-1- 05-5132-cv, 05-2593-cv ATSI Commc’ns v. Shaar Fund

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05-5132-cv, 05-2593-cv
ATSI Commc’ns v. Shaar Fund; ATSI Commc’ns v. Wolfson
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
3
August Term 2006 4
(Argued: November 29, 2006 Decided: July 11, 2007) 5
Docket No. 05-5132-cv 6
-------------------------------------------------------x 7
ATSI COMMUNICATIONS, INC., a Delaware Corporation, 8
9
Plaintiff-Appellant, 10
11
- v. - 12
13
THE SHAAR FUND, LTD., SHAAR ADVISORY SERVICES, N.V., RGC 14
INTERNATIONAL INVESTORS, LDC, ROSE GLEN CAPITAL MANAGEMENT, L.P., 15
CORPORATE CAPITAL MANAGEMENT, INTERCARIBBEAN SERVICES LTD., CITCO 16
FUND SVCS., LUC HOLLMAN, SAM LEVINSON, HUGO VAN NEUTEGEM, DECLAN 17
QUILLIGAN, WAYNE BLOCH, GARY KAMINSKY, STEVE KATZNELSON, TRIMARK 18
SECURITIES, INC., LEVINSON CAPITAL MANAGEMENT, and W.J. 19
LANGEVELD, 20
21
Defendants-Appellees, 22
23
MARSHALL CAPITAL SERVICES, LLC., JESUP & LAMONT STRUCTURED 24
FINANCE GROUP, MG SECURITY GROUP, INC., CROWN CAPITAL 25
CORPORATION, JOHN DOES 1-50, KENNETH E. GARDINER, NATHAN LIHON, 26
and SEI INVESTMENT CO., 27
28
Defendants. 29
30
-------------------------------------------------------x 31
32
Docket No. 05-2593-cv 33
34
-------------------------------------------------------x 35
36
ATSI COMMUNICATIONS, INC., a Nevada Corporation, 37
38

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Plaintiff-Appellant, 1
2
- v. - 3
4
URI WOLFSON, 5
6
Defendant-Appellee, 7
8
SAM LEVINSON, 9
10
Defendant. 11
12
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B e f o r e : JACOBS, Chief Judge, WALKER and RAGGI, Circuit 14
Judges. 15
16
Appeals from judgments of the United States District Court 17
for the Southern District of New York (Lewis A. Kaplan, Judge), 18
dismissing plaintiff ATSI Communications, Inc.’s complaints 19
alleging, inter alia, securities fraud in violation of § 10(b) of 20
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated 21
thereunder. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 357 F. 22
Supp. 2d 712 (S.D.N.Y. 2005). 23
AFFIRMED. 24
THOMAS I. SHERIDAN III (Andrea 25
Bierstein, Melissa C. Welch, on the 26
brief), Hanly Conroy Bierstein & 27
Sheridan LLP, New York, New York, 28
for ATSI Communications, Inc. 29
JONATHAN M. SPERLING (Amanda J. 30
Gourdine, on the brief), Covington 31
& Burling, New York, New York, for 32
The Shaar Fund, Ltd., Shaar 33
Advisory Services, N.V., Levinson 34
Capital Management, Sam Levinson, 35
and Uri Wolfson. 36

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J. KEVIN MCCARTHY (Joanne L. 1
Monteavaro, on the brief), Wilmer 2
Cutler Pickering Hale and Door LLP, 3
New York, New York, for Rose Glen 4
Capital Management, L.P., RGC 5
International Investors, LDC, Wayne 6
Bloch, Gary Kaminsky, and Steven 7
Katznelson. 8
DAVID G. CABRALES (W. Scott 9
Hastings, Jeffrey A. Logan, on the 10
brief), Locke Liddell & Sapp LLP, 11
Dallas, Texas; Cahill Gordon & 12
Reindel LLP (Thorn Rosenthal, Janet 13
A. Beer, on the brief), New York, 14
New York, for Trimark Securities, 15
Inc. 16
MICHAEL J. DELL (Elaine Golin, on 17
the brief), Kramer Levin Naftalis & 18
Frankel LLP, New York, New York, 19
for Citco Fund Services (Curaçao) 20
N.V., InterCaribbean Services, 21
Ltd., Hugo van Neutegem, Wim 22
Langeveld, Luc Hollman, and Declan 23
Quilligan. 24
Berkman, Henoch, Peterson & Peddy, 25
P.C. (Ronald M. Terenzi, on the 26
brief), Garden City, New York, for 27
Corporate Capital Management. 28
29
JOHN M. WALKER, JR., Circuit Judge: 30
These appeals arise from judgments of the United States 31
District Court for the Southern District of New York (Lewis A. 32
Kaplan, Judge), dismissing plaintiff ATSI Communications, Inc.’s 33
(“ATSI”) complaints under Fed. R. Civ. P. 12(b)(6) in two 34
separate actions arising from the same events. ATSI Commc’ns, 35
Inc. v. Shaar Fund, Ltd., 357 F. Supp. 2d 712 (S.D.N.Y. 2005). 36
ATSI alleges that the defendants made misrepresentations in 37

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connection with securities transactions and engaged in market 1
manipulation in violation of § 10(b) of the Securities Exchange 2
Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 3
promulgated thereunder, 17 C.F.R. § 240.10b-5, or were liable as 4
control persons under § 20(a) of the Exchange Act, 15 U.S.C. § 5
78t(a). ATSI claims that the defendants fraudulently induced it 6
to sell to them its convertible preferred stock. The defendants 7
then aggressively short sold ATSI’s common stock and converted 8
the preferred stock to cover their short positions. The alleged 9
consequence was a “death spiral” in the price of ATSI’s stock and 10
enormous profit for the defendants. 11
We affirm the judgments of the district court. 12
BACKGROUND 13
The following facts are taken from ATSI’s complaints and 14
supporting documents, which we must assume to be true in 15
reviewing a Fed. R. Civ. P. 12(b)(6) dismissal. See Rothman v. 16
Gregor, 220 F.3d 81, 88 (2d Cir. 2000). 17
A. ATSI and Its Efforts to Raise Money 18
ATSI was founded in December 1993 and hoped to become a 19
leading provider of retail communications services in Mexico in 20
the wake of the deregulation and privatization in Latin America’s 21
telecommunications markets. It never turned a profit. By 1999, 22
ATSI needed an infusion of capital to expand its U.S. customer 23
base and further develop its telephone network in Mexico. 24

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To raise money, ATSI issued four series of cumulative 1
convertible preferred stock (“Preferred Stock”): Series B, C, D, 2
and E. Each transaction included a Securities Purchase 3
Agreement, a Certificate of Designation, and a Registration 4
Rights Agreement. Each series included a risk-mitigating 5
conversion feature that worked as follows. Upon conversion, a 6
“Market Price” was calculated as the average of the lowest five 7
closing bid prices during the ten-day period preceding the 8
conversion date. The “Conversion Price” was calculated as the 9
lesser of (1) the closing bid price on a trading day fixed by the 10
Certificate of Designation and (2) the Market Price discounted by 11
17% to 22% depending upon the series. ATSI would then issue a 12
number of shares of common stock equal to (1) the number of 13
shares of Preferred Stock to be converted (2) multiplied by the 14
Preferred Stock’s stated value of $1,000 per share (3) divided by 15
the Conversion Price. Because there is no limit on the number of 16
common shares into which the Preferred Stock could convert, 17
securities such as these are called “floorless” convertibles. 18
The obvious inference from ATSI’s sale of these securities is 19
that these unfavorable terms were necessary to attract investors 20
because ATSI was continuously losing money. In fact, ATSI 21
acknowledged that in light of its financial condition, it might 22
“not be able to raise money on any acceptable terms.” American 23
Telesource International, Inc., Annual Report (Form 10-K), at 16 24
(July 31, 2000). 25

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1. Sales to the Levinson Defendants 1
On a “road show” in Dallas, Texas in March 1999, defendant 2
Corporate Capital Management (“CCM”) introduced ATSI executives 3
to defendant Sam Levinson, the managing director of Levinson 4
Capital and the Shaar Fund. Shaar Advisory Services, N.V. 5
(“Shaar Advisory”) served as executive officer and general 6
partner of the Shaar Fund. Defendant Uri Wolfson controls the 7
Shaar Fund. Collectively, Levinson, Levinson Capital, the Shaar 8
Fund, and Shaar Advisory constitute the “Levinson Defendants.” 9
During a May 1999 telephone conversation, CCM told ATSI that 10
the Shaar Fund had invested in several strong, successful 11
companies and that the Levinson Defendants were interested in 12
ATSI’s long-term growth. During a June meeting, Levinson told 13
ATSI, inter alia, that the Levinson Defendants sought a long-term 14
investment in ATSI and would not engage in any activity to 15
depress its stock. ATSI claims that all of these representations 16
were false and misleading because CCM and Levinson knew otherwise 17
and the Levinson Defendants were actually market manipulators 18
that profited at the expense of the companies in which they 19
invested. 20
Over the next six months, ATSI entered into the following 21
securities transactions with the Shaar Fund. 22
Transaction 23
Date 24
# of Preferred
Shares
Purchased
# of Warrants
Purchased
Total Purchase
Price

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July 2, 1999 1 2,000 Series B 50,000 $2,000,000
Sept. 24, 1999 2 500 Series C 20,000 $500,000
Feb. 22, 2000 3 3,000 Series D 150,000 $3,000,000
The Securities Purchase Agreement for each transaction 4
included written representations that: 5
1. The Shaar Fund was an “accredited investor” within the 6
meaning of Rule 501 of Regulation D under the 7
Securities Act of 1933; and 8
2. “Neither [the Shaar Fund] nor its affiliates nor any 9
person acting on its or their behalf has the intention 10
of entering, or will enter into, prior to the closing, 11
any put option, short position, or other similar 12
instrument or position with respect to the Common Stock 13
[of ATSI] and neither [the Shaar Fund] nor any of its 14
affiliates nor any person acting on its or their behalf 15
will use at any time shares of Common Stock acquired 16
pursuant to this Agreement to settle any put option, 17
short position or other similar instrument or position 18
that may have been entered into prior to the execution 19
of this Agreement.” 20
ATSI claims that these representations were false because 21
(1) the Shaar Fund’s net worth was not high enough to meet the 22
requirements for being an accredited investor and (2) the Shaar 23
Fund intended to engage, and did engage, in short selling and 24

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manipulation of ATSI’s stock before, during, and after entering 1
into these agreements. 2
The Registration Rights Agreement in each transaction 3
contained a merger clause stating that: 4
There are no restrictions, promises, warranties, or 5
undertakings, other than those set forth or referred to 6
herein. This Agreement, the Securities Purchase 7
Agreement, the Escrow Instructions, the Preferred 8
Shares and the Warrants supersede all prior agreements 9
and undertakings among the parties hereto with respect 10
to the subject matter hereof. 11
12
The Registration Rights Agreements contemplated that the 13
Shaar Fund would soon sell its converted common stock into the 14
public markets. They required ATSI to use its “best efforts” to 15
register the common stock to be issued upon conversion of the 16
Preferred Stock within 90 days of closing and to take all 17
reasonable steps to help the Shaar Fund sell the common stock. 18
They also imposed, at most, a 90-day holding period before the 19
Shaar Fund could convert its Preferred Stock. The only 20
restriction upon the Shaar Fund’s ability to sell the common 21
stock was if ATSI notified it of a material misstatement in the 22
stock’s prospectus. 23
2. Sales to Rose Glen 24
In September 1999, ATSI decided to issue $15 million in its 25
equity to fund an acquisition. Defendant Crown Capital 26
Corporation (“Crown Capital”), acting as placement agent, 27
recommended defendants RGC International Investors, LDC, and Rose 28
Glen Capital Management, L.P. Defendants Wayne Bloch, Gary 29

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Kaminsky, and Steve Katznelson were employees of Rose Glen 1
Capital Management. We refer collectively to all of these 2
defendants as “Rose Glen.” 3
During negotiations, Rose Glen allegedly made false verbal 4
representations similar to those made by the Levinson Defendants. 5
On September 27, 2000, Rose Glen submitted a draft term 6
sheet to ATSI offering a $10 million investment. ATSI claims 7
that it then fell victim to a bait-and-switch when, on October 8
16, 2000, Rose Glen submitted closing documents providing for 9
only a $2.5 million investment in Series E Preferred Stock, with 10
a promise of further investment of up to $10 million if certain 11
conditions were met. ATSI says it was forced to accept these 12
terms because it was required to pay $2 million to vendors in 13
Mexico the next day. ATSI sold Rose Glen additional Series E 14
Preferred Stock in March and July of 2001. 15
The Purchase Agreement pursuant to which these securities 16
were sold included two representations by Rose Glen that ATSI 17
claims to be false on the same basis as the Levinson 18
representations: 19
1. Rose Glen was an accredited investor; and 20
2. Rose Glen was purchasing the Preferred Stock and common 21
stock issuable upon conversion: 22
for its own account and not with a present view 23
towards the public sale or distribution thereof 24
except pursuant to sales registered or exempted 25
from registration under the 1933 Act; provided, 26
however that by making the representation herein, 27

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1 An investor sells short when he sells a security that he does
not own by borrowing the security, typically from a broker. See
Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir. 1998).
At a later date, he “covers” his short position by purchasing the
security and returning it to the lender. Id. A short seller
speculates that the price of the security will drop. Id. If the
price drops, the investor profits by covering for less than the
short sale price. Id. If, on the other hand, the price
increases, the investor takes a loss. A short seller’s potential
losses are limitless because there is no ceiling on how high the
stock price may rise.
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the Buyer does not agree to hold any of the 1
Securities for any minimum or other specific term 2
and reserves the right to dispose of the 3
Securities at any time in accordance with or 4
pursuant to a registration statement or exemption 5
under the 1933 Act. 6
7
The Registration Rights Agreements also contained a merger clause 8
similar to the one in the Shaar Fund transaction documents. 9
B. The “Death Spiral” Financing Manipulation Scheme 10
In addition to these misrepresentations, ATSI claims that 11
all of the defendants manipulated the market in ATSI’s common 12
stock by bringing about a “death spiral” in the price of ATSI’s 13
common stock. The scheme, as alleged, worked as follows. The 14
shareholder would short sell the victim’s common stock to drive 15
down its price.1 He then converts his convertible securities 16
into common stock and uses that common stock to cover his short 17
position. The convertible securities allow a manipulator to 18
increase his profits by allowing him to cover with discounted 19
common shares not obtained on the open market, to rely on the 20
convertible securities as a hedge against the risk of loss, and 21
to dilute existing common shares, resulting in a further decline 22

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in stock price. ATSI was aware of the risk of dilution; for 1
example, it disclosed in the registration statement on its Form 2
S-3 that it expected the Shaar Fund to convert shortly after the 3
registration became effective and that future issuances of 4
Preferred Stock would put downward pressure on and dilute its 5
common stock. 6
ATSI accuses the Levinson Defendants, Wolfson, and Rose Glen 7
of deliberately causing a “death spiral” in its common stock. 8
The Shaar Fund began converting its Preferred Stock shortly after 9
it was contractually permitted to do so. During the first two 10
quarters of fiscal year 2000, it had converted all of its Series 11
B shares into approximately 2.6 million common shares. Although 12
ATSI’s April 14, 2000 Form S-3 states that the Shaar Fund sold 13
the common stock, the complaints do not allege any such sales. 14
Between December 12, 2000 and January 23, 2002, the Shaar Fund 15
converted its Series D shares into 8,331,454 shares of ATSI 16
common stock. Between March 8, 2001 and August 14, 2002, Rose 17
Glen converted its Preferred Stock into over nineteen million 18
shares of common stock. 19
ATSI does not allege any specific acts of short selling by 20
the Levinson Defendants, but it includes circumstantial 21
allegations. It alleges that searches in the SEC’s Edgar 22
database reveal that of the 38 companies that reported the 23
Levinson Defendants as investors, 30 experienced stock price 24

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declines indicative of a “death spiral” financing scheme. Its 1
allegations against Rose Glen are of like kind. 2
ATSI also relies on the magnitude and timing of changes in 3
its stock price and trading volume. At the time of the Series B 4
transaction in July 1999, its stock traded at $1.50 per share. 5
Two months later, it traded at $1.08 per share. In February 6
2000, the Series D Preferred Stock purchase was preceded by a 7
significant increase in the daily trading volume of ATSI’s shares 8
and a dramatic rise in ATSI’s share price to $9 per share 9
(perhaps not coincidentally as ATSI listed its stock on the 10
American Stock Exchange (“AMEX”) during that period). April 2000 11
saw massive stock sales and large price declines in ATSI’s stock. 12
For example, between April 13, 2000 and April 18, 2000 – during 13
which time ATSI filed a registration statement for the common 14
stock into which the Series C and D Preferred Stock would convert 15
– the price fell from $6.50 per share to $3.62 per share on heavy 16
volume. ATSI claims that these price movements could only have 17
resulted from sales by the Levinson Defendants, despite 18
Levinson’s claim that the Shaar Fund was not selling. 19
ATSI’s stock price climbed up to $6 per share by early-June 20
2000. On September 8, 2000, ATSI’s registration of common stock 21
for the Series C and D Preferred Stock became effective and, by 22
November 28, 2000, its price had fallen to $0.75 per share, and 23
plummeted to $0.09 per share on August 16, 2002. 24

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In addition to these price fluctuations, ATSI relies more 1
specifically on price movements and trading volume around the 2
time that the Shaar Fund and Rose Glen converted their Series D 3
and E Preferred Stock, which worked to their benefit. ATSI 4
further points to instances where its stock price reacted 5
negatively to positive news. ATSI also points to a 10-trading- 6
day period between December 31, 2002 and January 14, 2003 in 7
which Depository Trust Company records show that over eight 8
million shares were traded in excess of settlement, which it 9
claims could only result from sham trading. 10
C. Other Defendants 11
ATSI alleges that any manipulation had to involve defendant 12
Trimark Securities, Inc. (“Trimark”), which served as the 13
principal market maker in ATSI’s stock. 14
ATSI also alleges that several defendants, hereinafter 15
referred to as the “Citco Defendants,” caused the Shaar Fund to 16
engage in the charged misconduct. Defendant Citco Fund Services 17
(Curaçao) N.V. is the parent of defendant InterCaribbean 18
Services, Ltd., the Shaar Fund’s sole director. Declan Quilligan 19
is a director of InterCaribbean. W.J. Langeveld, Hugo Van 20
Neutegem, and Luc Hollman served as Managing Directors of Shaar 21
Advisory. 22
D. ATSI’s Demise 23

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Telecom stocks were generally hard-hit during the period in 1
which ATSI alleges manipulation. Between February 22, 2000 (the 2
date on which ATSI issued the Series D Preferred Stock) and 3
October 31, 2002 (the date on which ATSI filed its first suit), 4
the AMEX North American Telecom Index (of which ATSI’s stock was 5
not a component) dropped by 73%. When ATSI filed its complaint, 6
its stock traded at $0.02 per share. Its financial impairment 7
has rendered it unable to raise capital to maintain or expand its 8
business. 9
E. ATSI’s Claims and Procedural History 10
ATSI claims that the Levinson Defendants, Wolfson, 11
Langeveld, Rose Glen, CCM, and Crown Capital are liable for 12
misrepresentations under § 10(b) and Rule 10b-5; that these same 13
defendants and Trimark are also liable for market manipulation in 14
violation of Rule 10b-5; and that the Citco Defendants and others 15
not relevant to this appeal are liable as control persons under § 16
20(a). ATSI also asserts various state law claims. 17
ATSI filed its complaint in the first suit in October 2002 18
against all defendants except Wolfson (“ATSI I”). In March 2004, 19
the district court dismissed ATSI’s first amended complaint 20
against the Levinson Defendants and Rose Glen for failing to 21
satisfy the pleading requirements of Fed. R. Civ. P. 9(b) and the 22
Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 23
78u-4(b). It dismissed as to the other defendants for improper 24
service and lack of personal jurisdiction. Second and third 25

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amended complaints followed and, in July 2004, ATSI filed a 1
largely identical complaint against Levinson and Wolfson in a 2
separate suit (“ATSI II”). In February 2005, the district court 3
dismissed the third amended complaint in ATSI I under Fed. R. 4
Civ. P. 12(b)(6) with prejudice for again failing to satisfy Rule 5
9(b) and the PSLRA’s pleading requirements. See ATSI Commc’ns, 6
357 F. Supp. 2d at 720. Because subject matter jurisdiction was 7
based solely on ATSI’s federal claims, the district court did not 8
separately consider the state law causes of action. The district 9
court entered judgment under Fed. R. Civ. P. 54(b), and the 10
parties in ATSI II stipulated to dismissal based on the district 11
court’s order in ATSI I. 12
ATSI’s timely appeals followed. 13
DISCUSSION 14
I. Legal Standards 15
We review a district court’s dismissal of a complaint 16
pursuant to Fed. R. Civ. P. 12(b)(6) de novo, accepting all 17
factual allegations in the complaint and drawing all reasonable 18
inferences in the plaintiff’s favor. Ganino v. Citizens Utils. 19
Co., 228 F.3d 154, 161 (2d Cir. 2000). In addition, we may 20
consider any written instrument attached to the complaint, 21
statements or documents incorporated into the complaint by 22
reference, legally required public disclosure documents filed 23
with the SEC, and documents possessed by or known to the 24

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2 We have declined to read Twombly’s flexible “plausibility
standard” as relating only to antitrust cases. See Iqbal v.
Hasty, - F.3d -, 2007 WL 1717803, at *11 (2d Cir. June 14, 2007).
“Some of [Twombly’s] language relating generally to Rule 8
pleading standards seems to be so integral to the rationale of
the Court’s parallel conduct holding as to constitute a necessary
part of that holding.” Id.
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plaintiff and upon which it relied in bringing the suit. 1
Rothman, 220 F.3d at 88. To survive dismissal, the plaintiff 2
must provide the grounds upon which his claim rests through 3
factual allegations sufficient “to raise a right to relief above 4
the speculative level.”2 Bell Atl. Corp. v. Twombly, 127 S. Ct. 5
1955, 1965 (2007). Once a claim has been adequately stated, it 6
may be supported by showing any set of facts consistent with the 7
allegations in the complaint. Id. at 1969. 8
Securities fraud claims are subject to heightened pleading 9
requirements that the plaintiff must meet to survive a motion to 10
dismiss. First, a complaint alleging securities fraud must 11
satisfy Rule 9(b), Ganino, 228 F.3d at 168, which requires that 12
“the circumstances constituting fraud . . . shall be stated with 13
particularity,” Fed. R. Civ. P. 9(b). This pleading constraint 14
serves to provide a defendant with fair notice of a plaintiff’s 15
claim, safeguard his reputation from improvident charges of 16
wrongdoing, and protect him against strike suits. Rombach v. 17
Chang, 355 F.3d 164, 171 (2d Cir. 2004). A securities fraud 18
complaint based on misstatements must (1) specify the statements 19
that the plaintiff contends were fraudulent, (2) identify the 20

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3 In a Rule 10b-5 action, scienter requires a showing of “intent
to deceive, manipulate, or defraud,” Ernst & Ernst v. Hochfelder,
425 U.S. 185, 194 n.12 (1976), or reckless conduct, In re Carter-
Wallace, Inc. Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000); SEC v.
U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998) (stating in
dicta that reckless behavior is sufficient to plead scienter).
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speaker, (3) state where and when the statements were made, and 1
(4) explain why the statements were fraudulent. Novak v. Kasaks, 2
216 F.3d 300, 306 (2d Cir. 2000). Allegations that are 3
conclusory or unsupported by factual assertions are insufficient. 4
See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). 5
Second, private securities fraud actions must also meet the 6
PSLRA’s pleading requirements or face dismissal. See 15 U.S.C. § 7
78u-4(b)(3)(A). In pleading scienter in an action for money 8
damages requiring proof of a particular state of mind, “the 9
complaint shall, with respect to each act or omission alleged to 10
violate this chapter, state with particularity facts giving rise 11
to a strong inference that the defendant acted with the required 12
state of mind.”3 Id. § 78u-4(b)(2). The plaintiff may satisfy 13
this requirement by alleging facts (1) showing that the 14
defendants had both motive and opportunity to commit the fraud or 15
(2) constituting strong circumstantial evidence of conscious 16
misbehavior or recklessness. Ganino, 228 F.3d at 168-69. 17
Moreover, “in determining whether the pleaded facts give rise to 18
a ‘strong’ inference of scienter, the court must take into 19
account plausible opposing inferences.” Tellabs, Inc. v. Makor 20
Issues & Rights, Ltd., – S. Ct. –, 2007 WL 1773208, at *10 (June 21

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21, 2007). For an inference of scienter to be strong, “a 1
reasonable person [must] deem [it] cogent and at least as 2
compelling as any opposing inference one could draw from the 3
facts alleged.” Id. (emphasis added). 4
If the plaintiff alleges a false statement or omission, the 5
PSLRA also requires that “the complaint shall specify each 6
statement alleged to have been misleading, the reason or reasons 7
why the statement is misleading, and, if an allegation regarding 8
the statement or omission is made on information and belief, the 9
complaint shall state with particularity all facts on which that 10
belief is formed.” 15 U.S.C. § 78u-4(b)(1). 11
II. ATSI’s Market Manipulation Claims 12
A. Market Manipulation and Short Selling 13
Section 10(b), in proscribing the use of a “manipulative or 14
deceptive device or contrivance,” id. § 78j(b), prohibits not 15
only material misstatements but also manipulative acts. Cent. 16
Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 17
511 U.S. 164, 177 (1994). Under the statute: 18
“Manipulation” is “virtually a term of art when used in 19
connection with securities markets.” The term refers 20
generally to practices, such as wash sales, matched 21
orders, or rigged prices, that are intended to mislead 22
investors by artificially affecting market activity. 23
Section 10(b)’s general prohibition of practices deemed 24
by the SEC to be “manipulative” – in this technical 25
sense of artificially affecting market activity in 26
order to mislead investors – is fully consistent with 27
the fundamental purpose of the [Exchange] Act “to 28
substitute a philosophy of full disclosure for the 29
philosophy of caveat emptor . . . .” 30
31

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Sante Fe Indus. v. Green, 430 U.S. 462, 476-77 (1977) (alteration 1
in original) (citations omitted). Thus, manipulation “connotes 2
intentional or willful conduct designed to deceive or defraud 3
investors by controlling or artificially affecting the price of 4
securities.” Ernst & Ernst, 425 U.S. at 199. The critical 5
question then becomes what activity “artificially” affects a 6
security’s price in a deceptive manner. 7
Although not explicitly described as such, case law in this 8
circuit and elsewhere has required a showing that an alleged 9
manipulator engaged in market activity aimed at deceiving 10
investors as to how other market participants have valued a 11
security. The deception arises from the fact that investors are 12
misled to believe “that prices at which they purchase and sell 13
securities are determined by the natural interplay of supply and 14
demand, not rigged by manipulators.” Gurary v. Winehouse, 190 15
F.3d 37, 45 (2d Cir. 1999); see also Mobil Corp. v. Marathon Oil 16
Co., 669 F.2d 366, 374 (6th Cir. 1981) (stating that the Supreme 17
Court has indicated that manipulation under § 10(b) refers to 18
“means unrelated to the natural forces of supply and demand”); 19
cf. Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986) 20
(agreeing with the SEC that “[w]hen individuals occupying a 21
dominant market position engage in a scheme to distort the price 22
of a security for their own benefit, they violate the securities 23
laws by perpetrating a fraud on all public investors”); Crane Co. 24
v. Westinghouse Air Brake Co., 419 F.2d 787, 796 (2d Cir. 1969) 25

-- 19 of 40 --

4 The efficient capital market hypothesis, as adopted by the
Supreme Court, posits that “the market price of shares traded on
well-developed markets reflects all publicly available
information.” See Basic Inc. v. Levinson, 485 U.S. 224, 246 &
n.24 (1988).
-20-
(holding that nondisclosure of large open market purchases 1
combined with large secret sales to deter stockholders from 2
participating in a competing tender offer violated Rule 10b-5 by 3
“distort[ing] the market picture and deceiv[ing] the [issuer’s] 4
stockholders”). 5
In identifying activity that is outside the “natural 6
interplay of supply and demand,” courts generally ask whether a 7
transaction sends a false pricing signal to the market. For 8
example, the Seventh Circuit recognizes that one of the 9
fundamental goals of the federal securities laws is “to prevent 10
practices that impair the function of stock markets in enabling 11
people to buy and sell securities at prices that reflect 12
undistorted (though not necessarily accurate) estimates of the 13
underlying economic value of the securities traded,” and thus 14
looks to the charged activity’s effect on capital market 15
efficiency.4 See Sullivan & Long, Inc. v. Scattered Corp., 47 16
F.3d 857, 861 (7th Cir. 1995). The Seventh Circuit’s focus on 17
disruptions to the efficient pricing of a security is consistent 18
with our view that in preventing market rigging, § 10(b) seeks a 19
market where “competing judgments of buyers and sellers as to the 20
fair price of the security brings about a situation where the 21

-- 20 of 40 --

-21-
market price reflects as nearly as possible a just price.” SEC 1
v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996) 2
(quoting H.R. Rep. No. 73-1383, at 11 (1934)). In an efficient 3
market, trading engineered to stimulate demand can mislead 4
investors into believing that the market has discovered some 5
positive news and seeks to exploit it, see In re Initial Pub. 6
Offering Sec. Litig., 383 F. Supp. 2d 566, 579 (S.D.N.Y. 2005), 7
aff’d Tenney v. Credit Suisse First Boston Corp., No. 05-3450-cv, 8
2006 WL 1423785 (2d Cir. May 19, 2006); the duped investors then 9
transact accordingly. To prevent this deleterious effect on the 10
capital markets, the Third Circuit distinguishes manipulative 11
from legal conduct by asking whether the manipulator “inject[ed] 12
inaccurate information into the marketplace or creat[ed] a false 13
impression of supply and demand for the security . . . for the 14
purpose of artificially depressing or inflating the price of the 15
security.” GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 16
207 (3d Cir. 2001); see also Jones v. Intelli-Check, Inc., 274 F. 17
Supp. 2d 615, 627-28 (D.N.J. 2003). 18
Market manipulation is forbidden regardless of whether there 19
is a fiduciary relationship between the transaction participants. 20
See United States v. Russo, 74 F.3d 1383, 1391-92 (2d Cir. 1996); 21
United States v. Regan, 937 F.2d 823, 829 (2d Cir. 1991). A 22
market manipulation claim, however, cannot be based solely upon 23
misrepresentations or omissions. Lentell v. Merrill Lynch & Co., 24
396 F.3d 161, 177 (2d Cir. 2005). There must be some market 25

-- 21 of 40 --

-22-
activity, such as “wash sales, matched orders, or rigged prices.” 1
See Sante Fe, 430 U.S. at 476. 2
Furthermore, short selling – even in high volumes – is not, 3
by itself, manipulative. GFL, 272 F.3d at 209. Aside from 4
providing market liquidity, short selling enhances pricing 5
efficiency by helping to move the prices of overvalued securities 6
toward their intrinsic values. See id. at 208; Sullivan & Long, 7
47 F.3d at 861-62 (discussing the defendants’ short sales as 8
arbitrage that eliminates disparities between price and value); 9
In re Scattered Corp. Sec. Litig., 844 F. Supp. 416, 420 (N.D. 10
Ill. 1994); John D. Finnerty, Short Selling, Death Spiral 11
Convertibles, and the Profitability of Stock Manipulation 2-3 12
(Mar. 2005), available at http://www.sec.gov/rules/petitions/4- 13
500/jdfinnerty050505.pdf; Ralph S. Janvey, Short Selling, 20 Sec. 14
Reg. L.J. 270, 272 (1992). In essence, taking a short position 15
is no different than taking a long position. To be actionable as 16
a manipulative act, short selling must be willfully combined with 17
something more to create a false impression of how market 18
participants value a security. Similarly, purchasing a floorless 19
convertible security is not, by itself or when coupled with short 20
selling, inherently manipulative. Such securities provide 21
distressed companies with access to much-needed capital and, so 22
long as their terms are fully disclosed, can provide a 23
transparent hedge against a short sale. 24
B. Pleading Market Manipulation 25

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-23-
Market manipulation requires a plaintiff to allege (1) 1
manipulative acts; (2) damage (3) caused by reliance on an 2
assumption of an efficient market free of manipulation; (4) 3
scienter; (5) in connection with the purchase or sale of 4
securities; (6) furthered by the defendant’s use of the mails or 5
any facility of a national securities exchange. See Schnell v. 6
Conseco, Inc., 43 F. Supp. 2d 438, 448 (S.D.N.Y. 1999); Cowen & 7
Co. v. Merriam, 745 F. Supp. 925, 929 (S.D.N.Y. 1990). 8
Because a claim for market manipulation is a claim for 9
fraud, it must be pled with particularity under Rule 9(b). See 10
Internet Law Library, Inc. v. Southridge Capital Mgmt., 223 F. 11
Supp. 2d 474, 486 (S.D.N.Y. 2002); U.S. Envtl., 82 F. Supp. 2d at 12
239; see also Rooney Pace, Inc. v. Reid, 605 F. Supp. 158, 162-63 13
(S.D.N.Y. 1985) (applying Rule 9(b) to a market manipulation 14
claim). A claim of manipulation, however, can involve facts 15
solely within the defendant’s knowledge; therefore, at the early 16
stages of litigation, the plaintiff need not plead manipulation 17
to the same degree of specificity as a plain misrepresentation 18
claim. See Internet Law Library, 223 F. Supp. 2d at 486; U.S. 19
Envtl., 82 F. Supp. 2d at 240; cf. Romach, 355 F.3d at 175 n.10 20
(relaxing the standard where information was likely to be in the 21
exclusive control of the defendants and analysts). 22
Accordingly, a manipulation complaint must plead with 23
particularity the nature, purpose, and effect of the fraudulent 24
conduct and the roles of the defendants. See In re Blech Sec. 25

-- 23 of 40 --

-24-
Litig., 928 F. Supp. 1279, 1291 (S.D.N.Y. 1996) (adopting this 1
test as set forth in the unpublished decision Baxter v. A.R. 2
Baron & Co., No. 94 Civ. 3913, 1995 WL 600720 (S.D.N.Y. Oct. 12, 3
1995)); see also Compudyne Corp. v. Shane, 453 F. Supp. 2d 807, 4
821 (S.D.N.Y. 2006); U.S. Commodity Futures Trading Comm’n v. 5
Bradley, 408 F. Supp. 2d 1214, 1222 (N.D. Okla. 2005) (market 6
manipulation under the Commodity Exchange Act); Fezzani v. Bear, 7
Stearns & Co., 384 F. Supp. 2d 618, 642 (S.D.N.Y. 2004); In re 8
Royal Ahold N.V. Sec. & ERISA Litig., 351 F. Supp. 2d 334, 372 9
(D. Md. 2004); Log On Am., Inc. v. Promethean Asset Mgmt., 223 F. 10
Supp. 2d 435, 445 (S.D.N.Y. 2001); U.S. Envtl., 82 F. Supp. 2d at 11
240; In re Blech Sec. Litig., 961 F. Supp. 569, 580 (S.D.N.Y. 12
1997). But see Intelli-Check, 274 F. Supp. 2d at 629 13
(articulating requirements for a less stringent pleading standard 14
in the Third Circuit). General allegations not tied to the 15
defendants or resting upon speculation are insufficient. This 16
test will be satisfied if the complaint sets forth, to the extent 17
possible, “what manipulative acts were performed, which 18
defendants performed them, when the manipulative acts were 19
performed, and what effect the scheme had on the market for the 20
securities at issue.” Baxter, 1995 WL 600720, at *6; see 21
also Miller v. Lazard Ltd., 473 F. Supp. 2d 571, 587 (S.D.N.Y. 22
2007); In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d 23
216, 270 (E.D.N.Y. 2002); Blech, 961 F. Supp. at 580. This 24
standard meets the goals of Rule 9(b) while also considering 25

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-25-
which specific facts a plaintiff alleging manipulation can 1
realistically plead at this stage of the litigation. 2
Because a claim for market manipulation requires a showing 3
of scienter, the PSLRA’s heightened standards for pleading 4
scienter also apply. Therefore, the complaint must plead with 5
particularly facts giving rise to a strong inference that the 6
defendant intended to deceive investors by artificially affecting 7
the market price of securities. See 15 U.S.C. § 78u-4(b)(2); 8
Section II.A, supra. This pleading requirement is particularly 9
important in manipulation claims because in some cases scienter 10
is the only factor that distinguishes legitimate trading from 11
improper manipulation. 12
C. Manipulation by the Levinson Defendants, Wolfson, 13
and Rose Glen 14
ATSI’s allegations that the Levinson Defendants, Wolfson, 15
and Rose Glen manipulated the market are based on (1) high-volume 16
selling of ATSI’s stock with coinciding drops in the stock price, 17
(2) trading patterns around conversion time, (3) the stock’s 18
negative reaction to positive news, and (4) the volume of trades 19
in excess of settlement during a 10-day period in 2003. We agree 20
with the district court that these allegations are inadequate 21
under Rule 9(b). In sum, ATSI has offered no specific 22
allegations that the defendants did anything to manipulate the 23
market; it relies, at best, on speculative inferences. Moreover, 24
ATSI has failed to adequately plead scienter. 25

-- 25 of 40 --

-26-
ATSI’s complaint alleges high-volume selling between April 1
13, 2000 and April 18, 2000, resulting in a 44% decline in stock 2
price. ATSI narrows the list of potential culprits to these 3
defendants because ATSI’s major shareholders said that they were 4
not selling stock, leaving only the defendants with large enough 5
blocks of shares to trade at the observed volumes. These 6
allegations fail to state even roughly how many shares the 7
defendants sold, when they sold them, and why those sales caused 8
the precipitous drop in stock price. And the complaint is devoid 9
of facts supporting ATSI’s belief that these defendants had 10
sufficient shares to engage in the high-volume trading alleged. 11
Even though the complaint alleges trading volumes of up to 1.5 12
million shares per day, ATSI reported in its April 14, 2000 Form 13
S-3 that the Shaar Fund held only 492,308 shares of its common 14
stock. The complaint and relevant documents do not reveal how 15
many shares Wolfson and Rose Glen held. ATSI argues that the 16
Shaar Fund’s 3,000 shares of Series D Preferred Stock were 17
eventually converted into 8.3 million common shares – sufficient 18
to support the observed trading volumes. This allegation does 19
not help ATSI, however, because the complaint states that the 20
Shaar Fund did not begin converting those preferred shares until 21
December 12, 2000, many months after the high-volume selling. 22
The complaint then alleges that there was a drop in ATSI’s 23
stock price in the days leading up to the defendants’ conversion 24
of the Preferred Stock. It alleges that in the absence of 25

-- 26 of 40 --

5 The strength of this broad proposition is questionable. Cf.
United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991)
(“[W]hether a public company’s stock price moves up or down or
stays the same after the filing of a Schedule 13D does not
establish the materiality of the statements made, though stock
movement is a factor the jury may consider relevant.”). For
example, the stock price may not move if the market already knew
about the good news, or if the market believes the news is
overblown or false, or if adverse developments in the company or
industry are anticipated or rumored.
-27-
manipulation, (1) the Reference Price for conversion should 1
approximate the average price during the 30 days prior to the 2
look-back period and (2) that trading volumes during the look- 3
back periods should have been equal to the average for the 4
previous quarter. We agree with the district court’s view that 5
ATSI’s “position is ludicrous.” ATSI Commc’ns, 357 F. Supp. 2d 6
at 719. One does not observe constant prices or trading volumes 7
in the stock markets. Cf. Cent. Nat’l Bank of Mattoon v. U.S. 8
Dep’t of Treasury, 912 F.2d 897, 902 (7th Cir. 1990) (“[T]he 9
value of a company is rarely constant over an entire year . . . 10
.”). 11
The complaint next alleges that manipulation may be inferred 12
from the stock’s negative reaction to positive news. The 13
district court was mistaken in dismissing this circumstance on 14
the grounds that “the announcement concerns events with no 15
apparent connection to the defendants or this case.” ATSI 16
Commc’ns, 357 F. Supp. 2d at 719. The premise of ATSI’s theory 17
is that an issuer’s stock price, in the absence of manipulation, 18
should increase when good news is announced.5 Under such a 19

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-28-
theory, the subject of the news and the defendants do not need to 1
be connected. 2
Nevertheless, this allegation cannot save the complaint 3
because ATSI pleads no particular connection between the negative 4
reaction of the stock price and anything the defendants did. 5
Adopting ATSI’s reasoning would subject large holders of 6
convertible preferred stock to the risk of suit under § 10(b) 7
whenever the stock price does not react to news as the issuer 8
expects. See Rombach, 355 F.3d at 171 (stating that Rule 9(b) 9
serves, inter alia, to safeguard a defendant’s reputation from 10
improvident charges of wrongdoing and protect him against strike 11
suits). 12
Finally, the complaint rests on an inference of manipulation 13
based upon Depository Trust Company records showing that 14
8,256,493 shares were traded in excess of settlements during the 15
10-day period before the AMEX suspended trading of ATSI’s stock. 16
Trading volume increased over this period, yet the percentage of 17
trading volume that settled decreased. ATSI claims that the only 18
plausible explanation is that the trades did not result in any 19
change in beneficial ownership, indicating “wash trades, matched 20
trades, phantom shares, and other manipulative trading.” 21
The inference ATSI asks us to draw is too speculative even 22
on a motion to dismiss. See Segal v. Gordon, 467 F.2d 602, 606, 23
608 (2d Cir. 1972) (holding that “distorted inferences and 24
speculations” could not meet Rule 9(b)’s requirements). Nowhere 25

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-29-
does ATSI particularly allege what the defendants did - beyond 1
simply mentioning common types of manipulative activity - or 2
state how this activity affected the market in ATSI’s stock. 3
This data could easily be the result of internal settlements 4
within broker-dealers that do not involve the Depository Trust 5
Company. Manipulation is also unlikely given that ATSI’s closing 6
share price during this period started at $0.08 per share and 7
ended at $0.08 per share. 8
For similar reasons, none of these allegations, nor anything 9
else in the complaint, meets the PSLRA’s requirements for 10
pleading scienter. See 15 U.S.C. § 78u-4(b)(2). A strong 11
inference of scienter is not raised by alleging that a legitimate 12
investment vehicle, such as the convertible preferred stock at 13
issue here, creates an opportunity for profit through 14
manipulation. See Ganino, 228 F.3d at 168-69. These 15
circumstances are present for any investor in floorless 16
convertibles. Cf. Chill v. Gen. Elec. Co., 101 F.3d 263, 267 & 17
n.5 (2d Cir. 1996) (holding that a generalized motive that an 18
issuer wishes to appear profitable, which could be imputed to any 19
public for-profit enterprise, was insufficiently concrete to 20
infer scienter); In re Alstom SA Sec. Litig., 454 F. Supp. 2d 21
187, 197 (S.D.N.Y. 2006) (stating a similar proposition for 22
corporate insiders). Accordingly, there is a “plausible 23
nonculpable explanation[]” for the defendants’ actions that is 24
more likely than any inference that the defendants intended to 25

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6 Rose Glen and Trimark also argue that ATSI lacks standing to
bring a Rule 10b-5 claim against them because ATSI sold its
Preferred Stock and warrants to the defendants in primary market
transactions and did not transact in the allegedly manipulated
secondary market. Because ATSI’s complaints do not meet the
pleading requirements, we choose not to reach this statutory
standing question. See Coan v. Kaufman, 457 F.3d 250, 256 (2d
Cir. 2006) (“Unlike Article III standing, which ordinarily should
be determined before reaching the merits, statutory standing may
be assumed for the purposes of deciding whether the plaintiff
otherwise has a viable cause of action.” (citations omitted));
see also Official Comm. Of Unsecured Creditors of Worldcom, Inc.
v. SEC, 467 F.3d 73, 80-81 (2d Cir. 2006); cf. Steel Co. v.
Citizens for a Better Env’t, 523 U.S. 83, 97 n.2 (1998).
-30-
manipulate the market, see Tellabs, 2007 WL 1773208, at *10: ATSI 1
and the defendants simply entered into mutually beneficial 2
financing transactions. Further, because ATSI has not adequately 3
pled that the defendants engaged in any short sales or other 4
potentially manipulative activity, there is no circumstantial 5
evidence of manipulative intent. See Ganino, 228 F.3d at 168-69. 6
Accordingly, more specific allegations are required. 7
D. Manipulation Claims Against Trimark 8
The complaint is plainly insufficient in alleging that 9
Trimark engaged in market manipulation.6 It only alleges that 10
Trimark was the principal market maker in ATSI’s stock, that 11
Trimark knew or should have known of the manipulation, and that 12
ATSI “believes” that Trimark was a cooperating broker-dealer. 13
Wholly absent are particular facts giving rise to a strong 14
inference that Trimark acted with scienter in manipulating the 15
market in ATSI’s common stock and any allegations of specific 16

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-31-
acts by Trimark to manipulate the market, much less how those 1
actions might have affected the market. 2
III. ATSI’s Misrepresentation Claims 3
To state a claim under Rule 10b-5 for misrepresentations, a 4
plaintiff must allege that the defendant (1) made misstatements 5
or omissions of material fact, (2) with scienter, (3) in 6
connection with the purchase or sale of securities, (4) upon 7
which the plaintiff relied, and (5) that the plaintiff’s reliance 8
was the proximate cause of its injury. Lentell, 396 F.3d at 172. 9
The district court properly dismissed the misrepresentations 10
claims. 11
A. Levinson Defendants and Wolfson 12
Of the misrepresentations that ATSI claims, we can quickly 13
dispose of all except the two alleged in the transaction 14
agreements. The Registration Rights agreement between ATSI and 15
the Shaar Fund plainly states that the only promises, 16
restrictions, and warranties to the transaction were those set 17
forth in the transaction documents. Where the plaintiff is a 18
sophisticated investor and an integrated agreement between the 19
parties does not include the misrepresentation at issue, the 20
plaintiff cannot establish reasonable reliance on that 21
misrepresentation. See Emergent Capital Inv. Mgmt. v. Stonepath 22
Group, Inc., 343 F.3d 189, 196 (2d Cir. 2003); Dresner v. 23
Utility.com, Inc., 371 F. Supp. 2d 476, 491-93 (S.D.N.Y. 2005). 24
By engaging in these private placements of complex securities, 25

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-32-
ATSI is clearly a sophisticated investor. Accordingly, to the 1
extent ATSI’s causes of action are based on alleged 2
misrepresentations made during negotiations preceding the 3
defendants’ investment, those claims are barred by the merger 4
clauses. 5
1. Promise Not to Short Sell 6
The complaint alleges, on information and belief, a 7
fraudulent misrepresentation by the Shaar Fund in promising, in 8
the Securities Purchase Agreement, not to enter a short position 9
prior to closing or cover a short position entered into prior to 10
execution of the agreement using converted common stock. The 11
complaint fails to sufficiently allege that this representation 12
was false when made. While the failure to carry out a promise in 13
connection with a securities transaction might constitute breach 14
of contract, it “does not constitute fraud unless, when the 15
promise was made, the defendant secretly intended not to perform 16
or knew that he could not perform.” Gurary, 190 F.3d at 44 17
(internal quotation marks omitted). The speculative allegations 18
that the Levinson Defendants and Wolfson engaged in short selling 19
are deficient for the same reasons that they did not establish 20
manipulation. 21
ATSI asks us to infer that the Levinson Defendants never 22
intended to honor this promise because they had previously 23
engaged in “death spiral” financing schemes, as evidenced by the 24
declining stock prices of unspecified companies in which they 25

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-33-
invested. These allegations fail Rule 9(b)’s requirement of 1
stating with particularity why the statement was fraudulent and 2
the PSLRA’s requirement of stating the facts on which a belief is 3
based. The complaint does not specify which companies 4
experienced a decline in share price or when they experienced the 5
decline (other than that they occurred within 1 year of an 6
unspecified time of investment). It also fails to allege with 7
particularity what, if anything, the defendants did to cause the 8
decline; it simply offers a generalized allegation that the 9
defendants engaged in death spiral financing combined with a 10
detailed definition of how death spiral financing works. Cf. 11
United States ex rel. Walsh v. Eastman Kodak Co., 98 F. Supp. 2d 12
141, 147 (D. Mass. 2000) (holding that fraud was not adequately 13
pled under Rule 9(b) where the plaintiff only alleged a method by 14
which the defendants could produce false invoices without 15
specifying instances of false claims arising from false 16
invoices). Holding otherwise would expose investors in start-ups 17
and risky, distressed companies to fraud claims based solely on 18
the (unsurprisingly) poor performance of their portfolios. See 19
Rombach, 355 F.3d at 171. 20
In response, ATSI argues that it adequately identified the 21
defendants’ victims by detailing how the companies could be found 22
by searching the SEC’s publicly-available Edgar database. It 23
also contends that the defendants have personal knowledge of what 24

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-34-
investments they made and when the stock prices of those 1
investments declined. 2
ATSI cannot sufficiently plead fraud by simply providing a 3
method for the defendant to discover the underlying details. If 4
ATSI had access to the details necessary to make these 5
allegations, it must plead them and not just tell the defendants 6
to go find them. 7
We also reject ATSI’s argument that it adequately pled fraud 8
by pointing to the drop in the stock prices of the defendants’ 9
other investments because that information is relevant under Fed. 10
R. Evid. 404(b) and 406 and supports “a reasonable inference of 11
fraud.” No inference of sabotage is available from the 12
circumstance that some (or many) risky investments come to 13
nothing. Moreover, the allegations fail to point to any specific 14
actions by the defendants with respect to those investments and 15
thus fail to establish that the defendants’ promise was 16
fraudulent. To the extent the Southern District of New York’s 17
decision in Internet Law Library, 223 F. Supp. 2d 474, is to the 18
contrary, we reject it. 19
2. Investor Profile Representation 20
ATSI also claims that the representation in the Securities 21
Purchase Agreement that the Shaar Fund was an accredited investor 22
was fraudulent. The complaint does not sufficiently allege loss 23
causation with respect to this misrepresentation. A plaintiff is 24
required to prove both transaction causation (also known as 25

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-35-
reliance) and loss causation. Lentell, 396 F.3d at 172; see also 1
15 U.S.C. § 78u-4(b)(4). Transaction causation only requires 2
allegations that “but for the claimed misrepresentations or 3
omissions, the plaintiff would not have entered into the 4
detrimental securities transaction.” Lentell, 396 F.3d at 172 5
(quoting Emergent Capital, 343 F.3d at 197). Loss causation, by 6
contrast, is the proximate causal link between the alleged 7
misconduct and the plaintiff’s economic harm. See Dura Pharm., 8
Inc. v. Broudo, 544 U.S. 336, 346 (2005); Lentell, 396 F.3d at 9
172. To that end, the plaintiff’s complaint must plead that the 10
loss was foreseeable and caused by the materialization of the 11
risk concealed by the fraudulent statement. See Lentell, 396 12
F.3d at 173. 13
The complaint alleges losses (1) through the tremendous 14
decline in ATSI’s share price, impairing its access to capital 15
and its viability as a business; and (2) by ATSI’s sale of its 16
own stock at depressed prices. It fails, however, to establish 17
any causal connection between those losses and the 18
misrepresentation that the Shaar Fund was an accredited investor. 19
In what appears to be an attempt to meet Lentell’s requirements, 20
ATSI contends that it adequately pled loss causation because the 21
Levinson Defendants made this misrepresentation to induce ATSI to 22
enter into the transaction under the pretense that they were 23
“trustworthy, reputable and long-term investor[s],” and that when 24
the true risk of their plans materialized through their 25

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-36-
manipulative acts, ATSI suffered losses. This allegation might 1
support transaction causation; it fails, however, to show how the 2
fact that the Shaar Fund was not an accredited investor caused 3
any loss. See id. at 174 (“Such an allegation - which is nothing 4
more than a paraphrased allegation of transaction causation - 5
explains why a particular investment was made, but does not speak 6
to the relationship between the fraud and the loss of the 7
investment.” (internal quotation marks omitted)). 8
ATSI is wrong in claiming that these allegations are 9
sufficient to establish loss causation under our decision in 10
Weiss v. Wittcoff, 966 F.2d 109 (2d Cir. 1992) (per curiam). In 11
Weiss, the plaintiff agreed to merge his business with the 12
defendant’s on the latter’s representation that his other company 13
would supply goods and services. Id. at 110. When the defendant 14
sold his other company a year after the transaction, id. at 110, 15
112, the plaintiff’s business suffered subsequent losses from 16
higher costs, id. at 110-11. We held that the complaint 17
adequately pled loss causation because the plaintiff’s losses 18
were “clearly a proximate result of his reliance on defendants’ 19
promises, since defendants’ failure to fulfill those promises 20
foreseeably caused [the business’s] financial condition to 21
deteriorate.” Id. at 111. 22
Weiss is easily distinguishable. There, the complaint 23
established a causal connection between (1) the promise to 24
provide for the business’s needs and (2) the business’s increased 25

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-37-
costs when the promise turned out to be false. See id. ATSI, by 1
contrast, fails to show that the subject of the fraudulent 2
statement proximately caused any loss. See Lentell, 396 F.3d at 3
173 (“Thus to establish loss causation, ‘a plaintiff must allege 4
. . . that the subject of the fraudulent statement or omission 5
was the cause of the actual loss suffered . . . .’” (alteration 6
in original)). 7
B. Misrepresentations by Rose Glen 8
The misrepresentations attributed to Rose Glen suffer from 9
largely the same defects as those against the Levinson 10
Defendants. ATSI cannot claim reliance on Rose Glen’s pre- 11
contractual, verbal representations because of the merger clause 12
in the Registration Rights Agreement. 13
The only representation in the Securities Purchase Agreement 14
that merits discussion is the one in which Rose Glen represented 15
that it was purchasing the Preferred Stock: 16
for its own account and not with a present view towards 17
the public sale or distribution thereof except pursuant 18
to sales registered or exempted from registration under 19
the 1933 Act; provided, however that by making the 20
representation herein, the Buyer does not agree to hold 21
any of the Securities for any minimum or other specific 22
term and reserves the right to dispose of the 23
Securities at any time in accordance with or pursuant 24
to a registration statement or an exemption under the 25
1933 Act. 26
27
In addition to failing to plead falsity under Gurary, ATSI’s 28
complaint fails to plead that Rose Glen even broke this promise, 29
much less that it secretly intended to break it. 30

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-38-
ATSI also alleges that Rose Glen engaged in a bait-and- 1
switch scheme by first promising in its draft term sheet to 2
invest $10 million, then offering only $2.5 million at closing. 3
The district court properly dismissed this claim. First, it is 4
time-barred. Prior to the passage of the Sarbanes-Oxley Act of 5
2002, Pub. L. No. 107-204, 116 Stat. 745 (2002), the statute of 6
limitations required that a Rule 10b-5 claim be brought within 7
one year of discovery of the facts constituting the violation and 8
within three years of the violation. Lampf, Pleva, Lipkind, 9
Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991). ATSI 10
learned of the alleged falsity of this representation when it 11
signed the closing documents on October 16, 2000, but did not 12
commence its action against Rose Glen until October 31, 2002 – 13
more than two years later. See LC Capital Partners, LP v. 14
Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003) 15
(stating that the limitations period begins to run, inter alia, 16
after the plaintiff receives actual knowledge of the facts giving 17
rise to the action). Second, ATSI has not pled falsity or 18
reliance because the term sheet expressly stated that Rose Glen’s 19
“obligation to fund is subject to satisfactory due diligence, in 20
RGC’s sole discretion.” 21
C. Misrepresentations by CCM 22
ATSI claims that CCM made misrepresentations very similar to 23
those alleged against Rose Glen. Largely for the same reasons as 24
above, the district court properly dismissed those claims. 25

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IV. Control Person Liability 1
ATSI alleges control person liability under § 20(a) against 2
the Levinson Defendants, Wolfson, Rose Glen, and the Citco 3
Defendants. To establish a prima facie case of control person 4
liability, a plaintiff must show (1) a primary violation by the 5
controlled person, (2) control of the primary violator by the 6
defendant, and (3) that the defendant was, in some meaningful 7
sense, a culpable participant in the controlled person’s fraud. 8
First Jersey, 101 F.3d at 1472. ATSI fails to allege any primary 9
violation; thus, it cannot establish control person liability. 10
V. Leave to Amend 11
ATSI argues that even if the district court properly 12
dismissed its complaints under Fed. R. Civ. P. 12(b)(6), it 13
should have granted leave to amend. We review a district court’s 14
denial of leave to amend for abuse of discretion. Grace v. 15
Rosenstock, 228 F.3d 40, 54 (2d Cir. 2000). In ATSI I, ATSI 16
submitted three amended complaints; in ATSI II, it submitted a 17
complaint largely identical to ATSI I’s third amended complaint. 18
The district court had already dismissed ATSI I’s first amended 19
complaint for failure to meet Rule 9(b) and the PSLRA’s pleading 20
requirements on many grounds similar to its final dismissal. 21
District courts typically grant plaintiffs at least one 22
opportunity to plead fraud with greater specificity when they 23
dismiss under Rule 9(b). See Luce, 802 F.2d at 56. ATSI was 24

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given that opportunity. The district court did not abuse its 1
discretion in declining to grant further leave to amend. 2
CONCLUSION 3
For the foregoing reasons, the judgments of the district 4
court are AFFIRMED. 5

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