rule 9(b) is expressly applicable to two elements of a securities fraud claim, i.e., scienter and material misrepresentation, because of the analogous heightened pleading requirements contained in the Reform Act.³ See 15 U.S.C. § 78u-4(b)(1) and (b)(2).

Therefore, when stating "falsity," i.e., "material misrepresentation" element of his/her 10b-5 claim, a securities fraud plaintiff must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed."⁴ 15 U.S.C. § 78u-4(b)(1), (2). Similarly, with respect to the scienter element of his/her 10b-5 claim, the Reform Act requires that "the complaint shall . . . state with particularity [all] facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

In sum, the Reform Act modified the traditional Rule 12(b)(6) analysis for the purposes of pleading "material misrepresentation" and "scienter." See Digital Island Sec. Litig., 357 F.3d 322, 328 (3d Cir.2004) ("The Reform Act requires a `strong inference' of scienter, and accordingly, alters the normal operation of inferences under Rule 12(b)(6)"); Rockefeller Ctr. Props. Secs. Litig., 311 F.3d at 224 (noting that "whereas under Rule 12(b)(6), [the court] must assume all factual...