09-1751-cv
In re Authentidate Holding Corp. Sec. Litig.




                         UNITED STATES COURT OF APPEALS
                             FOR THE SECOND CIRCUIT

                                               SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE
OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL
APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY
CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY
COUNSEL.



        At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of
New York, on the 12th day of March, two thousand ten.

PRESENT:
            ROBERT A. KATZMANN,
            REENA RAGGI,
                              Circuit Judges,
                            *
            JOHN G. KOELTL,
                              District Judge.
___________________________________________________

ILLINOIS STATE BOARD OF INVESTMENT,

                   Plaintiff-Appellant,

                   v.                                                     09-1751-cv

AUTHENTIDATE HOLDING CORP., SURENDRA PAI,
JOHN J. WATERS, DENIS H. BUNT, PETER R. SMITH, JOHN T. BOTTI,

            Defendants-Appellees.
____________________________________________________

For Plaintiff-Appellant:               JOHNSTON DE F. WHITMAN , JR., Entwistle & Cappucci, New
                                       York, NY (Andrew J. Entwistle, Jordan A. Cortez, Entwistle


         *
          The Honorable John G. Koeltl, of the United States District Court for the Southern
District of New York, sitting by designation.
                               & Cappucci, New York, NY; Lisa Madigan, Attorney
                               General, Michael A. Scodro, Solicitor General, Deborah
                               Ahlstrand, Assistant Attorney General, Office of the Illinois
                               Attorney General, Chicago, IL, on the brief)

For Defendants-Appellees:      IRWIN H. WARREN (Miranda S. Schiller, Margarita Platkov,
                               on the brief), Weil Gotshal & Manges, New York, NY


      Appeal from a judgment of the United States District Court for the Southern District
of New York (Swain, J.).

       UPON DUE CONSIDERATION IT IS HEREBY ORDERED, ADJUDGED,

AND DECREED that the judgment of the district court be AFFIRMED in part and

VACATED and REMANDED in part.

       Plaintiff-Appellant Illinois State Board of Investment (“ISBI”) appeals from a

judgment of the District Court for the Southern District of New York (Swain, J.) dismissing

in its entirety ISBI’s Second Amended Complaint (“the SAC”), in which ISBI alleges

various violations of the federal securities laws by the Defendants-Appellees, Authentidate

Holding Corporation and its individual officers and directors (collectively, “Authentidate”).

We assume the parties’ familiarity with the underlying facts and the procedural history of

the case.

       We review de novo the dismissal of a complaint under Rule 12(b)(6), accepting all

factual allegations as true and drawing all reasonable inferences in favor of the plaintiff.

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 

, 194

(2d Cir. 2008). “To survive a motion to dismiss, a complaint must plead ‘enough facts to

state a claim to relief that is plausible on its face.’” Ruotolo v. City of New York, 

, 188 (2d Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 

, 570 (2007));



                                               2
see also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 

, 98 & n.2 (2d Cir. 2007). A

complaint alleging securities fraud must satisfy the heightened pleading requirements of the

Private Securities Litigation Reform Act (“PSLRA”) and Federal Rule of Civil Procedure

9(b) by stating with particularity the circumstances constituting fraud. See generally

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

(2007).

       Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to “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). Securities and Exchange Commission Rule 10b-5

implementing the statute states that it “shall be unlawful for any person . . . [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.” 17 C.F.R. § 240.10b-5(b). Under the law of this Circuit, to state a claim

under Rule 10b-5 a plaintiff must allege that, in connection with the purchase or sale of

securities, the defendant made material misstatements or omissions of material fact, with

scienter, and the plaintiff’s reliance on the defendant’s action caused injury to the plaintiff.

Ganino v. Citizens Utils. Co., 

, 161 (2d Cir. 2000).

       We note at the outset that on this appeal ISBI presents, as it did to the court below, a

veritable forest of indistinct and overlapping claims, rendering it difficult to identify ones

for which dismissal may have been inappropriate. Nonetheless, we find that the SAC

properly states claims with respect to several statements Authentidate made—or did not

make—regarding possible amendment of the performance metrics in the agreement with

the United States Postal Service (“USPS”): the statements made in the September 8

                                                3
conference call and its allegedly misleading statements in February and May 2005.

       ISBI first argues that Authentidate had a duty to update statements made on

September 8, 2004. In a press release issued that day, Authentidate asserted that “the

Company believes that it has reached an agreement in principle and anticipates that an

agreement amending the original metrics will be completed shortly.” J.A. 176. In a

conference call that same day, Authentidate stated the following: “[We] hope to have an

amendment to our original agreement within the next few weeks. . . . We believe we have

an agreement in principle. . . . [W]e’re very confident we should have this amendment

signed in the not too distant future.” J.A. 1018, 1028.

       The SAC alleges that by December 2004 Authentidate knew that the USPS would

not agree to amend the metrics, as evidenced by a June 2005 statement from defendant

Waters stating that, after Authentidate received the First Deficiency Notice from the USPS

in September 2004, discussion with the USPS about amending the metrics “dragged on for

two or three months,” but “we then learned that the [USPS] did not want to continue

negotiations towards a contract amendment and we reported that as well.”1 J.A. 835.

Accordingly, Authentidate had a duty to alert the market that the amendment of the metrics

it predicted on September 8 would not be forthcoming. See In re Time Warner Sec. Litig.,

, 267 (2d Cir. 1993) (holding that a duty to update prior statements arises when

those statements “have become misleading as the result of intervening events”).

       The district court found the statement in the September 8 press release


       1
         Authentidate contests ISBI’s characterization of the facts regarding this issue, but on a
motion to dismiss we must presume that ISBI’s account is true. See Levitt v. Bear Stearns &
Co., 

, 101 (2d Cir. 2003).

                                              4
nonactionable, in part, because Authentidate noted that there was “no guarantee” that an

agreement would be reached. We agree that the statement is nonactionable, although we

rely on the “bespeaks caution” doctrine, which was not cited by the district court.2 The

doctrine renders certain forward-looking statements “immaterial as a matter of law because

it cannot be said that any reasonable investor could consider them important in light of

adequate cautionary language set out in the same offering.” Halperin v. eBanker USA.com,

Inc., 

, 357 (2d Cir. 2002). Given the explicit “no guarantee” warning, a

reasonable investor would not have been “misled into thinking” that an amendment was

definitively forthcoming. See 

       The statements made in the September 8 conference call, however, were not

accompanied by sufficient cautionary language to negate liability under the “bespeaks

caution” doctrine. The statements communicated principally that an agreement to amend

the metrics was imminent, if not formally concluded, and did not adequately alert investors

to the risk that an agreement would not actually materialize.3 Therefore, we find that the


       2
          To the extent that the court dismissed this claim because it found that, even without the
“bespeaks caution” defense, Authentidate was never under a duty to update the statement in the
September 8 press release, we disagree. Although this Court has found that there is “no need to
update when the original statement was not forward looking and does not contain some factual
representation that remains ‘alive’ in the minds of investors as a continuing representation,” In re
Int’l Bus. Machs. Corp. Sec. Litig., 

, 110 (2d Cir. 1998), the statement that “an
agreement amending the original metrics will be completed shortly” was clearly forward-looking
and was likely to remain “alive” in the minds of reasonable investors. Rather than being a
“vague statement[] of optimism,” 

8 statement is “the sort of definite positive
projection[]” that this Court has found “require[s] later correction” when intervening events
render it misleading, Time 

.
       3
         Although Authentidate began the call with a boilerplate warning that forward-looking
statements were “subject to certain risks and uncertainties,” J.A. 1016, the warning did not put
investors on notice of the particular risk at issue, see 

(observing that a

                                               5
SAC alleges sufficient facts to support a claim that Authentidate failed to inform investors,

as it was required to, that the September 8 conference call statements had been rendered

misleading by subsequent events.

       In addition, the SAC alleges that Authentidate made affirmatively misleading

statements in February and May 2005 when it stated “[w]e did a few things recently which

we think put us back in compliance [with the Revenue metrics]” and “management believes

it cured the metric deficiency.” SAC ¶¶ 119, 127. The SAC alleges facts indicating that, at

the time Authentidate made these statements, it knew that (1) its exceedingly low sales

meant that compliance with the original metrics was a virtual impossibility and (2)

negotiations with the USPS to amend the metrics had ended no later than December 2004.

SAC ¶¶ 119-21, 127-28, 137.

       Authentidate does not meaningfully dispute that the SAC properly states a claim in

this respect. It asserts instead that, because of cautionary language accompanying these

statements, they are nonactionable under the “bespeaks caution” doctrine and the PSLRA’s

“safe harbor” provision. Both defenses, however, apply only to forward-looking

statements, and the statements in question were statements of then-present fact. See 15

U.S.C. § 78u-5(c)(1) (stating that “a person . . . shall not be liable with respect to any

forward-looking statement”) (emphasis added); P. Stolz Family P’ship L.P. v. Daum, 

, 96-97 (2d Cir. 2004) (“[M]isrepresentation of present or historical facts cannot be

cured by cautionary language.”). Accordingly, we find that the SAC properly alleges that

the February and May 2005 statements were misleading.


plaintiff may overcome cautionary language that did not “expressly warn of or did not directly
relate to the risk that brought about plaintiffs’ loss”).

                                               6
       We are cognizant that, to state a claim under Rule 10b-5, ISBI must also allege facts

establishing the materiality of the misstatements and omissions regarding amendment of the

metrics.4 To fulfill the materiality requirement there must be a substantial likelihood that

the statement or omission “significantly altered the ‘total mix’ of information made

available,” as viewed by the reasonable investor. Basic, Inc. v. Levinson, 

,

231-32 (1988). A complaint cannot be dismissed for lack of materiality unless the

statements in question “are so obviously unimportant to a reasonable investor that

reasonable minds could not differ on the question of their importance.” Goldman v.

Belden, 

, 1067 (2d Cir. 1985).

       The SAC alleges—and Authentidate does not dispute—that during the Class Period

Authentidate’s sales fell well short of the levels mandated in the agreement. SAC ¶ 9. This

shortfall was ground for the USPS to terminate. In addition, we note that the SAC alleges

that Authentidate heralded the agreement as the “most significant development in the

history of [the] company,” Authentidate’s stock price rose dramatically based on market

anticipation of the sales contemplated in the agreement, and on two occasions it fell

precipitously following Authentidate’s public revelation of its failure to achieve the metrics

set forth in the agreement. SAC ¶¶ 3, 13, 14, 135. We therefore cannot conclude that

information regarding amendment of the agreement—which would potentially have

allowed Authentidate to remain in compliance with its terms and avoid cancellation by the

USPS—was “so obviously unimportant to a reasonable investor” that dismissal of these



       4
         A plaintiff must also establish causation and injury. The district court did not address
these elements with respect to any of ISBI’s claims, nor do the parties discuss them in their briefs
to this Court, and therefore we do not consider them here.

                                              7
claims on grounds of materiality would be appropriate.5

       Accordingly, we find that the SAC alleges sufficient facts to state claims premised

on Authentidate’s duty to update the statements made in the September 8 conference call

and its allegedly misleading statements in February and May 2005. Because the district

court appears not to have considered these statements as a basis for liability, we vacate the

court’s dismissal of the complaint as to these claims.

       The district court was correct, however, to dismiss all claims relating to

Authentidate’s general failure to reveal, prior to release of the First Deficiency Notice in

July 2004, the difficulties it was experiencing in meeting the revenue metrics called for in

the agreement it had with the USPS. These claims fail because the SAC does not allege

facts establishing that Authentidate had a duty to reveal this information. A duty to

disclose “arises whenever [nonpublic] information renders prior public statements

materially misleading.” Time 

. A party is not required to disclose a

fact “merely because a reasonable investor would very much like to know that fact.” 

As the district court noted, the SAC does not cite any public statements made by

Authentidate predicting that it would achieve a certain level of revenue or sales by a certain

date. It goes without saying that Authentidate was under no duty to disclose information

that would correct prior statements it never made.



       5
          In its brief to this Court, Authentidate suggests that any information regarding its
difficulties in meeting the terms of the agreement was not material, in part, because the USPS
could terminate the agreement at any time and thus investors would not have reasonably relied on
continuance of the agreement in making their investment decisions. We note, however, that a
reasonable investor may well have perceived there to be a significant difference between the fact
that the agreement could be terminated by the USPS without cause and the fact that negotiations
undertaken precisely to avoid Authentidate’s breach of the agreement had, in fact, failed.

                                               8
          The SAC also alleges that several generic statements in Authentidate’s SEC filings

regarding sales levels were misleading, but the statements in question did not suggest that

Authentidate’s sales were robust, and information in the same filings makes clear that the

company was earning minimal revenues from such sales. The SAC similarly alleges that

statements Authentidate made in press releases and conference calls regarding its sales

prospects were misleading. We affirm dismissal of these claims for the reasons given by

the district court.

          Finally, the SAC asserts that Authentidate had a particular duty, in connection with

its February 2004 stock offering, to reveal that its sales levels were exceedingly low and

that it was in serious danger of failing to meet the first revenue metric in July 2004. The

district court dismissed this claim on the ground that statements in February 2004 regarding

sales levels and satisfaction of revenue metrics targeted for July 2004 would have been

speculative and immaterial. We agree that because Authentidate had no duty to publicly

disclose the terms of its agreement with the USPS, the fact that its sales revenues were low

relative to those terms was not material information five months before the date of the first

metric.

          Accordingly, we also affirm the district court’s dismissal of the claims against

defendants Botti and Bunt in connection with the individual stock holdings they sold in late

2003. Because the district court did not address the individual defendants’ liability under

any of the other theories presented in the SAC, including liability for individual

misstatements and omissions or liability for those attributable to them under the group

pleading doctrine, we vacate and remand to allow the district court to consider those claims


                                                9
in light of our conclusions in this order. By the same token, in the event that Authentidate’s

liability for primary violations is properly established, we leave it to the district court to

consider ISBI’s claims for control person liability under Section 20(a) of the Exchange Act,

15 U.S.C. § 78t(a).

        We have considered the parties’ remaining arguments and find them to be without

merit. Accordingly, the judgment of the district court is hereby AFFIRMED in part and

VACATED and REMANDED in part.


                                                FOR THE COURT:
                                                Catherine O’Hagan Wolfe, Clerk




                                                 10