Nicholas La Grasta, et al. v. First Union Securities, Inc.

In this securities fraud class action against First Union Securities, Inc.,
investors who purchased the stock of Ask Jeeves, Inc., an online internet research
company, claimed that First Union's analyst, through her "strong buy"
recommendations, inflated the price of Ask Jeeves shares while acting under an
undisclosed conflict of interest. This conflict, it was alleged, consisted of First Union
and its analyst trying to obtain investment banking business from Ask Jeeves at the
same time that they were supposed to be providing unbiased analysis on the company
and its stock. According to the investors, this undisclosed conflict caused the analyst
to tout the stock so that First Union would be looked upon favorably when Ask
Jeeves decided who was going to get its investment banking business, and violated
§ 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and
Rule 10b-5, codified at 17 C.F.R. § 240.10b-5.

First Union asked the district court to dismiss the complaint under Federal Rule
of Civil Procedure 12(b)(6), arguing in part that the securities fraud claim was time-barred
and that the investors failed to sufficiently allege loss causation. The district
court dismissed the complaint on statute of limitations grounds, concluding that the
investors -- who had purchased the stock at prices ranging from $78 to $134 per
share -- were on inquiry notice of securities fraud when the stock dropped to $24 per
share. Given its ruling on the statute of limitations issue, the district court did not address First Union's loss causation argument.

We reverse. We conclude that the complaint was not time-barred on its face,
and remand so that the district court can, in the first instance, address the issue of loss
causation.

I

Like the district court, we accept the complaint's well-pleaded factual
allegations, which are set out below. See, e.g., Papasan v. Allain, 478 U.S. 265, 283
(1986); Marsh v. Butler County, 268 F.3d 1014, 1023 (11th Cir. 2001) (en banc).
But because the complaint lists the price of Ask Jeeves stock on only certain days
during the relevant period, we will take judicial notice, pursuant to Federal Rule of
Evidence 201(b), of the price of the stock on other days during this period. Those
prices are not subject to reasonable dispute, and are a proper subject for judicial
notice. See, e.g., In re NAHC, Inc. Securities Litigation, 306 F.3d 1314, 1331 (3rd
Cir. 2002) (taking judicial notice of stock prices in securities fraud action); Ganino
v. Citizens Utilities Co., 228 F.3d 154, 166 n.8 (2nd Cir. 2000) (same).1

A

Research analysts who study publicly traded companies and make recommendations on the securities of those companies exert considerable influence
in the marketplace. The reports and/or recommendations of such analysts can
influence the price of a company's stock even when nothing about the company's
prospects or fundamentals have changed.

Carolyn Trabuco, who worked for First Union, was one of these research
analysts. She covered internet companies, including Ask Jeeves, whose stock was
traded on the NASDAQ exchange. From November 18, 1999, until November 21,
2000, Ms. Trabuco prepared and issued research reports on Ask Jeeves.

Ask Jeeves began trading on July 1, 1999, and closed at $64.94 that day.
During the next 30 days, the stock fluctuated between a low of $41.56 and a high of
$72.00. On August 2, 1999, the closing price dropped to $41.00 per share. For most
of August of 1999, the stock hovered at around $30.00, and on September 2, 1999,
the price was $31.12. On October 1, 1999, the stock closed at $32.94, but thereafter
began making significant gains. By November 1, 1999, the price had shot up to
$83.31, an increase of about 150% in one month. The stock kept climbing in
November of 1999, breaking the $100 barrier on November 4 at $116.75. On
November 17, 1999, the day before Ms. Trabuco issued her first research report on
Ask Jeeves, the stock reached a high of $190.50, and closed at $171.00.

On November 18, 1999, in her first report on the company, Ms. Trabuco made a "strong buy" recommendation for Ask Jeeves stock and provided a target price of
$230.00 per share. That day the stock closed at $172.75, up $1.75.

Nicolas and Mauro La Grasta -- who were First Union customers -- bought Ask
Jeeves stock based upon Ms. Trabuco's reports. In December of 1999, Nicolas
bought 1,000 shares at $134.88 per share, and Mauro bought 1,000 shares at $124.68
per share. At the time of these purchases, the stock price had already dropped about
$55-$65 per share from the high of $190.50.

In January of 2000, First Union added Ask Jeeves to its "Analyst Action List"
and named the stock as its top pick for internet content providers in 2000. First
Union widely disseminated press releases "to ensure that its top stock pick was
known to all market participants." Shortly thereafter, Domenico La Grasta -- a
Merrill Lynch customer -- bought 500 shares of Ask Jeeves at $93.00 per share. By
the time of Domenico's purchase, the stock had dropped $97 per share -- a more than
50% decrease -- from its high of $190.50 the day before Ms. Trabuco's first report.

That same month, Ms. Trabuco and First Union learned from the chief financial
officer of Ask Jeeves that the company was considering a secondary public offering
of its shares and was interested in retaining First Union. Ms. Trabuco and First Union
continued to maintain the "strong buy" recommendations and high rating for Ask
Jeeves stock in the hope that its investment banking business could be secured. In seeking to generate investment banking profits, First Union encouraged Ms. Trabuco
to ignore her obligations as an analyst and promote Ask Jeeves. In other words, Ms.
Trabuco's goal was to "identify, and position those companies First Union believed
would be capable of generating significant investment banking fees." Whether or not
a company like Ask Jeeves "would be a long-term winner in its respective industry"
was, at best, a secondary concern. Ms. Trabuco -- whose compensation was based in
part on her ability to refer investment banking business -- and First Union had an
incentive to issue "strong buy" recommendations for Ask Jeeves stock; the higher the
price of the stock, the higher the fees that could be generated from an Ask Jeeves
stock offering.

First Union did not disclose these matters in its reports. First Union also did
not disclose any brokerage commissions it was paid (as Ms. Trabuco's employer) for
sales and purchases of Ask Jeeves stock, actual or potential compensation to Ms.
Trabuco based on investment deals she landed or the profitability of First Union's
investment banking division, or any ownership interests in Ask Jeeves held by Ms.
Trabuco, First Union, or First Union employees.

In February of 2000, while First Union continued to recommend Ask Jeeves
as a "strong buy," Nicolas bought 200 more shares at $89.75 per share, and Mauro
bought 1000 more shares at $78.00 per share. That same month, Ask Jeeves filed a $150 million secondary stock offering. Ask Jeeves did not, however, choose First
Union as one of its underwriters.2

B

The price of Ask Jeeves shares did not rise as Ms. Trabuco had predicted in
early 2000. In fact, the stock continued to decline. By March 1, 2000, the price had
fallen to $77.75, and by April 3, 2000, it was down to $55.00. Nevertheless, First
Union issued biweekly reports with "strong buy" recommendations and price targets
"significantly higher" than the prevailing market price of the shares.

On April 7, 2000, the stock reached what would be a monthly high of $56.25.

* * *

Until April 18, 2000, Ms. Trabuco reiterated her "strong buy" recommendation for
Ask Jeeves and maintained her target price at $230.00 per share. The low for the
stock during April of 2000 was $23.75 on April 23. On May 1, 2000, the stock
rebounded, rising more than 50% from the April low to $37.75, but then resumed its
slide, dropping to $20.87 on June 1, 2000.

In June of 2000, Smart Money magazine published an article entitled "Wall
Street Firms Count on their Stock Analysts for Many Things -- But Independent,
Incisive Research Isn't Exactly High on the List Right Now." The article featured
Ms. Trabuco and her coverage of Ask Jeeves, and disclosed that, since January of
2000, First Union had been "in the running" to be selected as the underwriter for Ask
Jeeves' secondary stock offering, with a "potential seven-figure payday." When Ask
Jeeves filed a secondary stock offering of $150 million in February of 2000,
however, it did not select First Union as an underwriter. The article also explained
that analysts like Ms. Trabuco had base salaries of $100,000-$200,000, with their
bonuses determined by "how much trading they bring for the sales force and, more
important, how much business they generate for the firm's investment bankers." On
the conflict of interest issue, Ms. Trabuco said the following in the article: "I've got
three different hats to wear. There's the research, but then there's the banking and marketing. I've got an obligation to all three . . . . You have to pay the bills."

In July of 2000, following the publication of the Smart Money article, the price
of Ask Jeeves stock stayed between $14.00 (July 11) and $21.44 (July 26). In August
of 2000, the stock had a low of $17.31 (August 2) and a high of $28.00 (August 30).
In September of 2000, the price fluctuated between $17.06 (September 27) and
$32.25 (September 5). First Union published Ms. Trabuco's final "strong buy"
recommendation on October 25, 2000. On that day, the stock closed at $10.75.

First Union fired Ms. Trabuco on November 21, 2000. The price of Ask Jeeves
stock was by then at $12.00. Each of the La Grastas sold their shares of Ask Jeeves
stock at a loss after Ms. Trabuco's termination. Nicolas lost around $130,000, Mauro
about $200,000, and Domenico approximately $85,000.

At no time did First Union correct any of Ms. Trabuco's reports, or change or
modify the "strong buy" recommendations. Instead, First Union suspended coverage
of Ask Jeeves. By late December of 2000, Ask Jeeves' stock was at $2.00.

* * *

REVERSED and REMANDED