Full opinion text
OPINION AND ORDER SCHEINDLIN, District Judge. This Document Relates To: All Cases TABLE OF CONTENTS INTRODUCTORY MATERIAL I. INTRODUCTION.293 II. SYNOPSIS OF HOLDINGS.295 III.SECURITIES LAW, HOT ISSUES MARKETS AND TIE-IN AGREEMENTS .298 A. General Background on the Securities Act and Exchange Act. OO 05 03 B. Hot Issues Markets, Market Manipulation and Tie-in Agreements 05 Oj 03 1. Hot Issues Market of 1959-1962. O CO 2. Hot Issues Market of 1967-1971 . C3 OO 3. Hot Issues Market of 1979-1983. lO 05 CO 4. Hot Issues Market of 1998-2000 .;. to 05 CO IV. THE COMPLAINTS.. CO o OO A. Individual Complaints. . OO o CO 1. Factual Allegations and Allegation of Market Manipulation . CO o OO 2. The Registration Statement’s Misleading Statements and Omissions . O t-H CO 3. Claims . t — I 00 B. Part I of Master Allegations. ^ t — i CO 1. Tie-in Allegations and Undisclosed Compensation. i — 1 CO 2. Statistical Analysis. OO i — I CO 3. Matrix Illustrating Various Relationships Among Underwriters 05 r — 4 CO 4. Analyst Allegations.. 05 t-H CO 5. Motivations of the Underwriters, Issuers and Individual Defendants . 03 C. Part II and Part III of the Master Allegations. 03 GOVERNING LEGAL PRINCIPLES V. PLEADING UNDER THE FEDERAL RULES OF. CIVIL PROCEDURE CO CO A. Rule 8(a).. CO CO B. Rule 9(b).. CO N> 1. Why Rule 9(b) Requires Particularity. CO to 2. How Particularity Deters Claims of Fraud. CO to 3. Rule 9(b) Must Be Read in Harmony with Rule 8. CO to VI. PLEADING SECURITIES FRAUD. CO CO A. Securities Fraud Before 1995 . CO CO B. Pleading Securities Fraud After the PSLRA. CO DO 1. Paragraph (b)(1) . CO CO 2. CO CO VII. PRELIMINARY ISSUES. r-H CO CO A. Standard of Review. 7 — t CO CO 1. The Court Must Take the Pleadings as True and Draw All Inferences In Plaintiffs’ Favor .:. CO CO 2. Both Defendants and the Court Must Accept the Complaints As Pled... 03 CO CO 3. Clarity of Pleadings Is Not a Factor in Dismissal. CO CO CO B. The Pleading Standards for Some of the Claims Are Governed by the PSLRA; Others are Governed by Both the PSLRA and the Federal Rules .. CO CO CO 1. The Differences Between the Scope of the PSLRA’s Pleading Requirements and Rule 9(b). CO CO CO 2. The Federal Rules Still Apply to Certain Types of Securities Fraud Claims. CO CO ^ 3. Summary.... CO CO CR APPLICATION OF LEGAL PRINCIPLES VIII. SECTION 11 CLAIMS.. CO CO 05 A. The Section 11 Claims Have Been Properly Pled. CO CO 05 1. The PSLRA’s Pleading Standards Do Not Apply to Claims Brought Under the Securities Act. CO CO -q 2. Rule 8(a) Applies to Section 11 00 CO CO 3. Plaintiffs Need Not Plead Reliance in Order to State Certain of Their Section 11 Claims. 04 CO 4. Plaintiffs Need Not Plead that the Issuers and Individual Defendants Had Knowledge in Order to State Section 11 Claims Against Those Defendants. 04 CO B. Most Plaintiffs Have Stated Section 11 Claims Upon Which Relief May Be Granted. ^ CO 1. Plaintiffs Have Standing. ^ CO 2. Plaintiffs Have Not Pled Allegations of Knowledge Inconsistent With Their Claims. CO 3. Those Plaintiffs Who Sold Securities Above the Offering Price Have No Damages and Therefore No Claim Upon Which Relief Can Be Granted. CO IX. SECTION 15 CLAIMS.351 X. RULE 10B-5 CLAIMS FOR MATERIAL MISSTATEMENTS AND OMISSIONS AGAINST THE UNDERWRITERS, ISSUERS AND INDIVIDUAL DEFENDANTS . CO oi co A. The Rule 10b-5 Claims for Material Misstatements Have Been Properly Pled. CO cn co 1. The Material Misstatement Claims Satisfy Paragraph (b)(1) of the PSLRA — Particularity. CO cn co a. Paragraph (b)(l)’s First Two Requirements Have Been Satisfied. CO cn co b. Paragraph (b)(l)’s Last Requirement Has Been Satisfied ... CO oí ^ 2. The Material Misstatement Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter. lO CO a. Allocating Underwriters. CO CO b. Non-Allocating Underwriters. (O CO c. Individual Defendants. CD CO i. The Motive Allegations Are Sufficient as to Sixty-Four Defendants. CO o 05 ii. The Motive Allegations Are Insufficient as to 161 Defendants. CO CO CO d. Issuers. 00 CO CO i. The Motive Allegations Are Sufficient as to 185 Issuers o t> CO ii. The Motive Allegations Are Insufficient as to 116 Issuers. O E> CO e. Summary. 1-i t> CO 3. The Material Misstatement Claims Adequately Plead the Remaining Elements of a Rule 10b-5 Claim: Transaction Causation, Loss Causation, Reliance and Damages. CO DO a. Transaction Causation. CO «<1 Ol b. Loss Causation and Damages. CO B. Plaintiffs Have Stated Rule 10b-5 Claims For Material Misstatements and Omissions Upon Which Relief May Be Granted .... CO ~C| 00 1. The Misstatements and Omissions Are Material. co “-3 CO 2. All Defendants Had a Duty to Disclose. CO CO O XI. RULE 10B-5 CLAIMS FOR MARKET MANIPULATION AGAINST THE ALLOCATING UNDERWRITERS.384 A. The Market Manipulation Claims Satisfy Paragraph (b)(2) of the PSLRA — Scienter.384 B. The Market Manipulation Claims Adequately State Claims Upon Which Relief May Be Granted.385 1. Plaintiffs Adequately Plead “Deceptive or Manipulative Conduct”.387 2. College Bound II Is Not the Law..390 XII. SECTION 20 CLAIMS.392 CONCLUDING MATERIAL XIII. LEAVE TO REPLEAD.397 XIV. CONCLUSION.399 TABLE OF AUTHORITIES APPENDICES Al. LIST OF CONSOLIDATED CASES .... C£> H T* A2. SECTION 11. tH (M A3. SECTION 15. 03 (M ^ A4. RULE 10b-5 CLAIMS AGAINST INDIVIDUAL DEFENDANTS CQ (M A5. RULE 10b-5 CLAIMS AGAINST ISSUERS *£> (M ^ A6. SECTION 20. CO INTRODUCTORY MATERIAL These cases allege a vast scheme to defraud the investing public. The scheme — characterized by Tie-in Agreements, Undisclosed Compensation, and analyst conflicts, and concealed by misrepresentations and omissions — was aimed at fraudulently driving up the price of stock in hundreds of companies in the immediate aftermarket of their initial public offerings (“IPOs”). Plaintiffs allege that investment banks routinely required substantial investors to participate in the scheme in order to receive allotments of these valuable IPOs. The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell their individual holdings at enormous gains. The investment banks profited by receiving kickbacks from the investors who received the IPO allocations. To hide the scheme from the investing public, the investment banks, companies, and officers violated the securities laws by making misleading statements in offering documents and by manipulating the market. Thousands of ordinary investors, who are. Plaintiffs in these cases, allege that the value of their holdings plummeted as a result of this unlawful conduct. I. INTRODUCTION From January 1998 to December 2000, over 460 high technology and Internet-related companies raised capital by selling ownership of their company to the public. Prior to going public, each company hired a group of investment banks to underwrite their IPO. Some, but not all, of the Underwriters allocated the IPO stock for distribution to initial purchasers (“Allocating Underwriters”). On the day of the IPO, the Allocating Underwriters sold the stock directly to those customers, usually institutional investors. The price of the stock was predetermined and set forth in a registration statement filed with the Securities and Exchange Commission (“SEC”). In general, the Underwriters received 7% of the gross proceeds (or some other fixed amount) as compensation for their services, and the Issuer received the remaining capital. See MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F.Supp.2d 251, 253 (S.D.N.Y.2002). After the offering, those who purchased on the IPO could profit by selling their stock in the aftermarket, ie., on a stock exchange such as the Nasdaq. Indeed, from 1998 to 2000, customers who bought IPO stock often made large profits as the price of the stock dramatically surged in the aftermarket. Plaintiffs who bought stock in the aftermarket for 309 of these high-technology and Internet-related stocks allege that the Allocating Underwriters required their customers to enter into agreements to buy additional shares of the Issuer in the aftermarket as a condition of receiving the right to purchase the IPO stock. In some instances, these customers were also required to make those purchases at predetermined escalating prices. As a result of these “Tie-in Agreements,” the Allocating Underwriters created an artificial demand for the company’s stock and caused the price of the stock to rise. In addition, the Underwriters used this scheme to enrich themselves by requiring customers to pay them a portion of the profits they made by selling the IPO shares in the aftermarket. Spurred by newspaper and government investigations into the IPO allocation practices of various investment banks, Plaintiffs filed over 1,000 Complaints in this district from January 11 to December 6, 2001, each alleging that the Underwriters perpetrated this scheme in connection with 309 IPOs. See Makaron v. VA Linux Sys., Inc., No. 01 Civ. 242 (first action filed January 11, 2001); Genduso v. Internap Network Servs. Corp., No. 01 Civ. 11247 (last action filed December 6, 2001). Plaintiffs are suing three groups of defendants in each IPO case; the Underwriters of the IPO, the company that issued the stock (“Issuer” or “Issuer Defendant”), and the company’s officers (“Individual Officers” or “Individual Defendants”). In total, Plaintiffs are suing fifty-five Underwriters, 309 Issuers, and thousands of Individual Defendants. In an effort to coordinate the lawsuits and avoid taxing the limited judicial resources of this district, the Assignment Committee of the Southern District of New York directed that all of the actions be transferred to this Court for “coordination and decision of pretrial motions, discovery and related matters other than trial.” Order, In re Initial Public Offering Sec. Litig., 21 MC 92 (Aug. 9, 2001). This Court subsequently consolidated the lawsuits by Issuer {e.g., In re Cacheflow Securities Litigation), thereby resulting in 309 consolidated cases that are being coordinated in the above-captioned litigation. The Underwriters, Issuers, and Individual Defendants now move to dismiss these actions in their entirety. In broad terms, the Defendants put forward two grounds for dismissal. First, they argue that each of the 309 Complaints fails to comply with the pleading requirements of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Second, they contend that even if the allegations are properly pled and assumed to be true, the Complaints must be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). For the reasons that follow, these motions are granted in part and denied in part. II. SYNOPSIS OF HOLDINGS It is axiomatic that when deciding a motion to dismiss, a court must accept as true the factual allegations of a complaint. Indeed, the court must draw every reasonable inference from those factual allegations in favor of the party bringing suit. It is against this backdrop that the many rulings contained in this Opinion must be understood. The general requirements for pleading a complaint are found in the Federal Rules of Civil Procedure unless a specific statute sets forth a different pleading standard. Rule 8 requires, only a “short and plain statement of the claim showing that the pleader is entitled to relief.” When pleading fraud, under Rule 9, however, “the circumstances constituting fraud [must] be stated with particularity.” In addition, in the field of securities law, the PSLRA imposes a heightened pleading standard with respect to some causes of action by adding two more requirements. First, when pleading that a defendant has made a material misstatement or omission on which the investing public relies, the complaint must specify each statement alleged to have been misleading, the reason the statement is misleading, and, if the misstatement is alleged on information and belief, the facts on which that belief is formed. Second, when a securities fraud claim requires that a defendant act with fraudulent intent, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Taking the facts of the Complaints as true, the causes of action as pled, and drawing every inference in Plaintiffs’ favor, Plaintiffs have alleged one coherent scheme to defraud, the entire purpose of which was to artificially drive up the price of the securities. This scheme offends the very purpose of the securities laws, namely “to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing.” Where insiders conspire to frustrate the efficient function of securities markets by exploiting their position of privilege, they have perpetrated a double fraud: they have manipulated the market, and they have covered up that manipulation with lies and omissions. When investors have been injured by these frauds, those insiders may be liable under the securities laws. Plaintiffs bring six claims against various Defendants. All Defendants are alleged to have made false statements in the registration statement and prospectus related to a particular IPO, in violation of Section 11 of the Securities Act of 1933 (First Claim). The Individual Defendants are alleged to have controlled the Issuers who made those false statement in violation of Section 15 of the 1933 Act (Second Claim). All Defendants are alleged to have made false statements in the registration statement and prospectus with the intent to deceive the investing public, in violation of Section 10(b) of the Exchange Act of 1934 (Third and Fourth Claims). The Allocating Underwriters are also alleged to have engaged in a scheme to manipulate the securities markets in violation of Section 10(b) of the 1934 Act (Fifth Claim). Lastly, the Individual Defendants are alleged to have controlled the Issuers who violated Section 10(b) of the 1934 Act, in violation of Section 20 of that Act (Sixth Claim). Because these cases are of great importance to the public, and because this Opinion is lengthy and highly technical, a synopsis of its holdings is warranted. The following constitutes, in summary form, the rulings of the Court. Section 11 Claims Section 11 was designed to hold those who prepare registration statements in connection with IPOs — such as the Underwriters, Issuers, and Individual Defendants here — to a stringent standard of liability for any material misrepresentations contained in those statements, although certain Defendants may raise their due diligence as an affirmative defense at trial. Pleading under Section 11 is governed solely by Rule 8 because fraud is not an element of a Section 11 claim. Plaintiffs have sufficiently pled, under the standard of Rule 8, that all those who signed the registration statement or prospectus violated Section 11 because those documents failed to disclose the fraudulent scheme— specifically, the Tie-in Agreements and the Undisclosed Compensation. Moreover, on the secondary offerings, the registration documents also failed to disclose that the analyst reports were prepared by analysts employed by the Underwriters, who consistently issued recommendations tainted by undisclosed conflicts of interest. However, those Plaintiffs who sold their shares above the offering price have no damages as a matter of law, and their claims must be dismissed. Section 15 Claims Section 15 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 11. Pleading a Section 15 claim is also governed by Rule 8, and thus only requires an allegation that the defendant controlled a person or entity that violated Section 11. Here, the Individual Defendants are alleged to have controlled the Issuers who violated Section 11. While the Individual Defendants may raise lack of knowledge as an affirmative defense at trial, Plaintiffs need not plead that the Section 15 Defendants acted with the intent to defraud. Thus, the Section 15 claims are dismissed only in those cases where the Section 11 claims have been dismissed for lack of damages. Section 10(b) Claims for Material Misstatements and Omissions Section 10(b) —the general “securities fraud” provision in the 1933 and 1934 Acts — was designed to punish intentionally manipulative or deceptive practices employed as part of a scheme to defraud. One prohibited practice is intentionally making materially false or misleading statements concerning publicly traded securities. In such a case, a plaintiff must comply with either the PSLRA or Rule 9, depending on the particular element, because Section 10(b) claims are claims of fraud. Thus, Plaintiffs jnust plead the misleading statements themselves, the basis to believe those statements are misleading, and the Defendants’ intent to defraud investors under the PSLRA. Plaintiffs must also plead that those misstatements and omissions were material, and that those Defendants had a duty to disclose the information. Finally, Plaintiffs must plead, under Rule 9, that they purchased the stock _ after relying on those material misstatements and were damaged as a result. Plaintiffs have successfully pled that all of the Underwriters (both Allocating and Non-Allocating) made material misstatements and omissions, which they had a duty to disclose, with the intent to defraud the investing public. Plaintiffs have also alleged, with the required particularity, that they purchased stock based on their falsely inflated market price, and that the misrepresentations caused a significant disparity between the price of the securities and their real value, resulting in significant financial damages. Nonetheless, Plaintiffs have failed to plead that some of the Issuers and Individual Defendants acted with the required intent to defraud. Specifically, when an Issuer exploited the inflated value of the company to engage in a merger or acquisition, or to raise even more money through further stock offerings, the intent requirement has been satisfied. Likewise, when an Individual Defendant sold large amounts of her shares at a significant profit relatively close in time to the IPO, the requisite intent has been demonstrated. In all other instances, the pleading of intent to defraud is inadequate and therefore the claims against those Issuers and Individual Defendants must be dismissed. Section 10(b) Claim for Market Manipulation In addition to punishing material misstatements and omissions, Section 10(b) was designed to prohibit any intentional conduct that deceives or defrauds investors by controlling or artificially affecting the price of securities. Such claims are typically described as “market manipulation” claims. Plaintiffs’ pleading obligations for the market manipulation claims are identical to those for the material misstatements claims except, because there are no alleged misstatements, the PSLRA only governs the pleading of intent to defraud. Thus, Plaintiffs must plead with particularity the manipulative scheme itself, the intent to defraud the investing public, reliance on the integrity of the market (ie., that they believed it was not manipulated) and resulting damages. Plaintiffs have succeeded in pleading a market manipulation claim against the Allocating Underwriter Defendants. They have alleged that these Defendants acted with the requisite intent because they required their customers to engage in Tie-in Agreements and to pay Undisclosed Compensation in order to receive an initial allocation of stock. Subsequent purchases, at escalating prices, falsely inflated the price of the shares. This very conduct evinces a strong inference that Defendants intended to defraud the investing public. Plaintiffs also have alleged that these Defendants engaged in deceptive or manipulative conduct because Defendants’ conduct was “designed to deceive or defraud investors by controlling or artificially affecting the price of securities.” Finally, Plaintiffs have alleged the remaining elements of these claims with the required specificity. Section 20 Claims Section 20 was designed to hold a defendant jointly liable if it controlled a person or entity who violated Section 10(b). The pleading of a Section 20 claim is governed solely by Rule 8, because such claims do not necessarily require proof of scienter, nor is fraud an essential element of such claims. Thus a plaintiff must allege only that a defendant controlled a person or entity who violated Section 10(b). At trial, a plaintiff must also show that the defendant was a “culpable participant” in the underlying fraud- — ie., took some action (or inaction) that furthered the underlying fraud. A defendant may then offer proof that the culpable participation was done in good faith. Because Plaintiffs have adequately alleged control, the Section 20 claims survive against those Individual Defendants who controlled Issuers liable under Section 10(b), and are dismissed only against those Individual Defendants who controlled an Issuer as to whom the Section 10(b) claims have been dismissed. In sum, Plaintiffs have pled a coherent scheme by Underwriters, Issuers, and their officers to defraud the investing public. As such, these lawsuits may proceed. III. SECURITIES LAW, HOT ISSUES MARKETS, AND TIE-IN AGREEMENTS A. General Background of the Securities Act and Exchange Act In the aftermath of the bull market of the 1920s, the 1929 stock market crash, and the subsequent Great Depression, Congress held extensive hearings to investigate the practices underlying securities trading. See generally Legislative History of the Securities Act of 1933 and Securities Exchange Act of 193J( (J.S. Ellenber-ger & Ellen P. Mahar eds.1973). During these investigations, Congress repeatedly discovered instances of market manipulation and deception, which it concluded had contributed to the market’s collapse. For example, Professor Steve Thel has written: Before [President] Roosevelt was even inaugurated, [Chief Counsel of the Senate Banking and Currency Committee Ferdinand] Pécora revealed fabulous excesses in investment, commercial banking, and the financing of public utilities. Among other things, he showed that in the years before the crash, some respected bankers had controlled the market price of securities in which they held an interest by effecting huge purchases or sales as the situation required. Instances of such manipulative trading were uncovered repeatedly throughout the course of the hearings. Steve Thel, The Original Conception of Section 10(b) of the Securities Exchange Act, 42 Stan. L.Rev. 385, 412 (1990) (footnotes omitted). Likewise, a 1934 Act Senate Committee report explained, albeit in more muted tones, how the market was manipulated: Several devices are employed for the purpose of artificially raising or depressing security prices.... Among such practices are fictitious “wash” sales; “matched” orders, or orders for the purchase and sale of the same security emanating from a common source for the purpose of recording operations on the tape and thereby creating a false appearance of activity; and other transactions specifically designed to manipulate the price of a security. S.Rep. No. 73-792, at 7-8 (1934). (“1934 Senate Report”). In order to protect the integrity of the market and combat such practices, Congress enacted the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). In general, the Securities Act regulates the initial offering of securities, see Gustafson v. Alloyd Co., 513 U.S. 561, 571-72, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995), while the Exchange Act regulates post-distribution purchases and trading, see Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 171, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). The Securities Act “was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing.” Ernst & Ernst, 425 U.S. at 195, 96 S.Ct. 1375 (citing H.R.Rep. No. 73-85, at 1-5). The Exchange Act “was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges.” Id. (citing 1934 Senate Report at 1-5). “A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat em/ptor and thus to achieve a high standard of business ethics in the securities industry.” SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (footnote omitted). See also SEC v. Zandford, 535 U.S. 813, 122 S.Ct. 1899, 1903, 153 L.Ed.2d 1 (2002) (same). Every IPO at issue here is governed by the regulatory framework created by these Acts. B. Hot Issues Markets, Market Manipulation, and Tie-in Agreements When a company goes public, the initial offering price (the price paid by the first customer) is established by the company and underwriters. Once issued, the stock price is determined by the market. For at least five decades, studies have shown that IPOs generally trade on the open market at a price significantly higher than the offering price, a phenomenon known as underpricing. For example, a stock might have an initial offering price of $18 and rise to a closing market price of $20 on its first day. Such stock is underpriced by $2 (or approximately 11%). “For a long time, the standard underpricing seemed to be between five and twenty percent.” Robert Prentice, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals For Its Future, 51 Duke L.J. 1397, 1446 n.230 (2002) (citation omitted). From the perspective of the initial purchasers, the underpricing of IPO stock is wonderful because they can make a substantial profit on their investment by selling their stock in the aftermarket. The increased sales activity — and the higher stock price — -are also attractive to the issuer, who benefits from the false impression that the company is so highly valued. The issuer then exploits that impression by using its stock as currency to make acquisitions, or by raising more capital through a higher-priced secondary offering. The underpricing itself is not all good for the issuer — in one sense there was “money left on the table” because the issuer lost out on the difference between the offering price and the first day’s closing market price. MDCM Holdings, 216 F.Supp.2d at 254. But the increased aftermarket trading that may attend under-priced issues is likely to make the whole process a winning proposition for the isr suer. When the price of an IPO stock rises quickly in the market, it is often referred to as a “hot issue.” In turn, so-called “hot issues markets” are typically characterized by severe underpricing. See, e.g., Jay R. Ritter, The ‘Hot Issue’ Market of 1980, 57 J. Bus. 215 (1984). Over the past four decades, there have been four such markets. The first three occurred from 1959-1962, 1967-1971, and 1979-1983, while the most recent hot issues market lasted from 1998-2000' — the time period at the heart of this litigation. Not surprisingly, conduct of the sort alleged in these cases came to the attention of regulators in each of these hot issues markets. 1. Hot Issues Market of 1959-1962 “From 1959 until the market decline of early 1962, the distribution of securities by companies that had not made a previous public offering reached the highest level in history.” SEC Special Study at 487; see also id. at 514. “The public eagerly sought stocks of companies in certain ‘glamour’ industries, especially the electronics industry, in the expectation that they would quickly rise to a substantial premium — an expectation that was often fulfilled.” Id. at 487. “It was not uncommon for underwriters to receive, prior to the effective date, public ‘indications of interest’ for five times the number of shares available.” Id. at 515. “Within a few days or even hours after the initial distribution, these so-called ‘hot issues’ would be traded at premiums of as much as 300 percent above the original offering price.” Id. at 487. “In many cases, the price of a ‘hot’ issue later fell to a fraction of its original offering price.” Id. In the midst of this “climate of general optimism and speculative interest,” id., the SEC “addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold.” SEC Legal Bulletin (describing Exchange Act, Release No. 6536). In response to these reports, the SEC issued the following interpretive release: The attention of the Securities and Exchange Commission has been directed to recently published articles in business magazines and the public press which indicate that certain dealers participating in distributions of new issues have been making allotments to their customers only if such customers agree to make some comparable purchase in the open market after the issue is initially sold. The Commission wishes to call the attention of dealers to the fact that generally speaking any such arrangement involves a violation of the anti-manipulative provisions of the Securities Exchange Act, particularly Rule 10b-6 thereunder, and may involve violation of other provisions of the federal securities laws. Should evidence of such practice by individual firms be developed, the Commission will take appropriate action. Securities Act, Release No. 4358/Exchange Act, Release No. 6536 (Apr. 24, 1961), available at 1961WL 61584. In 1963, the SEC transmitted to Congress the “Report of Special Study of Securities Markets of the Securities and Exchange Commission.” See supra note 15. It “was the most extensive examination of the securities markets since the 1930s” and included “a thorough analysis of new issues” in response to the bull market of the previous three years. SEC Hot Issues Report at 5. “The intensive and extensive examination made by the special study reveals a picture ... 'of a general climate of speculation which may rank with excesses of previous eras.” SEC Special Study at 553. “More than any single activity or incident, it is this climate of speculative fervor which provides a key to the new-issue phenomenon.” Id. “The Special Study brought into sharp focus, for the first time, the role of the underwriter in the new issues markets.” SEC Hot Issues Report at 6. “The underwriter played an important role in the new-issue phenomenon not only by originating and distributing stock in companies going public but also, in many cases, by encouraging the speculative climate.” SEC Special Study at 553. “Many of the problems targeted by the Special Study related to underwriting practices, distribution and aftermarket trading.” SEC Hot Issues Report at 6. For example, some firms “under pressure from customers and salesmen hungry for new issues, lowered their standards of quality and size of issuers whose securities they would underwrite.” SEC Special Study at 553-54. “In the pricing of new issues, underwriters could not help but be influenced by the knowledge that the prices of many issues would subsequently rise in the immediate after-market to prices hardly justified by traditional standards of value.” Id. at 554. The Special Study identified a number of problems and abuses that resulted from this knowledge. For example, some underwriters “set low offering prices in the expectation of withholding substantial portions of the issue in accounts of insiders to be sold out to the public.” Id. Likewise, “[s]ome underwriters found opportunities with the strong public demand for new issues to obtain very high amounts of compensation from small speculative companies.” Id. “The Special Study also found that certain techniques employed by broker-dealers exacerbated the ‘hotness’ of an issue, often creating immediate and substantial premiums over the initial offering price.” SEC Hot Issues Report at 8. Among other manipulative techniques, the study found that “solicitation of aftermarket purchases was common and might be actively engaged in by one or more of the major distributors.” SEC Special Study at 556. “To add to the aftermarket excitement, some managing underwriters arranged for solicitation of customers at premium prices through nonparticipating firms.” Id. “Demand for new issues was further stimulated in some cases by market letters, advisory recommendations, articles in the financial press and other planned publicity, usually optimistic in tone.” Id. 2. Hot Issues Market of 1967-1971 “In 1967-1971, the new issues markets experienced a resurgence,” SEC Hot Issues Report at 11, this time with issues in fast food business and “space age” technology. As former SEC Chairman Arthur Levitt has recalled: It was in the midst of the so-called “go-go years.” I remember walking the halls sensing a feeling among us of unlimited potential and boundless opportunity. Our markets were experiencing an enormous volume surge, growing institutionalization and quite rampant speculation. It was big news I recall that Kentucky Fried Chicken was selling at close to 100 times earnings. Arthur Levitt, Remarks before the 2000 Annual Meeting of the Securities Industry Association (Nov. 9, 2000). “In response [to this market], the Commission and the NASD [National Association of Securities Dealers] created a joint task force in mid-1972 to combat the problems caused by hot issues.” SEC Hot Issues Report at 11. “Teams of Commission and NASD personnel conducted intensive examinations and investigations of certain broker-dealers.” Id. The SEC also “began public, fact-finding hearings on the hot issues experience.” Id. (citing SEC File No. 4-148). These investigations uncovered a “considerable number” of violations of the securities laws that resulted in various enforcement actions by the SEC and NASD. Id. Indeed, the trading abuses of the hot issues market also received scrutiny from the New York State Attorney General who requested that his office study the problems associated with the hot issues market of the late 1960s. See David Clurman, Controlling a Hot Issue Market, 56 Cornell L.Rev. 74 (1970) (discussing study made at the request of Attorney General Louis J. Lefkowitz). The Attorney General’s study concluded that “a pattern emerged whereby substantial sums of money went into new and highly speculative ventures.”. Id. at 82. The atmosphere became one of pure gambling, and in the process it was not too difficult to rig the game. The big winners were underwriters, insiders of the issuing companies, and those with contacts in these groups. The losers were those investors who purchased at inflated prices and the economy itself. Id. “The basic device used to further overheat the market was stimulating demand while simultaneously reducing supply.” Id. at 76. “Brokers increased demand,” for example, “by frequently emphasizing to their customers the difficulty of obtaining shares.” Id. “Salesmen regularly predicted that the after-market prices would be higher than the original or current prices.” Id. “Cruder techniques [to stimulate demand] included brokers informing customers that if they did not make additional purchases in the after-market they would be cut off from further new issues.” Id. “In addition, a steady flow of ‘tips’ was fed into the market, and purchasers often stated that this type of information had stimulated their interest in a particular security.” Id. at 76-77. The study also “uncovered instances- where intra-office brokerage memoranda were inconsistent with offering literature.” Id. at 77. In sum, “[e]ompany insiders and investment bankers took full advantage of the opportunities presented to them by the generally heated situation — a situation that was partially of their own creation.” Id. at 78. ' In response, the SEC “proposed a number of amendments to its rules to curb the excesses of hot issues.” SEC Hot Issues Report at 12. In particular, the SEC proposed adopting Rule 10b-20 after having received “indications that broker-dealers involved in distributing shares may be imposing requirements involving consideration in addition to the announced price of the shares.” Certain Short Selling of Securities and Securities Offerings, Exchange Act Release No. 10636, 39 Fed. Reg. 7806 (February 11, 1974). As the SEC explained: Proposed Rule 10b-20 makes explicit the duty placed on broker-dealers (and others) to refrain from explicitly or implicitly demanding from their customers any payment or consideration in addition to the announced offering price of any securities. The Commission has received indications that in some offerings for which public demand is inadequate the purchase of such offerings[’] shares may be tied to certain inducements, such as the opportunity to purchase sought after “hot” issue shares, for which demand exceeds supply. In response to these inducements, a number of persons may have been encouraged to participate in the distribution of shares for which sufficient public demand does not exist by purchasing them solely with a view to their immediate resale and merely to accommodate those marketing the offerings. The demand for offering shares crea[t]ed by the activities of these participants in the distribution process may obfuscate realistic assessments by underwriters who do not induce such participation and by investors and potential investors of the valid demand for such offerings and may artificially affect the offering price for such shares. Further, rewarding these participants with “hot” issue shares may artificially stimulate high public demand for such shares in that the prior commitment made1 to such participants, which unjustifiably deprives many members of the public of the opportunity to purchase such “hot” issue shares at their original offering price, relegates such persons denied shares in the offerings to making purchases in the after market. Id. (emphasis added). Rule 10b-20 was eventually withdrawn in 1988. See Exchange Act Release No. 26182 (Oct. 14,1988), available at 1988 WL 999999. The SEC explained: In view of the substantial period of time that has elapsed since Rule 10b-20 was proposed and the fact that ‘tie-in’ arrangements may be reached under existing antifraud and antimanipulation provisions of the federal securities laws, the Commission has determined to withdraw proposed Rule 10b-20. Id. (citing SEC Hot Issues Report at Section IV.A.3). See also SEC Hot Issues Report at Section V (entitled “Current Regulatory Authority”). 3. Hot Issues Market of 1979-1983 From 1979 to 1983, another hot issues market arose. This time the companies going public were from Denver, Salt Lake City and the New York area. See SEC Hot Issues Report at 15-23. “Fad and high-technology business lines were well-represented, including robotic manufacturing, medical products, computers, video materials and entertainment.” Id. at 22-23. Once again, the SEC and NASD launched a number of investigations into broker-dealers and their underwriting practices in response to reports of abuses in the allocation process. See id. at 15-23. The SEC provided a comprehensive review of this market when it issued its 1984 Hot Issues Report describing “the abuses identified by the Commission’s regulatory and enforcement efforts” and “set[ting] forth the Commission’s relevant statutory and rulemaking authority, concluding that this authority is broad enough to cover abuses that have been identified during hot issues markets.” Id. at 3-4. The Report found that “selling abuses” were the most common form of misconduct. Id. at 28. “Generally, the abuses found in a hot issues market involve either artificial restrictions on supply or attempts to stimulate demand that facilitate a rapid rise in the price of a security.” Id. at 29. The Commission uncovered a wide range of fraudulent activities including schemes founded upon market manipulation and domination, free-riding and withholding of stocks to shorten supply. See id. at 29-30. “A few cases involve ‘tie-in’ arrangements by which underwriters of hot issues require customers, as a condition of participation in a hot issue offering, either (1) to agree to purchase additional shares of the same issue at a later time and at an increased price, or (2) to participate in another hot issue offering.” Id. at 37. “This practice stimulates demand for a hot issue in the aftermarket, thereby facilitating the process by which stock prices rise to a premium.” Id. at 37-38. Indeed, the report highlights an example of one underwriter who was alleged to have caused the price of an IPO stock priced at $1 to rise to over $4 within a few hours of its offering. See id. at 38-39 (discussing case 13 attached to the report). The broker-dealer achieved this by (1) requiring customers to place aftermarket purchase orders for the IPO stock at substantial premiums above the offering price and (2) instructing salespersons to advise customers that the company had good financial prospects when it did not. See id. When discussing whether schemes such as tie-in arrangements violate the law, the report is unambiguous: “Every abusive sales and trading practice discussed in this Report clearly violates the federal securities laws as implemented by the Commission pursuant to its rulemaking authority.” Id. at 61-62 (emphasis added). “The anti-fraud provisions of the federal securities laws, a cornerstone of Congress’ system of promoting free and open markets for capital formation, are indispensable weapons in combating hot issues abuses. Taken together, these prohibitions offer broad protection to investors.” Id. at 62. 4. Hot Issues Market of 1998-2000 Few people may remember the glamour industries of the 1960s, the 1970s “go-go years,” or the fact that Denver and Salt Lake City were at the epicenter of the 1980s IPO market. But the Internet and high-tech boom of the 1990s, “irrational exuberance,” and Silicon Valley are not far removed from current events. Indeed, in recent years the rise and fall of these companies has been the subject of numerous articles, many books, several documentaries (real and fictional), and at least one off-Broadway play. Two observations concerning this market bear special mention. The first is that the underpricing of the IPOs of the late 1990s was severe when measured against any other time period. While IPOs have been historically under-priced by five to twenty percent, IPOs in the 1990s frequently surged to 100%-200% of the offering price on the first day of trading. See Jay Ritter, Big Runups of 1975-2000 (August 2001) (listing IPO stock that doubled in price on the first day of trading since 1975) available at http://bear.cba.ufl.edu/ritter/runup750.pdf. “In 1999,” for example, “117 IPOs doubled on their first day. This compares with 39 during the previous 24 years combined.” Id. In fact, the ten largest first-day increases in IPO stock since 1975 all took place from November 1998 to December 1999. Indeed, the IPO market of 1998-2000 was more extraordinary than the previous three hot issues markets. The other hot issues markets that had unusual first day increases were often accompanied by a below average number of companies going public. For example, in February of 1980, the average first day increase for IPOs was 119%; in February of 2000, the average first day increase was 116%. These two averages are the first and second highest increases of the last three decades. But what makes the latter far more impressive is that only eight companies went public in February 1980, a number far below the historical average of twenty-nine companies that go public per month. In stark contrast, fifty-five companies issued stock in February 2000. Likewise, taking into account the number of months that witnessed extraordinary first day increases, the IPO market of the 1990s substantially surpassed each of the previous hot issues markets. The table below sets forth the top fifteen months in terms of average first day increases since 1960, a majority of which occurred in the most recent hot issues market: First Day Number Increase Month/Year of IPOs 119.1 Feb. 1980 8 116.2 Feb. 2000 65 114.6 Dec. 1999 40 103.8 Dee. 1967 11 99.5 Jan. 1999 12 97.9 Nov. 1999 54 96 May 1968 28 90.7 Apr. 1977 5 87.5 Mar. 1999 21 86.5 Jan. 2000 15 85 Mar. 2000 53 82.2 Sep. 1998 3 80 May 1978 2 77.1_Oct. 1999_56 76.8_Sep. 1999_40 The second point is that at the end of 2000, the SEC and various newspapers began to report on abuses in the IPO allocations. In August 2000, the SEC’s Division of Market Regulation issued a legal bulletin stating that it had “become aware of complaints that, while participating in a distribution of securities, underwriters and broker-dealers have solicited their customers to make additional purchases of the offered security after trading in the security begins.” SEC Legal Bulletin. The Bulletin sought to remind “underwriters, broker-dealers, and any other person who is participating in a distribution of securities ... that they are prohibited from soliciting or requiring their customers to make aftermarket purchases until the distribution is completed.” Id. (emphasis added). Newspapers also reported on their own investigations into the IPO allocation process. For example, on December 6, 2000, the Wall Street Journal published a front-page article discussing how investment banks were requiring their customers to buy shares of stock in the aftermarket as a condition of receiving IPO stock allocations. See Trying to Avoid the Flippers. The article begins: Hedge-fund trader Robert Meglio was riding high Aug. 15 when shares of Dyax Corp., a biotech company, made their trading debut at $15 and jumped to $20. His fund, Oracle Partners, had been allowed to buy 50,000 shares of the initial public offering. It scored a quick paper profit of $250,000. But its fat slice of the deal was no accident. To snare such a generous IPO allocation, Mr. Meglio says, he had told salesmen at Dyax’s lead underwriter, J.P. Morgan & Co., that his fund would be willing to buy 100,000 more shares after they started trading. “I got a nice allocation, and if I hadn’t indicated I would be an after-market buyer, I would have gotten a lot less,” Mr. Meglio says. So goes the new IPO playbook on Wall Street. Underwriters want robust after-market buying so that an IPO will be a success for the newly public company and will make money for ground-floor investors. And big institutional investors are happy to express their plans for such buying in hopes of getting more shares at the IPO price. Id. The next day, the Wall Street Journal published another article reporting that federal authorities had begun investigating how securities firms were allocating IPO stock. See Susan Pulliam & Randall Smith, U.S. Probes Inflated Commissions for Hot IPOs, Wall St. J., Dec. 7, 2000, at Cl. The article explained: The Securities and Exchange Commission along with the U.S. attorney’s office in Manhattan are conducting the inquiry, which is at an early stage, the people say. A federal grand jury has also been called by the U.S. attorney’s office to consider evidence. Both the U.S. attorney’s office and the SEC have issued subpoenas to IPO participants, requesting trading records and other documents, these people add. The authorities are scrutinizing ways in which Wall Street dealers may have sought and obtained larger-than-typical trading commissions in return for giving coveted allocations of IPOs to certain investors. Some of the arrangements could have included specific formulas tied to the investors’ profits on the offerings, the people familiar with the probe say. Id. The first complaint in this litigation was filed one month later. See Makaron v. VA Linux Sys., Inc., 01 Civ. 242 (filed Jan. 11, 2001). IV. THE COMPLAINTS Plaintiffs have filed an Amended Complaint in 308 of the 309 consolidated cases. The Complaints detail the allegations about each Issuer’s offering and set forth the various claims against the Underwriters, the Issuer and its officers. In addition, Plaintiffs have filed a document entitled “Master Allegations” that contains the allegations that are shared by all of the Complaints. The individual Complaints incorporate the Master Allegations by reference. A. Individual Complaints As a randomly-chosen example of the individual Complaints, I shall describe in some detail the 34-page Consolidated Amended Complaint in In re Cacheflow, Inc. Sec. Litig., 01 Civ. 5143 (filed April 24, 2002) (“Cacheflow Compl.”). 1. Factual Allegations and Allegations of Market Manipulation In 1999, Cacheflow, Inc., was a Sunnyvale, California-based company that produced appliances designed to speed up content delivery over the Internet. See Cacheflow Compl. ¶ 17. At the time the company decided to go public, Brian NeS-mith was the company’s President and Chief Executive Officer, Michael Malcolm was Chairman of the Board of Directors, and Michael Johnson was Chief Financial Officer, Vice President and Secretary. See id. ¶¶ 18-20. Each of these individuals signed a registration statement and prospectus that was submitted to the SEC (collectively referred to as the “registration statement”). See id. On November 18, 1999, Cacheflow’s registration statement was approved by the SEC. See id. ¶ 5. The next day, an underwriting syndicate distributed 5,000,000 shares of Cacheflow at a price of $24.00 per share. See id. ¶ 30. The underwriting syndicate consisted of the following investment banks: POSITION UNDERWRITER LEAD MANAGER Morgan Stanley CO-MANAGER CSFB Dain Rauscher SYNDICATE MEMBERS Robertson Stephens (as successor-in-interest to Banc Boston) BaneBoston Salomon J.P. Morgan (as successor-in-interest to H & Q) H&Q Id. ¶ 14. All of the Underwriters were allocated Cacheflow’s initial stock except for J.P. Morgan (H & Q). See id. ¶¶ 14-15. “On the day of the IPO, the price of Cacheflow stock shot up dramatically, trading as high as $139.25 per share, or more than 480% above the IPO price on substantial volume.” Id. ¶ 31. Trading on the Nasdaq .under the ticker symbol “CFLO”, the price of Cacheflow’s stock continued to rise in the weeks following the IPO. See id. ¶ 32. Indeed, the stock “hit a high of $182 1/6 per share on December 9,1999, just prior to the end of the quiet period.” Id. At some point after the offering, “Plaintiffs Val Kay, Greg Frick, Eric Egelman and Kenneth L. Schmid ... purchased or otherwise acquired shares of Cacheflow common stock traceable to the IPO.” Id. ¶ 12. Plaintiffs allege that this remarkable price increase in Cacheflow’s stock “was not the result of normal market forces.” Id. ¶ 31. Rather, “the Allocating Underwriter Defendants created artificial demand for Cacheflow stock by conditioning share allocations in the IPO upon the requirement that customers agree to purchase shares of Cacheflow in the aftermarket and, in some instances, to make those purchases at pre-arranged, escalating prices (“Tie-in Agreements”).” Id. ¶ 3. “As part and parcel of this scheme ... certain of the underwriters ... also improperly utilized their analysts, who, unbeknownst to investors, were compromised by conflicts of interest, [to] artificially inflate or maintain the price of Cacheflow stock by issuing favorable recommendations in analyst reports.” Id. ¶ 7. Under this scheme, Caeheflow’s Underwriters profited by “requiring] their customers to repay a material portion of profits obtained from selling IPO share allocations in the aftermarket through one or more of the following types of transactions:” (a) paying inflated brokerage commissions; (b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or (c) purchasing equity offerings underwritten by these IPO Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the unlawful scheme alleged herein. Id. ¶ 4. Plaintiffs collectively refer to these payments as “Undisclosed Compensation.” Id. Plaintiffs also contend that NeSmith, Malcolm and Johnson “knew of or recklessly disregarded the conduct complained of herein through their participation in the ‘Road Show1 process by which underwriters generate interest in public offerings.” Id. ¶ 8. Moreover, these officers benefitted from the Tie-in Agreements “as a result of their personal holdings of the Issuer’s stock.” Id. 2. The Registration Statement’s Misleading Statements and Omissions According to the Complaint, Cacheflow’s registration statement “failed to disclose, among other things ... that the Allocating Underwriter Defendants had required Tie-in Agreements in allocating shares in the IPO and would receive Undisclosed Compensation in connection with the IPO.” Id. ¶ 6. Plaintiffs further allege that the Defendants made eight specific materially false or misleading statements. First, Plaintiffs highlight the following paragraph in the registration statement: In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may agree to sell or allot more shares than the 5,000,000 shares of common stock Cacheflow has agreed to sell them. This over-allotment would create a short position in the common stock for their own account. To cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these aetivities and may end any of these activities at any time. Id. ¶ 37. “[These statements] were materially false and misleading because the Allocating Underwriter Defendants required customers to commit to Tie-in Agreements and created the false appearance of demand for the stock at prices in excess of the IPO price in violation of Regulation M,” a regulation promulgated by the SEC under the Exchange. Act. Id. ¶ 38. Rule 101(a) of Regulation M states: Unlawful Activity. In connection with a distribution of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period. Id. ¶ 35 (quoting 17 C.F.R. § 242.101). Moreover, the SEC Legal Bulletin explains: Tie-in agreements are a particularly egregious form of solicited transactions prohibited by Regulation M. As far back as 1961, the Commission addressed reports that certain dealers participating in distributions of new issues had been making allotments to their customers only if such customers agreed to make some comparable purchase in the open market after the issue was initially sold. The Commission said that such agreements may violate the antimanipulative provisions of the Exchange Act, particularly Rule 10b-6 (which was replaced by Rules 101 and 102 of Regulation M) under the Exchange Act, and may violate other provisions of the federal laws. Solicitations and tie-in agreements for aftermarket purchases are manipulative because they undermine the integrity of the market as an independent pricing mechanism for the offered security. Solicitations for aftermarket purchases give purchasers in the offering the impression that there is a scarcity of the offered securities. This can stimulate demand and support the pricing of the offering. Moreover, traders in the aftermarket will not know that the aftermarket demand, which may appear to validate the offering price, has been stimulated by the distribution participants. Underwriters have an incentive to artificially influence aftermarket activity because they have underwritten the risk of the offering, and a poor aftermarket performance could result in rep-utational and subsequent financial loss. Id. ¶ 36 (emphasis in original) (quoting the SEC Legal Bulletin). “At no time did the Registration Statement/Prospectus disclose that the Allocating Underwriter Defendants would require their customers to engage in transactions causing the market price of Cacheflow common stock to rise, in transactions that cannot be characterized as stabilizing transactions, over-allotment transactions, syndicate covering transactions or penalty bids.” Id. ¶ 38. Second, Plaintiffs contend that the registration statement was false and misleading because Regulation S-K requires disclosure of payments from customers who received IPO shares. See Cacheflow Compl. ¶ 42. Item 508(e) of Regulation SK provides: Underwriter’s Compensation. Provide a table that sets out the nature of the compensation and the amount of discounts and commissions to be paid to the underwriter for each security and in total. The table must show the separate amounts to be paid by the company and the selling shareholders. In addition, include in the table all other items considered by the National Association of Securities Dealers to be underwriting compensation for purposes of that Association’s Rules of Fair Practice. Id. ¶ 39 (emphasis in original) (quoting 17 C.F.R. § 229.508(e)). The NASD “specifically addresses what constitutes underwriting compensation in NASD Conduct Rule 2710(c)(2)(B) (formerly Article III, Section 44 of the Association’s Rules of Fair Practice)!].]” Id. ¶ 40. It states: For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraphs (3) and (4) below shall be included. Id. (emphasis omitted). NASD Conduct Rule 2710(c)(2)(C) requires: If the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover of the prospectus or similar document shall include a cross-reference to the section on underwriting or distribution arrangements. Id. ¶ 41. “Contrary to applicable law, the Registration Statement/Prospectus did not set forth, by footnote or otherwise, the Undisclosed Compensation.” Id. ¶ 42. Third, the registration statement “misleadingly stated that the underwriting syndicate would receive as compensation an underwriting discount of $1.68 per share, or a total of $8,400,000, based on the spread between the per share proceeds to Cacheflow ($22.32) and the Offering price to the public ($24.00 per share).” Id. ¶ 43. “This disclosure was materially false and misleading as it misrepresented underwriting compensation by faili