STATES UNITED DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA MIAMI DIVISION CASE NO. 06-21071 -CIV-ALTONAGA/Turnoff RICHARD STEVENS, on behalf of himself and all others similarly situated, Plaintiffs, vs. GLOBETEL COMMUNICATIONS CORP., et al., Defendants.
ORDER ON MOTIONS TO DISMISS Defendants have filed two separate motions to dismiss Plaintiffs' Consolidated Amended Complaint.' Defendants , GlobeTel Communications Corp. ("GlobeTel"), Timothy Huff ("Huff'), Lawrence Lynch ("Lynch"), J. Randolph Dumas ("Dumas"), Thomas Y. Jimenez ("Jimenez"), Michael P. Castellano ("Castellano"), Dorian Klein ("Klein"), Jonathan Leinwand ("Leinwand"), and Mitchell Siegel ("Siegel") filed their Motion to Dismiss the Consolidated Amended Complaint [D.E. 37] on December 20, 2006. Defendant, Kyle McMahan ("McMahan"), filed a separate Motion to Dismiss Consolidated Amended Class Action Complaint [D.E. 38] on the same date. The motions and arguments presented have been fully briefed in the memoranda and exhibits submitted by the parties.
1 This case was consolidated with case numbers 06-21174-Civ and 06-60771-Civ on August 4, 2006, and the Richard Stevens Group (consisting of Stevens, Dion Cozamanis, Mike Newman, Ahmed Lawahmeh and Peter Ward) was appointed lead plaintiff in these related actions. (See [D.E. 27]). Shalov Stone & Bonner LLP and Sarraf Gentile LLP were appointed co-lead counsel, and Vianale & Vianale LLP was appointed liaison counsel. (See id.).
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A.
Allegations of the Corrected Consolidated Amended Class Action Complain Lead Plaintiffs, Richard Stevens, Dion Cozamanis, Mike Newman, Ahmed Lawahmeh and
Peter Ward, and Plaintiff, Davorin Fasmon, all purchased securities ofDefendant, GlobeTel, between December 30, 2005 and August 24, 2006, the alleged Class Period. (See Corr. Cons. Am. Class Action Compl. [D.E. 32] 1, 12). Plaintiffs bring this class action on behalf of all persons who purchased the common stock of GlobeTel during the Class Period. (See id. 1, 133-138). They have brought this action against the Defendants seeking to pursue remedies under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j (b); Rule lOb-5 promulgated thereunder, 17 C.F.R. 240.10b- 5; and Section 20(a) of the Exchange Act , 15 U.S.C. 78t(a). (See id. 111, 9). The Defendants include GlobeTel, a Delaware corporation with its principal place of business in Pembroke Pines, Florida, and its senior officers and directors, Huff (Director and Chief Executive Officer), Dumas (Chairman), Lynch (Chief Operating Officer and later Chief Financial Officer), Jimenez (Chief Financial Officer), Castellano (Director; Chairman of the Audit Committee), Klein (Director), McMahan (Director), Leinwand (Director; Corporate Counsel), and Siegel (Director; Vice President) (collectively referred to as the "Individual Defendants"). (See id. 1113-23). Since its inception, GlobeTel has operated under several names and has engaged in several lines of business, including home building, shock absorbers, syphilis detection kits,
2 The Corrected Consolidated Amended Class Action Complaint contains numerous exhibits, including the Joint Venture Agreement, in its original and redacted forms; documents and correspondence provided to co-lead counsel by Vadim Alexandrovich Tataurov and Sergey Sergeevich Zhukov; GlobeTel's 17-page business plan; the Sonair Agreement; and a photocopy of Internafta's Charter and Articles of Incorporation. The contents of several of these documents are referred to in the discussion which follows in this Order.
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telecommunications , and financial services . (See id. 24). On May 23, 2005, following a reverse 15:1 stock split, GlobeTel began trading on the American Stock Exchange (the "AMEX"). (See id. 33). In early 2005, GlobeTel decided to publicly announce a Russian-based telecommunications joint venture that it valued at $600 million, between itself and a Moscow-based company named LLC Internafta ("Internafta"). (See id. 2, 62). To further this idea, GlobeTel prepared a 17-page business plan outlining a purported deal with its Russian partner to install wireless telecommunications in 30 of the largest cities of Russia, at a cost of $600 million. (See id. 63). It was in late 2005 that GlobeTel representatives in Europe contacted Vadim Alexandrovich Tataurov ("Tataurov") to search for a possible partner for the proposed Russian deal, and provided Tataurov with a copy of the 17-page business plan. (See id. 65). On October 4, 2005, GlobeTel, through a wholly owned subsidiary, entered into an agreement with Tataurov in which Tataurov would receive a referral fee of 2% ofthe net contract value of any deal he brought to GlobeTel. (See id. 1 66). Tataurov contacted Sergey Sergeevich Zhukov ("Zhukov" ) to help him secure the Russian partner with the necessary capital for the $600 million deal, and offered to split the commission with Zhukov. (See id. 67). Tataurov and Zhukov found Maxim Vyacheslavovich Chernizov
("Chernizov"), an "underground oligarch" with the ability to provide the necessary $600 million in financing. (See id. 68). At Chernizov's urging, the three Russians formed Internafta in November 2005 as a limited liability partnership in the business of oil and mineral resources. (See id. 71). Internafta has no vendors, clients or employees, and it does not build, assemble or manufacture anything. (See id. 72). Internafta was established in order to provide GlobeTel with a Russian partner with which to
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announce the consummation of the Russian deal and to provide Tataurov and Zhukov with a $12 million referral fee (2% of the $600 million Russian deal). (See id. 73). Prior to GlobeTel consummating a Joint Venture Agreement ("JV Agreement") with Internafta, the Russians explained to Defendant Huff that GlobeTel would receive from Internafta letters ofcredit made out to GlobeTel from Chernizov' s bank, Banco do Brasil S .A. (Rio de Janeiro). (See id. 1 74). Huff was also told and accepted that Internafta would not be able to ready such financing by the date called for in the JV Agreement because ofthe Russian New Year holidays. (See id.). Huff insisted that the Russians sign the JV Agreement because he wanted to present it to GlobeTel's shareholders before the end of the year "to make them happy," and offered to give the Russians shares of GlobeTel to "play" with. (Id. 75). Thus, on December 29, 2005 , Internafta and GlobeTel, through a wholly-owned subsidiary, GlobeTel Wireless Corp., entered into a Russian deal to install wireless communications networks connecting Russia's 30 largest cities by signing the JV Agreement. (See id. 38, 76). Notwithstanding the lack of any due diligence, feasibility study, analysis or research (see id. 78), GlobeTel represented publicly that the JV Agreement was "binding" in a press release that stated, among other things, that GlobeTel Wireless has entered into an agreement with LLC Internafta ("Internafta") ofMoscow, Russia, whereby Internafta will pay to GlobeTel Wireless a series of four construction payments totaling US $600 million for the installation of an array of proprietary networks to be installed in Russia's 30 largest cities, starting with Moscow and St. Petersburg. (Id. 38, quoting Press Release). A copy of this press release , with a redacted copy of the JV Agreement , was filed with the SEC on January 6, 2006. According to Plaintiffs , the JV Agreement
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binds neither party to it to an act nor does it require either party to forfeit any funds. (See id. 77). Indeed, Hufftold the Russians before signing it that the JV Agreement was "not binding," but rather for the purpose ofbeing presented to the shareholders. (See id.). As a result of this announcement, GlobeTel stock surged from $2.19 per share to $3.92 per share, and increase of $1.73, or over 75%, on extremely heavy volume. (See id. 39, 79). Following the December 30, 2005 press release, over the next several months , GlobeTel issued a series of press releases , quoted in the Corrected Amended Class Action Complaint, that sought to explain why the Russian deal was not going forward. In a press release issued on January 9, 2006, GlobeTel stated that the proposed wireless network in Russia would be operated by NuTel Wireless, a Russian company, and that "[i]f, as anticipated, NuTel achieves its goal of 10 million subscribers during its first three years of operation .... this implies operating revenues of between US$350 million and US$500 million per month." (Id. 43, quoting Press Release). The January 9 press release also stated that "GlobeTel has made every effort to assess the potential for default risk by the Russian Investors and.... the risk appears quite low." (Id.). GlobeTel stock fell from $3.14 per share to $2.68 per share following the January 9 press release, a loss of $0.46 per share, or 15%. (See id. 46). On March 3, 2006, GlobeTel issued another press release to explain why it had not yet received the necessary funding from Internafta. (See id. 48). This one stated that funding had "been delayed by the bank until next week due to internal bank scheduling." (See id., quoting Press Release ). Furthermore , it stated that "Internafta has reassured GlobeTel that the transaction is in its final stages." (Id.). Following this press release , GlobeTel stock rose from $2.85 per share to $3.26
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per share, an increase of $0.41 per share or 14%. (See id. 49). On March 13, 2006, an article was published in the Motley Fool, casting suspicion on the Russian deal. (See id. 89). That same day, yet another press release was issued by GlobeTel, in which it advised that if Internafta did not provide the required funds within one week, "GlobeTel will have no choice but to exercise its right to default the contract for non-payment ." (Id. 15 1 , quoting Press Release). Because of the news of the imminent collapse of the Russian deal, the stock price of GlobeTel declined from $3.23 per share to $2.56 per share, a drop of $0.67 or 20%. (See id. 52, 89). Four days later (and to counter the March 13 article) (see id. 90), on March 17, 2006, GlobeTel issued a press release explaining that the Russian deal was once more on track, and that Internafta's "bank recommends that smaller, more frequent, progress payments be established." (Id. 54). Furthermore, GlobeTel explained that This is a very large transaction that requires solutions to many commercial issues, the implementation of tailored banking facilities, and the conformance to many international treaties, regulatory requirements, and legal matters. The parties continue to work in good faith and remain committed to building a state-of-the-art wireless network in Russia. We feel that the process must be given every reasonable opportunity to succeed given the commercial stakes involved. (Id., quoting Press Release). Following the news that the Russian deal was going forward, the stock rebounded from $2.33 per share to $2.83 per share, an increase of $0.50 or 21%. (See id. 55). On March 20, 2006, an article in the New YorkPost compared "the $600 million Russian deal" to "a replay of the $50 million aluminum blimps deal, with the `binding agreement' giving way to a series of increasingly lengthy and tediously detailed press releases explaining why GlobeTel hadn't yet received the first dime of anything from its Russian partners ." (Id., 19 1 , quoting News Article). 6
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GlobeTel stock "sank back down to $2.56 per share" following the March 20 article . (Id.). On March 31, 2006, GlobeTel filed its annual report for 2006 on Form 10-K, signed by Defendants Huff, Dumas, Castellano, Klein, McMahon, Leinwand, Siegel and Jimenez. (See id. 57). The annual report narrated the history of the Russian deal. (See id.). On April 11, 2006, an article in The Motley Fool described the numerous failures by GlobeTel to commence its business ventures, including the Russian deal. (See id. 92). The price ofGlobeTel stock again dropped from $2.10 to $1.78 per share, a los of $32, or 15%. (See id.). On May 1, 2006, GlobeTel issued a press release announcing that it had declared a formal default by Internafta. (See id. 58). The May 1 press release stated, inter alia, that GlobeTel had produced a highly detailed 108-page business plan. (See id.). It stated that in January 2006,
Internafta requested additional time to deliver funds and GlobeTel agreed. (See id.). When Internafta delivered to GlobeTel a US$300 million Letter-of-Credit on Banco do Brasil letterhead, the terms were not acceptable to GlobeTel's bankers. (See id.). And, "[a] s ofmid-April, in spite of continuing assurances to the present day, Internafta has failed to provide clear, incontrovertible evidence of its ability to meet its funding obligations." (Id., quoting Press Release). The price of GlobeTel stock fell from $1.73 per share to $1.47 per share, a loss of $0.26 per share, or 15%. (See id. 59). On May 12, 2006, GlobeTel filed with the SEC a quarterly report for the quarter ended March 31, 2006, on Form 10-Q, signed by Huffand Lynch, which described the Russian deal. (See id. 16 1). The pleading alleges that all of the press releases, as well as the reports filed with the SEC, were false because GlobeTel failed to disclose the non-binding nature of the JV Agreement, the lack of any technical or financial analysis undertaken to determine the feasibility of the deal, the parties' lack of resources to consummate the project, and the existence of side-agreements and other 7
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assurances made by Defendants that materially altered the purported deal. Specifically, the statements
(See id. 40).
were false and misleading, because, inter alia, according to both Tataurov and Zhukov, neither GTE [GlobeTel] nor Chernizov had any intention of advancing the substance of the Russian deal beyond its announcement. Indeed, even though Internafta, according to both Tataurov and Zhukov, complied with the JV Agreement and provided the necessary financing, GTE refused to accept the funding and GTE and Chernizov actively sought to delay the project. Thus, many of GTE's statements regarding the Russian deal, if not all of them - according to both Tataurov and Zhukov - were knowingly or recklessly false. (Id. 82). According to Tatarov and Zhukov, Internafta complied with its obligations under the JV Agreement by delivering a valid letter of credit from the Banco do Brasil S.A. (Rio de Janeiro) to GlobeTel in the amount of $300 million. (See id. 84). Huff informed the Russians that GlobeTel's U. S. banks would not accept money based on a Brazilian bank guarantee. (See id. 87). This "sudden change" in position by Huff surprised the Russians, and they were further surprised when Huff offered them GlobeTel stock to "play the market." (See id. 88). Tataurov and Zhukov became convinced that Huff and Chernizov had been working to slow the progress of the deal, and had entered into a side arrangement whereby Chernizov was given additional secret compensation in the form of company stock, to help permanently delay the deal. (See id. 94). Frustrated and angered by Chernizov's breach of loyalty, Zhukov replaced Chernizov as General Director ofInternafta . (See id.). An April 17 , 2006 communication from Zhukov to Huff went unanswered . (See id. 1195-97). On May 1, 2006, GlobeTel announced that it was terminating the JV Agreement as a result of Internafta ' s default, and did not mention the April 17 correspondence. (See id. 98).
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On July 18, 2006, all trading in GlobeTel stock was halted and the American Stock Exchange informed GlobeTel that it intended to delist the company from the exchange. (See id. 100-101). According to the AMEX, "[T]he Company has engaged in a pattern of issuing overly promotional press releases and ... the Company or its management has engaged in operations , which, in the opinion of the [American Stock] Exchange, are contrary to the public interest ." (Id. 101). A second AMEX letter dated August 17, 2006, details additional violations by GlobeTel. (See id. 104 a-I). When the August 17 correspondence was publicly disclosed on August 24, the stock price of GlobeTel stock fell from $0 . 64 per share to $0.55 per share , a loss of $0.09 per share or 14%. (See id. 105). The Corrected Consolidated Amended Class Action Complaint contains approximately 19 pages of "Scienter Allegations." (See id. pp. 32-51). Plaintiffs generally allege that Defendants acted with scienter in that Defendants knew that the public documents and statements, issued or disseminated by or in the name ofthe Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws .... Defendants, by virtue oftheir receipt ofinformation reflecting the true facts regarding the Company and its business practices, their control over and/or receipt of the Company's allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning GTE were active and culpable participants in the fraudulent scheme alleged herein. Defendants knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public. This case ... involves false statements concerning the Company's present business and operations. The fraudulent scheme ... could not have been perpetrated over a substantial period oftime, as has occurred, without the knowledge and complicity of the ... Defendants. (Id. 107). The reasons given for Defendants ' participation in the fraud are "to inflate the price of GTE 9
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common stock in order to: (a) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (b) enhance the value oftheir personal holdings of GTE common stock and options; and, (c) to use the Company's stock as currency for further corporate acquisitions ." (Id. 108). The pleading describes "planned" insider sales of Company stock by Defendants Huff and Lynch, and by Steven King, Paul Taboada, and Leigh Coleman, individuals who either themselves or their companies are closely associated with GlobeTel. (See id. 110-122). The pleading further describes the rampant use of Company stock as currency to make corporate acquisitions and pay for a variety of services, incentives, and debts. (See id. 123). During 2005, GlobeTel issued over 13 million Company stock options to directors and officers, former directors and officers, consultants, and affiliates. (See id. 125). GlobeTel engaged in a number of private placements to issue additional Company stock. (See id. 126 a-h). Although
GlobeTel has never been profitable, it paid the individual Defendants as follows in 2005: Huff ($2,538,390), Dumas ($4,462,847), Lynch ($1,056,547), Jimenez ($1,431,695), Leinwand ($256,200), Siegel ($1,763,093). (See id. 128). Lastly, as part of its scienter allegations, the pleading describes other failed business ventures ofGlobeTel, which should have made the individual Defendants aware ofthe falsity ofthe statements issued with respect to the Russian deal. (See id. 129). GlobeTel' s earlier failed ventures, which constitute the majority ofGlobeTel' s business, which never commenced beyond their announcement, and which were known to GlobeTel and its officers at the times the ventures were publicly announced (see id. 113 1), include: A May 2004 deal to provide the Company additional business opportunities (see id. 130a); 10
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A June 2004 agreement to develop bankcards, which, according to the 2006 Form 10-K, "we were slated to perform the initial launch of this program .... however, due to additional regulatory requirements, the launch has been rescheduled for second quarter of 2006" (id. 130b); A July 2004 deal to develop seafarer and lighthouse cardholders' access to ATMs in the Philippines, which, according to the 2006 Form 10-K, "has been put on hold pending further research of requirements under Maritime Law" (id. 130c); A July 2004 deal to provide a GlobeTel purported Stored Value Card Program in Australia, which, according to the 2006 Form 10-K, "[d]ue to unfavorable business conditions, we have decided to pursue other POS solutions with another vendor" (id. 130d); An August 2004 deal to issue credit cards in the Philippines, which, according to the 2006 Form 10-K, "based upon the business terms presented, we will not be moving forward with this deal" (id. 130e); An August 2004 deal to provide a GlobeTel purported Stored Value Program in Japan, which, according to the 2006 Form 10-K, "[b]ecause of the difficulty in providing this service in Japan, we have decided not to continue pursuing this opportunity at this time" (id. 130f); An August 2004 deal to develop a domestic and worldwide financial transaction processing service, for which, according to the 2006 Form 10-K, "due to regulatory requirements, operations have been rescheduled to begin in the second quarter 2006" (id. 130g); A September 2004 deal to provide direct deposit facilities in 54 banks, which, according to the 2006 Form 10-K, "[b]ased upon our recent agreement with FSS, we will not be going forward with this program" (id. 130h); An October 2004 deal to develop a value card payment processing system, which, according 11
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to the 2006 Form 10-K, "[t]he Company is currently in negotiations with several banks who are interested in participating in the program during fiscal year 2006" (id. 130i); A February 2005 deal with Banco Azteca ofMexico to develop prepaid calling cards, which, according to the 2006 Form 10-K, "based on the business terms presented, the company has decided not to move forward with this deal" (id. 113 Oj); A July 2005 joint venture agreement with Leo A. Daly III and J. Randolph Dumas (GlobeTel's current Chairman) to develop a blimp project throughout Europe, the Middle East, and Africa, for which, according to the 2006 Form 10-K, "no transactions have occurred that would require recording or disclosure in the Company's financial statements related to this agreement" (id. 130k); A July 2005 deal to modify the Company' s Store Value international remittance service, for which, according to the 2006 Form 10-K, "no transactions have occurred that would require recording or disclosure in the Company' s financial statements " (id. 1301); A July 2005 deal to acquire the assets and operations of Altvater GmbH of Germany, for which, according to the Form 2006 10-K, "an agreement was signed, but the acquisition has not yet closed" (id. 130m); A July 2005 joint venture agreement between Sanswire and Apogeo to set up five blimps over the jungles of Colombia, for which, according to the 2006 Form 10-K, "no transactions have occurred" (id. 130n); An August 2005 announcement that GlobeTel Wireless, a division ofGlobeTel, was awarded a contract to install wireless networks in Germany, but for which, according to the 2006 Form 10-K, "no transactions have occurred" (id. 1300); 12
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An August 2005 deal to provide a wireless communications network in China, for which, according to the 2006 Form 10-K, "no transactions have occurred" (id. 130p); A September 6, 2005 letter of intent between Sanswire Technologies Inc. ("Sanswire"), a telecommunications company GlobeTel acquired in early 2004, and the Center for Solar Energy and Hydrogen Research Baden-Wuerttemberg that was never realized (see id. 130q); An October 6, 2005 announcement of a deal with Global Crossing Ltd. to provide telecommunications services for clients in Latin America and the Caribbean, and for which, according to the 2006 Form 10-K, "no transactions have occurred" (id. 130r); An October 12, 2005 announcement that Sanswire signed an agreement with TAOTechnologies in cooperation with the University of Stuttgart in Germany relating to the design of air ships to further the Company's blimp project, for which, according to the 2006 Form 10-K, "no transactions have occurred" (id. 130s); and A November 9, 2005 announcement regarding a signed agreement with Financial Software & Systems Ltd. ('FSS"), based in Chennai, India, to purportedly establish a commercial relationship between GlobeTel and FSS, which, according to the 2006 Form 10-K, had no transactions to report (id. 130t). The purchasers of GlobeTel common stock during the Class Period are alleged to have all suffered similar injury through their purchase of stock at artificially inflated prices, and a presumption ofreliance on the information disseminated by the Defendants applies. (See id. 140). Furthermore, the losses in the value of GlobeTel stock and the artificial inflation of the value of the stock were directly caused by the partial revelations made by GlobeTel, the adverse media articles followed by more optimistic portrayals by GlobeTel, and disclosures ofthe AMEX investigation. (See id. 14013
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147). Plaintiffs further allege that the statutory safe harbor provided to forward-looking statements under certain circumstances does not applyhere because ifanywere forward-looking statements, they did not contain any meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. (See id. 148). And, if any safe harbor does apply, Defendants are nonetheless liable because each of the forward-looking statements was made when the particular speaker or officer who authorized the statements knew the statements to be false. (See id.). Count One of the Corrected Amended Complaint alleges violations of Section 10(b) of the Exchange Act and Rule lOb-5 promulgated thereunder against all Defendants. Count Two alleges a violation of Section 20(a) ofthe Exchange Act against the Individual Defendants, in that they acted as controlling persons and by reason of their senior executive positions they had the power and authority to cause GlobeTel to engage in the wrongful conduct complained of. (See id. 155). Plaintiffs seek class certification under Fed. R. Civ. P. 23, compensatory damages , fees and costs, and trial by jury. B. Analysis of the Arguments Raised in the Motions to Dismiss
GlobeTel and the Individual Defendants assert several arguments in support of dismissal.' First, they argue that Plaintiffs fail to adequately allege scienter because: (1) as to virtually all Defendants, no facts suggesting scienter are alleged; (2) as to Huff, the allegations of scienter are insufficient because the sources of information, Zhukov and Tataurov, are not shown to have had sufficient access to information and the allegations concerning Huffs statement that the JV
3 Defendants incorporate by reference the arguments made in each of the Motions [D.E. 37 , 38], and thus no differentiation regarding which of the Defendant(s) raised the arguments is made in this order.
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Agreement was "not binding" are susceptible to several interpretations, thus undercutting any strong inference that Huff acted with the required state of mind; (3) the pleading is internally inconsistent and non-sensical in that it labels the JV Agreement as non-binding and a sham, and yet describes actions by the parties evincing the existence ofa binding agreement; (4) the allegations ofDefendants' motives and opportunity are insufficient; and (5) the allegations oftrading are insufficient to establish the inference of scienter. Second, Defendants argue that Plaintiffs have failed to allege that
Defendants made materially false statements, as is required by Rule 9(b), Fed. R. Civ. P., in that: (1) the Individual Defendants are not alleged to have made any statements; (2) while the Corrected Consolidated Amended Class Action Complaint alleges that GlobeTel' s statements were false and misleading, nowhere is this allegation supported by facts; (3) and the alleged "false and misleading" statements contained in the pleading are not linked to specific Defendants with the particularity required by Rule 9(b), Fed. R. Civ. P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4 et seq. ("PSLRA"). Lastly, Defendants seek a dismissal of Count Two on the basis that because the Corrected Consolidated Amended Class Action Complaint fails to state an underlying section 10(b) violation, it likewise fails to state a claim under section 20(a). The Motion to Dismiss filed by McMahon is limited to one issue, namely, that the Corrected Consolidated Amended Class Action Complaint fails to allege any specific facts that would give rise to a strong inference that McMahon, an outside director of GlobeTel, acted with the requisite knowledge regarding each act of alleged misconduct, as is required by the PSLRA. McMahon's arguments are addressed in the analysis pertaining to claims against the Individual Defendants. Plaintiffs insist the Corrected Consolidated Amended Class Action Complaint should survive the Motions to Dismiss. Plaintiffs maintain that they have sufficiently identified statements made by 15
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Defendants regarding the $600 million telecommunications deal with Internafta, they have described why the statements were false and misleading , and they have detailed how the Defendants knew or were severely reckless in not knowing that the statements were false and misleading. Plaintiffs argue that their sources of information, Zhukov and Tataurov, are reliable, and they argue that there is no inconsistency in the allegations concerning the Russians' knowledge that the deal was a "sham" with the allegations concerning the several actions taken to consummate the deal. 1. Law Governing the Motions to Dismiss the Securities Fraud Complaint
"Dismissal is appropriate where it is clear the plaintiff can prove no set of facts in support of the claims in the complaint. Accordingly, the court may dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) when, on the basis of a dispositive issue of law, no construction of the factual allegations will support the cause of action." Marshall County Bd of Educ. v. Marshall County Gas Dist., 992 F.2d 1171, 1174 (1 l th Cir. 1993) (citations omitted). "In ruling on the motion to dismiss the district court must accept the well pleaded facts as true and resolve them in the light most favorable to the plaintiff." St. Joseph's Hosp., Inc. v. Hosp. Corp. ofAmerica, 795 F.2d 948, 954 (11th Cir. 1986). "When the allegations contained in a complaint are wholly conclusory,
however, and fail to set forth facts which, if proved, would warrant the relief sought, it is proper to dismiss for failure to state a claim." Davidson v. Georgia, 622 F.2d 895, 897 (11th Cir. 1980). "In ruling on a motion to dismiss , the Court is constrained to review the allegations as contained within the four corners ofthe complaint and may not consider matters outside the pleading without converting the defendant's motion into one for summary judgment." Crowell v. Morgan Stanley Dean Witter Services, Co., 87 F. Supp . 2d 1287, 1290 ( S.D. Fla. 2000); see also Milburn v. United States, 734 F.2d 762, 765 (11th Cir. 1984) ("Consideration of matters beyond the 16
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complaint is improper in the context of a motion to dismiss .... [T]he court converts a motion to dismiss into a motion for summary judgment by considering matters beyond the complaint."). In evaluating a motion to dismiss, however, a court may also consider any exhibits to the complaint. See Grossman v. Nationsbank, N.A., 225 F.3d 1228 , 1231 ( 11th Cir. 2000). Moreover, on a motion to dismiss a securities class action complaint, the court may take judicial notice of relevant public documents required to be filed with the SEC and actually filed. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1280 (11th Cir. 1999). Turning to Count One, Section 10(b) of the Exchange Act makes it unlawful for any person "[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe ." 15 U.S.C. 78j(b). Rule lOb- 5 specifies the behavior that Section 10(b) prohibits, making it unlawful (a) To employ any device, scheme, or artifice to defraud, (b) To 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, (c) To engage in any act practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. 240.1Ob-5. To properly allege securities fraud under Rule I Ob-5, "a plaintiffmust state: 1) a misstatement or omission, 2) of a material fact, 3) made with scienter, 4) on which plaintiff relied, 5) that proximately caused his injury." Bryant, 187 F. 3d 1271 at 1281 (citing Ross v. Bank South, N.A., 885 F.2d 723, 728 (11th Cir. 1989) (en banc). Scienter is defined as "a mental state embracing intent to 17
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deceive, manipulate, or defraud." Ernst & Ernst v. Hoch/elder, 425 U.S. 185, 194 (1976). For claims under the Exchange Act and under claims Section lob and Section 20a (Count Two), the complaint 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 ... state with particularity all facts on which that beliefis formed." 15 U. S. C. 78u-4(b)(1); see Druskin v. Answerthink, Inc., 299 F. Supp. 2d at 1307, 1321 (S.D. Fla. 2004). To hold a defendant liable under Section 10(b), the plaintiff must attribute a statement to the defendant. See Theoharous v. Fong, 256 F.3d 1219 (11th Cir. 2001). A securities fraud complaint must also satisfy the heightened pleading requirements of Rule 9(b), Fed. R. Civ. P., and of the PSLRA. In re SINA Corp. Sec. Lit., 2006 WL 2742048 * 5 (Sept. 26, 2006). Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." To satisfy Rule 9(b) the complaint must set forth "`(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud."' Garfield v. NDCHealth Corp., 466 F.3d 1255, 1262 (11th Cir. 2006) (quoting Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001) (quoting Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1371 (11th Cir. 1997)). Before the PSLRA, Rule 9 was the only additional pleading requirement for a securities fraud claim. The Rule 9 "requirements, alone, however, proved ineffective in curtailing vexatious securities litigation." In re Unicapital Sec. Litig., 149 F. Supp. 2d 1353, 1370 (S.D. Fla. 2001) (citing In re 18
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Comshare Inc. Sec. Litig., 183 F.3d 542, 548 (6th Cir. 1999)). In enacting the PSLRA, Congress sought to provide the safeguards Rule 9 had missed and insure that baseless claims were dismissed before discovery. See Malin v. Ivax, 17 F. Supp. 2d 135, 1352 (S.D. Fla. 1998) ("The Reform Act prohibits certain kinds of securities claims and implements various procedural protections in an effort to insure that baseless claims are disposed of before a defendant is forced to engage in expensive, protracted discovery."). The PSLRA's heightened pleading requirements "alter[] the usual contours of a Rule 12(b)(6) ruling because, while a court continues to give all reasonable inferences to plaintiffs, those inferences supporting [intent to defraud] must be strong ones." Garfield, 466 F.3d at 1264. Regarding the element of scienter, the PSLRA requires that "the complaint ... with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state ofmind." 15 U.S.C. 78u-4(b)(2). The Eleventh Circuit clarified this requirement in Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015 (11th Cir. 2004). In Phillips, the defendants argued that plaintiffs could not aggregate factual allegations to infer scienter and that plaintiffs were required to establish scienter with respect to each defendant and with respect to each alleged violation. The Eleventh Circuit interpreted the PSLRA to "permit the aggregation of facts to infer scienter." Id. at 1017. The Court went on to hold, however, that "scienter must be found with respect to each defendant and with respect to each alleged violation of the statute ." Id. at 1017-8.4
4 The "group pleading doctrine," in which "allegations of securities fraud based upon statements in group published information are presumed to be the collective action of corporate officers involved in the dayto-day management of the corporation," Druskin, 299 F. Supp. 2d at 1322 n.21 (quotation omitted), is not sufficient to establish scienter. Id. at 1322. While Plaintiffs may aggregate facts to imply scienter as to each
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There are two relevant "states of mind" under the PSLRA, one for forward-looking statements5 and one for statements that are not forward-looking. See Theoharous, 256 F.3d at 1225. Plaintiffs allege that the statements at issue are not forward-looking. (See Corr. Cons. Am. Class Action Compl. 107). For statements that are not forward-looking, "plaintiff must allege particular facts giving rise to a strong inference that the defendant acted `in a severely reckless manner."' Theoharous, 256 F.3d at 1225 (quoting Bryant, 187 F.3d at 1287). "Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger ofmisleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." Bryant, 187 F.3d at 1282 n.18 (quoting McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814
Defendant, they may not rely on group pleading. See Phillips , 374 F. 3d at 1017. 5 The term "forward- looking statement" means (A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure or other financial items; (B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer; (C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operation included pursuant to the rules and regulations of the Commission; (D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C); (E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or (F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission. 15 U.S.C. 78u-5(i)(1).
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(11th Cir. 1989) (quoting Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. 1981) (en banc)). Accordingly, the Court, in considering all of the factual allegations, must review each separate alleged omission or misrepresentation and determine whether Plaintiffs have adequately alleged the omission or misrepresentation of a material fact and whether each Defendant acted in a severely reckless manner. As to Count Two, for violation of Section 20(a) of the Exchange Act, 15 U.S.C. 78t(a), liability attaches to "controlling persons" who aid and abet "any person liable under any provision of this chapter or of any rule or regulation thereunder." 15 U.S.C. 78t. Because Plaintiffs ' claims under Section 20(a) are alleged against the Individual Defendants based upon the same alleged unlawful conduct underlying Count One, the success of the Section 20(a) claims turns on resolution of the Section 10b and Rule l Ob-5 claims . See Garfield, 466 F.3d 1255 at 1261 ; see also Malin, 17 F. Supp. 2d at 1351 (holding that "without a primary violation of securities laws, there can be no secondary violation under 20(a)"). Thus, as McMahon argues in his separately-filed Motion, "Plaintiffs must allege a complete substantive fraud claim against McMahon in order to state a claim. This includes allegations of Mr. McMahon's scienter, or intent to commit the fraud alleged." (McMahon Mem . ofLaw [D .E. 38-2] at 6). 2. Challenge to the Sources of Information and Internal Inconsistency of the Allegations
The undersigned, preliminarily, addresses Defendants' challenge to the reliability of the sources of information mentioned throughout the Corrected Consolidated Amended Class Action Complaint, and the charge that the allegations concerning the binding nature of the JV Agreement are nonsensical and internally inconsistent. As stated, Defendants question the reliability of
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information provided by Tataurov and Zhukov, likening them to "disgruntled ex-employees ." (Defs. ' Reply Mem. [D.E. 48] at 9). Defendants maintain that these two Russians were merely minority owners of Internafta, who are not alleged to have negotiated the JV Agreement or performed substantive duties for Internafta. Defendants insist that sources of information must be "described with sufficient particularity to support the probability that a person in the position occupied by the same would possess the information" attributed to them. (Defs. ' Mem. of Law [D.E. 37] at 15 (quoting Marrari v. Med. Staffing Network Hldngs, Inc., 395 F. Supp . 2d 1169 , 1188 (S.D. Fla. 2005)). The undersigned is not persuaded that these two men, two ofthe three members ofInternafta, and the two who brought in Chernikov and originally had contact with Huff, were not in a position from which to acquire or provide the information alleged, or are so untrustworthy on the basis ofthe allegations alone to discount the statements and actions they attribute to GlobeTel and Huff, the only Defendants they specifically address. See, e.g., PSS World Medical, Inc. Sec. Litig., 250 F. Supp. 2d 1335, 1350 (M.D. Fla. 2002) (where allegations were supported by information provided by "numerous former" employees, "[p]laintiffs do not need to specificallyname their confidential sources in support of their averments.") Defendants also devote much oftheir arguments seeking dismissal to a characterization ofthe Corrected Consolidated Amended Class Action Complaint as internally inconsistent and non-sensical. Defendants maintain that it is inconsistent to allege the JV Agreement was "not binding" while at the same time alleging that the relevant parties acted as though there was a binding deal. Or, as
Defendants put it, "[w]hy would Tataurov and Zhukov attempt to `terminate' a `deal ' that they allegedly had been told was a sham to begin with? This makes no sense." (Defs. 'Mem. ofLaw [D. E. 22
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37] at 10). Because of the perceived internal inconsistency in the allegations, Defendants also argue that the strong inference of scienter is missing and a dismissal is warranted. The undersigned is similarly not persuaded that such internal inconsistency exists. Regardless of the "not binding" statement made by Huff, Tataurov and Zhukov were allegedly promised a $12 million referral fee upon consummation of the Russian deal, and they allegedly pursued its consummation and even wrote to Huff seeking completion of the deal with that goal in mind. 3. Sufficiency of Count One
a. As to the Individual Defendants (less Hui, the allegations supporting scienter nrP inciiffiriPnt
To state a claim for securities fraud, Plaintiffs must allege specific facts giving rise to a strong inference of scienter "for each defendant with respect to each violation ." Garfleld, 466 F.3d at 1264. Plaintiffs fail to do so as to all Individual Defendants, with the exception ofDirector and CEO, Huff, who is addressed separately below. First, as to Defendants McMahan, Klein, and Castellano, current or former outside directors of GlobeTel, other than an allegation that they signed an annual report on SEC Form 10-K (see Corr. Cons. Am. Class Action Compl. 18-20, 57), there is no allegation that they knew any of the challenged disclosures were false when made. Outside directors are presumed not to be involved in a company's day to day operations. See In re Sunbeam Sec. Litig., 89 F. Supp. 2d 1326, 1342 (S.D. Fla. 1999). Furthermore, the mere signing of an SEC filing is not a basis from which to find an inference of scienter. See In re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308 , 1330 -31 (M.D. Fla. 2002). Similarly, there is a paucity of information from which one can infer scienter, or conclude
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Defendants had access to inside information, as to Defendants Lynch, Leinwand and Siegel, current or former officers of GlobeTel. While Huff admittedly stated that the Russian deal was a "huge, company-transforming event" (Corr. Cons. Am. Class Action Compl. 58), the pleading does no more as to these Defendants other than to state their level of compensation, that they signed SEC filings, and name their positions. There are no allegations showing that each of these Defendants knew that the challenged disclosures concerning the "company-transforming event" were false when made. Even when one aggregates the well-plead facts in an attempt to infer scienter, see, e.g., Phillips, 374 F.3d at 1016-17, as Plaintiffs urge (see Pls. ' Mem. ofLawin Opp. [D.E. 47] at 13), the pleading fails to state with particularity the facts giving rise to that strong inference of scienter as to each act or omission alleged. See In re Smith Gardner Sec. Litig., 214 F. Supp. 2d 1291, 1303 (S. D. Fla. 2002) (dismissing complaint and stating that to establish scienter the Reform Act requires facts to be plead with particularity giving rise to a strong inference as to each defendant and each act or omission). As to Defendant Dumas, in addition to allegations concerning his position and compensation, and that he also signed SEC filings, Plaintiffs allege Dumas remarked that GlobeTel may have made "mistakes" or been "naive" in connection with the Russian deal. (See Corr. Cons. Am. Class Action Compl. 1199, 102). The allegations concerning Dumas' after-the fact opinions concerning mistakes made are not the equivalent of allegations that Dumas knew or had a basis to believe the challenged statements were false or inaccurate when made. See, e.g., In re Sunterra, 199 F. Supp. 2d at 1331 (defendant's "after-the-fact statement in the January 2000 press release regarding the rapidity of the Company's growth does not contribute to or create on its own an inference of scienter. statement is merely his account as to what caused Sunterra's failure.") 24 The
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Additional reasons advanced by the Motions to Dismiss compel the conclusion that scienter is not sufficiently plead as to the foregoing Individual Defendants. The first issue concerns the allegations that Huffmade a statement that the JV Agreement was "not binding" at some unspecified time before it was signed, and attributing this non-binding understanding to the Individual Defendants. (See Corr. Cons. Am. Class Action Compl. 77). While this assertion, when coupled with something more, might support an inference that the later challenged communications were false when uttered and were uttered with the requisite scienter, the pleading does not describe the circumstances under which Huff made the statement. Defendants have correctly relied upon several observations made in Garfield, 466 F.3d 1255 , concerning the prohibition on attributing statements to a securities defendant without including a description of the context in which the statements are made. For example , in affirming a dismissal ofthe complaint, the court in Garfield stated that "[plaintiff]'s broad claim of testimonial evidence is not set forth with requisite detail because [plaintiff] failed to allege what was said at the meeting, to whom it was said, or in what context." Id. at 1265. Here, too, the pleading does not identify in what context Huff uttered the words or when, in relation to the signing ofthe JV Agreement, they were said. Because the allegations "do not exclude other plausible explanations that would undercut ... scienter,... [the] facts cannot be fairly said to raise a `strong inference' that the defendant[s] acted with the required state of mind." In re Sportsline.com Sec. Litig., 366 F. Supp. 2d 1159, 1164 (S.D. Fla. 2004). The next issue concerns the insufficiency ofmotive and opportunity allegations. "[A] showing ofinere motive and opportunity [to commit fraud] is insufficient to plead scienter." Bryant, 187 F.3d at 1287. Plaintiffs certainly plead that the Individual Defendants wanted to protect their positions in GlobeTel, received handsome compensation from a company that never realized a profit, used 25
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company stock as currency for future acquisitions , and enhanced the value oftheir personal holdings of company stock. And while these Defendants' actions and motives may not pass the "smell test, ,6 courts reject the sufficiency of such allegations to support a finding of scienter. See, e.g., Sportsline, 366 F. Supp . 2d at 1171 (desire to consummate corporate acquisitions insufficient to show scienter); Druskin, 299 F. Supp. 2d at 1335 (desire to increase value of personal stock holdings , increase compensation and attract buyer found insufficient); Cutsforth v. Renschler, 235 F. Supp. 2d 1216, 1250 (M.D. Fla. 2002) (desire to benefit private placement offering insufficient); In re Republic Services, Inc. Sec. Litig., 134 F. Supp. 2d 1355, 1360 (S.D. Fla. 2001) (desire to "fuel acquisitions," a "strategy not confined to Republic Services but to many public companies," too attenuated to show scienter); Malin, 17 F. Supp. 2d at 1361 (desire to maintain executive positions insufficient). The allegations concerning GlobeTel's numerous failed ventures' and lack of a detailed business plan may certainly add an aura ofrecklessness to the actions and representations complained of, but they, too, are insufficient to establish that each of the named Individual Defendants knew or recklessly disregarded the falsity ofthe challenged statements issued by GlobeTel regarding the deal with the Russians . See, e. g., Alabama Farm Bureau Mut. Cas. Co., Inc. v. American Fid. Life Ins. Co., 606 F.2d 602, 608 (5th Cir. 1979) ("A breach of fiduciary duty by majority stockholders or corporate officers without any manipulation, deception, misrepresentation or nondisclosure violates neither the statute nor Rule I Ob-5 ....") (citation omitted). Alleging recklessness requires showing
6 "Smell test" is defined as a "[m]etaphoric test used to determine the legitimacy or authenticity of a situation;" it is a "fragrant phrase [that] comes from the idea of smelling food in advance as a test to see if it has gone bad." http://www.wordspy.com. While Plaintiffs include GlobeTel's statements describing the reasons for each failed business deal, no details are provided as to why each deal failed.
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a danger of misleading investors that is "either known to the defendant or is so obvious that the defendant must have been aware of it." Bryant, 187 F.3d at 1282. There are no allegations
describing each Defendant's involvement in each of the failed deals or development of the business plans,' or each officer's knowledge concerning the list of failed deals or business plans. There is no allegation concerning how each ofthe failed deals or weakness in the prepared business plans relates to each Defendant's knowledge ofthe truth or falsity of any ofthe challenged statements concerning the Russian deal. Moreover, disclosure ofmost ofthe proposed deals' failures appears to have postdated announcement ofthe Russian deal at issue, since the disclosures appear in the 2006 Form 10-K. Lastly, Plaintiffs include allegations pertaining to Defendant Lynch 's planned sale of securities during the class period. However, there is no allegation that he or any other Defendant actually sold shares during the class period. The absence of an allegation concerning what each Defendant
"obtained as a consequence of the [alleged] fraud," Garfield, 466 F.3d at 1262, combined with the absence of any allegation of actual trading, see, e.g., Druskin, 299 F. Supp. 2d at 1336 (absence of allegations that CEO sold any stock "refute[s] any inference of scienter"); Sunterra, 199 F. Supp. 2d at 1326 (lack of allegations of sales "certainly weights against an inference of scienter"); Cutsforth, 235 F. Supp. 2d at 1250 (absence of allegations of personal sales), undermines any inference of scienter. And while the Corrected Consolidated Amended Class Action Complaint names other persons or entities who planned to sell GlobeTel stock during the class period (see Corr. Cons. Am. Class Action Compl. 115, 118, 122), it does not state that sales took place or even identify the
$ The parties agree there were two business plans, the shorter one attached to the pleading, and a longer, 108-page plan, that neither Tataurov nor Zhukov ever saw. (See Pls. 'Mem. ofLaw in Opp. [D.E. 47] at 16 n.15).
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named Defendants' connections to the planned sales , to rouse a suspicion that unusual sales by insiders were taking place.' See, e.g., Druskin, 299 F. Supp. 2d at 1335-36 ("plaintiffs bear the burden of showing that sales by insiders were in fact unusual or suspicious in amount and timing"); Plevy v. Haggerty , 38 F. Supp. 2d 816 , 834 n.12 (C.D. Cal. 1998 ) (sales by non-party insiders irrelevant to assessing scienter of named defendants). For all of the foregoing reasons, individually and in the aggregate, the allegations (and the documents attached to the Corrected Consolidated Amended Class Action Complaint) that are presented to support an inference of scienter are insufficient to meet the heightened pleading requirements of the PSLRA against the Individual Defendants other than Huff. b. Count One also fails to satisfy Fed. R. Civ. P . 9(b) as to the Individual Defendants (less Hui .
To satisfy Rule 9(b), Fed. R. Civ. P., a securities fraud complaint must allege what statements or omissions were made in what documents, the time and place of each and the person responsible for making or not making them, the content of the statements and the manner in which they misled the plaintiff, and what the defendants obtained as a result of the fraud. See Garfield, 466 F.3d at 1262. In other words, the complaint must allege the who, what, when, where, and how. Id. Moreover, the circumstances of fraud or mistake must be alleged with
(citations omitted).
"particularity." Fed. R. Civ. P. 9(b). In addressing their obligations under Rule 9(b), Plaintiffs allege that the December 30, 2005
9 Curiously, Plaintiffs allege that Infinity Capital Partners, an entity in which Huff allegedly was a forty (40) percent owner, was issued GlobeTel stock in a private placement. (See Corr. Cons. Am. Class Action Compl. 126(e)). As Defendants point out, "[i]f Mr. Huff knew the Company's stock was inflated, why would he allow Infinity to accept GlobeTel stock as currency, and then never sell it?" (Defs. ' Mem. of Law [D.E. 37] at 13).
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announcement of the joint venture between GlobeTel and Internafta and all other disclosures by GlobeTel (press releases and SEC quarterly reports) were false and misleading . The falsity consists ofthe failure to disclose the non-binding nature ofthe JV Agreement, the lack oftechnical or financial analysis undertaken to determine the feasibility of the purported deal, the parties' lack of resources to consummate the project, and the existence of side agreements that materially altered the deal. (See Corr. Cons. Am. Class Action Compl. 40). Only Defendant Huff is alleged to have made the misleading statements or omissions. (See id. 13 8). Plaintiffs do not attribute any statements to the other Individual Defendants, or their role, if any, in directing or acquiescing to any omissions from the press releases and other statements uttered by GlobeTel. Because the Corrected Consolidated Amended Class Action Complaint does not attribute any statement or omission to any of these Individual Defendants, it fails to satisfy Rule 9(b) and must be dismissed. See Theoharous, 256 F.3d at 1225 (dismissing Section 10(b) claim against a CEO because the complaint "does not attribute any statement to him."). c. The allegations supporting recklessness by GlobeTel and Huff are sufficient to establish their scienter as to Count One .
In contrast to the insufficiency of the scienter allegations as to the Individual Defendants addressed in the preceding discussion, Plaintiffs satisfy the heightened pleading requirements of the PLSRA as to GlobeTel and Huff, because of the combination of severe recklessness and motive and opportunity shown as to these Defendants. "The scienter of a corporation's officer may be imputed to the corporation itself under general agency and corporate law principles." Druskin, 299 F. Supp. 2d at 1322 (footnote omitted) (citing Cheney v. Cyberguard Corp., 2000 WL 1140306, at *7 (S.D. Fla. 2000)). In the Eleventh Circuit, "a securities fraud plaintiff must plead scienter with particular
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facts that give rise to a strong inference that the defendant acted in a severely reckless manner." Bryant, 187 F.3d at 1287. Moreover, "a showing of mere motive and opportunity is insufficient to plead scienter." Id. With this framework in mind, the undersigned now addresses why scienter is satisfied as to GlobeTel and Huff. In fiscal year 2005, GlobeTel reported a net loss of $31.9 million, based on total revenues of $81 million. (See Corr. Cons. Am. Class Action Compl. 34). In a press release dated December 30, 2005, GlobeTel Wireless announced it had entered into an agreement with LLC Internafta worth "US $600 million for the installation of an array of proprietary networks to be installed in Russia's 30 largest cities, starting with Moscow and St. Petersburg ." (Id. at 38, quoting Press Release).
In the same press release, Huff commented "[i]t is beyond exciting to be able to bring this level of connectivity to Russia." (Id.). The press release also described GlobeTel 's role under the agreement with Internafta. According to the Company's press release , GlobeTel "will both manage the
completed network and will retain an ongoing 50% shareholding in the operations of the network, allowing the Company to enjoy the significant benefits of the recurring revenue stream." (Id.). GlobeTel also declared its plan to roll out the network in three stages , comprising 10 cities each, over the next twenty-seven months. (See id.). Given the magnitude of the proposed deal, and that it would be a "huge, companytransforming event" (id. 58),GlobeTel and Huff were reckless when they announced the deal (1) with an initial mere 17-page business plan lacking any analysis of relevant consumer markets or the elements necessary to install and operate a wireless network in 30 cities spread out over Russia; (2) without any efforts to verify that Internafta - which did not even exist at the time of the planned initial announcement of the Russian deal - had the financial resources to meet a $600 million 30
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obligation; and (3) during and after repeatedly touting the creation of several other and similar joint ventures that never progressed beyond their announcement. (See id. at 40, 64, and 130(a)-(t)). In In re Eagle Building Tech., Inc. Sec. Litig., 319 F. Supp. 2d 1318, 1326 (S.D. Fla. 2004) recklessness was found where one fraudulent transaction constituted 74% of the defendant issuer's business . The court in In re Eagle Building Tech. collects several cases that stand for the proposition that the magnitude of a misstatement or fraud may suggest recklessness sufficient to support an inference of scienter: See In re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308, 1338 (M.D. Fla. 2002) (citing Carley Capital Group v. Deloitte & Touche, L.L.P., 27 F. Supp. 2d 1324 (N.D. Ga. 1998), as stating that "a drastic overstatement" coupled with GAAP violations could be enough to raise the requisite strong inference against an auditor); In re Sunbeam Sec. Litig., 89 F. Supp. 2d 1326, 1345 (S.D. Fla. 1999) (citing the allegation that the "sheer magnitude of the restatements of Sunbeam's financial statements suggests that Arthur Andersen should have known or was severely reckless not to know that its Unqualified Audit Opinion was misleading"); Carley Capital, 27 F. Supp. 2d at 1339-40 (holding that the totality and magnitude of that defendant's accounting violations constituted strong circumstantial evidence of reckless or conscious behavior); In re Sahlen &Assoc., Inc. Sec. Litig., 773 F. Supp. 342 (S.D. Fla. 1991) (holding that the allegations, which included the allegation that defendant was at least grossly reckless in failing to discover that nearly two-thirds of the accounts receivable were required to be written off, clearly suggested that the defendant "may have had a strong indication that something was seriously amiss... and certainly provide [defendant] with fair notice of Plaintiffs' claims"); Kinney, 170 F. Supp. 2d at 180 (stating that the "failure to `investigate the doubtful' gives rise to a strong inference of scienter, particularly in light ofthe magnitude of the accounting error involved" and that the magnitude of the reporting errors may lend weight to allegations of recklessness where the defendants are in a position to detect errors); MicroStrategy, 115 F. Supp. 2d at 636 ("[w]hile alleging a misapplication of Generally Accepted Accounting Principles standing alone is insufficient, such allegation when combined with a drastic overstatement of financial results can give rise to a strong inference of scienter ... [and] the totality and magnitude of the ... accounting violations [may] constitute strong circumstantial evidence of reckless or conscious misbehavior.") (citing Carley Capital, 27 F. Supp. 2d at 1339-40).
Id.
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And while the cases collected rely upon violations of GAAP and GAAS to demonstrate scienter, see, In re Spear & Jackson Sec. Litig., 399 F. Supp. 2d 1350, 1362 (S.D. Fla. 2005), the cases also emphasize that courts should examine the "overall context" in which a "magnitude of the fraud" analysis is employed to find an inference of scienter. Here, the overall context supports a finding that a strong inference of scienter has been shown as to GlobeTel and Huff in making the several announcements concerning a Russian deal lacking a well-founded business plan, with a virtually non-existent company to be created for the purpose of consummating the "deal," and in the face of two- dozen similar ventures some of which had already failed, and others which later were announced to have similarly failed. (See, e.g., Corr. Cons. Am. Class Action Compl. 38, 40, 43, 64, 72 and 74). Huff is alleged to have had personal involvement in the initial negotiations with the Russians, attended meetings personally, and by virtue of his position as Chief Executive Officer and Director, was in a position to know the falsity or misleading nature of the statements concerning the Russian deal. (See id. at 72, 74, and 75). Moreover, even ifthe statements at issue are considered "forward-looking," no reasonable basis existed for the statements issued concerning the Russian deal with an as-yet unformed company and in the absence of any concrete plan or analysis as to the feasibility of the proposed deal. See, e.g., Primavera Investors v. Liquidmetal Technologies, Inc., 403 F. Supp. 2d 1151, 1159 (M.D. Fla. 2005) ("plaintiffs sufficiently allege that no reasonable basis existed for the forward- looking statements issued during the class period.") Admittedly Plaintiffs do not plead that GlobeTel engaged in a corporate acquisition during the Class Period in which it was allegedly using stock as currency. However, Plaintiffs do allege that GlobeTel was unusually dependent upon the use of its stock as currency to pay for corporate
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acquisitions and financial obligations. (See Corr. Cons. Am. Class Action Compl. 123-128). Given the foregoing "red flags" that consequently make the press releases and statements by GlobeTel and Huff reckless, combined with these Defendants' obvious motives and opportunity, the undersigned is satisfied that a strong inference of scienter has been adequately plead as to these Defendants. 4. Sufficiency of Count Two
Plaintiffs' second claim is for a violation of Section 20(a) of the Exchange Act . 15 U.S.C. 78t(a). Section 20(a) creates a cause of action against defendants alleged to have been "control persons" of those engaged in securities fraud. A plaintiff need plead only the existence of a primary violation by a controlled person and the direct or indirect control of the primary violator by the defendant in order to state a claim under Section 20(a). In re Interpublic, 2003 WL 21250682 at * 15. Defendants' challenge to Count Two is that Plaintiffs have not sufficiently alleged an underlying violation of Section 10(b). Because the undersigned agrees that Plaintiffs have not sufficiently alleged a violation of Section 10(b), Count Two similarly fails as to the Individual Defendants (less Huff), notwithstanding Plaintiffs' argument, which is unsupported by any Eleventh Circuit law, that the standards ofFed. R. Civ. P. 8 should apply and no more is needed. Consistent with the foregoing analysis and
conclusions, however, Count Two is sufficiently plead as to Huff. For all of the foregoing reasons, it is ORDERED AND ADJUDGED as follows: (1) The Motions to Dismiss [D.E. 37 & 38] are granted as to Individual Defendants , Lynch,
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Case No. 06-21071-CIV-Altonaga
Dumas, Jimenez, Castellano, Klein, Leinwand, Siegel and McMahan. (2) The Motion to Dismiss [D.E. 37] is denied as to Defendants GlobeTel and Huff. (3) Plaintiffs shall have until April 27 , 2007 to file a second amended complaint. DONE AND ORDERED in Chambers at Miami, Florida this 4th day of April, 2007.
CECILIA M. ALTO GA UNITED STATES DISTRICT JUDGE
cc: Magistrate Judge William C. Turnoff counsel of record
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