Lalor v . Omtool, et a l . CV-99-469-M 12/14/00 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

John Lalor and John Heck, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs

v. Civil N o . 99-469-M Opinion N o .

Omtool, Ltd, Robert L . Voelk, Darioush Mardan, Martin A . Schultz and Bruce E . Evans, Defendants

O R D E R

John Lalor and John Heck, on behalf of themselves and all

similarly situated individuals, bring this securities litigation

against Omtool, Ltd. and various officers and directors of the

company. Pursuant to Rules 9(b) and 12(b)(6) of the Federal

Rules of Civil Procedure, defendants move to dismiss the amended

complaint. Plaintiffs object.

Standard of Review

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) is one of

limited inquiry, focusing not on “whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer

evidence to support the claims.” Scheuer v . Rhodes,

(1974). In considering a motion to dismiss, “the

material facts alleged in the complaint are to be construed in

the light most favorable to the plaintiff and taken as admitted.”

Chasan v . Village District of Eastman,

7 8 , 579

(D.N.H. 1983). See also The Dartmouth Review v . Dartmouth

College,

3 , 15 (1st Cir. 1989). “[D]ismissal is

appropriate only if ‘it appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would

entitle him to relief.’” Roeder v . Alpha Industries, Inc.,

2 , 25 (1st Cir. 1987)(quoting Conley v . Gibson,

1 , 45-46 (1957)).

Background

Viewed in the light most favorable to plaintiffs, the

material facts appear as follows. Omtool, Ltd. designs,

develops, markets, and supports open client/server facsimile

software, which automates and integrates fax communications. On

August 8 , 1997, Omtool became a publicly owned company by means

2 of an initial public offering (“IPO”) of its stock. Through the

underwriters of the IPO, Omtool and defendants Voelk, Schultz,

and Evans sold a total of approximately 4.6 million shares of

Omtool common stock at $9 per share.

Eleven months later, after the market closed on July 8 ,

1998, Omtool warned that its revenues for the second quarter of

1998 would fall below analysts’ projections. The press release

attributed the anticipated shortfalls “primarily . . . to several

significant corporate contracts that were not completed on a

timely basis.” Exhibit 4 to defendants’ memorandum. The

following day, Omtool’s stock fell over forty percent ( 4 0 % ) .

Approximately two weeks later, Omtool announced its actual

revenue for the second quarter and again pointed to its failure

to complete several corporate contracts as one of the primary

reasons for its disappointing earnings. See Exhibit 5 to

defendants’ memorandum. Again, the stock market reacted

negatively, and Omtool’s stock continued to decline.

3 On October 6, 1998, the end of the class period, the stock

closed at $2.50 per share. After the close of the market, Omtool

announced that it anticipated its third quarter results would

fall below expectations. Although the company reported that it

was “able to finalize several significant corporate contracts

during the quarter,” it attributed revenue shortfalls to

“extended sales cycles and changes in the buying patterns of our

customers.” Exhibit 6 to defendants’ memorandum. The following

day, the stock again dropped substantially and closed at $1.6875.

Thus, during the class period, the stock traded at a high of

$14.75 per share and, at the end of the class period, fell to

$2.50 per share - a decline of more than eighty percent ( 8 0 % ) .

In the ninety days following the close of the class period,

however, the stock rebounded slightly and traded at an average

price of approximately $2.85 per share.

The amended complaint appears to focus on two allegedly

unlawful courses of conduct. First, plaintiffs claim that the

Registration Statement and Prospectus prepared and distributed by

defendants in connection with the IPO contained material

4 misstatements and omissions. Specifically, plaintiffs challenge

the accuracy of financial statements relating to the year ending

December 3 1 , 1996, and the six month period ending June 3 0 , 1997,

both of which were incorporated into the Prospectus. See Amended

complaint, counts 1 and 2 . Next, they say defendants engaged in

fraud by knowingly recognizing improper revenue, “stuffing”

distribution channels, making fictitious sales, and failing to

maintain corporate accounting statements in accordance with

generally accepted accounting principles. See Amended complaint,

counts 3 and 4 .

Plaintiffs’ complaint advances three basic claims. Count 1

alleges violations of Section 11 of the Securities Act of 1933

(“Securities Act”), 15 U.S.C. § 77k. Count 2 alleges violations

of Section 12 of the Securities Act, 15 U.S.C. § 77l. Both

counts relate to allegedly material false statements contained in

the Prospectus. Counts 3 and 4 , on the other hand, relate to

defendants’ allegedly fraudulent conduct following the IPO.

Count 3 alleges violations of Section 10(b) of the Securities and

Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and

5 Rule 10b-5 promulgated thereunder. And, although pled as a

separate claim, Count 4 simply alleges that various individual

defendants named in Count 3 are “controlling persons” of Omtool,

within the meaning of Section 20(a) of the Exchange Act, 15

U.S.C. § 78t, and are, therefore, individually liable to

plaintiffs for alleged violations of Section 10(b) and Rule 10b-

5. See, e.g., Shaw v . Digital Equipment Corp.,

,

1216 n.29 (1st Cir. 1996) (noting that “Section 20(a) provides

for derivative liability of persons who ‘control’ others found to

be primarily liable under the Exchange Act.”).

Discussion

In support of their motion to dismiss, defendants advance

four arguments. First, they say that the fraud in which they are

alleged to have engaged did not cause the losses plaintiffs claim

to have suffered. Second, they assert that plaintiffs’ claims

are barred by the statute of limitations. Next, defendants

assert that plaintiffs’ claims under section 12(a)(2) of the

Securities Act must be dismissed for lack of privity. Finally,

6 defendants say the amended complaint fails to plead the alleged

fraud with sufficient specificity.

I. Loss Causation.

Defendants say that “Plaintiffs’ complaint was dead on

arrival when filed because it does not allege that Defendants’

supposed fraud scheme caused Plaintiffs any loss. While

investors who bought Omtool shares during the class period may

have lost money, the Complaint confirms that it was not the

allege fraud scheme that caused those losses.” Defendants’

motion to dismiss at 1 (emphasis in original).

To state a prima facie claim under § 10(b) of the Exchange

Act, a plaintiff “must allege two types of causation, both loss

causation - that the misrepresentations or omission caused the

economic harm - and transaction causation - that the violations

in question caused the plaintiff to engage in the transaction in

question.” Citibank, N.A. v . K-H Corp.,

(2d

Cir. 1992) (citation and internal quotation marks omitted). See

also 15 U.S.C. § 78u-4(b)(4) (“In any private action arising

7 under this chapter, the plaintiff shall have the burden of

proving that the act or omission of the defendant alleged to

violate this chapter caused the loss for which the plaintiff

seeks to recover damages.”). To properly allege “loss

causation,” a plaintiff must allege that the defendant’s

misrepresentations were the reason the plaintiff’s stock purchase

turned out to be a losing one. In other words, “loss causation”

is simply another name “for the standard rule of tort law that

the plaintiff must allege and prove that, but for the defendant’s

wrongdoing, the plaintiff would not have incurred the harm of

which he complaints.” Bastian v . Petren Resources Corp.,

8 0 , 685 (7th Cir. 1990). See also Robbins v . Koger

Properties, Inc.,

(11th Cir. 1997) (“To prove

loss causation, a plaintiff must show that the untruth was in

some reasonably direct, or proximate, way responsible for his

loss. . . . In other words, loss causation describes the link

between the defendant’s misconduct and the plaintiff’s economic

loss.”) (citations and internal quotation marks omitted). As to

claims under § 11 and 12 of the Securities Act, “loss causation”

is not an essential element of a viable cause of action. It i s ,

8 however, an affirmative defense that may be raised by a

defendant. See 15 U.S.C. § 77l(b). See also 15 U.S.C. § 77k(e).

Here, plaintiffs have adequately alleged that, but for

defendants’ wrongful conduct, they would not have suffered the

losses of which they complain. Specifically, the amended

complaint alleges that the market price of Omtool stock was

artificially inflated due to defendants’ material

misrepresentations concerning various financial aspects of the

company. Had defendants accurately reported the company’s

financial status and had the company employed proper accounting

principles in reporting income and losses, say plaintiffs, the

price at which they purchased shares of the stock would have been

substantially lower. And, when the market finally saw an

accurate picture of the company’s financial health (following the

press releases in July and, more specifically, in October of

1998), the value of the stock declined precipitously, causing the

losses of which plaintiffs complain. Assuming those allegations

to be true - as the court must at this juncture - they are

sufficient to plead “loss causation.” See, e.g., Semerenko v .

9 Cendant Corp.,

(3rd Cir. 2000) (“where the

claimed loss involves the purchase of a security at a price that

is inflated due to an alleged misrepresentation, there is a

sufficient causal nexus between the loss and the alleged

misrepresentation to satisfy the loss causation requirement.”);

Miller v . New America High Income Fund,

(D.Ma. 1991) (holding that to adequately plead loss causation,

plaintiffs “must allege that they were injured because the risks

that materialized were the risks of which they were unaware as a

result of defendants’ misleading statements, not the risks of

which they were fully aware.”).

Defendants suggest that because Omtool never admitted (or

revealed to the public) any instances of fraudulent or improper

accounting practices, such alleged fraud could not have caused

the stock’s precipitous decline. Consequently, say defendants,

plaintiffs have failed to adequately plead a causal connection

between the allegedly fraudulent accounting practices and the

losses plaintiffs sustained. In short, defendants seem to be

saying that if the public was never aware of the alleged fraud,

10 it could have had no impact on the value of Omtool stock. While

that argument has some logical appeal, at least one circuit court

of appeals has rejected precisely such a claim.

The district court concluded that Deloitte met this burden by showing that WOW never disclosed to the market the fact that the 1987 financial statements contained material errors. This analysis was, quite simply, far too narrow.

Loss causation exists where “the misrepresentation touches upon the reasons for the investment’s decline in value.” The district court’s application of section 11(e) ignores the broad nature of the “loss causation” determination. Indeed, the plaintiffs rightly note that, if correct, “the district court’s interpretation would eviscerate the statute. Companies and their auditors could immunize themselves from § 11 liability for false and even fraudulent financial statements simply by refusing to admit their falsity (or refusing to include in the adverse public disclosures information that would ‘clue in the market’ to their falsity) prior to the time a § 11 suit is filed.”

In re Worlds of Wonder Securities Litigation,

, 1422-

23 (9th Cir. 1994) (citations omitted) (emphasis in original).

Finally, defendants say that since the price of Omtool’s

stock increased in the 90 days following the October, 1998 press

release, plaintiffs cannot demonstrate that the fraud of which

11 they complain (which they also allege was revealed in that press

release) actually caused the stock’s price to decline. In fact,

say defendants, the market responded to the October press release

by assigning a higher value to Omtool’s stock.

Notwithstanding defendants’ claims to the contrary, however,

that Omtool’s stock rebounded slightly in the 90 days following

the October, 1998, press release is of no substantial legal

significance. One might reasonably posit that, after having

artificially inflated the stock’s value in the months following

the IPO (as plaintiffs allege), defendants, mindful of their

wrongdoing, eased the stock back down into a more accurate and

realistic trading range by issuing a series of negative (but not

entirely accurate) press releases designed to accomplish that

goal, without risking the liability which would surely follow

revelation of the true reason behind the stock’s diminished

value. In other words, if they unlawfully inflated the value of

Omtool’s stock, defendants knew that sooner or later the market

would catch up with them. And, in such circumstances, one

plausible option might be to slowly lower the stock’s price by

12 issuing a series of negative but seemingly ordinary earnings

reports and press releases – done in a manner gradual enough not

to attract unwanted attention to the allegedly improper sales and

bookkeeping practices, but deliberate enough to get the stock

trading in an “appropriate” range given its true value. Then,

defendants could claim, as they d o , that the market took the

stock downward for reasons wholly unrelated to any allegedly

unlawful sales or bookkeeping practices.

Plaintiffs do claim that the press releases issued following

the IPO were consistent with such a scheme. Plaintiffs say that

defendants materially overstated Omtool’s net income and

earnings, at least arguably to avoid any precipitous decline in

the value of Omtool’s stock and, in so doing, disguised

defendants’ earlier unlawful conduct. The fact that the stock

price actually moved upward slightly in the 90 days following the

October press release might mean little more than that defendants

succeeded in guiding the stock’s price down into a more

reasonable trading range without ever having to acknowledge their

alleged unlawful conduct and the stock’s concomitant inflated

13 price. And, according to plaintiffs, it was only in the wake of

that October, 1998, press release that the public had sufficient

information about Omtool’s sales and accounting practices to be

put on reasonable notice that the company might have engaged in

unlawful conduct in the months leading up to and following the

IPO.

The difference in the parties’ positions i s , not

surprisingly, stark. Plaintiffs claim that the decline in value

of Omtool’s stock was caused by, among other things, defendants’

improper and, at times, fraudulent sales and bookkeeping

practices. Defendants, on the other hand, suggest that the

stock’s decline was caused by market factors wholly unrelated to

any alleged wrongful conduct on their part. At this stage of the

litigation, however, the court must accept plaintiffs’ factual

allegations as true. Doing s o , it is apparent that plaintiffs

have adequately alleged a causal connection between defendants’

alleged wrongdoing and plaintiffs’ claimed losses.

14 II. Statute of Limitations.

Actions for violations of §§ 11 or 12 of the Securities Act

must be brought “within one year after the discovery of the

untrue statement or the omission, or after such discovery should

have been made by the exercise of reasonable diligence.” 15

U.S.C. § 77m. The same is true with regard to plaintiffs’ claims

under § 10(b) of the Exchange Act. See Lampf, Pleva, Lipkind,

Prupis & Petigrow v . Gilbertson,

5 0 , 364 (1991).

Plaintiffs filed their complaint on October 5 , 1999, just

less than one year after defendants’ October 6, 1998 press

release. In support of their claim that plaintiffs’ complaint is

time barred, defendants say that nothing novel was disclosed in

the October 6 press release. Instead, they say, all pertinent

information (including projections about future earnings

shortfalls) was fully disclosed in the warning and subsequent

earnings report, both of which were issued earlier, in July.

Thus, defendants argue, “if, as Plaintiffs claim, the October 6

press release ‘announced the bad news’ and revealed the fraud,

then so too did the earlier combination of the July press

15 releases which disclosed the same information and the 42% stock

drop that followed more than a year before filing suit.”

Defendants’ memorandum, at 1 1 . Consequently, defendants assert

that plaintiffs were on notice of their potential claims in July

of 1998, yet failed to file suit within one year of that date.

Plaintiffs disagree, noting first that any determination of

when the statute of limitations began to run is most

appropriately made in the context of summary judgment o r , if

there are disputed and material factual issues, following an

evidentiary hearing. See, e.g., Olcott v . Delaware Flood Co.,

(10th Cir. 1996). The court is inclined to

agree, particularly since determining when the statute began to

run first requires finding when plaintiffs learned o r , in the

exercise of reasonable diligence, should have learned of their

potential cause(s) of action and because the press releases in

question are not part of plaintiffs’ complaint and, at least

arguably, are not properly part of the record the court may

consider in ruling on defendants’ motion to dismiss. See

generally Watterson v . Page,

, 3 (1st Cir. 1993)

16 (“Ordinarily, of course, any consideration of documents not

attached to the complaint, or not expressly incorporated therein,

is forbidden, unless the proceeding is properly converted into

one for summary judgment under Rule 5 6 . However, courts have

made narrow exceptions for documents the authenticity of which

are not disputed by the parties; for official public records; for

documents central to plaintiffs’ claim; or for documents

sufficiently referred to in the complaint.”).

Nevertheless, even if the court were to consider those press

releases, resolution of defendants’ motion to dismiss would be no

different. Notwithstanding defendants’ arguments to the

contrary, the July press releases and the October press release

do not appear to have disclosed identical information. As noted,

the July press releases attributed Omtool’s revenue shortfalls to

its inability to complete corporate contracts on a timely basis.

Three months later, however, the October press release

represented that the company had been “able to finalize several

significant corporate contracts.” Having apparently addressed

its inability to finalize customer contracts (the problem

17 identified in the July press releases), the company attributed

revenue shortfalls in the most recent quarter to “further

extended sales cycles and changes in the buying patterns of our

customers.”

At a minimum, whether the July press releases were

sufficient to put plaintiffs on notice of defendants’ allegedly

wrongful conduct would seem to be a disputed, material fact. If,

as plaintiffs allege, they did not have sufficient information to

recognize their potential claims until after the October press

release was issued, their suit was filed in a timely manner.

This is particularly true since, as defendants point out, Omtool

never revealed any fraud to the public. Thus, from plaintiffs’

perspective, they were forced to piece together evidence of

defendants’ allegedly secret and unlawful practices and, only

upon reviewing the October, 1998, press release, were they armed

with sufficient information to realize that they had been had.

In light of the foregoing, the court is precluded from

granting defendants’ motion to dismiss on limitations grounds.

18 III. Privity and Who is a “Seller”.

As to count 2 of the complaint, defendants say it fails to

state a viable claim since none of the named defendants is a

“seller” of securities for purposes of § 12(a)(2) of the

Securities Act. Specifically, defendants point out that the

Omtool IPO was made pursuant to a “firm commitment” underwriting

and, therefore, all sales of Omtool shares were made by the

underwriters (not named as defendants), rather than Omtool or its

officers or directors. In response, plaintiffs say that they

have adequately pled a viable claim, insofar as they have alleged

that: (1) defendants “solicited” the sale of Omtool common stock

in the August 1997 IPO and were motivated by financial gain to

sell shares of Omtool in that offering; (2) defendants were

involved in the preparation of the Prospectus; and (3) defendants

were the primary beneficiaries of the stock offering. See

Amended complaint, at para. 3 8 . Thus, say plaintiffs, they have

adequately alleged that defendants are “sellers,” as that term is

used in section 12(a) of the Securities Act.

19 The Court of Appeals for the First Circuit recently

addressed this issue in detail in an opinion that undermines

plaintiffs’ claims. See Shaw v . Digital Equipment Corp.,

(1st Cir. 1996). The Shaw court first observed that, in a

firm commitment offering, there is a material distinction between

an “issuer” and a “seller” of stock:

In a firm commitment underwriting, the issuer of the securities sells all of the shares to be offered to one or more underwriters, at some discount from the offering price. Investors thus purchase shares in the offering directly from the underwriters (or broker- dealers who purchase from the underwriters), not directly from the issuer.

. Such was the case here: although defendants were

plainly “issuers” of the stock in question, plaintiffs do not

allege that they purchased shares of Omtool directly from any one

or more of the defendants.

Given the manner in which a “firm commitment” offering is

structured, the Shaw court concluded that, at least ordinarily,

corporate officers and directors are not “sellers” under section

12(a).

20 Because the issuer in a firm commitment underwriting does not pass title to the securities, [the corporate defendant] and its officers cannot be held liable as “sellers” under Section 12(2), unless they actively “solicited” the plaintiffs’ purchase of securities to further their own financial motives, in the manner of a broker or a vendor’s agent. Absent such solicitation, [the corporate defendant] can be viewed as no more than a “seller’s seller,” whom plaintiffs would have no right to sue under Section 12(2).

In an effort to save count 2 of the amended complaint from

dismissal, plaintiffs claim that defendants “solicited” their

purchases of Omtool stock by virtue of having participated in the

preparation of the Prospectus. The Shaw court, however, rejected

just such an argument, reasoning that “neither involvement in

preparation of a registration statement or prospectus nor

participation in ‘activities’ relating to the sale of securities,

standing alone, demonstrates the kind of relationship between

defendant and plaintiff that could establish statutory seller

status.”

(emphasis in original) (citing Pinter v .

Dahl,

2 2 , 650-51 (1988)).

21 While the amended complaint asserts that defendants

“solicited the sale of Omtool common stock” and were “motivated

by financial gain” to sell those shares, id., at para. 3 8 , such

general and conclusory assertions are insufficient to state a

viable claim against defendants under section 12(a)(2). To

impose liability on defendants, plaintiffs must plead and

demonstrate that defendants acted as something more than simply a

“seller’s seller.” Shaw,

. That is to say,

plaintiff’s must point to more than simply defendants’ sale of

stock to the underwriters of the IPO: they must demonstrate that

there was some sort of relationship between plaintiffs and

defendants and that defendants “actively solicited” plaintiffs’

purchases of Omtool common stock. The amended complaint fails to

allege such “active solicitation.” There are, for example, no

allegations that plaintiffs had any contact whatsoever with any

of the defendants, or received any “solicitations” from them

(apart from the Prospectus). Consequently, count 2 of the

amended complaint fails to state a viable claim against

defendants under section 12(a)(2) of the Securities Act.

22 IV. Pleading Requirements and Allegations of Fraud.

Finally, defendants assert that plaintiffs’ amended

complaint fails to plead allegations of fraud under section 10(b)

of the Exchange Act with sufficient specificity. And, while they

acknowledge that fraud is not an element of claims under either

section 11 or 12(a)(2) of the Securities Act, they say that

because plaintiffs’ claims under those sections “sound in fraud,”

they are subject to the more rigorous pleading standards

applicable to fraud claims.

Rule 9(b) of the Federal Rules of Civil Procedure provides

that “[i]n all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with

particularity.” In the securities fraud context, the complaint

must also “set forth specific facts that make it reasonable to

believe that defendant[s] knew that a statement was materially

false or misleading. The rule requires that the particular

times, dates, places or other details of the alleged fraudulent

involvement of the actors be alleged.” Serabian v . Amoskeag Bank

Shares, Inc.,

5 7 , 361 (1st Cir. 1994) (citation and

23 internal quotation marks omitted). See generally 15 U.S.C.

§ 78u-4(b)(1) (“In any private action arising under this chapter

in which the plaintiff alleges that the defendant [engaged in

fraud] . . . , the complaint shall 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, the complaint shall

state with particularity all facts on which that belief is

formed.”). The Court of Appeals for the First Circuit “has been

notably strict and rigorous in applying the Rule 9(b) standard in

securities fraud actions.” Greebel v . FTP Software, Inc.,

(1st Cir. 1999). Consequently, it has held that

“inferences of scienter survive a motion to dismiss only if they

are both reasonable and ‘strong’ inferences.”

.

Here, the amended complaint alleges fraud with sufficient

specificity to meet the rigorous pleading standards imposed by

Rule 9(b) and 15 U.S.C. § 78u-4. For example, the amended

complaint contains detailed and specific claims regarding sales

that Omtool made to “Customer Three” that were, allegedly,

24 fictitious and with regard to which Customer Three had no payment

obligations. See Amended complaint, paras. 61-66. The amended

complaint also alleges that a fictitious sale of $250,000 was

made to Customer Four, based upon false statements that Omtool

had a “hot order” for a substantial purchase from the Social

Security Administration. That sale (apparently to be consummated

through Customer Four) never materialized and plaintiffs allege

that when Customer Four subsequently attempted to confirm the

order with the Social Security Administration, it was told that

the Administration was “not aware of any such order.” Amended

complaint, para. 7 4 . The amended complaint alleges that

nevertheless, Omtool improperly recognized $250,000 in revenue as

a result of that “transaction.” Amended complaint, para. 7 6 .

To be sure, the court of appeals has, under somewhat similar

circumstances, concluded that a complaint like plaintiffs’,

alleging “channel stuffing” and deviations from generally

accepted accounting principles (“GAPP”), failed to plead fraud

with sufficient specificity. See

In this case,

however, the allegedly improper sales and accounting practices:

25 (1) are alleged with greater specificity; and, if true, (2) had a

far more substantial impact on the company’s bottom line.

According to plaintiffs’ complaint, those improprieties caused

Omtool to overstate its net income by as much as 69% for the

quarter ending December 3 1 , 1997, and by as much as 338% for the

quarter ending June 3 0 , 1998. See Amended complaint at paras. 52

and 7 6 . Compare Greebel,

(“At best, plaintiffs’

additional evidence supports an inference that [defendant]

improperly recognized from $416,000 to $1.55 million in revenue

in the third quarter of 1995. Because [defendant] reported

overall revenue during the quarter of $37.1 million, these

transactions do not support a strong inference of scienter. It

is equally possible to conclude that [defendant] made some

incorrect accounting decisions regarding a limited number of

transactions.”). In this case, however, the magnitude of the

allegedly improper accounting practices (as a percentage of

Omtool’s total revenue) undermines the reasonableness of any

inference that Omtool simply “made some incorrect accounting

decisions regarding a limited number of transactions,”

and,

instead, supports a strong inference of scienter. See generally

26 Schaffer v . Timberland Co.,

(D.N.H.

1996).

Conclusion

In light of the foregoing, defendants’ motion to dismiss

(document n o . 34) is granted in part and denied in part. Count 2

of plaintiffs’ amended complaint (alleging violations of section

12(a)(2) of the Securities Act) is dismissed for failing to

adequately allege that defendants were “sellers” of securities.

In all other respects, however, defendants’ motion is denied.

SO ORDERED.

Steven J. McAuliffe United States District Judge

December 1 4 , 2000

cc: David P. Slawsky, Esq. Janine R. Azrilliant, Esq. Richard B . Drubel, Esq. Francis J. Farina, Esq. James P. Bassett, Esq. Patricia R. Ray, Esq.

27