Class Action

PSLRA Class Action Defense Cases–In re Authentidate Holding: New York Federal Court Grants Motion To Dismiss Securities Class Action Holding Class Action Allegations Failed To Satisfy PSLRA

By Michael J. Hassen

Securities Class Action Warranted Dismissal with Prejudice because Allegations in Second Amended Class Action Complaint Failed to Establish Duty to Disclose New York Federal Court Holds

Plaintiffs filed a class action against Authentidate Holding Corporation and individual defendants (collectively “Authentidate”) alleging violations of federal securities laws; the class action complaint asserted that defendants “failed to make proper disclosures regarding performance metrics in an agreement (‘the Agreement’) the Company had with the United States Postal Service to serve as the preferred provider of the Postal Service’s electronic postmark (‘EPM’), thereby artificially inflating the price of Authentidate common stock in order to, inter alia, attract capital and avoid insolvency.” In re Authentidate Holding Corp. Sec. Litig., ___ F.Supp.2d ___ (S.D.N.Y. March 23, 2009) [Slip Opn., at 1]. The class action alleged that defendants’ misconduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, id. Defense attorneys moved to dismiss the Consolidated Second Amended Securities Class Action Complaint for failure to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). Id. The district court determined that allegations in the class action complaint failed to satisfy the PSLRA and dismissed the class action with prejudice.

After summarizing the well established law governing Rule 12(b)(6) motions to dismiss securities class action complaints, see In re Authentidate, at 2-3, including Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the district court turned first to the duty to disclose and noted that for purposes of Section 10(b) “‘[s]ilence, absent a duty to disclose, is not misleading,’ Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988), and an omission is actionable under the securities laws only when the Defendant was subject to a duty to disclose.” Id., at 3 (additional citation omitted). The class action complaint alleged that defendants were under a duty to disclose Authentidate’s “low level of EPM sales and their continuing or likely failure to meet the revenue metrics.” Id. The federal court disagreed. First, it rejected the claim that Item 303 of SEC Regulation S-K (17 C.F.R. § 229.303) created a duty to disclose. See id., at 4-5. Item 303, entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” requires, inter alia, that a registrant “describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). Id., at 4. Plaintiffs’ allegations that “virtually nonexistent EPM sales and the likely failure to meet upcoming revenue metrics were ‘known trends or uncertainties’” were not supported by “any particularized factual allegations making it plausible that these omissions caused any piece of existing ‘reported financial information’ to misleadingly indicate a specific future result or financial condition.” Id., at 5. This was particularly true since EPM sales were not “a significant percentage of the reported monthly revenues.” Id. (citation omitted).

Full post as published by Class Action Defense Blog on April 09, 2009 (boomark / email).