Investors' Suit Dismissed For Failure To Plead Fraud

Per the Securities Class Action Reporter, Nov. 15, 2005:

The U.S. District Court for the District of Connecticut granted a company's motion to dismiss a group of investors' complaints alleging violations of federal securities laws. (Johnson v. NYFIX Inc., No. 04-0802 (D. Conn. Oct. 26, 2005)). The district court held that the investors had not properly pleaded fraud in their complaint. Douglas Johnson, THS&H Investment Associates L.L.C. and Bruce Frank sued on behalf of themselves and a class of other investors who purchased the common stock of NYFIX Inc. from Mar. 30, 2000, to Mar. 30, 2004. The plaintiffs alleged that NYFIX and five of its executive officers violated § 11 of the Securities Act of 1933 (the Act) and that two executives violated § 15 of the Act. Plaintiffs also alleged that NYFIX and three executives violated § 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder. The plaintiffs further alleged that three executives violated § 20(a) of the Exchange Act. All allegations arose from NYFIX's method of accounting for its investment in NYFIX Millenium L.L.C., which led NYFIX to report inflated financial results in numerous SEC filings, a registration statement and several press releases. The district court held that, although NYFIX's executives had the opportunity to commit fraud as required under the Private Securities Litigation Reform Act (PSLRA), the plaintiffs failed to adequately demonstrate motive. The district court held that mere ownership of stock without a corresponding personal benefit tied to alleged misrepresentation could not constitute motive. Similarly, using inflated stock to transact a merger or acquisition does not alone support a finding of motive.