     05-5132-cv, 05-2593-cv
     ATSI Commc’ns v. Shaar Fund; ATSI Commc’ns v. Wolfson



1                         UNITED STATES COURT OF APPEALS

2                             FOR THE SECOND CIRCUIT

3

4                                 August Term 2006

5     (Argued: November 29, 2006                      Decided: July 11, 2007)

6                              Docket No. 05-5132-cv

7    -------------------------------------------------------x

 8   ATSI COMMUNICATIONS, INC., a Delaware Corporation,
 9
10                     Plaintiff-Appellant,
11
12          - v. -
13
14   THE SHAAR FUND, LTD., SHAAR ADVISORY SERVICES, N.V., RGC
15   INTERNATIONAL INVESTORS, LDC, ROSE GLEN CAPITAL MANAGEMENT, L.P.,
16   CORPORATE CAPITAL MANAGEMENT, INTERCARIBBEAN SERVICES LTD., CITCO
17   FUND SVCS., LUC HOLLMAN, SAM LEVINSON, HUGO VAN NEUTEGEM, DECLAN
18   QUILLIGAN, WAYNE BLOCH, GARY KAMINSKY, STEVE KATZNELSON, TRIMARK
19   SECURITIES, INC., LEVINSON CAPITAL MANAGEMENT, and W.J.
20   LANGEVELD,
21
22                     Defendants-Appellees,
23
24   MARSHALL CAPITAL SERVICES, LLC., JESUP & LAMONT STRUCTURED
25   FINANCE GROUP, MG SECURITY GROUP, INC., CROWN CAPITAL
26   CORPORATION, JOHN DOES 1-50, KENNETH E. GARDINER, NATHAN LIHON,
27   and SEI INVESTMENT CO.,
28
29                     Defendants.
30
31   -------------------------------------------------------x
32
33                             Docket No. 05-2593-cv
34
35   -------------------------------------------------------x
36
37   ATSI COMMUNICATIONS, INC., a Nevada Corporation,
38
                                          -1-
 1                     Plaintiff-Appellant,
 2
 3        - v. -
 4
 5   URI WOLFSON,
 6
 7                     Defendant-Appellee,
 8
 9   SAM LEVINSON,
10
11                     Defendant.
12
13   -------------------------------------------------------x

14   B e f o r e :     JACOBS, Chief Judge, WALKER and RAGGI, Circuit
15                     Judges.
16

17        Appeals from judgments of the United States District Court

18   for the Southern District of New York (Lewis A. Kaplan, Judge),

19   dismissing plaintiff ATSI Communications, Inc.’s complaints

20   alleging, inter alia, securities fraud in violation of § 10(b) of

21   the Securities Exchange Act of 1934 and Rule 10b-5 promulgated

22   thereunder.     ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 357 F.

23   Supp. 2d 712 (S.D.N.Y. 2005).

24        AFFIRMED.

25                                    THOMAS I. SHERIDAN III (Andrea
26                                    Bierstein, Melissa C. Welch, on the
27                                    brief), Hanly Conroy Bierstein &
28                                    Sheridan LLP, New York, New York,
29                                    for ATSI Communications, Inc.

30                                    JONATHAN M. SPERLING (Amanda J.
31                                    Gourdine, on the brief), Covington
32                                    & Burling, New York, New York, for
33                                    The Shaar Fund, Ltd., Shaar
34                                    Advisory Services, N.V., Levinson
35                                    Capital Management, Sam Levinson,
36                                    and Uri Wolfson.


                                       -2-
1                                  J. KEVIN MCCARTHY (Joanne L.
2                                  Monteavaro, on the brief), Wilmer
3                                  Cutler Pickering Hale and Door LLP,
4                                  New York, New York, for Rose Glen
5                                  Capital Management, L.P., RGC
6                                  International Investors, LDC, Wayne
7                                  Bloch, Gary Kaminsky, and Steven
8                                  Katznelson.

 9                                 DAVID G. CABRALES (W. Scott
10                                 Hastings, Jeffrey A. Logan, on the
11                                 brief), Locke Liddell & Sapp LLP,
12                                 Dallas, Texas; Cahill Gordon &
13                                 Reindel LLP (Thorn Rosenthal, Janet
14                                 A. Beer, on the brief), New York,
15                                 New York, for Trimark Securities,
16                                 Inc.

17                                 MICHAEL J. DELL (Elaine Golin, on
18                                 the brief), Kramer Levin Naftalis &
19                                 Frankel LLP, New York, New York,
20                                 for Citco Fund Services (Curaçao)
21                                 N.V., InterCaribbean Services,
22                                 Ltd., Hugo van Neutegem, Wim
23                                 Langeveld, Luc Hollman, and Declan
24                                 Quilligan.

25                                 Berkman, Henoch, Peterson & Peddy,
26                                 P.C. (Ronald M. Terenzi, on the
27                                 brief), Garden City, New York, for
28                                 Corporate Capital Management.

29

30   JOHN M. WALKER, JR., Circuit Judge:

31        These appeals arise from judgments of the United States

32   District Court for the Southern District of New York (Lewis A.

33   Kaplan, Judge), dismissing plaintiff ATSI Communications, Inc.’s

34   (“ATSI”) complaints under Fed. R. Civ. P. 12(b)(6) in two

35   separate actions arising from the same events.   ATSI Commc’ns,

36   Inc. v. Shaar Fund, Ltd., 357 F. Supp. 2d 712 (S.D.N.Y. 2005).

37   ATSI alleges that the defendants made misrepresentations in
                                    -3-
1    connection with securities transactions and engaged in market

2    manipulation in violation of § 10(b) of the Securities Exchange

3    Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5

4    promulgated thereunder, 17 C.F.R. § 240.10b-5, or were liable as

5    control persons under § 20(a) of the Exchange Act, 15 U.S.C. §

6    78t(a).   ATSI claims that the defendants fraudulently induced it

7    to sell to them its convertible preferred stock.    The defendants

8    then aggressively short sold ATSI’s common stock and converted

9    the preferred stock to cover their short positions.    The alleged

10   consequence was a “death spiral” in the price of ATSI’s stock and

11   enormous profit for the defendants.

12        We affirm the judgments of the district court.

13                                 BACKGROUND

14        The following facts are taken from ATSI’s complaints and

15   supporting documents, which we must assume to be true in

16   reviewing a Fed. R. Civ. P. 12(b)(6) dismissal.    See Rothman v.

17   Gregor, 220 F.3d 81, 88 (2d Cir. 2000).

18        A.   ATSI and Its Efforts to Raise Money

19        ATSI was founded in December 1993 and hoped to become a

20   leading provider of retail communications services in Mexico in

21   the wake of the deregulation and privatization in Latin America’s

22   telecommunications markets.    It never turned a profit.   By 1999,

23   ATSI needed an infusion of capital to expand its U.S. customer

24   base and further develop its telephone network in Mexico.


                                      -4-
1         To raise money, ATSI issued four series of cumulative

2    convertible preferred stock (“Preferred Stock”): Series B, C, D,

3    and E.   Each transaction included a Securities Purchase

4    Agreement, a Certificate of Designation, and a Registration

5    Rights Agreement.    Each series included a risk-mitigating

6    conversion feature that worked as follows.    Upon conversion, a

7    “Market Price” was calculated as the average of the lowest five

8    closing bid prices during the ten-day period preceding the

9    conversion date.    The “Conversion Price” was calculated as the

10   lesser of (1) the closing bid price on a trading day fixed by the

11   Certificate of Designation and (2) the Market Price discounted by

12   17% to 22% depending upon the series.    ATSI would then issue a

13   number of shares of common stock equal to (1) the number of

14   shares of Preferred Stock to be converted (2) multiplied by the

15   Preferred Stock’s stated value of $1,000 per share (3) divided by

16   the Conversion Price.    Because there is no limit on the number of

17   common shares into which the Preferred Stock could convert,

18   securities such as these are called “floorless” convertibles.

19   The obvious inference from ATSI’s sale of these securities is

20   that these unfavorable terms were necessary to attract investors

21   because ATSI was continuously losing money.    In fact, ATSI

22   acknowledged that in light of its financial condition, it might

23   “not be able to raise money on any acceptable terms.”    American

24   Telesource International, Inc., Annual Report (Form 10-K), at 16

25   (July 31, 2000).
                                      -5-
1                1.     Sales to the Levinson Defendants

2         On a “road show” in Dallas, Texas in March 1999, defendant

3    Corporate Capital Management (“CCM”) introduced ATSI executives

4    to defendant Sam Levinson, the managing director of Levinson

5    Capital and the Shaar Fund.     Shaar Advisory Services, N.V.

6    (“Shaar Advisory”) served as executive officer and general

7    partner of the Shaar Fund.     Defendant Uri Wolfson controls the

8    Shaar Fund.      Collectively, Levinson, Levinson Capital, the Shaar

9    Fund, and Shaar Advisory constitute the “Levinson Defendants.”

10        During a May 1999 telephone conversation, CCM told ATSI that

11   the Shaar Fund had invested in several strong, successful

12   companies and that the Levinson Defendants were interested in

13   ATSI’s long-term growth.     During a June meeting, Levinson told

14   ATSI, inter alia, that the Levinson Defendants sought a long-term

15   investment in ATSI and would not engage in any activity to

16   depress its stock.     ATSI claims that all of these representations

17   were false and misleading because CCM and Levinson knew otherwise

18   and the Levinson Defendants were actually market manipulators

19   that profited at the expense of the companies in which they

20   invested.

21        Over the next six months, ATSI entered into the following

22   securities transactions with the Shaar Fund.

23   Transaction          # of Preferred   # of Warrants   Total Purchase
24   Date                 Shares           Purchased       Price
                          Purchased

                                        -6-
1    July 2, 1999     2,000 Series B   50,000         $2,000,000
2    Sept. 24, 1999   500 Series C     20,000         $500,000
3    Feb. 22, 2000    3,000 Series D   150,000        $3,000,000

4         The Securities Purchase Agreement for each transaction

5    included written representations that:

6         1.   The Shaar Fund was an “accredited investor” within the

7              meaning of Rule 501 of Regulation D under the

8              Securities Act of 1933; and

9         2.   “Neither [the Shaar Fund] nor its affiliates nor any

10             person acting on its or their behalf has the intention

11             of entering, or will enter into, prior to the closing,

12             any put option, short position, or other similar

13             instrument or position with respect to the Common Stock

14             [of ATSI] and neither [the Shaar Fund] nor any of its

15             affiliates nor any person acting on its or their behalf

16             will use at any time shares of Common Stock acquired

17             pursuant to this Agreement to settle any put option,

18             short position or other similar instrument or position

19             that may have been entered into prior to the execution

20             of this Agreement.”

21        ATSI claims that these representations were false because

22   (1) the Shaar Fund’s net worth was not high enough to meet the

23   requirements for being an accredited investor and (2) the Shaar

24   Fund intended to engage, and did engage, in short selling and


                                     -7-
1    manipulation of ATSI’s stock before, during, and after entering

2    into these agreements.

3         The Registration Rights Agreement in each transaction

4    contained a merger clause stating that:

 5        There are no restrictions, promises, warranties, or
 6        undertakings, other than those set forth or referred to
 7        herein. This Agreement, the Securities Purchase
 8        Agreement, the Escrow Instructions, the Preferred
 9        Shares and the Warrants supersede all prior agreements
10        and undertakings among the parties hereto with respect
11        to the subject matter hereof.
12
13        The Registration Rights Agreements contemplated that the

14   Shaar Fund would soon sell its converted common stock into the

15   public markets.    They required ATSI to use its “best efforts” to

16   register the common stock to be issued upon conversion of the

17   Preferred Stock within 90 days of closing and to take all

18   reasonable steps to help the Shaar Fund sell the common stock.

19   They also imposed, at most, a 90-day holding period before the

20   Shaar Fund could convert its Preferred Stock.    The only

21   restriction upon the Shaar Fund’s ability to sell the common

22   stock was if ATSI notified it of a material misstatement in the

23   stock’s prospectus.

24             2.      Sales to Rose Glen

25        In September 1999, ATSI decided to issue $15 million in its

26   equity to fund an acquisition.    Defendant Crown Capital

27   Corporation (“Crown Capital”), acting as placement agent,

28   recommended defendants RGC International Investors, LDC, and Rose

29   Glen Capital Management, L.P.    Defendants Wayne Bloch, Gary
                                      -8-
1    Kaminsky, and Steve Katznelson were employees of Rose Glen

2    Capital Management.    We refer collectively to all of these

3    defendants as “Rose Glen.”

4         During negotiations, Rose Glen allegedly made false verbal

5    representations similar to those made by the Levinson Defendants.

6         On September 27, 2000, Rose Glen submitted a draft term

7    sheet to ATSI offering a $10 million investment.    ATSI claims

8    that it then fell victim to a bait-and-switch when, on October

9    16, 2000, Rose Glen submitted closing documents providing for

10   only a $2.5 million investment in Series E Preferred Stock, with

11   a promise of further investment of up to $10 million if certain

12   conditions were met.    ATSI says it was forced to accept these

13   terms because it was required to pay $2 million to vendors in

14   Mexico the next day.    ATSI sold Rose Glen additional Series E

15   Preferred Stock in March and July of 2001.

16        The Purchase Agreement pursuant to which these securities

17   were sold included two representations by Rose Glen that ATSI

18   claims to be false on the same basis as the Levinson

19   representations:

20        1.   Rose Glen was an accredited investor; and

21        2.   Rose Glen was purchasing the Preferred Stock and common

22             stock issuable upon conversion:

23             for its own account and not with a present view
24             towards the public sale or distribution thereof
25             except pursuant to sales registered or exempted
26             from registration under the 1933 Act; provided,
27             however that by making the representation herein,
                                      -9-
1                the Buyer does not agree to hold any of the
2                Securities for any minimum or other specific term
3                and reserves the right to dispose of the
4                Securities at any time in accordance with or
5                pursuant to a registration statement or exemption
6                under the 1933 Act.
7
8    The Registration Rights Agreements also contained a merger clause

9    similar to the one in the Shaar Fund transaction documents.

10        B.     The “Death Spiral” Financing Manipulation Scheme

11        In addition to these misrepresentations, ATSI claims that

12   all of the defendants manipulated the market in ATSI’s common

13   stock by bringing about a “death spiral” in the price of ATSI’s

14   common stock.    The scheme, as alleged, worked as follows.    The

15   shareholder would short sell the victim’s common stock to drive

16   down its price.1   He then converts his convertible securities

17   into common stock and uses that common stock to cover his short

18   position.    The convertible securities allow a manipulator to

19   increase his profits by allowing him to cover with discounted

20   common shares not obtained on the open market, to rely on the

21   convertible securities as a hedge against the risk of loss, and

22   to dilute existing common shares, resulting in a further decline


     1
       An investor sells short when he sells a security that he does
     not own by borrowing the security, typically from a broker. See
     Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir. 1998).
     At a later date, he “covers” his short position by purchasing the
     security and returning it to the lender. Id. A short seller
     speculates that the price of the security will drop. Id. If the
     price drops, the investor profits by covering for less than the
     short sale price. Id. If, on the other hand, the price
     increases, the investor takes a loss. A short seller’s potential
     losses are limitless because there is no ceiling on how high the
     stock price may rise.
                                    -10-
1    in stock price.    ATSI was aware of the risk of dilution; for

2    example, it disclosed in the registration statement on its Form

3    S-3 that it expected the Shaar Fund to convert shortly after the

4    registration became effective and that future issuances of

5    Preferred Stock would put downward pressure on and dilute its

6    common stock.

7         ATSI accuses the Levinson Defendants, Wolfson, and Rose Glen

8    of deliberately causing a “death spiral” in its common stock.

9    The Shaar Fund began converting its Preferred Stock shortly after

10   it was contractually permitted to do so.    During the first two

11   quarters of fiscal year 2000, it had converted all of its Series

12   B shares into approximately 2.6 million common shares.    Although

13   ATSI’s April 14, 2000 Form S-3 states that the Shaar Fund sold

14   the common stock, the complaints do not allege any such sales.

15   Between December 12, 2000 and January 23, 2002, the Shaar Fund

16   converted its Series D shares into 8,331,454 shares of ATSI

17   common stock.    Between March 8, 2001 and August 14, 2002, Rose

18   Glen converted its Preferred Stock into over nineteen million

19   shares of common stock.

20        ATSI does not allege any specific acts of short selling by

21   the Levinson Defendants, but it includes circumstantial

22   allegations.    It alleges that searches in the SEC’s Edgar

23   database reveal that of the 38 companies that reported the

24   Levinson Defendants as investors, 30 experienced stock price


                                     -11-
1    declines indicative of a “death spiral” financing scheme.    Its

2    allegations against Rose Glen are of like kind.

3         ATSI also relies on the magnitude and timing of changes in

4    its stock price and trading volume.   At the time of the Series B

5    transaction in July 1999, its stock traded at $1.50 per share.

6    Two months later, it traded at $1.08 per share.    In February

7    2000, the Series D Preferred Stock purchase was preceded by a

8    significant increase in the daily trading volume of ATSI’s shares

9    and a dramatic rise in ATSI’s share price to $9 per share

10   (perhaps not coincidentally as ATSI listed its stock on the

11   American Stock Exchange (“AMEX”) during that period).    April 2000

12   saw massive stock sales and large price declines in ATSI’s stock.

13   For example, between April 13, 2000 and April 18, 2000 – during

14   which time ATSI filed a registration statement for the common

15   stock into which the Series C and D Preferred Stock would convert

16   – the price fell from $6.50 per share to $3.62 per share on heavy

17   volume.   ATSI claims that these price movements could only have

18   resulted from sales by the Levinson Defendants, despite

19   Levinson’s claim that the Shaar Fund was not selling.

20        ATSI’s stock price climbed up to $6 per share by early-June

21   2000.   On September 8, 2000, ATSI’s registration of common stock

22   for the Series C and D Preferred Stock became effective and, by

23   November 28, 2000, its price had fallen to $0.75 per share, and

24   plummeted to $0.09 per share on August 16, 2002.


                                    -12-
1         In addition to these price fluctuations, ATSI relies more

2    specifically on price movements and trading volume around the

3    time that the Shaar Fund and Rose Glen converted their Series D

4    and E Preferred Stock, which worked to their benefit.    ATSI

5    further points to instances where its stock price reacted

6    negatively to positive news.   ATSI also points to a 10-trading-

7    day period between December 31, 2002 and January 14, 2003 in

8    which Depository Trust Company records show that over eight

9    million shares were traded in excess of settlement, which it

10   claims could only result from sham trading.

11        C.     Other Defendants

12        ATSI alleges that any manipulation had to involve defendant

13   Trimark Securities, Inc. (“Trimark”), which served as the

14   principal market maker in ATSI’s stock.

15         ATSI also alleges that several defendants, hereinafter

16   referred to as the “Citco Defendants,” caused the Shaar Fund to

17   engage in the charged misconduct.     Defendant Citco Fund Services

18   (Curaçao) N.V. is the parent of defendant InterCaribbean

19   Services, Ltd., the Shaar Fund’s sole director.    Declan Quilligan

20   is a director of InterCaribbean.    W.J. Langeveld, Hugo Van

21   Neutegem, and Luc Hollman served as Managing Directors of Shaar

22   Advisory.

23        D.     ATSI’s Demise




                                    -13-
1         Telecom stocks were generally hard-hit during the period in

2    which ATSI alleges manipulation.    Between February 22, 2000 (the

3    date on which ATSI issued the Series D Preferred Stock) and

4    October 31, 2002 (the date on which ATSI filed its first suit),

5    the AMEX North American Telecom Index (of which ATSI’s stock was

6    not a component) dropped by 73%.    When ATSI filed its complaint,

7    its stock traded at $0.02 per share.    Its financial impairment

8    has rendered it unable to raise capital to maintain or expand its

9    business.

10        E.     ATSI’s Claims and Procedural History

11        ATSI claims that the Levinson Defendants, Wolfson,

12   Langeveld, Rose Glen, CCM, and Crown Capital are liable for

13   misrepresentations under § 10(b) and Rule 10b-5; that these same

14   defendants and Trimark are also liable for market manipulation in

15   violation of Rule 10b-5; and that the Citco Defendants and others

16   not relevant to this appeal are liable as control persons under §

17   20(a).    ATSI also asserts various state law claims.

18        ATSI filed its complaint in the first suit in October 2002

19   against all defendants except Wolfson (“ATSI I”).       In March 2004,

20   the district court dismissed ATSI’s first amended complaint

21   against the Levinson Defendants and Rose Glen for failing to

22   satisfy the pleading requirements of Fed. R. Civ. P. 9(b) and the

23   Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. §

24   78u-4(b).    It dismissed as to the other defendants for improper

25   service and lack of personal jurisdiction.    Second and third
                                    -14-
1    amended complaints followed and, in July 2004, ATSI filed a

2    largely identical complaint against Levinson and Wolfson in a

3    separate suit (“ATSI II”).    In February 2005, the district court

4    dismissed the third amended complaint in ATSI I under Fed. R.

5    Civ. P. 12(b)(6) with prejudice for again failing to satisfy Rule

6    9(b) and the PSLRA’s pleading requirements.       See ATSI Commc’ns,

7    357 F. Supp. 2d at 720.     Because subject matter jurisdiction was

8    based solely on ATSI’s federal claims, the district court did not

9    separately consider the state law causes of action.      The district

10   court entered judgment under Fed. R. Civ. P. 54(b), and the

11   parties in ATSI II stipulated to dismissal based on the district

12   court’s order in ATSI I.

13        ATSI’s timely appeals followed.

14                                 DISCUSSION

15        I.   Legal Standards

16        We review a district court’s dismissal of a complaint

17   pursuant to Fed. R. Civ. P. 12(b)(6) de novo, accepting all

18   factual allegations in the complaint and drawing all reasonable

19   inferences in the plaintiff’s favor.       Ganino v. Citizens Utils.

20   Co., 228 F.3d 154, 161 (2d Cir. 2000).      In addition, we may

21   consider any written instrument attached to the complaint,

22   statements or documents incorporated into the complaint by

23   reference, legally required public disclosure documents filed

24   with the SEC, and documents possessed by or known to the


                                      -15-
1    plaintiff and upon which it relied in bringing the suit.

2    Rothman, 220 F.3d at 88.   To survive dismissal, the plaintiff

3    must provide the grounds upon which his claim rests through

4    factual allegations sufficient “to raise a right to relief above

5    the speculative level.”2   Bell Atl. Corp. v. Twombly, 127 S. Ct.

6    1955, 1965 (2007).   Once a claim has been adequately stated, it

7    may be supported by showing any set of facts consistent with the

8    allegations in the complaint.   Id. at 1969.

9         Securities fraud claims are subject to heightened pleading

10   requirements that the plaintiff must meet to survive a motion to

11   dismiss.   First, a complaint alleging securities fraud must

12   satisfy Rule 9(b), Ganino, 228 F.3d at 168, which requires that

13   “the circumstances constituting fraud . . . shall be stated with

14   particularity,” Fed. R. Civ. P. 9(b).   This pleading constraint

15   serves to provide a defendant with fair notice of a plaintiff’s

16   claim, safeguard his reputation from improvident charges of

17   wrongdoing, and protect him against strike suits.   Rombach v.

18   Chang, 355 F.3d 164, 171 (2d Cir. 2004).   A securities fraud

19   complaint based on misstatements must (1) specify the statements

20   that the plaintiff contends were fraudulent, (2) identify the



     2
       We have declined to read Twombly’s flexible “plausibility
     standard” as relating only to antitrust cases. See Iqbal v.
     Hasty, - F.3d -, 2007 WL 1717803, at *11 (2d Cir. June 14, 2007).
     “Some of [Twombly’s] language relating generally to Rule 8
     pleading standards seems to be so integral to the rationale of
     the Court’s parallel conduct holding as to constitute a necessary
     part of that holding.” Id.
                                    -16-
1    speaker, (3) state where and when the statements were made, and

2    (4) explain why the statements were fraudulent.    Novak v. Kasaks,

3    216 F.3d 300, 306 (2d Cir. 2000).    Allegations that are

4    conclusory or unsupported by factual assertions are insufficient.

5    See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986).

6         Second, private securities fraud actions must also meet the

7    PSLRA’s pleading requirements or face dismissal.    See 15 U.S.C. §

8    78u-4(b)(3)(A).    In pleading scienter in an action for money

9    damages requiring proof of a particular state of mind, “the

10   complaint shall, with respect to each act or omission alleged to

11   violate this chapter, state with particularity facts giving rise

12   to a strong inference that the defendant acted with the required

13   state of mind.”3   Id. § 78u-4(b)(2).   The plaintiff may satisfy

14   this requirement by alleging facts (1) showing that the

15   defendants had both motive and opportunity to commit the fraud or

16   (2) constituting strong circumstantial evidence of conscious

17   misbehavior or recklessness.    Ganino, 228 F.3d at 168-69.

18   Moreover, “in determining whether the pleaded facts give rise to

19   a ‘strong’ inference of scienter, the court must take into

20   account plausible opposing inferences.”    Tellabs, Inc. v. Makor

21   Issues & Rights, Ltd., – S. Ct. –, 2007 WL 1773208, at *10 (June


     3
       In a Rule 10b-5 action, scienter requires a showing of “intent
     to deceive, manipulate, or defraud,” Ernst & Ernst v. Hochfelder,
     425 U.S. 185, 194 n.12 (1976), or reckless conduct, In re Carter-
     Wallace, Inc. Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000); SEC v.
     U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998) (stating in
     dicta that reckless behavior is sufficient to plead scienter).
                                    -17-
1    21, 2007).   For an inference of scienter to be strong, “a

2    reasonable person [must] deem [it] cogent and at least as

3    compelling as any opposing inference one could draw from the

4    facts alleged.”     Id. (emphasis added).

5         If the plaintiff alleges a false statement or omission, the

6    PSLRA also requires that “the complaint shall specify each

7    statement alleged to have been misleading, the reason or reasons

8    why the statement is misleading, and, if an allegation regarding

9    the statement or omission is made on information and belief, the

10   complaint shall state with particularity all facts on which that

11   belief is formed.”    15 U.S.C. § 78u-4(b)(1).

12        II.   ATSI’s Market Manipulation Claims

13              A.     Market Manipulation and Short Selling

14        Section 10(b), in proscribing the use of a “manipulative or

15   deceptive device or contrivance,” id. § 78j(b), prohibits not

16   only material misstatements but also manipulative acts.      Cent.

17   Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,

18   511 U.S. 164, 177 (1994).    Under the statute:

19        “Manipulation” is “virtually a term of art when used in
20        connection with securities markets.” The term refers
21        generally to practices, such as wash sales, matched
22        orders, or rigged prices, that are intended to mislead
23        investors by artificially affecting market activity.
24        Section 10(b)’s general prohibition of practices deemed
25        by the SEC to be “manipulative” – in this technical
26        sense of artificially affecting market activity in
27        order to mislead investors – is fully consistent with
28        the fundamental purpose of the [Exchange] Act “to
29        substitute a philosophy of full disclosure for the
30        philosophy of caveat emptor . . . .”
31
                                      -18-
1    Sante Fe Indus. v. Green, 430 U.S. 462, 476-77 (1977) (alteration

2    in original) (citations omitted).     Thus, manipulation “connotes

3    intentional or willful conduct designed to deceive or defraud

4    investors by controlling or artificially affecting the price of

5    securities.”   Ernst & Ernst, 425 U.S. at 199.    The critical

6    question then becomes what activity “artificially” affects a

7    security’s price in a deceptive manner.

8         Although not explicitly described as such, case law in this

9    circuit and elsewhere has required a showing that an alleged

10   manipulator engaged in market activity aimed at deceiving

11   investors as to how other market participants have valued a

12   security.   The deception arises from the fact that investors are

13   misled to believe “that prices at which they purchase and sell

14   securities are determined by the natural interplay of supply and

15   demand, not rigged by manipulators.”     Gurary v. Winehouse, 190

16   F.3d 37, 45 (2d Cir. 1999); see also Mobil Corp. v. Marathon Oil

17   Co., 669 F.2d 366, 374 (6th Cir. 1981) (stating that the Supreme

18   Court has indicated that manipulation under § 10(b) refers to

19   “means unrelated to the natural forces of supply and demand”);

20   cf. Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986)

21   (agreeing with the SEC that “[w]hen individuals occupying a

22   dominant market position engage in a scheme to distort the price

23   of a security for their own benefit, they violate the securities

24   laws by perpetrating a fraud on all public investors”); Crane Co.

25   v. Westinghouse Air Brake Co., 419 F.2d 787, 796 (2d Cir. 1969)
                                    -19-
1    (holding that nondisclosure of large open market purchases

2    combined with large secret sales to deter stockholders from

3    participating in a competing tender offer violated Rule 10b-5 by

4    “distort[ing] the market picture and deceiv[ing] the [issuer’s]

5    stockholders”).

6         In identifying activity that is outside the “natural

7    interplay of supply and demand,” courts generally ask whether a

8    transaction sends a false pricing signal to the market.    For

9    example, the Seventh Circuit recognizes that one of the

10   fundamental goals of the federal securities laws is “to prevent

11   practices that impair the function of stock markets in enabling

12   people to buy and sell securities at prices that reflect

13   undistorted (though not necessarily accurate) estimates of the

14   underlying economic value of the securities traded,” and thus

15   looks to the charged activity’s effect on capital market

16   efficiency.4   See Sullivan & Long, Inc. v. Scattered Corp., 47

17   F.3d 857, 861 (7th Cir. 1995).   The Seventh Circuit’s focus on

18   disruptions to the efficient pricing of a security is consistent

19   with our view that in preventing market rigging, § 10(b) seeks a

20   market where “competing judgments of buyers and sellers as to the

21   fair price of the security brings about a situation where the



     4
       The efficient capital market hypothesis, as adopted by the
     Supreme Court, posits that “the market price of shares traded on
     well-developed markets reflects all publicly available
     information.” See Basic Inc. v. Levinson, 485 U.S. 224, 246 &
     n.24 (1988).
                                    -20-
1    market price reflects as nearly as possible a just price.”        SEC

2    v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996)

3    (quoting H.R. Rep. No. 73-1383, at 11 (1934)).     In an efficient

4    market, trading engineered to stimulate demand can mislead

5    investors into believing that the market has discovered some

6    positive news and seeks to exploit it, see In re Initial Pub.

7    Offering Sec. Litig., 383 F. Supp. 2d 566, 579 (S.D.N.Y. 2005),

8    aff’d Tenney v. Credit Suisse First Boston Corp., No. 05-3450-cv,

9    2006 WL 1423785 (2d Cir. May 19, 2006); the duped investors then

10   transact accordingly.   To prevent this deleterious effect on the

11   capital markets, the Third Circuit distinguishes manipulative

12   from legal conduct by asking whether the manipulator “inject[ed]

13   inaccurate information into the marketplace or creat[ed] a false

14   impression of supply and demand for the security . . . for the

15   purpose of artificially depressing or inflating the price of the

16   security.”   GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189,

17   207 (3d Cir. 2001); see also Jones v. Intelli-Check, Inc., 274 F.

18   Supp. 2d 615, 627-28 (D.N.J. 2003).

19        Market manipulation is forbidden regardless of whether there

20   is a fiduciary relationship between the transaction participants.

21   See United States v. Russo, 74 F.3d 1383, 1391-92 (2d Cir. 1996);

22   United States v. Regan, 937 F.2d 823, 829 (2d Cir. 1991).     A

23   market manipulation claim, however, cannot be based solely upon

24   misrepresentations or omissions.    Lentell v. Merrill Lynch & Co.,

25   396 F.3d 161, 177 (2d Cir. 2005).     There must be some market
                                    -21-
1    activity, such as “wash sales, matched orders, or rigged prices.”

2    See Sante Fe, 430 U.S. at 476.

3         Furthermore, short selling – even in high volumes – is not,

4    by itself, manipulative.     GFL, 272 F.3d at 209.    Aside from

5    providing market liquidity, short selling enhances pricing

6    efficiency by helping to move the prices of overvalued securities

7    toward their intrinsic values.     See id. at 208; Sullivan & Long,

8    47 F.3d at 861-62 (discussing the defendants’ short sales as

9    arbitrage that eliminates disparities between price and value);

10   In re Scattered Corp. Sec. Litig., 844 F. Supp. 416, 420 (N.D.

11   Ill. 1994); John D. Finnerty, Short Selling, Death Spiral

12   Convertibles, and the Profitability of Stock Manipulation 2-3

13   (Mar. 2005), available at http://www.sec.gov/rules/petitions/4-

14   500/jdfinnerty050505.pdf; Ralph S. Janvey, Short Selling, 20 Sec.

15   Reg. L.J. 270, 272 (1992).    In essence, taking a short position

16   is no different than taking a long position.       To be actionable as

17   a manipulative act, short selling must be willfully combined with

18   something more to create a false impression of how market

19   participants value a security.    Similarly, purchasing a floorless

20   convertible security is not, by itself or when coupled with short

21   selling, inherently manipulative.       Such securities provide

22   distressed companies with access to much-needed capital and, so

23   long as their terms are fully disclosed, can provide a

24   transparent hedge against a short sale.

25             B.   Pleading Market Manipulation
                                      -22-
1         Market manipulation requires a plaintiff to allege (1)

2    manipulative acts; (2) damage (3) caused by reliance on an

3    assumption of an efficient market free of manipulation; (4)

4    scienter; (5) in connection with the purchase or sale of

5    securities; (6) furthered by the defendant’s use of the mails or

6    any facility of a national securities exchange.    See Schnell v.

7    Conseco, Inc., 43 F. Supp. 2d 438, 448 (S.D.N.Y. 1999); Cowen &

8    Co. v. Merriam, 745 F. Supp. 925, 929 (S.D.N.Y. 1990).

9         Because a claim for market manipulation is a claim for

10   fraud, it must be pled with particularity under Rule 9(b).       See

11   Internet Law Library, Inc. v. Southridge Capital Mgmt., 223 F.

12   Supp. 2d 474, 486 (S.D.N.Y. 2002); U.S. Envtl., 82 F. Supp. 2d at

13   239; see also Rooney Pace, Inc. v. Reid, 605 F. Supp. 158, 162-63

14   (S.D.N.Y. 1985) (applying Rule 9(b) to a market manipulation

15   claim).    A claim of manipulation, however, can involve facts

16   solely within the defendant’s knowledge; therefore, at the early

17   stages of litigation, the plaintiff need not plead manipulation

18   to the same degree of specificity as a plain misrepresentation

19   claim.    See Internet Law Library, 223 F. Supp. 2d at 486; U.S.

20   Envtl., 82 F. Supp. 2d at 240; cf. Romach, 355 F.3d at 175 n.10

21   (relaxing the standard where information was likely to be in the

22   exclusive control of the defendants and analysts).

23        Accordingly, a manipulation complaint must plead with

24   particularity the nature, purpose, and effect of the fraudulent

25   conduct and the roles of the defendants.    See In re Blech Sec.
                                     -23-
1    Litig., 928 F. Supp. 1279, 1291 (S.D.N.Y. 1996) (adopting this

2    test as set forth in the unpublished decision Baxter v. A.R.

3    Baron & Co., No. 94 Civ. 3913, 1995 WL 600720 (S.D.N.Y. Oct. 12,

4    1995)); see also Compudyne Corp. v. Shane, 453 F. Supp. 2d 807,

5    821 (S.D.N.Y. 2006); U.S. Commodity Futures Trading Comm’n v.

6    Bradley, 408 F. Supp. 2d 1214, 1222 (N.D. Okla. 2005) (market

7    manipulation under the Commodity Exchange Act); Fezzani v. Bear,

8    Stearns & Co., 384 F. Supp. 2d 618, 642 (S.D.N.Y. 2004); In re

9    Royal Ahold N.V. Sec. & ERISA Litig., 351 F. Supp. 2d 334, 372

10   (D. Md. 2004); Log On Am., Inc. v. Promethean Asset Mgmt., 223 F.

11   Supp. 2d 435, 445 (S.D.N.Y. 2001); U.S. Envtl., 82 F. Supp. 2d at

12   240; In re Blech Sec. Litig., 961 F. Supp. 569, 580 (S.D.N.Y.

13   1997).   But see Intelli-Check, 274 F. Supp. 2d at 629

14   (articulating requirements for a less stringent pleading standard

15   in the Third Circuit).   General allegations not tied to the

16   defendants or resting upon speculation are insufficient.      This

17   test will be satisfied if the complaint sets forth, to the extent

18   possible, “what manipulative acts were performed, which

19   defendants performed them, when the manipulative acts were

20   performed, and what effect the scheme had on the market for the

21   securities at issue.”    Baxter, 1995 WL 600720, at *6; see

22   also Miller v. Lazard Ltd., 473 F. Supp. 2d 571, 587 (S.D.N.Y.

23   2007); In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d

24   216, 270 (E.D.N.Y. 2002); Blech, 961 F. Supp. at 580.     This

25   standard meets the goals of Rule 9(b) while also considering
                                    -24-
1    which specific facts a plaintiff alleging manipulation can

2    realistically plead at this stage of the litigation.

3         Because a claim for market manipulation requires a showing

4    of scienter, the PSLRA’s heightened standards for pleading

5    scienter also apply.   Therefore, the complaint must plead with

6    particularly facts giving rise to a strong inference that the

7    defendant intended to deceive investors by artificially affecting

8    the market price of securities.     See 15 U.S.C. § 78u-4(b)(2);

9    Section II.A, supra.     This pleading requirement is particularly

10   important in manipulation claims because in some cases scienter

11   is the only factor that distinguishes legitimate trading from

12   improper manipulation.

13             C.   Manipulation by the Levinson Defendants, Wolfson,

14                  and Rose Glen

15        ATSI’s allegations that the Levinson Defendants, Wolfson,

16   and Rose Glen manipulated the market are based on (1) high-volume

17   selling of ATSI’s stock with coinciding drops in the stock price,

18   (2) trading patterns around conversion time, (3) the stock’s

19   negative reaction to positive news, and (4) the volume of trades

20   in excess of settlement during a 10-day period in 2003.    We agree

21   with the district court that these allegations are inadequate

22   under Rule 9(b).   In sum, ATSI has offered no specific

23   allegations that the defendants did anything to manipulate the

24   market; it relies, at best, on speculative inferences.    Moreover,

25   ATSI has failed to adequately plead scienter.
                                    -25-
1         ATSI’s complaint alleges high-volume selling between April

2    13, 2000 and April 18, 2000, resulting in a 44% decline in stock

3    price.   ATSI narrows the list of potential culprits to these

4    defendants because ATSI’s major shareholders said that they were

5    not selling stock, leaving only the defendants with large enough

6    blocks of shares to trade at the observed volumes.     These

7    allegations fail to state even roughly how many shares the

8    defendants sold, when they sold them, and why those sales caused

9    the precipitous drop in stock price.   And the complaint is devoid

10   of facts supporting ATSI’s belief that these defendants had

11   sufficient shares to engage in the high-volume trading alleged.

12   Even though the complaint alleges trading volumes of up to 1.5

13   million shares per day, ATSI reported in its April 14, 2000 Form

14   S-3 that the Shaar Fund held only 492,308 shares of its common

15   stock.   The complaint and relevant documents do not reveal how

16   many shares Wolfson and Rose Glen held.    ATSI argues that the

17   Shaar Fund’s 3,000 shares of Series D Preferred Stock were

18   eventually converted into 8.3 million common shares – sufficient

19   to support the observed trading volumes.    This allegation does

20   not help ATSI, however, because the complaint states that the

21   Shaar Fund did not begin converting those preferred shares until

22   December 12, 2000, many months after the high-volume selling.

23        The complaint then alleges that there was a drop in ATSI’s

24   stock price in the days leading up to the defendants’ conversion

25   of the Preferred Stock.   It alleges that in the absence of
                                     -26-
1    manipulation, (1) the Reference Price for conversion should

2    approximate the average price during the 30 days prior to the

3    look-back period and (2) that trading volumes during the look-

4    back periods should have been equal to the average for the

5    previous quarter.    We agree with the district court’s view that

6    ATSI’s “position is ludicrous.”     ATSI Commc’ns, 357 F. Supp. 2d

7    at 719.    One does not observe constant prices or trading volumes

8    in the stock markets.    Cf. Cent. Nat’l Bank of Mattoon v. U.S.

9    Dep’t of Treasury, 912 F.2d 897, 902 (7th Cir. 1990) (“[T]he

10   value of a company is rarely constant over an entire year . . .

11   .”).

12          The complaint next alleges that manipulation may be inferred

13   from the stock’s negative reaction to positive news.    The

14   district court was mistaken in dismissing this circumstance on

15   the grounds that “the announcement concerns events with no

16   apparent connection to the defendants or this case.”     ATSI

17   Commc’ns, 357 F. Supp. 2d at 719.    The premise of ATSI’s theory

18   is that an issuer’s stock price, in the absence of manipulation,

19   should increase when good news is announced.5    Under such a


     5
       The strength of this broad proposition is questionable. Cf.
     United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991)
     (“[W]hether a public company’s stock price moves up or down or
     stays the same after the filing of a Schedule 13D does not
     establish the materiality of the statements made, though stock
     movement is a factor the jury may consider relevant.”). For
     example, the stock price may not move if the market already knew
     about the good news, or if the market believes the news is
     overblown or false, or if adverse developments in the company or
     industry are anticipated or rumored.
                                    -27-
1    theory, the subject of the news and the defendants do not need to

2    be connected.

3         Nevertheless, this allegation cannot save the complaint

4    because ATSI pleads no particular connection between the negative

5    reaction of the stock price and anything the defendants did.

6    Adopting ATSI’s reasoning would subject large holders of

7    convertible preferred stock to the risk of suit under § 10(b)

8    whenever the stock price does not react to news as the issuer

9    expects.   See Rombach, 355 F.3d at 171 (stating that Rule 9(b)

10   serves, inter alia, to safeguard a defendant’s reputation from

11   improvident charges of wrongdoing and protect him against strike

12   suits).

13        Finally, the complaint rests on an inference of manipulation

14   based upon Depository Trust Company records showing that

15   8,256,493 shares were traded in excess of settlements during the

16   10-day period before the AMEX suspended trading of ATSI’s stock.

17   Trading volume increased over this period, yet the percentage of

18   trading volume that settled decreased.   ATSI claims that the only

19   plausible explanation is that the trades did not result in any

20   change in beneficial ownership, indicating “wash trades, matched

21   trades, phantom shares, and other manipulative trading.”

22        The inference ATSI asks us to draw is too speculative even

23   on a motion to dismiss.   See Segal v. Gordon, 467 F.2d 602, 606,

24   608 (2d Cir. 1972) (holding that “distorted inferences and

25   speculations” could not meet Rule 9(b)’s requirements).    Nowhere
                                    -28-
1    does ATSI particularly allege what the defendants did - beyond

2    simply mentioning common types of manipulative activity - or

3    state how this activity affected the market in ATSI’s stock.

4    This data could easily be the result of internal settlements

5    within broker-dealers that do not involve the Depository Trust

6    Company.   Manipulation is also unlikely given that ATSI’s closing

7    share price during this period started at $0.08 per share and

8    ended at $0.08 per share.

9         For similar reasons, none of these allegations, nor anything

10   else in the complaint, meets the PSLRA’s requirements for

11   pleading scienter.     See 15 U.S.C. § 78u-4(b)(2).   A strong

12   inference of scienter is not raised by alleging that a legitimate

13   investment vehicle, such as the convertible preferred stock at

14   issue here, creates an opportunity for profit through

15   manipulation.   See Ganino, 228 F.3d at 168-69.    These

16   circumstances are present for any investor in floorless

17   convertibles.   Cf. Chill v. Gen. Elec. Co., 101 F.3d 263, 267 &

18   n.5 (2d Cir. 1996) (holding that a generalized motive that an

19   issuer wishes to appear profitable, which could be imputed to any

20   public for-profit enterprise, was insufficiently concrete to

21   infer scienter); In re Alstom SA Sec. Litig., 454 F. Supp. 2d

22   187, 197 (S.D.N.Y. 2006) (stating a similar proposition for

23   corporate insiders).    Accordingly, there is a “plausible

24   nonculpable explanation[]” for the defendants’ actions that is

25   more likely than any inference that the defendants intended to
                                      -29-
1    manipulate the market, see Tellabs, 2007 WL 1773208, at *10: ATSI

2    and the defendants simply entered into mutually beneficial

3    financing transactions.   Further, because ATSI has not adequately

4    pled that the defendants engaged in any short sales or other

5    potentially manipulative activity, there is no circumstantial

6    evidence of manipulative intent.   See Ganino, 228 F.3d at 168-69.

7    Accordingly, more specific allegations are required.

8              D.   Manipulation Claims Against Trimark

9         The complaint is plainly insufficient in alleging that

10   Trimark engaged in market manipulation.6   It only alleges that

11   Trimark was the principal market maker in ATSI’s stock, that

12   Trimark knew or should have known of the manipulation, and that

13   ATSI “believes” that Trimark was a cooperating broker-dealer.

14   Wholly absent are particular facts giving rise to a strong

15   inference that Trimark acted with scienter in manipulating the

16   market in ATSI’s common stock and any allegations of specific




     6
       Rose Glen and Trimark also argue that ATSI lacks standing to
     bring a Rule 10b-5 claim against them because ATSI sold its
     Preferred Stock and warrants to the defendants in primary market
     transactions and did not transact in the allegedly manipulated
     secondary market. Because ATSI’s complaints do not meet the
     pleading requirements, we choose not to reach this statutory
     standing question. See Coan v. Kaufman, 457 F.3d 250, 256 (2d
     Cir. 2006) (“Unlike Article III standing, which ordinarily should
     be determined before reaching the merits, statutory standing may
     be assumed for the purposes of deciding whether the plaintiff
     otherwise has a viable cause of action.” (citations omitted));
     see also Official Comm. Of Unsecured Creditors of Worldcom, Inc.
     v. SEC, 467 F.3d 73, 80-81 (2d Cir. 2006); cf. Steel Co. v.
     Citizens for a Better Env’t, 523 U.S. 83, 97 n.2 (1998).
                                    -30-
1    acts by Trimark to manipulate the market, much less how those

2    actions might have affected the market.

3         III. ATSI’s Misrepresentation Claims

4         To state a claim under Rule 10b-5 for misrepresentations, a

5    plaintiff must allege that the defendant (1) made misstatements

6    or omissions of material fact, (2) with scienter, (3) in

7    connection with the purchase or sale of securities, (4) upon

8    which the plaintiff relied, and (5) that the plaintiff’s reliance

9    was the proximate cause of its injury.    Lentell, 396 F.3d at 172.

10   The district court properly dismissed the misrepresentations

11   claims.

12             A.     Levinson Defendants and Wolfson

13        Of the misrepresentations that ATSI claims, we can quickly

14   dispose of all except the two alleged in the transaction

15   agreements.    The Registration Rights agreement between ATSI and

16   the Shaar Fund plainly states that the only promises,

17   restrictions, and warranties to the transaction were those set

18   forth in the transaction documents.   Where the plaintiff is a

19   sophisticated investor and an integrated agreement between the

20   parties does not include the misrepresentation at issue, the

21   plaintiff cannot establish reasonable reliance on that

22   misrepresentation.    See Emergent Capital Inv. Mgmt. v. Stonepath

23   Group, Inc., 343 F.3d 189, 196 (2d Cir. 2003); Dresner v.

24   Utility.com, Inc., 371 F. Supp. 2d 476, 491-93 (S.D.N.Y. 2005).

25   By engaging in these private placements of complex securities,
                                    -31-
1    ATSI is clearly a sophisticated investor.    Accordingly, to the

2    extent ATSI’s causes of action are based on alleged

3    misrepresentations made during negotiations preceding the

4    defendants’ investment, those claims are barred by the merger

5    clauses.

6                    1.     Promise Not to Short Sell

7         The complaint alleges, on information and belief, a

8    fraudulent misrepresentation by the Shaar Fund in promising, in

9    the Securities Purchase Agreement, not to enter a short position

10   prior to closing or cover a short position entered into prior to

11   execution of the agreement using converted common stock.    The

12   complaint fails to sufficiently allege that this representation

13   was false when made.    While the failure to carry out a promise in

14   connection with a securities transaction might constitute breach

15   of contract, it “does not constitute fraud unless, when the

16   promise was made, the defendant secretly intended not to perform

17   or knew that he could not perform.”     Gurary, 190 F.3d at 44

18   (internal quotation marks omitted).    The speculative allegations

19   that the Levinson Defendants and Wolfson engaged in short selling

20   are deficient for the same reasons that they did not establish

21   manipulation.

22        ATSI asks us to infer that the Levinson Defendants never

23   intended to honor this promise because they had previously

24   engaged in “death spiral” financing schemes, as evidenced by the

25   declining stock prices of unspecified companies in which they
                                    -32-
1    invested.    These allegations fail Rule 9(b)’s requirement of

2    stating with particularity why the statement was fraudulent and

3    the PSLRA’s requirement of stating the facts on which a belief is

4    based.   The complaint does not specify which companies

5    experienced a decline in share price or when they experienced the

6    decline (other than that they occurred within 1 year of an

7    unspecified time of investment).    It also fails to allege with

8    particularity what, if anything, the defendants did to cause the

9    decline; it simply offers a generalized allegation that the

10   defendants engaged in death spiral financing combined with a

11   detailed definition of how death spiral financing works.     Cf.

12   United States ex rel. Walsh v. Eastman Kodak Co., 98 F. Supp. 2d

13   141, 147 (D. Mass. 2000) (holding that fraud was not adequately

14   pled under Rule 9(b) where the plaintiff only alleged a method by

15   which the defendants could produce false invoices without

16   specifying instances of false claims arising from false

17   invoices).   Holding otherwise would expose investors in start-ups

18   and risky, distressed companies to fraud claims based solely on

19   the (unsurprisingly) poor performance of their portfolios.       See

20   Rombach, 355 F.3d at 171.

21        In response, ATSI argues that it adequately identified the

22   defendants’ victims by detailing how the companies could be found

23   by searching the SEC’s publicly-available Edgar database.    It

24   also contends that the defendants have personal knowledge of what


                                     -33-
1    investments they made and when the stock prices of those

2    investments declined.

3         ATSI cannot sufficiently plead fraud by simply providing a

4    method for the defendant to discover the underlying details.    If

5    ATSI had access to the details necessary to make these

6    allegations, it must plead them and not just tell the defendants

7    to go find them.

8         We also reject ATSI’s argument that it adequately pled fraud

9    by pointing to the drop in the stock prices of the defendants’

10   other investments because that information is relevant under Fed.

11   R. Evid. 404(b) and 406 and supports “a reasonable inference of

12   fraud.”    No inference of sabotage is available from the

13   circumstance that some (or many) risky investments come to

14   nothing.    Moreover, the allegations fail to point to any specific

15   actions by the defendants with respect to those investments and

16   thus fail to establish that the defendants’ promise was

17   fraudulent.    To the extent the Southern District of New York’s

18   decision in Internet Law Library, 223 F. Supp. 2d 474, is to the

19   contrary, we reject it.

20                     2.   Investor Profile Representation

21        ATSI also claims that the representation in the Securities

22   Purchase Agreement that the Shaar Fund was an accredited investor

23   was fraudulent.    The complaint does not sufficiently allege loss

24   causation with respect to this misrepresentation.    A plaintiff is

25   required to prove both transaction causation (also known as
                                    -34-
1    reliance) and loss causation.    Lentell, 396 F.3d at 172; see also

2    15 U.S.C. § 78u-4(b)(4).    Transaction causation only requires

3    allegations that “but for the claimed misrepresentations or

4    omissions, the plaintiff would not have entered into the

5    detrimental securities transaction.”    Lentell, 396 F.3d at 172

6    (quoting Emergent Capital, 343 F.3d at 197).    Loss causation, by

7    contrast, is the proximate causal link between the alleged

8    misconduct and the plaintiff’s economic harm.    See Dura Pharm.,

9    Inc. v. Broudo, 544 U.S. 336, 346 (2005); Lentell, 396 F.3d at

10   172.    To that end, the plaintiff’s complaint must plead that the

11   loss was foreseeable and caused by the materialization of the

12   risk concealed by the fraudulent statement.     See Lentell, 396

13   F.3d at 173.

14          The complaint alleges losses (1) through the tremendous

15   decline in ATSI’s share price, impairing its access to capital

16   and its viability as a business; and (2) by ATSI’s sale of its

17   own stock at depressed prices.    It fails, however, to establish

18   any causal connection between those losses and the

19   misrepresentation that the Shaar Fund was an accredited investor.

20   In what appears to be an attempt to meet Lentell’s requirements,

21   ATSI contends that it adequately pled loss causation because the

22   Levinson Defendants made this misrepresentation to induce ATSI to

23   enter into the transaction under the pretense that they were

24   “trustworthy, reputable and long-term investor[s],” and that when

25   the true risk of their plans materialized through their
                                      -35-
1    manipulative acts, ATSI suffered losses.   This allegation might

2    support transaction causation; it fails, however, to show how the

3    fact that the Shaar Fund was not an accredited investor caused

4    any loss.   See id. at 174 (“Such an allegation - which is nothing

5    more than a paraphrased allegation of transaction causation -

6    explains why a particular investment was made, but does not speak

7    to the relationship between the fraud and the loss of the

8    investment.” (internal quotation marks omitted)).

9         ATSI is wrong in claiming that these allegations are

10   sufficient to establish loss causation under our decision in

11   Weiss v. Wittcoff, 966 F.2d 109 (2d Cir. 1992) (per curiam).     In

12   Weiss, the plaintiff agreed to merge his business with the

13   defendant’s on the latter’s representation that his other company

14   would supply goods and services.   Id. at 110.   When the defendant

15   sold his other company a year after the transaction, id. at 110,

16   112, the plaintiff’s business suffered subsequent losses from

17   higher costs, id. at 110-11.   We held that the complaint

18   adequately pled loss causation because the plaintiff’s losses

19   were “clearly a proximate result of his reliance on defendants’

20   promises, since defendants’ failure to fulfill those promises

21   foreseeably caused [the business’s] financial condition to

22   deteriorate.”   Id. at 111.

23        Weiss is easily distinguishable.   There, the complaint

24   established a causal connection between (1) the promise to

25   provide for the business’s needs and (2) the business’s increased
                                    -36-
1    costs when the promise turned out to be false.     See id.   ATSI, by

2    contrast, fails to show that the subject of the fraudulent

3    statement proximately caused any loss.    See Lentell, 396 F.3d at

4    173 (“Thus to establish loss causation, ‘a plaintiff must allege

5    . . . that the subject of the fraudulent statement or omission

6    was the cause of the actual loss suffered . . . .’” (alteration

7    in original)).

8              B.     Misrepresentations by Rose Glen

9         The misrepresentations attributed to Rose Glen suffer from

10   largely the same defects as those against the Levinson

11   Defendants.    ATSI cannot claim reliance on Rose Glen’s pre-

12   contractual, verbal representations because of the merger clause

13   in the Registration Rights Agreement.

14        The only representation in the Securities Purchase Agreement

15   that merits discussion is the one in which Rose Glen represented

16   that it was purchasing the Preferred Stock:

17        for its own account and not with a present view towards
18        the public sale or distribution thereof except pursuant
19        to sales registered or exempted from registration under
20        the 1933 Act; provided, however that by making the
21        representation herein, the Buyer does not agree to hold
22        any of the Securities for any minimum or other specific
23        term and reserves the right to dispose of the
24        Securities at any time in accordance with or pursuant
25        to a registration statement or an exemption under the
26        1933 Act.
27
28   In addition to failing to plead falsity under Gurary, ATSI’s

29   complaint fails to plead that Rose Glen even broke this promise,

30   much less that it secretly intended to break it.

                                     -37-
1         ATSI also alleges that Rose Glen engaged in a bait-and-

2    switch scheme by first promising in its draft term sheet to

3    invest $10 million, then offering only $2.5 million at closing.

4    The district court properly dismissed this claim.   First, it is

5    time-barred.   Prior to the passage of the Sarbanes-Oxley Act of

6    2002, Pub. L. No. 107-204, 116 Stat. 745 (2002), the statute of

7    limitations required that a Rule 10b-5 claim be brought within

8    one year of discovery of the facts constituting the violation and

9    within three years of the violation.   Lampf, Pleva, Lipkind,

10   Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991).     ATSI

11   learned of the alleged falsity of this representation when it

12   signed the closing documents on October 16, 2000, but did not

13   commence its action against Rose Glen until October 31, 2002 –

14   more than two years later.   See LC Capital Partners, LP v.

15   Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003)

16   (stating that the limitations period begins to run, inter alia,

17   after the plaintiff receives actual knowledge of the facts giving

18   rise to the action).   Second, ATSI has not pled falsity or

19   reliance because the term sheet expressly stated that Rose Glen’s

20   “obligation to fund is subject to satisfactory due diligence, in

21   RGC’s sole discretion.”

22             C.    Misrepresentations by CCM

23        ATSI claims that CCM made misrepresentations very similar to

24   those alleged against Rose Glen.   Largely for the same reasons as

25   above, the district court properly dismissed those claims.
                                    -38-
1         IV.   Control Person Liability

2         ATSI alleges control person liability under § 20(a) against

3    the Levinson Defendants, Wolfson, Rose Glen, and the Citco

4    Defendants.   To establish a prima facie case of control person

5    liability, a plaintiff must show (1) a primary violation by the

6    controlled person, (2) control of the primary violator by the

7    defendant, and (3) that the defendant was, in some meaningful

8    sense, a culpable participant in the controlled person’s fraud.

9    First Jersey, 101 F.3d at 1472.   ATSI fails to allege any primary

10   violation; thus, it cannot establish control person liability.

11        V.    Leave to Amend

12        ATSI argues that even if the district court properly

13   dismissed its complaints under Fed. R. Civ. P. 12(b)(6), it

14   should have granted leave to amend.    We review a district court’s

15   denial of leave to amend for abuse of discretion.       Grace v.

16   Rosenstock, 228 F.3d 40, 54 (2d Cir. 2000).   In ATSI I, ATSI

17   submitted three amended complaints; in ATSI II, it submitted a

18   complaint largely identical to ATSI I’s third amended complaint.

19   The district court had already dismissed ATSI I’s first amended

20   complaint for failure to meet Rule 9(b) and the PSLRA’s pleading

21   requirements on many grounds similar to its final dismissal.

22   District courts typically grant plaintiffs at least one

23   opportunity to plead fraud with greater specificity when they

24   dismiss under Rule 9(b).    See Luce, 802 F.2d at 56.    ATSI was


                                     -39-
1   given that opportunity.   The district court did not abuse its

2   discretion in declining to grant further leave to amend.

3                               CONCLUSION

4        For the foregoing reasons, the judgments of the district

5   court are AFFIRMED.




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