UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

______________________________________ 

IN RE CONSTAR INT’L INC. 

SECURITIES LITIGATION 

This Document Relates To: 

ALL ACTIONS. 

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Master File No. 03cv05020 

MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ 

MOTIONS TO DISMISS THE CONSOLIDATED AMENDED COMPLAINT

 LAW OFFICES BERNARD M. GROSS, P.C. 

 Deborah R. Gross, I.D. No. 44542 

 1515 Locust Street, Second Floor 

 Philadelphia, PA 19102 

 Telephone: (215) 561-3600

Liaison Counsel for Lead Plaintiffs 

 and the Class 

BERNSTEIN LIEBHARD LERACH COUGHLIN STOIA GELLER 

 & LIFSHITZ, LLP RUDMAN & ROBBINS LLP 

Jeffrey M. Haber Steven W. Pepich 

Timothy J. MacFall Andrew J. Brown 

Stephanie M. Beige Brian O. O’Mara 

10 East 40th Street, 22nd Floor 401 B Street, Suite 1700 

New York, NY 10016 San Diego, CA 92101 

Telephone: (212) 779-1414 Telephone: (619) 231-1058 

 

Lead Counsel for Lead Plaintiffs and the Class 

 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 1 of 61
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TABLE OF CONTENTS 

Table of Authorities ......................................................................................................................... i 

Introduction......................................................................................................................................1 

I. STATEMENT OF FACTS ..................................................................................................5 

 A. Crown and its Acquisition of Constar.....................................................................5 

 1. Constar’s Value and Goodwill Became Substantially 

 Impaired Following the Acquisition ............................................................5 

 a. Constar’s Antiquated Technology Causes 

 the Loss of Customers and Key Personnel ......................................6 

 b. Constar's Business Losses................................................................6 

 c. Lost Business Opportunities ............................................................7 

 

 d. Constar Was Plagued by Defective Products...................................8 

 e. Crown Fails to Write-Off Constar's Diminished Goodwill .............9 

 f. Crown Seeks to Privately Sell Constar ............................................9 

 g. The IPO and Its Aftermath.............................................................10 

II. ARGUMENT.....................................................................................................................12 

 A. The Complaint Readily Satisfies the Pleading 

 Requirements of the Securities Act........................................................................12 

 1. Applicable Standards .................................................................................12 

 B. The Registration Statement Contains Material 

 Misrepresentations and Omissions ........................................................................13 

 1. Constar's Obsolete Technology ................................................................14 

 2. The Misstatements Concerning Constar's Equipment 

 Were Material and Lacked any Reasonable Basis.....................................18 

 3. Misstatements Concerning the Company's Technology............................22 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 2 of 61
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 4. The Misleading Statements Concerning Capital 

 Expenditures and Expansion......................................................................27 

 a. Capital Expenditures .....................................................................27 

 b. Capacity Expansion ......................................................................29 

 5. Material Omissions Concerning Constar's Financial Condition................30 

 6.. Material Misrepresentations And Omissions Concerning Resin...............32 

 7. Defendants' False Statements Concerning Goodwill.................................33 

 C. Defendants' Attack on the Confidential Sources is Improper................................36 

 D. Defendants' False And Misleading Statements Are Not 

 Immunized By Purported "Risk Disclosures"........................................................39 

 1. Defendants' False and Misleading Statements Are 

 Not Protected Under the Bespeaks Caution Doctrine................................39 

 2. The Purported Risk Disclosures Are Not Adequate ..................................40 

 E. Defendants' Loss Causation Arguments Are Baseless 

 And Should Be Rejected........................................................................................45 

 F. The Underwriter Defendants are Liable for Constar's False 

 and Misleading Prospectus and Registration Statement ........................................47 

 G. The Complaint Adequately Alleges Section 11 Liability 

 Against the Underwriter Defendants .....................................................................48 

 H. The Complaint Pleads Securities Violations and 

 Not Corporate Mismanagement.............................................................................49 

 I. The Defendants Are Liable Under Section 15(a) of the Securities Act.................49 

 J. If Necessary, Leave to Amend Should Be Granted ...............................................51 

III. CONCLUSION..................................................................................................................52 

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TABLE OF AUTHORITIES 

CASES 

ALA, Inc. v. CCAIR, Inc., 

29 F.3d 855 (3d Cir. 1994) ................................................................................................12 

Akerman v. Oryx Communications, Inc., 

810 F.2d 336 (2d Cir. 1987) ..............................................................................................46 

Angelastro v. Prudential-Bache Sec., Inc., 

764 F.2d 939 (3d Cir. 1985) ................................................................................................4 

Asher v. Baxter Intern. Inc., 

No. 03-3189, 2004 WL 1687885 (7th Cir. July 29, 2004)...........................................41, 44 

Basic Inc. v. Levinson, 

485 U.S. 224 (1988)...............................................................................................13, 20, 25 

Bastian v. Petren Res. Corp., 

892 F.2d 680 (7th Cir. 1990) .............................................................................................46 

Billet v. Storage Tech. Corp., 

72 F.R.D. 583 (S.D.N.Y. 1976) .........................................................................................46 

Carol Gamble Trust 86 v. E-Rex, Inc., 

No. 03-15032, 2004 WL 43216 (9th Cir. Jan. 5, 2003).....................................................37 

Celotex Corp. v. Cotreff, 

477 U.S.317 (1986)............................................................................................................46 

Ellison v. Am. Image Motor Co., Inc., 

36 F. Supp. 2d 628 (S.D.N.Y. 1999)..................................................................................51 

Emmi v. First Mfr Nat=l Bank, 

336 F. Supp. 629 (D. Me. 1971) ........................................................................................46 

Ernst & Ernst v. Hochfelder, 

425 U.S. 185 (1976)...........................................................................................................48 

Falkowski v. Imation Corp., 

309 F.3d 1123 (9th Cir. 2002) ..................................................................................... 37-38 

Fecht v. Price Co., 

70 F.3d 1078 (9th Cir. 1995) .............................................................................................43 

Foman v. Davis, 

371 U.S. 178, 83 S. Ct. 227 (1962)....................................................................................51 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 4 of 61
ii

Ganino v. Citizens Util. Co., 

228 F.3d 154 (2d Cir. 2000) ........................................................................................24, 35 

Herman & MacLean v. Huddleston, 

459 U.S. 375 (1983).....................................................................................................13, 48 

Huddleston v. Herman & MacLean, 

640 F.2d 534 (5th Cir. 1981) .................................................................................28, 36, 44 

In re ATI Tech. Inc., Sec. Litig., 

216 F. Supp. 2d 418 (E.D. Pa. 2002) .................................................................................31 

In re Applied Magentics Corp. Sec. Litig., 

No. CV 93-6195 DT (JRX), 1994 WL 486550 

(C.D. Cal. May 16, 1994) .................................................................................................28 

In re Adams Golf, Inc. Sec. Litig., 

381 F.3d 267 (3d Cir., 2004) .......................................................................................44, 47 

In re Advanta Corp. Sec. Litig., 

180 F.3d 525 (3d Cir. 1999) ........................................................................................19, 40 

In re Apple Computer Sec. Litig., 

886 F.2d 1109 (9th Cir. 1989) ...........................................................................................28 

In re Burlington Coat Factory Sec. Litig., 

114 F.3d 1410 (3d Cir. 1997) ............................................................................4, 12, 38, 51 

In re Cabletron System Inc., 

311 F.3d 11 (1st Cir. 2002)..................................................................................................1 

In re Cell Pathways Inc. Sec. Litig., 

No. 99-725, 2000 WL 805221 

(E.D. Pa. June 21, 2000) ..............................................................................................35, 45 

In re Compaq Sec. Litig., 

848 F. Supp. 1307 (S.D. Tex. 1993) ..................................................................................45 

In re Donald J. Trump Casino Sec. Litig., 

7 F.3d 357 (3d Cir. 1993) ............................................................................................39, 44 

In re Enron Sec., Derivative & "ERISA" Litig., 

235 F. Supp. 2d 549 (S.D. Tex. 2002) ...............................................................................50 

In re Fortune Syst. Sec. Litig., 

680 F. Supp. 1360 (N.D. Cal. 1987) ..................................................................................46 

In re Home Health Corp. of Am. Sec. Litig., 

No. Civ. A. 98-834, 1999 WL 79057, 

(E.D. Pa. Jan. 29, 1999) .....................................................................................................49

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 5 of 61
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In re Initial Public Offering Sec. Litig., 

241 F. Supp. 2d 281 (S.D.N.Y. 2003)................................................................................38 

In re Metawave Communications Corp. Sec. Litig., 

298 F. Supp. 2d 1056 (W.D. Wash. 2003).........................................................................37 

In re MobileMedia Sec. Litig., 

28 F. Supp. 2d 930 (D.N.J. 1998) ..........................................................................28, 36, 50 

In re NationsMart Corp. Sec. Litig., 

130 F.3d 309 (8th Cir. 1997) .......................................................................................41, 47 

In re Pemstar, Inc. Sec. Litig., 

No. Civ. 02-1821 DWFSRN, 2003 WL 21975563 

(D. Minn. Aug. 15, 2003) ..................................................................................................44 

In re Ravisent Tech., Inc. Sec. Litig., 

No. Civ. A. 00-CV-1014, 2004 WL 1563024 

(E.D. Pa. July 13, 2004)............................................................................................. passim

In re Resource America Sec. Litig., 

No. Civ. 98-5446, 2000 WL 1053861 

(E.D. Pa. July 26, 2000).....................................................................................................35

In re Seagate Technology II Securities Litigation, 

No. C 88-20489 RPA, 1989 WL 222969 

(N.D. Cal. May 3, 1989) ....................................................................................................16 

In re Sprint Corp. Sec. Litig., 

232 F. Supp. 2d 1193 (D. Kan. 2002)......................................................................................19, 26

In re Time Warner, Inc. Sec. Litig., 

9 F.3d 259 (2d Cir. 1993) ............................................................................................19, 26 

In re Towne Serv. Sec. Litig., 

184 F. Supp. 2d 1308 (N.D. Ga. 2001)..............................................................................43 

In re Unisys Corp. Sec. Litig., 

No. Civ. A. 00-1849, 2000 WL 1367951 

(E.D. Pa. Sept. 21, 2000) .......................................................................................12, 24, 25 

In re U.S. Interactive, Inc. Class Action Sec. Litig., 

No. 01-CV-522, 2002 WL 1971252 

(E.D. Pa. Aug. 23, 2002)....................................................................................................40 

In re ValuJet, Inc. Sec. Litig., 

984 F. Supp. 1472 (N.D. Ga. 1997).............................................................................28, 36 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 6 of 61
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In re Viropharma, Inc. Sec. Litig., 

No. Civ. A. 02-1627, 2003 WL 1824914 

(E.D. Pa. Apr. 7, 2003) ..........................................................................................12, 40, 43 

In re Westinghouse Sec. Litig., 

90 F.3d 696 (3d Cir. 1996) ..................................................................................25, 42, 481 

In re Worlds of Wonder Sec. Litig., 

35 F.3d 1407 (9th Cir. 1994) .............................................................................................39 

Isquith v. Middle S. Util., Inc., 

847 F.2d 186 (5th Cir. 1988) .................................................................................18, 29, 38 

Kaplan v. Rose, 

49 F.3d 1363 (9th Cir. 1994) .............................................................................................48 

Lone Star Ladies Inv. Club v. Schlotzsky's, Inc., 

238 F.3d 363 (5th Cir. 2001) .............................................................................................47 

Lucia v. Prospect St. High Income Portfolio, Inc., 

36 F.3d 170 (1st Cir. 1994)........................................................................................ 45-461 

Lyne v. Arthur Andersen & Co., 

772 F. Supp. 1064 (N.D. Ill. 1991) ....................................................................................45 

Mayer v. Mylod, 

988 F.2d 635 (6th Cir. 1993) .......................................................................................19, 26 

Miller v. New Am. High Income Fund, 

755 F. Supp. 1099 (D. Mass 1991), ..................................................................................45 

Neuberger v. Shapiro, No. 

Civ. A. 97-7947, 1998 WL 408877 

(E.D. Pa. July 17, 1998).....................................................................................................47

Newman & Schwartz v. Asplundh Tree Expert Co. Inc., 

102 F.3d 660 (2d Cir. 1996) ................................................................................................4 

Nielsen v. Greenwood, 

 849 F. Supp.1233 (N.D. Ill. 1994)................................................................46 

Parnes v. Gateway 2000, Inc., 

122 F.3d 539 (8th Cir. 1997) .............................................................................................44 

Provenz v. Miller, 

102 F.3d 1478 (9th Cir. 1996) ...........................................................................................44 

Schaffer v. Evolving Sys., Inc., 

29 F. Supp. 2d 1213 (D. Colo. 1998).................................................................................40 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 7 of 61
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Shapiro v. UJB Fin. Corp., 

964 F.2d 272 (3d Cir. 1992) ..............................................................................................20 

Shoenhaut v. Am. Sensors, Inc., 

 986 F. Supp. 785 (S.D.N.Y. 1997)................................................................16 

TSC Indus., Inc. v. Northway, Inc., 

426 U.S. 438 (1976)...........................................................................................................20 

Tracinda Corp. v. Daimlerchrysler AG, 

197 F. Supp. 2d 42 (D. Del. 2002).....................................................................................12 

Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 

140 F.3d 478 (3d Cir. 1998) ........................................................................................12, 38 

Vess v. Ciba-Geigy Corp. USA, 

317 F.3d 1097 (9th Cir. 2003) ...........................................................................................47 

Virginia Bankshares, Inc. v. Sandberg, 

501 U.S. 1083 (1991).............................................................................................19, 26, 39 

Voit v. Wonderware Corp., 

977 F. Supp. 363 (E.D. Pa. 1997) ......................................................................................44 

Weiner v. Quaker Oats Co., 

129 F.3d 310 (3d Cir. 1997) ..............................................................................................19 

FEDERAL STATUTES 

15 USC 877 k(a)(1)-(3)..................................................................................................................48 

15 U.S.C. '77k(e)............................................................................................................................46 

Fed. R. Civ. P. 8(a) ................................................................................................................2, 3, 38 

Fed. R. Civ. P. 12(b)(6) .......................................................................................................3, 38, 45 

Fed. R. Civ. P. 15(a) ......................................................................................................................51 

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By this consolidated opposition brief, Lead Plaintiffs hereby oppose Defendants’ 

motions to dismiss the Consolidated Amended Class Action Complaint (the 

“Complaint”).1 

Introduction 

When Crown purchased Constar in 1992, Constar was a successful, profitable 

company. Over the next 10 years, however, Crown was unable to continue to grow 

Constar’s business in the competitive plastic containers industry. As a result of Crown’s 

increasing financial problems, the Constar business suffered. Crown did not spend the 

money necessary to upgrade Constar’s manufacturing equipment or even to properly 

maintain what was becoming increasingly out-dated equipment. Over the course of the 

1990s, Crown’s financial position worsened, as it continued to lose money and amass a 

substantial amount of debt. As Crown’s financial position worsened, so did Constar’s 

ability to compete within its market. Over time, Constar’s production and equipment 

problems worsened, adversely affecting Constar’s ability to retain customers or compete 

for new business. As a consequence, Constar began losing major customers. 

By 2001, Crown’s financial condition had become precarious, ending 2001 with a 

net loss of almost $1 billion. Crown was laying-off workers and closing plants. Its 

ability to access capital markets was deteriorating, with its unsecured bonds and its $2.5 

billion credit facility relegated to “junk” status by ratings agencies. To solve its cash 

 

1

 “Constar Defendants” refers to Charles F. Casey, William G. Little, Michael J. 

Hoffman, James C. Cook, Alan W. Rutherford, John W. Conway, Angus F. Smith, and 

Frank J. Mechura (collectively, the “Individual Defendants”), Constar International, Inc. 

(“Constar” or the “Company”), and Crown Cork & Seal Company, Inc. (“Crown”). 

“Underwriters” or “Underwriter Defendants” refers to Salomon Smith Barnet Inc., 

Deutsche Bank Securities, Inc., JP Morgan Securities Inc., and Lazard Fréres & Co. LLC. 

The Constar Defendants and the Underwriter are collectively referred to herein as 

“Defendants.” 

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crisis, Crown began selling “non-core” assets, one of which was Constar. Initially, 

Crown attempted to sell Constar to its competitors for a price in the “low $200 million 

range,” but could find no takers. Instead, Crown decided to spin-off the Company in a 

public offering in November 2002 (the “IPO”). 

The Registration Statement and Prospectus (the “Registration Statement”) that 

Defendants filed in connection with the IPO, however, was false and misleading in many 

material respects. For example, it portrayed Constar as a highly competitive, growing 

company when, in fact, the opposite was true. It represented that Constar utilized “state 

of the art” equipment, and that its “machinery had been continuously maintained and 

upgraded” when, in fact, its machinery was two generations behind its competitors and 

the Company had failed to maintain that aging equipment. Most importantly, the 

Registration Statement incorporated financial statements that were materially false and 

misleading, overstating Constar’s “goodwill” by at least $183 million. Accordingly, the 

financial statements in the Registration Statement violated generally accepted accounting 

principles (“GAAP”), as well as Constar’s own publicly-stated accounting policies. Had 

Defendants been truthful concerning Constar’s business and balance sheet, they would 

not have been able to complete the IPO at $12 per share. As it was, the IPO price had to 

be reduced twice – from $18 per share to $15 per share, then to $12 per share. 

Because the Complaint alleges the foregoing in significant detail, Defendants are 

“on notice” of the basis for their liability consistent with the pleading requirements of 

Fed. R. Civ. P. 8(a). In the face of these detailed allegations, Defendants argue the 

courthouse doors are, nonetheless, closed to Plaintiffs and the class of shareholders they 

seek to represent. The arguments asserted by Defendants in support of their respective 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 10 of 61
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motions to dismiss the Complaint, however, improperly raise disputed issues of fact, 

improperly challenge the sources of Plaintiffs’ allegations, mischaracterize the 

allegations of the Complaint, and misstate the law. None of their arguments are, 

therefore, sufficient to sustain their heavy burden on this Rule 12(b)(6) motion. 

For example, Defendants expend a great deal of effort attacking the various 

confidential sources identified as the bases for certain of the allegations in the Complaint. 

Relying on cases decided under Rule 9(b) and the Private Securities Litigation Reform 

Act (the “PSLRA”), Defendants claim Plaintiffs’ sources are “unreliable,” or otherwise 

are not credible. In this case, however, the Complaint - which asserts only allegations 

under the Securities Act of 1933 - is subject to neither the particularity requirements of 

Rule 9(b), nor the heightened pleading standards of the PSLRA. Indeed, the proper 

pleading standard – under Fed. R. Civ. P. 8(a) – does not require Plaintiffs to identify any 

sources at all. Therefore, the challenge to the sufficiency of factual allegations that 

Plaintiffs are not even required to make, can hardly support a motion to dismiss for 

failure to state a claim. At best, Defendants’ “credibility” arguments raise issues of 

disputed fact that cannot be decided here. 

Similarly, Defendants’ assertion that many of the false statements in the 

Registration Statement are not actionable because they are not “material,” should be 

rejected. Because the materiality of the misrepresentations identified in the Complaint 

involve disputed issues of fact, such determinations are not appropriate for resolution in 

connection with this Rule 12(b)(6) motion. Basic Inc. v. Levinson, 485 U.S. 224, 237 

(1988). Moreover, Plaintiffs have properly alleged that the specific false statements in 

the Registration Statement would have been material to a reasonable investor because, at 

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a minimum, such statements altered the “total mix of information” concerning Constar. 

Id. 

Defendants also incorrectly contend that these statements are entitled to protection 

of the “bespeaks caution” doctrine because the Registration Statement contains 

cautionary risk-disclosing warnings. This assertion is not only wrong, but many of the 

so-called risk factors are themselves misleading because many of the things that had 

already occurred at Constar were described as mere future contingencies. Even then, 

many of the so-called risk disclosures were so general and vague that Defendants did not 

properly caution the reader to the specific adverse conditions identified in the Complaint. 

Accordingly, the “bespeaks caution” doctrine is inapplicable here. 

Neither the Constar Defendants nor the Underwriter Defendants have sustained 

their burden that the Complaint fails to state a claim for which relief can granted under 

Sections 11 and 15 of the Securities Act. Accordingly, both motions should be denied.2

 

2

 In considering a motion to dismiss for failure to state a claim under Fed. R. Civ. 

P. 12(b)(6), a court must limit itself to “facts stated in the complaint or in documents 

attached to the complaint as exhibits or incorporated in the complaint by reference.” 

Newman & Schwartz v. Asplundh Tree Expert Co. Inc., 102 F.3d 660, 662 (2d Cir. 1996); 

see also In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 n.16 (3d Cir. 

1997) (“As a general matter, a district court ruling on a motion to dismiss may not 

consider matters extraneous to the pleadings.”) (citing Angelastro v. Prudential-Bache 

Sec., Inc., 764 F.2d 939, 944 (3d Cir. 1985). Defendants’ brief, to the extent it 

transgresses this limitation, should be disregarded. For example, the Court must reject 

Defendants’ reference to, and reliance on, Exhibits B and C attached to Defendants’ 

motion to dismiss. These documents are nothing more than Defendants’ 

mischaracterizations of Plaintiffs’ allegations and an attempt to impose the pleading 

standard for fraud onto Plaintiffs’ Section 11 claim. As such, both of these documents 

should be disregarded in their entirety. 

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I. STATEMENT OF FACTS 

A. Crown and its Acquisition of Constar 

Crown primarily manufactures metal beverage cans and cork-filled bottle caps for 

the beverage and food storage markets. ¶ 12. 3 In 1989, Crown began an aggressive 

acquisition campaign to enter new markets and new product areas. ¶¶ 12, 64. To pay for 

this aggressive diversification, however, Crown incurred a substantial amount in debt. 

¶ 64. As part of this strategy, and to hedge against the growing dominance of plastic 

containers in the food and beverage industry, Crown acquired Constar in 1992 for $519 

million, a price considered high by many industry observers. ¶ 62. Because the value of 

Constar’s hard assets were much less than $519 million, Crown booked more than 93% 

of the purchase price as goodwill. Id. 

1. Constar’s Value and Goodwill Became Substantially Impaired 

Following the Acquisition 

Prior to the acquisition, Constar was a leading player in the polyethylene 

terephthalate (“PET”) food and beverage container market. ¶¶ 6-9. Constar’s customers 

included major brand marketers, such as Buffalo Rock, Anheuser-Busch, PepsiCo, the 

Minute Maid Company, and Proctor & Gamble. At the time of the acquisition, Constar 

was relatively debt-free and profitable, as opposed to Crown, which had become heavily 

leveraged. ¶ 13. 

Crown’s financial condition worsened after the Constar acquisition. ¶ 68. By 

1995, Crown committed a significant portion of its cash flow to servicing its heavy debt. 

Consequently, Crown could not, and did not, make critical capital expenditures to 

upgrade Constar’s property, plants and equipment. This failure was material, as the 

 

3

 References to “¶ __,” are to paragraphs of the Complaint. 

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manufacture of PET containers is capital intensive. Crown’s refusal or inability to invest 

the capital in Constar resulted in the Company being unable to maintain technological 

parity with its competitors. 

a. Constar’s Antiquated Technology Causes the Loss of 

 Customers and Key Personnel 

As a result of Crown’s failure to adequately capitalize Constar’s operations, the 

Company could not acquire the state-of-the-art equipment necessary to maintain 

Constar’s competitive position. ¶¶ 82-90. For example, by 1996, when the Sidel No. 2 

(the “SB02”) became the industry-standard machine for the manufacture of preforms, 

Constar was still using the older model, the Sidel No. 1 (the “SB01”), as its primary 

preform manufacturing equipment.4

 ¶ 83. The SB01 produced fewer bottles per hour 

than the newer model. Id. By the time of the IPO in 2002, Constar’s primary 

manufacturing equipment was two-generations older than that of its competitors. While 

Constar was still using the SB01, the Sidel No. 2+ (the “SB02+”) was the industrystandard for the manufacture of preforms. Id. 

The competitive disadvantage resulting from Constar’s reliance on older, slower 

equipment was exacerbated by the Company’s financial inability to adequately maintain 

and repair its aging equipment. ¶¶ 85-90, 119-21. Constar’s aging, inadequately 

maintained manufacturing base resulted in widespread product defects; an inability to 

offer competitive pricing and the resulting loss of longstanding customers; an inability to 

compete for new business; and an erosion of margins. ¶¶ 81–121. In addition, the 

Company experienced an exodus of key employees following the acquisition by Crown. 

 

4 Preforms are test tube-shaped intermediate products in the manufacturing process 

for bottles and are purchased by customers or other PET container manufacturers that 

operate equipment to convert preforms into bottles. ¶ 83. 

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¶ 65. 

b. Constar’s Business Losses 

The Company’s inability to competitively price its products due to its reliance on 

outdated, inefficient, and poorly maintained equipment, caused the loss of critical, 

longstanding customer accounts. Those accounts included the loss of a contract to 

manufacture motor oil containers for Exxon (after 13 years), and the loss of business 

from the Consolidated Pepsi Facility in 1999 or early 2000. ¶¶ 92-95. 

In addition, Constar lost customers due to its failure to invest in new equipment 

necessary to meet the customers’ new product needs. These losses included the loss of 

the existing Clorox business in the spring of 2001, and the loss of business from Folgers 

Coffee after 17 years. ¶¶ 97, 110-11, 113-14. Constar did not submit bids on certain 

accounts or potential accounts because it would have required a significant capital 

investment to upgrade its equipment. Id. 

Similarly, pervasive product defects stemming from technological and production 

problems caused the Company to lose business from Buffalo Rock, a major independent 

Pepsi bottler, which resulted in the closure of Constar’s Birmingham, Alabama plant. ¶¶ 

103-04. In addition, problems with the efficacy of the Company’s proprietary Oxbar 

technology caused the loss of business from Anheuser-Busch in 2002. ¶¶ 107-08. The 

Company also lost an account to manufacture motor oil quart containers for Mobil Oil 

about the time of the Company’s IPO in the fall of 2002. ¶¶ 119-21. 

c. Lost Business Opportunities 

Constar was also unable to capitalize on myriad new business opportunities 

because of its antiquated manufacturing infrastructure. ¶ 128. For example, Constar 

attempted to solicit the production of 200 million custom-plastic bottles from Austin 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 15 of 61
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Nichols & Company during the summer of 2001. ¶ 129. After a year of negotiations, 

Constar pulled out of consideration for the business because the Company did not want to 

upgrade its equipment to manufacture bottles with an EVOH liner that could withstand 

high temperatures during the beverage-fill process. Id. 

During the summer of 2001, Constar also solicited Riley Foods to produce 25 

million units of customer containers and closures (caps) on an annual basis for differentflavored instant powered teas. ¶ 131. Constar was unable to secure the business, 

however, because the Company had initiated a practice of adding a 20% premium to its 

planned bid price on certain products to bolster margins. ¶¶ 131-32. The 20% increase, 

however, rendered Constar’s bid too high, and the Company lost the account to its 

competitors Ring Can and Phoenix Closure. ¶ 132. 

Similarly, Constar lost a contract with Dole Foods for the production of 20 to 30 

million units of conventional PET water-bottles in mid-to-late 2001. ¶ 134. A 

competitor, whose bid was based on the use of a six-station Seidel machine that produced 

6,000 units per hour, beat the Constar bid, which was based on the use of two Seidel 

machines, each of which had two stations. Id. Constar would not, or could not, invest 

the approximately $5 million necessary to purchase the six-station machine. Id. 

d. Constar Was Plagued by Defective Products 

Constar’s use of outdated machinery also caused pervasive product defects that 

strained the Company’s relationships with many of its customers. ¶ 135. For example, 

chronic problems with 2-liter bottles produced for PepsiCo-Tulsa caused it to threaten 

canceling its contract with Constar in May 2002, endangering the Company’s relationship 

with PespsiCo on a national level. ¶¶ 135-41. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 16 of 61
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e. Crown Fails to Write-Off Constar’s Diminished 

Goodwill 

Over time, Constar’s value became substantially impaired. Nonetheless, Crown 

continued to amortize the goodwill associated with Constar on a 40 year straight line 

basis, with no adjustment to reflect its true value. ¶ 187. By November 2002, Constar’s 

goodwill was still valued at more than $331 million, representing almost half of the 

Company’s $700 million in total assets. Id. In truth, however, Constar’s goodwill, had 

become impaired by at least $183 million.5

 

f. Crown Seeks to Privately Sell Constar 

Crown’s financial position became so precarious that by 2002, Crown was forced 

to sell off assets merely to service its debt. One of these assets was Constar. Crown 

started shopping Constar as early as 2001, but Crown could not generate serious interest 

because its asking-price was far too high. ¶¶ 70-74. Unable to sell Company outright, the 

Constar Defendants decided to spin off the Company to the investing public in the IPO. ¶ 

75. Nonetheless, Crown failed to take an appropriate charge for the impairment of 

goodwill prior to the IPO - even though it was required to conduct impairment checks as 

of January 1, 2002 under Statement of Financial Accounting Standards (“SFAS”) 142 -

because had it written off the full $183 million of impaired goodwill, it would have 

reduced total assets by at least 24% and goodwill by 55%. This would have prevented 

Crown from successfully completing the IPO at the inflated price of $12 per share. 

 

5 Crown took a $50.059 million charge several months before the IPO for its 

European reporting unit due to the cumulative effect of a change in accounting principles 

as of January 1, 2002. ¶ 191. However, the Company failed to take any write-down for 

its U.S. operations at that time. ¶ 193. 

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g. The IPO and Its Aftermath 

On November 14, 2002, the Constar Defendants filed with the SEC the 

Registration Statement for the issuance of 10.5 million shares of Constar common stock. 

¶ 149. The IPO was solely comprised of shares sold by Crown and was priced at $12 per 

share for total proceeds of $117 million after underwriting discounts and commissions. 

Id. 

As part of the IPO, Crown caused Constar’s asset base to become further impaired 

by transferring substantial debt to Constar. Crown, which had total control over Constar 

prior to the IPO, caused the Company to issue a $350 million note to Crown. However, 

because the Company received nothing of value in return, the $350 million note was, in 

effect, a “dividend” for Crown, despite the fact that Constar had insufficient retained 

earnings to declare a dividend of this magnitude. ¶ 76. Payment of the $350 million note 

was to be made, in part, from the proceeds of $175 million of senior subordinated notes 

to be issued by Constar. The remainder of the $350 million was to be paid from a loan 

that Constar agreed to secure following the IPO. Id. Constar was left with no working 

capital or capital available for financing following the IPO. ¶ 77. 

On July 29, 2003, the true state of Constar’s financial problems partially came to 

light when the Company alerted the market of its disappointing financial results for the 

second quarter of 2003. ¶ 208. The Company attributed this loss to, among other things, 

“slower than expected ramp-up of new customers and product conversions in the United 

States and Europe.” Id. Defendants further stated that without the expected growth, “we 

were unable to offset the previously announced business losses and the price concessions 

given in exchange for added volume and contract extensions.” Id.

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 18 of 61
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Defendants’ announcement was followed up with a conference call with analysts, 

wherein Defendants Hoffman and Cook disclosed that Constar’s poor financial results 

were due to the loss of customers, including Folgers, Powerade, and Buffalo Rock. ¶ 

209. Significantly, Hoffman admitted that Constar’s margins had eroded because the 

Company lacked the technology to produce custom PET products. Id. 

As a result of these disclosures, the price of Constar stock dropped almost 30%, 

from a trading high of $9.17 per share on July 28, to a trading low of $6.00 per share on 

July 30, with trading volume of over 1.56 million shares on that day. As the market 

continued to digest Defendants’ disclosures, the price of Constar stock continued to 

decline. By August 5, 2003, the price of Constar stock had fallen to $5.25 per share. 

¶ 210. However, Defendants’ disclosures were far from complete. 

On August 14, 2003, approximately two weeks after Constar’s partial disclosure, 

the Company belatedly admitted that its financial position was not as previously 

represented because the Company had failed to recognize an impairment of goodwill. ¶ 

211. Without providing specific details, Defendants stated that the “Company is 

currently assessing the potential impact of the impairment, and while the assessment is 

not yet complete, the Company expects the impairment charge will be material.” Id. As 

a result, the Company delayed filing its quarterly report on Form 10-Q for the second 

quarter of 2003. Id. The Company subsequently acknowledged that it would take a $183 

million charge to write-off its impaired goodwill. Id. 

In the days following this announcement, it was reported that Constar was closing 

a number of its manufacturing plants, including its Reserve, Louisiana and Birmingham, 

Alabama facilities. ¶ 213. As reported on September 5, 2003 in the Philadelphia 

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Inquirer, “Contributing to the poor financial results are the losses of at least two 

significant customers. Also, Constar agreed to price reductions to secure contract 

extensions with PepsiCo Inc. Constar expected the lower prices to lead to higher 

volumes, which failed to materialize.” Id.

II. ARGUMENT 

A. The Complaint Readily Satisfies the Pleading Requirements of 

the Securities Act 

1. Applicable Standards 

 “The purpose of a Rule 12(b)(6) motion to dismiss is to test the sufficiency of a 

complaint, not to resolve disputed facts or decide the merits of a case.” In re Ravisent 

Tech., Inc. Sec. Litig., No. Civ. A. 00-CV-1014, 2004 WL 1563024, at *2 (E.D. Pa. July 

13, 2004) (citing Tracinda Corp. v. Daimlerchrysler AG, 197 F. Supp. 2d 42, 53 (D. Del. 

2002)). “A complaint should be dismissed only if, after accepting as true all of the facts 

alleged in the complaint, and drawing all reasonable inferences in the plaintiff’s favor, no 

relief could be granted under any set of facts consistent with the allegations.” Trump 

Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478, 483 (3d Cir. 1998) 

(citing ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994)). See also In re Unisys 

Corp. Sec. Litig., No. Civ. A. 00-1849, 2000 WL 1367951, at *3 (E.D. Pa. Sept. 21, 

2000); In re Viropharma, Inc. Sec. Litig., No. Civ. A. 02-1627, 2003 WL 1824914, at *1 

(E.D. Pa. Apr. 7, 2003). Thus, in deciding a Rule 12(b)(6) motion, “the court should not 

look to whether plaintiffs will ‘ultimately prevail,’ it should only consider whether they 

should be allowed to offer evidence in support of their claims.” Ravisent, 2004 WL 

1563024, at *2 (citing In re Burlington Coat Factory Secs. Litig., 114 F.3d 1410, 1420 

(3d Cir. 1997)). 

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To plead a prima facie claim under Section 11 of the Securities Act, the plaintiff 

must allege: (i) that the registration statement contained a misstatement or omission 

when it became effective; (ii) that the misstatement or omission was material; (iii) and the 

plaintiff purchased the security pursuant to such statement. In re Adams Golf Inc. Sec. 

Litig., 381 F.3d 267, 274 n. 5 (3d Cir. 2004). Ravisent, 2004 WL 1563024, at *12 (citing 

Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983)). Moreover, “pleading an 

action under Section 11 does not require proof of scienter, or a general motive or intent to 

manipulate.” Ravisent, 2004 WL 1563024, at *12. Indeed, liability under Section 11 

“approximates the tort standard of strict liability.” Id. See also Adams, 381 F3d 274 n. 7 

(“Sections 11 and 12(a)(2) are virtually absolute liability provisions . . .”). The 

Complaint readily satisfies this liberal pleading standard. 

As discussed below, the Complaint alleges that Plaintiffs purchased Constar stock 

pursuant and traceable to the Registration Statement (¶¶ 31-32), which contained 

materially false and misleading statements at the time that it became effective. ¶¶ 151-

84, 193-95. No more is required to plead a viable claim under Section 11. 

B. The Registration Statement Contains Material 

Misrepresentations and Omissions 

Lacking any meritorious basis for challenging the allegations of the Complaint, 

Defendants attack the sufficiency of allegations that Plaintiffs never made, distort those 

that Plaintiffs did make, impermissibly inject disputed issues of fact into the 

determination of the adequacy of Plaintiffs’ allegations, and improperly engraft the 

pleading standard for fraud onto Plaintiffs’ strict liability Section 11 claim. A plain 

reading of the straightforward allegations of the Complaint and application of the correct 

pleading standards, however, demonstrates the viability of Plaintiffs’ claims and the 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 21 of 61
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paucity of merit in Defendants’ arguments. Defendants’ motions should, therefore, be 

denied. 

1. Constar’s Obsolete Technology 

The Registration Statement is replete with materially false and misleading 

statements that paint Constar as a vibrant company utilizing cutting-edge manufacturing 

equipment and practices to maintain a cost-competitive industry position. In reality, 

however, for years leading up to the IPO, Constar’s debt-laden parent was unable and 

unwilling to make the capital investments necessary to upgrade Constar’s manufacturing 

equipment to remain competitive. ¶ 18. Constar’s inability to meet customer demands 

and the pervasive quality-control problems caused by the Company’s outdated 

manufacturing equipment resulted in an exodus of key customers by the time of the IPO. 

Specifically, the Registration Statement states that Constar “was able to maintain 

[its] competitive cost position as [it] grew by purchasing state-of-the-art manufacturing 

equipment for [its] high-volume product lines . . .,” (¶ 164), and that the Company’s 

“manufacturing platform is cost competitive” because Constar’s machinery “has been 

continuously maintained and upgraded, and because the speed and capacity of [its] 

equipment are generally comparable to the equipment of [its] competitors. . . .” ¶ 166. 

These statements were materially false and misleading because Constar utilized 

manufacturing equipment that: (i) did not have the speed and capacity that was “generally 

comparable” to that of the equipment used by the Company’s competitors; (ii) did not 

result in a cost competitive manufacturing platform; and (iii) had not been continuously 

upgraded. ¶¶ 165, 167-68. In addition, the Company had not “maintained its competitive 

position by purchasing state-of-the-art manufacturing equipment for [its] high volume 

business.” Id. 

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The primary manufacturing equipment used by the Company was the Sidel SB01. 

¶ 83. The Sidel SB01 was two generations old by the time of Constar’s IPO. ¶¶ 82-85. 

As far back as 1996, the industry “workhorse” was the Sidel SB02. ¶ 83. Moreover, 

while the rest of the industry had moved on from the Sidel SB02 to the Sidel SB02+ by 

the time of the IPO, Constar continued to use the SB01.6

 Id. ¶¶ 70, 83. Constar’s use 

of outdated manufacturing equipment, and its refusal or inability to upgrade that 

equipment, is corroborated by former Constar employees. ¶¶ 84-86, 96-99, 103, 112-18. 

Because Constar used the Sidel SB01 at the time of the IPO, the speed and 

capacity of its equipment was not “generally comparable” to that of the Company’s 

competitors. As explained by a former Constar corporate officer and industry consultant, 

the newer Sidel machines produced more bottles per hour than the older equipment used 

by Constar. ¶ 83. Therefore, the statements in the Registration Statement concerning the 

“upgrading” and “comparability” of Constar’s equipment, were materially false and 

misleading. 

Likewise, far from being able to maintain its competitive position in the high 

volume sector by purchasing state-of-the-art manufacturing equipment, numerous former 

employees reported that Constar’s competitive position steadily worsened in the period 

leading up to the IPO precisely because of the Company’s failure to purchase state-of theart equipment. ¶¶ 85-86, 96-99, 103. The Company’s failure to adequately maintain its 

equipment also hampered operations and contributed to Constar’s increasing inability to 

effectively compete. ¶¶ 86-90, 100-04. 

 

6

 Defendants, who have raised a host of impermissible factual issues on this 

motion, do not dispute that the Company’s primary manufacturing equipment at the time 

of the IPO was the Sidel SB01, or that its competitors primarily used the SB02. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 23 of 61
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Defendants argue that the fact that Constar “continued to do significant business 

with that machinery” undermines Plaintiffs’ allegations. Defs. Mem. at 35.7 Plaintiffs, 

however, do not allege that Constar’s equipment was unusable, but rather that the 

Company’s equipment had not “been continually . . . upgraded,” and that the speed and 

capacity of the equipment was not “generally comparable” to the newer equipment used 

by its competitors.8

 In other words, Plaintiffs do not allege that Constar could not 

manufacture products because of its outdated machinery, but that the use of such 

equipment adversely impacted its competitive position and profitability, causing it to lose 

key customer accounts. ¶¶ 18-20, 82-84. 

In addition, Plaintiffs allege that the Registration Statement falsely states that 

“[s]ubject to demand for capacity, we seek to maintain and improve our competitive cost 

position by acquiring the highest speed state of the art equipment on each occasion that 

we increase capacity.” ¶ 166. This statement, which Defendants now ignore, is false and 

misleading because Defendants failed to disclose that rather than expanding its capacity, 

 

7 References to “Defs. Mem. at __,” are to the Memorandum in Support of motion 

of Defendants to Dismiss the Consolidated Amended Class Action Complaint filed by the 

Constar Defendants. 

8

 Defendants’ reliance on Shoenhaut v. American Sensors, Inc. 986 F. Supp. 785 

(S.D.N.Y. 1997), and In re Seagate Technology II Securities Litigation, No. C 88-20489 

RPA, 1989 WL 222969 (N.D. Cal. May 3, 1989), are unavailing. Those cases involved 

claims that were dismissed because the plaintiffs’ allegations that the defendants’ 

products were obsolete were belied by the continued sale of the products at issue. In 

sharp contrast, here, Plaintiffs allege that Constar’s manufacturing equipment was 

“obsolete” in the sense that it was two generations old and substantially less efficient than 

its competitors’ equipment. See Miriam-Webster Online Dictionary (“obsolete” defined 

as “no longer in use or no longer useful.”) (emphasis added); Encarta Dictionary

(defining “obsolete” as “superseded by something newer, though possibly still in use”). 

That Constar still used such equipment does not mean that the Company’s competitive 

position was not adversely affected, or that the statements in the Registration Statement 

concerning Constar’s “state of the art” equipment were true. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 24 of 61
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Constar was actually reducing capacity at this time through plant closures necessitated by 

customer defections. ¶ 168. 

Likewise, Defendants ignore Plaintiffs’ allegation that the Registration Statement 

falsely states “[w]e believe that we are advantaged by opportunities that exist to deploy 

existing high speed equipment in some newly converting specialty custom applications 

. . . .” ¶ 168. This statement is false because Constar failed to disclose that the Company 

lacked the capital to exploit any of the opportunities to deploy such high speed 

equipment. Id. 

Defendants further argue that because the Registration Statement stated that 

Constar purchased state-of-the-art equipment as it grew its operational capacity, the 

Company’s use of outdated equipment pending increases in its capacity was consistent 

with its representations. Defs. Mem. at 36. This argument is unavailing, however, 

because the misstatements concerning the Company’s manufacturing equipment are not 

limited to the statement about the growth of Constar’s capacity. The Registration 

Statement expressly states, “[b]ecause our machinery has been continuously maintained 

and upgraded . . . we believe that our manufacturing platform is cost competitive.” ¶ 166 

(emphasis added). As discussed, above, Constar’s machinery had not been upgraded, 

continuously or otherwise, nor was its manufacturing platform cost competitive. See

infra at 16. 

Defendants also assert that Plaintiffs’ allegations concerning the falsity of the 

statements concerning the continuous maintenance of Constar’s equipment must fail 

because it is predicated on information provided by one employee with respect to a single 

plant. Defendants also contend that the allegation is deficient because the Registration 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 25 of 61
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Statement discloses how much the Company spent on maintaining its equipment. Defs. 

Mem. at 36-37. These arguments are similarly lacking in merit. 

The information concerning the maintenance problems with the Company’s 

equipment was corroborated by several sources. ¶¶ 86-90, 100-03, 119-21, 137-41. For 

example, in addition to the problems at the Havre de Grace facility (¶¶ 86-90), according 

to a former Constar Manager at the Company’s Birmingham, Alabama plant, major 

technical and production problems caused product defects that, in large part, caused the 

Company to lose its Buffalo Rock account. ¶¶ 100-03. 

Further, the mere disclosure of the dollar value of the Company’s annual 

maintenance expenditures does not address the issue of the adequacy of such 

expenditures. In other words, without an appropriate context, such disclosure is 

meaningless. See Isquith v. Middle S. Utils., Inc., 847 F. 2d 186, 201 (5th Cir. 1988) (the 

adequacy of a disclosure depends upon the context in which it is made). Therefore, that 

the dollar amount of Constar’s annual maintenance expenditures is disclosed in the 

Registration Statement, does not, standing alone, negate the falsity of the statements 

identified in the Complaint.9

2. The Misstatements Concerning Constar’s Equipment 

Were Material and Lacked any Reasonable Basis 

Defendants incorrectly assert that the statement concerning the general 

comparability of the speed and capacity of Constar’s machinery, as well as the statements 

 9

 To the extent that Defendants contend that they were not required to 

disclose “any of the individual instances of malfunctioning equipment identified in the 

Complaint,” their argument must fail. Defs. Mem. at 36. That allegation is illustrative of 

Defendants failure to adequately maintain Constar’s equipment, evidencing the falsity of 

the statements in the Registration Statement. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 26 of 61
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concerning its ability to leverage its “strong customer relationships” by remaining a 

“high-quality, low cost operator implementing best practices manufacturing disciplines,” 

are merely the expression of “vague and general optimism” and the expression of 

“opinion, motive, and intentions,” which are inactionable. Defs. Mem. at 36-37. 

However, “merely packaging a false or misleading statement as a belief or 

opinion does not automatically insulate the speaker from . . . liability.” In re Sprint Corp. 

Sec. Litig., 232 F. Supp. 2d 1193, 1214 (D. Kan. 2002). In Virginia Bankshares, Inc. v. 

Sandberg, 501 U.S. 1083, 1093-94 (1991), the Supreme Court determined that statements 

couched as opinion or belief are actionable if the opinion is (1) known by the speaker to 

be false when made or (2) made without a reasonable basis in fact. See Mayer v. Mylod, 

988 F.2d 635, 639 (6th Cir. 1993) (“Material statements which contain the speaker’s 

opinion are actionable under Section 10(b) of the Securities Exchange Act if the speaker 

does not believe the opinion and opinion is not factually well-grounded."); In re Time 

Warner, Inc. Sec. Litig., 9 F.3d 259, 266 (2d Cir. 1993) (acknowledging opinions or 

belief may be actionable). Here, the Complaint contains numerous allegations detailing 

the reasons that Defendants’ statements were “not factually grounded.” ¶¶ 70, 83-86, 

96-99, 103, 112-18. 

Furthermore, by arguing that the foregoing statements are “puffery,” Defendants 

assert, in substance, that the statements are not material. See In re Advanta Corp. Sec. 

Litig., 180 F. 3d 525, 538 n. 10-11 (3d Cir. 1999); Ravisent, 2004 WL 1563024, at * 8. 

The determination of materiality, however, is ordinarily a fact specific issue that is not 

appropriate for resolution on a Rule 12(b)(6) motion. See Weiner v. Quaker Oats Co., 

129 F.3d 310, 317 (3d Cir. 1997) (“[T]he emphasis on a fact-specific determination of 

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20

materiality militates against a dismissal on the pleadings.”). As this Court is well-aware, 

materiality determinations are a mixed question of law and fact ordinarily decided by the 

trier of fact, and may only be ruled on as a matter of law Aif the alleged 

misrepresentations or omissions are so obviously unimportant to an investor that 

reasonable minds cannot differ on the question of materiality.@ Shapiro v. UJB Fin. 

Corp., 964 F.2d 272, 281 n.11 (3d Cir. 1992).

A statement or omission is considered material if there is a Asubstantial 

likelihood@ that it Awould have been viewed by the reasonable investor as having 

significantly altered the >total mix= of information made available.@ TSC Indus., Inc. v. 

Northway, Inc., 426 U.S. 438, 449 (1976). Because A[t]he determination [of materiality] 

requires delicate assessments of the inferences of a >reasonable shareholder= would draw 

from a given set of facts and the significance of those inferences to him, these 

assessments are peculiarly ones for the trier of fact.@ Basic, 485 U.S. at 237. A 

misrepresentation or omission may be deemed immaterial as a matter of law only if it is 

so obviously unimportant to the reasonable investor that reasonable minds could not 

differ on the question of materiality. TSC Indus., 426 U.S. at 450. 

The misstatements concerning the Company’s manufacturing equipment were 

plainly material.10 The Company’s lack of competitiveness, and its corresponding loss of 

 

10 The Company acknowledged as much in the Registration Statement. Under “Risk 

Factors,” Constar stated, “[s]ignificant technological changes could render our existing 

technology or our product and services obsolete. We attribute much of our competitive 

success to our existing technology, and our ability to compete may dissipate if our 

existing technology is rendered obsolete. If we are unable to successfully respond to 

these developments or do not respond in a cost effective way, our net sales and 

profitability may decline. . . . Similarly the equipment that we use may be rendered 

obsolete by new technologies.” ¶ 160 (emphasis added). While the foregoing statement 

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business, was a direct consequence of its use of manufacturing equipment that did not 

provide speed and capacity that was generally comparable to that used by its competitors. 

 The success of Constar’s shift in emphasis from lower volume, higher-margin 

custom products to the higher-volume, lower-margin soft drink and water bottle business 

was especially dependent on production volume. ¶82. However, this high-volume 

business could be profitable only if production is run on state-of-the-art equipment at full 

volume capacity.11 ¶ 82. Newer machines produced more bottles per hour and increased 

profitability. Constar’s use of generations-old machinery, therefore, adversely impacted 

the Company’s competitiveness and profitability in the high volume industry segment. 

The Company lost the Buffalo Rock business due to product defects and an 

inability to compete with competitor Plastipak resulting from the continued use of 

antiquated manufacturing equipment. ¶¶ 100-04. Likewise, the Company ended its 

longstanding relationship with Folgers because it would not – or could not – upgrade its 

manufacturing equipment to accommodate Folgers’ introduction of a plastic, blowmolded coffee canister to replace the metal coffee canister. ¶¶ 110-18. During the July 

30, 2003 analyst conference call, the loss of certain key customers, including Folgers and 

Buffalo Rock, were cited as substantial factors in the Company’s earnings loss. ¶¶ 208-

09. Constar’s facilities in Birmingham, Alabama – which manufactured bottles for 

 

was, at the time it was made, materially false and misleading because it describes events 

that had already transpired as mere future contingencies, it also demonstrates that the 

Company’s undisclosed use of generations-old manufacturing equipment was material. 

11 One of Plaintiffs’ confidential sources explained that because certain operational 

costs - such as raw materials, labor, and warehousing expenses - are generally the same 

throughout the industry, the greater the number of units produced per hour, the greater the 

profitability. ¶ 82. 

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Buffalo Rock – and Reserve, Louisiana – which manufactured containers for Folgers – 

were ultimately closed following the loss of those customers. ¶¶ 103, 117. 

The Complaint recites numerous other examples of lost business, lost business 

opportunities, and product defects that were a direct consequence of the Company’s 

failure to upgrade and/or adequately maintain its manufacturing equipment. See ¶¶ 87-

90, 92-104, 110-21, 127-41. This lost business and the Company’s pervasive product 

defects stand in stark contradiction to the statement in the Registration Statement 

concerning Constar’s ability to leverage strong customer relations by being a highquality, low cost operator implementing best-practices manufacturing. 

In light of the adverse impact of the Company’s use of outdated manufacturing 

equipment, and its failure to adequately maintain that equipment, a reasonable investor 

would have viewed Defendants’ optimistic statements as having significantly altered the 

“total mix” of available information concerning Constar. See In re Applied Magentics 

Corp. Sec. Litig., No. CV 93-6195 DT (JRX), 1994 WL 486550, at **3-4 (C.D. Cal. May 

16, 1994) (finding statement, “Applied Magnetics will continue to leverage its strong 

position and demonstrated ability to advance ferrite technology in targeting majorcustomer opportunities and growing its share of the market,” among others, actionable 

under Section 10(b) where the useful life of ferrite technology had “virtually come to an 

end”). Therefore, Defendants’ arguments in this regard should be rejected. 

3. Misstatements Concerning the Company’s Technology 

The Registration Statement states that the Company “believes that [its] Oxbar 

oxygen-scavenging technology . . . is the best performing technology for the 

preservation of oxygen sensitive products,” and that “Oxbar . . . is recognized as the best 

available technology for the protection of Oxygen sensitive foods.” ¶¶ 169, 171 

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(emphasis added). The statements, however, were materially false and misleading at the 

time of the IPO. 

Anheuser-Busch contracted with Constar to provide plastic beer bottles 

manufactured with the Company’s Oxbar technology. In the spring of 2002, AnheuserBusch began to complain to Constar about the quality of the bottles the Company 

produced. ¶ 105-07. Specifically, it complained that the Constar bottles failed to meet 

Anheuser-Busch’s specifications for the prevention of oxygen transmission. ¶ 107. An 

analysis showed that the Company’s Oxbar technology performed less effectively than 

that of its competitors, including Owen-Illinois, Inc. (“Owen”). ¶¶ 107-08. As a 

consequence of the poor performance of the Company’s Oxbar technology, AnheuserBusch dropped Constar as a supplier, and selected Owen to manufacture all of its plastic 

beer bottles. ¶ 109. The loss of the Anheuser-Busch account had an adverse impact 

beyond the loss of $3-$4.5 million in revenue. Id. In addition, the loss of this account 

hampered the Company’s efforts to secure other contracts for products manufactured 

with Oxbar. Id. 

Defendants attempt to trivialize the loss of the Anheuser-Busch contract by 

stating that the Anheuser-Busch contract accounted for less than 1% of the Company’s 

sales. Defs. Mem. at 39. Specifically, Defendants assert that the Company had “almost 

$750 million in sales in 2001, due in fair measure to its Oxbar technology. . . .” Id. 

(Emphasis added). Defendants then argue that the Company was under no obligation to 

disclose the loss of a single contract for less than 1% of the Company’s annual sales. Id. 

There are several obvious problems with Defendants’ contentions not the least of 

which is that the statements that Constar believed that Oxbar was the “best performing” 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 31 of 61
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technology for preserving oxygen sensitive foods, and that Oxbar was recognized as the 

“best available” technology of this type, were false and misleading in light of the 

circumstances surrounding the loss of the Anheuser-Busch contract.12 Moreover, the loss 

of the Anheuser-Busch business prevented the Company from pursuing other business 

opportunities utilizing Oxbar technology.13 ¶ 109. 

Furthermore, Defendants’ assertion that the Anheuser-Busch contract accounted 

for less than 1% of the Company’s annual sales is meaningless because Defendants do 

not quantify the percentage of such sales attributable to products made using the Oxbar 

technology. Defendants’ vague assertion that the Company’s annual sales were “due in 

fair measure” to the sales of Oxbar products, lacks the requisite specificity to make any 

determination concerning the volume of Oxbar product sales, and what percentage of 

such sales was lost when Anheuser-Busch switched to Owens’ product. Indeed, the 

portion of the Registration Statement to which Defendants cite (Statement of Operation, 

Ex. A, p. 31) does not attribute the Company’s sales to any particular technology. 

Accordingly, the percentage of sales attributable to Constar’s Oxbar-based products is an 

issue of fact inappropriate for consideration on this motion. 

 

12 Not only did Anheuser-Busch’s switch to Owens’ products establish that 

Anheuser-Busch did not believe that Oxbar was the “best available” oxygen-scavenging 

technology, but the fact that an analysis showed that Oxbar was not as effective at 

preventing oxygen transmission as certain competing technologies, establishes that 

Constar lacked any basis for its belief that Oxbar was the “best performing” technology 

of this type. Compare ¶¶ 107-08, with ¶¶ 169, 171. 

13 Contrary to Defendants’ contention, however, Plaintiffs never alleged that 

Constar was obligated to disclose the loss of the Anheuser-Busch contract. Defs. Mem. 

at 39. Although given its significance to the sale of Oxbar-based products, it was a 

material event that should have been disclosed. See Unisys, 2000 WL 1367951, at **3-4; 

Ganino v. Citizens Utils. Co., 228 F. 3d 154, 162 (2d Cir. 2000). 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 32 of 61
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Moreover, Defendants’ argument is, in substance, an assertion that the loss of the 

Anheuser-Busch contract is not material because that contract constituted a small 

percentage of the Company’s annual revenues. However, in Unisys, 2000 WL 1367951, 

at **4-6, the court considered and rejected the same rigid arithmetic approach to 

materiality that Defendants urge here. In Unisys, the court explained: 

Thus, the real issue is whether there is a substantial likelihood that the 

disclosure would have been viewed by the reasonable investor as having 

“significantly altered the ‘total mix’ of information” available to that 

investor. . . . To demonstrate that the BT and GSA were not material, 

defendant argues that the BT contract represented less than .6% of Unisys' 

annual revenue, and similarly the GSA contract also represented less than 

.6% of Unisys’ annual revenue. To support its mathematical approach to 

materiality, defendant cites, among other cases, In re Westinghouse Sec. 

Litig., 90 F.3d 696, 714-15 (3d Cir. 1996), because in that case, the 

inadequate loan loss reserve that gave rise to the litigation only 

represented .54% of the company's net income. However, the In re 

Westinghouse Sec. Litig. Court only concluded that the loan loss reserve 

was not material because plaintiff alleged no additional facts to 

demonstrate that this reserve inadequacy would be relevant to a reasonable 

investor. . . . 

In this case, the Court finds that it cannot conclude, as a matter of law, that 

defendants’ misrepresentations were not material. Each contract was part 

of a separate announcement signifying their individual importance to the 

company. 

Id.14 Here, as in Unisys, the significance of the Anheuser-Busch business is not merely 

determinable based on the percentage of annual sales it represented. The loss of that 

 

14 Indeed, the Supreme Court, in Basic, 485 U.S. at 236 n.14, expressly rejected the 

notion that materiality can be determined solely on the basis of simple arithmetic: 

Although ... ideally it would be desirable to have absolute certainty 

in the application of the materiality concept . . . such a goal is 

illusory and unrealistic. The materiality concept is judgmental in 

nature and it is not possible to translate this into a numerical 

formula. 

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business was a major setback for the Company because it foreclosed Constar from 

securing other business utilizing its Oxbar technology. ¶ 109. 

To the extent that Defendants argue that their statements concerning the efficacy 

and customer perception about Oxbar are expressions of belief concerning future 

performance or puffery (Defs. Mem. at 39-40), those characterizations are belied by the 

very language of the statements cited in the Complaint. First, the statements do not relate 

to the future performance of the technology inasmuch as the Registration Statement states 

“we believe Oxbar . . . is the best performing technology for the preservation of oxygen 

sensitive foods . . .,” and that “Oxbar . . . is recognized as the best available technology 

for the protection of Oxygen sensitive foods.” ¶¶ 169, 171 (emphasis added). 

In any event, “merely packaging a false or misleading statement as a belief or 

opinion does not automatically insulate the speaker from . . . liability.” Sprint Corp., 232 

F. Supp. 2d at 1214. In Virginia Bankshares, 501 U.S. at 1093-94, the Supreme Court 

determined that statements couched as opinion or belief may be actionable if the opinion 

is (1) known by the speaker to be false when made or (2) made without a reasonable basis 

in fact. See Mayer, 988 F.2d at 639 (“Material statements which contain the speaker’s 

opinion are actionable under Section 10(b) of the Securities Exchange Act if the speaker 

does not believe the opinion and opinion is not factually well-grounded."); Time Warner,

9 F.3d at 266 (acknowledging opinions or belief may be actionable). As alleged in the 

Complaint, there was no reasonable basis for the statements in the Registration Statement 

because analysis had shown that Oxbar was not the “best performing technology for the 

 

Id. (quoting House Committee on Interstate and Foreign Commerce, Report of the 

Advisory Committee on Corporate Disclosure to the Securities and Exchange 

Commission, 95th Cong., 1st sess., 327 (Comm. Print 1997)). 

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preservation of oxygen sensitive foods,” and because Anheuser-Busch’s cancellation of 

its business with the Company demonstrated that Oxbar was not “recognized as the best 

available technology for the protection of Oxygen sensitive foods.” 

4. The Misleading Statements Concerning Capital 

Expenditures and Expansion 

a. Capital Expenditures 

Plaintiffs also allege that certain “Risk Factors” in the Registration Statement are 

materially false and misleading because they describe as future contingencies events or 

conditions that had already occurred. For example, numerous former Constar employees 

described the Company’s inability to make the capital expenditures necessary to upgrade 

its manufacturing equipment, as well as the adverse impact of the failure to make such 

expenditures. ¶¶ 85-90, 96-104, 110-21, 127-34. 

Nevertheless, the Registration Statement warns only of the possibility that the 

Company may not be able to make necessary capital expenditures in the future: “[i]f we 

do not have adequate funds to make our capital expenditures or if the expected benefits of 

capital expenditures are not achieved, our business may by impaired or our profitability 

reduced.” ¶ 162 (emphasis added). Likewise, while the Company had failed to make 

critical capital expenditures to preserve its competitive position, the Registration 

Statement merely warns that “[i]f we are unable to generate sufficient cash from 

operations to service our debt and fund our operations . . . we may have to defer capital 

expenditures . . . which could weaken our competitive position.” ¶ 158 (emphasis 

added). 

Because the Registration Statement couches events that had already transpired as 

mere future possibilities, such statements are materially false and misleading: 

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To warn that the untoward may occur when the event is contingent is 

prudent; to caution that it is only possible for the unfavorable events to 

happen when they have already occurred is deceit. 

Huddleston v. Herman & MacLean, 640 F.2d 534, 544 (5th Cir. 1981), aff’d in relevant 

part and rev’d in part on other grounds, 459 U.S. 375 (1983). See also In re Apple 

Computer Sec. Litig., 886 F. 2d 1109, 1115 (9th Cir. 1989) (“There is a difference 

between knowing that any product-in-development may run into a few snags, and 

knowing that a particular product has already developed problems. . . .”); In re 

MobileMedia Sec. Litig., 28 F. Supp. 2d 930 (D.N.J. 1998) (“Warnings of possible 

adverse events are insufficient to make omissions of present knowledge of certain future 

events legally immaterial. . . . Allegations based upon omissions of existing facts or 

circumstances do not constitute forward looking statements protected by the safe harbor 

of the Securities Act.”); In re ValuJet, Inc. Sec. Litig., 984 F. Supp. 1472, 1479 (N.D. Ga. 

1997) (refusing to apply safe harbor because of defendants’ alleged failure to disclose 

existing facts). 

Once again, Defendants mischaracterize Plaintiffs’ allegations by asserting that 

because the Company disclosed the capital expenditures it did make, it was under no 

obligation to disclose the expenditures that it chose not to make. Defs. Mem. at 28-29. 

Plaintiffs, however, make no such allegation. Rather, Plaintiffs allege that Defendants’ 

warnings were misleading because the events described as future possibilities had, at the 

time such statements were made, already occurred.15

 

15 Defendants erroneously contend that Plaintiffs allege that the Company’s 

forward-looking statements concerning future capital expenditures are misleading. Defs. 

Mem. at 29-30. As discussed, herein, Plaintiffs have made no such allegation. Instead, 

Plaintiffs allege that Defendants’ warning that the Company may be adversely affected 

by its inability to make necessary capital expenditures in the future, when Constar’s 

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Defendants also assert that the mere disclosure of financial data concerning the 

capital expenditures that Constar did make, in conjunction with the Company’s debt load, 

somehow cures this deficiency. This is incorrect. As noted above, “courts interpreting 

the securities laws have long recognized that reviewing the context in which a disclosure 

appears is an essential part of determining the disclosure’s adequacy.” Isquith, 847 F. 2d 

at 201. Here, the disclosure of raw financial data regarding capital expenditures and 

outstanding debt provides no context from which the investing public can ascertain the 

sufficiency of those capital expenditures. This is especially true because the Registration 

Statement also contained misleading statements concerning Constar’s manufacturing 

equipment, capacity expansion, technology, and capital expenditures. ¶¶ 153-72. 

b. Capacity Expansion 

The Registration Statement also states that the Company planned to “invest[] in 

capacity expansion in all categories of PET bottle markets where profitable growth can 

be sustained by appropriate contractual terms with our customers.” ¶ 154. This 

statement is materially false and misleading, however, because the Company not only 

lacked the financial wherewithal to expand capacity (¶ 155), but it also had actually 

reduced capacity through plant closures caused by lost business. ¶¶ 103, 117. 

Defendants argue that the Company’s decision not to pursue certain contracts, 

such as the Folgers’ canister contract or the Clorox contract, were simply business 

decisions that did not reflect Constar’s inability to make the capital expenditures 

necessary to secure that new business. Defs. Mem. at 31-32. This assertion, however, 

raises a factual issue - whether Constar failed to expand capacity to pursue these new 

 

operations and business had already been affected by its failure to make such 

expenditures, is materially false and misleading. 

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business opportunities because it lacked the capital to do so, or decided to forego such 

opportunities in the exercise of its business judgment - which cannot be resolved on this 

motion.16 Ravisent, 2004 WL 1563024, at *2. Further, Defendants’ improper factual 

assertion ignores the detailed information provided by myriad former employees that the 

Company lacked the funding to perform routine maintenance on existing equipment (¶¶ 

85-90) or complete projects that had already been started (id., ¶ 85), let alone purchase 

new equipment. ¶¶ 96-99, 110-16, 119-21, 127-29, 134. 

5. Material Omissions Concerning Constar’s Financial 

Condition 

The Registration Statement omits material information about the financial 

relationship between Crown and Constar that made other statements materially 

misleading. For example, while the Registration Statement discloses that the proceeds of 

the IPO would be used to pay off part of the Company’s debt, including a $350 million 

note to Crown (Defs. Mem. at 23-24), the Registration Statement does not disclose that 

the $350 million note to Crown was, in effect a “dividend” for Crown, despite the fact 

that Constar had insufficient retained earnings to pay a dividend of that magnitude. ¶ 22. 

In other words, the Registration Statement failed to disclose that Crown – which provided 

no value in exchange for the $350 million payment – was able to effectively transfer a 

substantial amount of its staggering debt to Constar, while leaving the Company with 

little or no working capital upon completion of the IPO. Id. 

Defendants argue that Plaintiffs have alleged that the Registration Statement 

omits material information concerning Crown’s financial condition and its desperate need 

 

16 To the extent that Defendants assert that such language is forward-looking and 

subject to “bespeaks caution” doctrine, as explained below, their arguments must also 

fail. 

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for cash to service its enormous debt. Defs. Mem. at 22. Defendants spend the next two 

pages explaining why Plaintiffs’ allegation must fail because, inter alia, information 

concerning Crown’s financial condition was public knowledge. Defs. Mem. at 22-23. 

Once again, however, Defendants attack an allegation that Plaintiffs never made. 

Plaintiffs allege that the Registration Statement failed to disclose material 

information about the financial relationship between Crown and Constar. ¶ 22-23. 

Plaintiffs do not challenge the absence of information about Crown’s heavy debt, except 

to the extent that the IPO afforded Crown an opportunity to unload $350 million of that 

debt onto Constar. ¶ 23. Indeed, Defendants’ “interpretation” of Plaintiffs’ allegation is 

nothing more than the by-product of the misleading use of an ellipse. Compare ¶ 22 

(“Had Defendants disclosed the true state of affairs at Crown and Constar in the 

Registration Statement . . .” (emphasis added)), with Defs. Mem. at 22 (“Plaintiffs 

contend that ‘had defendants disclosed the true state of affairs at Crown . . . in the 

Registration Statement . . . .’” (citing ¶ 22)). 

Defendants also argue that the Registration Statement is not misleading because it 

discloses the debt to Crown, warns that failure to generate sufficient cash flow to service 

Constar’s debt may adversely impact capital expenditures, the Company’s liquidity, and 

its competitive position. Defs. Mem. at 25-26. Defendants’ argument ignores, however, 

that the Registration Statement omitted any mention of the fact that the Company 

received nothing in exchange for the $350 million note it issued to Crown. In light of the 

fact that the Company was using outdated and slower machinery than its competitors, 

could not afford to provide necessary and adequate maintenance for that equipment, and 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 39 of 61
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was experiencing mass customer defections due to its lack of competitiveness, resulting 

in plant closures and financial losses, this information is material. 

6. Material Misrepresentations And Omissions 

Concerning Resin 

Plaintiffs allege that the statement that most of the Company’s contracts contain 

provisions that permit Constar to pass through increases in the price of resin to its 

customers was materially false and misleading. ¶¶ 173-74. While the Registration 

Statement does warn that market conditions “may” not permit the Company to fully pass 

through price increases and that such inability “may” adversely affect Constar’s 

profitability (¶ 173), the Registration Statement failed to disclose that it was virtually 

impossible to pass through such price increases to PepsiCo – Constar’s largest customer. 

¶ 174. 

Mischaracterizing the information provided by one of Plaintiffs’ confidential 

sources, Defendants argue that they were under no obligation to disclose the “economics 

101” explanation that PepsiCo used alternate packaging materials when resin prices 

increased. Defs. Mem. at 41. Defendants miss the point. 

First, the Registration Statement states that the switch to alternative packaging is a 

mere risk, whereas CW1 stated that it was a regular practice by PepsiCo to avoid the 

Company invoking the pass-through provisions of its contract. ¶¶ 174-75. Moreover, 

CW1 also stated that PepsiCo used other strategies to avoid invocation of the resin price 

pass-through provisions. ¶ 176. Thus, for example, PepsiCo would threaten to raise 

product defect issues, which could cause the shutdown of an entire production line, to 

avoid the pass-throughs. Id. 

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In addition, the Registration Statement provides that PepsiCo could choose to 

supply the Company with an increasing amount of resin, which could diminish the 

Company’s leverage with other resin suppliers and, thereby, adversely impact 

profitability. ¶ 177. However, the Registration Statement fails to disclose that PepsiCo 

forced Constar to purchase inferior quality Futura resin - instead of Eastman resin - which 

caused widespread product defects and adversely impacted the Company’s margins. ¶¶ 

178-79. 

Likewise, the Registration Statement falsely states that the resin price increase 

pass through provisions “insulate our gross profits from changes in resin prices. . . .” ¶ 

182. This statement is false because the Company was unable to pass through such 

increases to Pepsi-Co, which accounted for 35% of Constar’s 2001 revenues. ¶¶ 174-76. 

Therefore, these contractual provisions did not insulate the Company from the effects of 

such price increases. 

7. Defendants’ False Statements Concerning Goodwill 

At the time of the IPO, Constar reported $331 million in goodwill on its balance 

sheet – nearly 50% of the Company’s total asset value. The $331 million represented a 

carry-forward of the goodwill Constar recognized when it was purchased by Crown in 

1992. ¶¶ 3(d), 62. 

By the time of the IPO, however, at least $183 million of Constar’s goodwill was 

impaired because of the adverse events and conditions described in the Complaint. 

Moreover, there were numerous red flags that the Company’s goodwill was substantially 

overstated by the time of the IPO, including: (i) declining demand for the Company’s 

products; (ii) the loss of key customers; (iii) downward industry pressures coupled with 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 41 of 61
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increasing resin prices; and (iv) substantial goodwill writedowns by Constar’s 

competitors in 2002. ¶¶ 193-05. 

Constar’s failure to writedown goodwill prior to the IPO was a violation of 

GAAP, as well as accounting rule SFAS 142. Further, the Company’s overstatement of 

goodwill by more than 55%, made the financial results incorporated into the Registration 

Statement were materially false and misleading. ¶¶ 184-92. 

Defendants do not - and, indeed, cannot - deny that the Company’s goodwill was 

overstated or that the financial results in the Registration Statement were materially false 

and misleading. Instead, Defendants improperly attempt to “explain away” their failure 

to properly account for goodwill by asserting that they were not required to tell the truth 

concerning Constar’s goodwill because the market must have already known of the 

goodwill impairment and took such impairment into account. Defendants contend that 

the fact that the initial IPO share price had to be reduced and “the market set the price for 

Constar in the course of the IPO,” somehow establishes that the market understood that 

the Company’s goodwill was overstated. Defs. Mem. at 42-43. This is absurd. 

Obviously, a number of factors go into the pricing of an IPO. See, e.g. Reg S-K 

(Requiring defendants to list factors considered in setting the IPO Price). Defendants’ 

contention that the market understood that the Company’s goodwill was materially 

overstated and, therefore, drove down the price of Constar’s offering prior to the IPO is 

rank speculation. In support of this argument, Defendants assert that the fact that the 

price of the Company’s stock did not fall upon announcement of the goodwill writedown 

- ten months after the IPO - demonstrates that the public had already discounted the value 

of Constar’s goodwill. Defs’ Mem. at 43-44. However, that the market may or may not 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 42 of 61
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have been aware of the overstatement of the value of the Company’s goodwill in August 

2003, demonstrates nothing about what the market knew in November 2002. 

Moreover, Defendants’ contention about what the market knew about Constar’s 

overstated goodwill is a factual issue not appropriate for decision on a motion to dismiss. 

See In re Cell Pathways Inc. Sec. Litig., No. 99-725, 2000 WL 805221, at *8 (E.D. Pa. 

June 21, 2000) (“At this stage of the proceedings . . . [it is] inappropriate . . . to dismiss 

the Complaint based merely on [defendants’] vehement insistence on their version of the 

contested issues in this case.”). Cf. Ganino v. Citizens Utils. Co., 228 F.3d at 167 (“The 

truth-on-the-market defense is intensely fact-specific and is rarely an appropriate basis 

for dismissing a § 10(b) complaint . . .”); In re Resource America Sec. Litig., No. Civ. 98-

5446, 2000 WL 1053861, at *5 (E.D. Pa. July 26, 2000) (“ To prevail on a ‘truth on the 

market’ defense at this stage of the litigation, [the defendants] must establish that defense 

as a matter of law on the basis of the allegations of the Amended Complaint, and they 

have not done so.”). Thus, only a full factual record, after all discovery is completed, 

would justify consideration of this argument. 

Defendants also assert certain risk disclosures – disclosures that do not reflect the 

true amount of goodwill – to relieve them of liability. For instance, Defendants claim 

that they disclosed that Constar had recently changed its accounting method for reporting 

goodwill, had just taken a write down to goodwill, and cautioned investors that further 

reductions could happen in the future. Accordingly, Defendants argue that they had no 

obligation to predict that Constar would subsequently write down additional goodwill. 

Again, Defendants miss the point. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 43 of 61
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Plaintiffs do not allege that Defendants violated the securities laws by failing to 

predict that goodwill would need to be written down in the future. Plaintiffs allege that 

“goodwill was overstated and should have been written down prior to the IPO.” ¶ 205. 

Thus, at the time the Registration Statement was issued, it contained materially false and 

misleading financial statements. The Complaint contains a detailed analysis explaining 

why Constar’s goodwill was impaired and should have been written down prior to the 

IPO. ¶¶ 193-07. Indeed, Constar’s own accounting policies required no less. See ¶¶ 67, 

193-205; see also supra at §§I.A.1-3. Therefore, Plaintiffs have adequately alleged that 

the Registration Statement was materially false and misleading, not because of a failure 

to predict future events, but because the Company failed to properly write down its 

impaired goodwill prior to the IPO. 

In addition, because the Company’s goodwill was already substantially impaired 

at the time the Registration Statement became effective, the Company’s “warning” that a 

goodwill write-down could occur is itself misleading. Huddleston, 640 F.2d at 544; 

MobileMedia, 28 F. Supp. 2d at 930 (“Warnings of possible adverse events are 

insufficient to make omissions of present knowledge of certain future events legally 

immaterial.... Allegations based upon omissions of existing facts or circumstances do not 

constitute forward looking statements protected by the safe harbor of the Securities 

Act.”); ValuJet, 984 F. Supp. at 1479 (refusing to apply safe harbor because of 

defendants’ alleged failure to disclose existing facts). 

C. Defendants’ Attack on the Confidential Sources is Improper 

Defendants go to great lengths to discredit the confidential sources cited in the 

Complaint in order to undermine Plaintiffs’ allegations. Defs. Mem. at 19-21; Defs. Ex. 

C. 

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In so doing, Defendants seek to impermissibly impose the “particularity” 

requirement of Rule 9(b) and/or the heightened pleading standards of the Private 

Securities Litigation Reform Act (“PSLRA”) to measure Plaintiffs’ Section 11 

allegations. See Defs. Mem. at 20 n.5. Indeed, the primary authority cited by 

Defendants, In re Metawave Communications Corporation Securities Litigation, 298 F. 

Supp. 2d 1056 (W.D. Wash. 2003), concerned the adequacy of allegations regarding the 

bases of the confidential witnesses’ knowledge under the heightened pleading standards 

of the PSLRA in a securities fraud action brought under Section 10(b) of the Exchange 

Act. Id. at 1067. 17

Rule 9(b), however, pertains only to those actions sounding in fraud. See 

Ravisent, 2004 WL 1563024, at **13-14. Here, Defendants have not – and, indeed, 

cannot – argue that Plaintiffs’ allegations sound in fraud. Therefore, the requirements of 

Rule 9(b) are simply inapplicable here. Likewise, the heightened pleading standards of 

the PSLRA do not apply to claims brought under Section 11. Adams Golf, 381 F3d at 

274 n. 5. See Carol Gamble Trust 86 v. E-Rex, Inc., No. 03-15032, 2004 WL 43216, at 

*2 (9th Cir. Jan. 5, 2003) (violations of sections 11 and 12 of the 1933 Act are not 

governed by the PSLRA); Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 

 

17 All the authorities upon which Defendants rely in this regard (Defs. Mem. at 20, 

n.5) relate to claims sounding in fraud. Therefore, the adequacy of the allegations in 

those cases was determined under both the PSLRA and Rule 9(b). In any event, the 

allegations of the Complaint provide sufficient information concerning the bases of the 

information provided by various confidential witnesses. See In re ATI Tech. Inc., Sec. 

Litig., 216 F. Supp. 2d 418, 436 n.11 (E.D. Pa. 2002) (“we held that unnamed sources of 

information comport with heightened pleading so long as sufficient information is given 

‘to support the probability that a person in the position occupied by the source would 

possess the information alleged’”) (citations omitted). 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 45 of 61
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2002) (same); In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281, 338 (S.D.N.Y. 

2003) (“the PSLRA pleading requirements have no application to claims that arise under 

Section 11 or other provisions of the Securities Act . . . e.g., Section 15”). Plaintiffs need 

“plead only misrepresentations and/or omissions that satisfy the liberal pleading standard 

of Rule 8(a).” Ravisent, 2004 WL 1563024, at *14. Therefore, Defendants’ challenge to 

the bases of the witnesses’ knowledge is irrelevant for purposes of this motion. 

Further, Defendants’ arguments amount to little more than a challenge to the 

evidentiary support for the allegations of the Complaint. Because Plaintiffs’ allegations 

must be accepted as true for the purposes of this motion (Trump Hotels & Casino 

Resorts, 140 F.3d at 483; Unisys, 2000 WL 1367951, at *3), any rebuttal evidence or 

attempted impeachment of witnesses must await a proper record and trial on the merits. 

See Ravisent, 2004 WL 1563024, at *2 (in deciding a Rule 12(b)(6) motion, “the court 

should not look to whether plaintiffs will ‘ultimately prevail,’ it should only consider 

whether they should be allowed to offer evidence in support of their claims”) (citing 

Burlington Coat Factory, 114 F.3d at 1420). 

In other words, Plaintiffs are not required to plead any sources under Rule 8(a). 

That Plaintiffs did so here does not undermine the allegations, which are taken as true, 

because the detail is not necessary to satisfy Plaintiffs’ pleading burden. 18 Ravisent, 

2004 WL 1563024, at *14. 

 

18 In addition to a statement regarding jurisdiction and a demand for relief, Rule 

8(a) requires only that a complaint contain “a short and plain statement of the claim 

showing that the pleader is entitled to relief. . . .” 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 46 of 61
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D. Defendants’ False And Misleading Statements Are Not 

 Immunized By Purported “Risk Disclosures” 

Defendants argue that they are insulated from liability for their false and 

misleading statements and omissions, claiming alternatively that (i) they are immunized 

under the “bespeaks caution” doctrine because they adequately disclosed the true facts 

and risks involved; and (ii) that their misstatements and omissions are not material. Defs. 

Mem. at 14-19. Defendants are wrong both legally and factually. 

1. Defendants’ False and Misleading Statements Are Not 

Protected Under the Bespeaks Caution Doctrine 

The “bespeaks caution” doctrine is narrow in scope, relying as it does on Supreme 

Court precedent that holds “not every mixture with the tru[th] will neutralize the 

deceptive.” Virginia Bankshares, 501 U.S. at 1097. Hence, federal courts have 

cautioned that the “bespeaks caution” doctrine applies only when “optimistic projections 

are coupled with cautionary language -- in particular, relevant specific facts or 

assumptions -- affecting the reasonableness of reliance on the materiality of those 

projections.” In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994). 

[A]n overbroad application of the doctrine would encourage management 

to conceal deliberate misrepresentations beneath the mantle of broad 

cautionary language. To prevent this from occurring, the bespeaks caution 

doctrine applies only to precise cautionary language which directly 

addresses itself to future projections, estimates or forecasts in a 

prospectus. By contrast, blanket warnings that securities involve a high 

degree of risk [are] insufficient to ward against a federal securities fraud 

claim. 

Id. 

Thus, the cautionary language must be detailed and specific to the future 

projection at issue. In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 371-72 (3d Cir. 

1993) (“To suffice, the cautionary language must be substantive and tailored to the 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 47 of 61
40

specific future projections, estimates or opinions in the prospectus which the plaintiffs 

challenge.”). Here, the bespeaks caution doctrine cannot insulate Defendants’ untrue and 

misleading present tense statements that: 

• “we are able to maintain our competitive cost position as we grow 

by purchasing state-of-the-art manufacturing equipment for our 

high-volume product lines and redeploying existing machines to 

lower volume and specialty product lines;” 

• “We believe that we have the patented technology and full-service 

deign [sic] capabilities necessary to capture expected large scale 

conversion opportunities for PET packaging;” and 

• “We believe that we are advantaged by opportunities that exist to 

deploy existing high speed equipment in some of the newly 

converting specialty custom applications, enhancing both 

operating efficiency and capital efficiency throughout our 

system.” 

Defs. Mem. at 34, 38. (emphasis added). See Viropharma, 2003 WL 1824914, at *8 

(finding that the language cited by Defendants as cautionary was verbose, and fell far 

short of advising investors about any specific risks); Schaffer v. Evolving Sys., Inc., 29 F. 

Supp. 2d 1213, 1221 (D. Colo. 1998) (the bespeaks caution doctrine “does not apply to 

misleading statements concerning ‘present factual conditions’”).19

2. The Purported Risk Disclosures Are Not Adequate 

Even if the “bespeaks caution” defense were appropriate for resolution on a 

motion to dismiss, the language quoted in Defendants’ motion is not sufficiently tailored 

 

19 The authorities relied upon by Defendants do nothing to weaken Plaintiffs’ 

argument. Defs. Mem. at 16-17. See Advanta, 180 F.3d at 538 (statements alleged to be 

false and misleading were accurate reports of past earnings and expressions of optimism 

for the future not statements of present facts); In re U.S. Interactive, Inc. Class Action 

Sec. Litig., No. 01-CV-522, 2002 WL 1971252, *18 (E.D. Pa. Aug. 23, 2002) (statements 

found to be actionable because they were not expressions of opinion, but rather 

“representations of the current situation of USIT” at the time the statements were made). 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 48 of 61
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to the adverse events and conditions identified in the Complaint to insulate Defendants 

from liability. See Asher v. Baxter Intern. Inc., No. 03-3189, 2004 WL 1687885, at *5 

(7th Cir. July 29, 2004) (Easterbrook, J.) (“cautions must be tailored to the risks that 

accompany the particular projections”); In re NationsMart Corp. Sec. Litig., 130 F.3d 

309, 317 (8th Cir. 1997) (“Cautionary statements . . . cannot be general risk warnings or 

mere boilerplate; they must be detailed and specific.”). Instead, the Registration 

Statement merely contains generic warnings concerning the possible adverse effects of 

various then-existing events. For example, the Registration Statement “warns”: 

• “We Had Net Losses In Recent Years And We May Not 

Generate Profits In the Future” – “For the fiscal years ended 

December 31, 2001 and 2000 we had net losses of approximately 

$13.6 million and $14.8 million respectively.” 

• “We Have To Generate Sufficient Cash Flow To Service Our 

Debt And Provide For Ongoing Operations” – “[W]e may have 

to defer capital expenditures or sell assets to generate cash .... 

When we complete this offering, we will have approximately 

$365 million in principal amount of debt...” 

• “Our Debt May Negatively Impact Our Liquidity And Harm Our 

Competitive Position” - “Our debt may have important negative 

consequences for us, such as...limiting our ability to obtain 

additional financing.” 

• “If We Do Not Have Adequate Funds To Make All Capital 

Expenditures That Are Necessary To Grow With Our Markets 

and Maintain Our Facilities, Our Business May Be Impaired 

And Our Profitability Reduced” – “We expect to have substantial 

capital needs in the near future .... If we do not have funds 

available to satisfy our capital expenditures requirements, we may 

not be able to pursue our strategy for profitable growth.” 

• “Demand For Our Products May Fluctuate As Our Customers 

Change Their Product Lines And Marketing Strategies” – 

“[O]ur customers’ demand for PET Packaging may fluctuate or 

decrease permanently.” 

• “We Have A Significant Amount of Goodwill And A Writedown 

of Goodwill Could Result In Lower Reported Net Income And A 

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42

Reduction Of Our Net Worth” – “We have a significant amount 

of goodwill and a writedown of our goodwill would reduce our 

net worth.... One circumstance that may indicate the need for an 

immediate impairment review would be if our book value was in 

excess of our market capitalization.” 

Defs. Mem. at 3 (emphasis added). 

This broad recitation of general market economics simply does not warn of the 

specific, undisclosed, then-existing adverse conditions and events identified in the 

Complaint. For example, the Registration Statement failed to disclose that (i) Constar’s 

manufacturing equipment was already outdated, rendering the Company less competitive 

than its peers (¶¶ 82-90); (ii) Constar could not upgrade its manufacturing equipment due 

to the Company’s lack of adequate capitalization (¶¶ 85-89, 98, 112, 121, 129, 134); (iii) 

Constar had lost, and was losing, key customer accounts (¶¶ 92-126); (iv) the Company’s 

manufacturing and technological limitations adversely affected Constar’s ability to 

develop new business (¶¶ 98-99, 128-30); (v) the lack of adequate capitalization 

prevented the Company from adequately maintaining its manufacturing infrastructure (¶¶ 

86-89, 100-02); and (vi) it was virtually impossible for Constar to pass through any 

increase in resin prices to PepsiCo and, therefore, that the Company’s profitability was 

not insulated from the effects of resin price increases by contractual provisions. ¶¶ 174-

76. 

 In In re Westinghouse Sec. Litig., 90 F. 3d 696, 714 (3d Cir. 1996), the Third 

Circuit explained: 

An omitted fact is material if there is a “substantial likelihood that, under 

all the circumstances, the omitted fact would have assumed actual 

significance in the deliberations of the reasonable shareholder.” . . . “In 

other words, the issue is whether there is a substantial likelihood that the 

disclosure would have been viewed by the reasonable investor as having 

‘significantly altered the “total mix” of information’ available to that 

investor.” Moreover, “[m]ateriality is a mixed question of law and fact, 

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43

and the delicate assessments of the inferences a reasonable shareholder 

would draw from a given set of facts are peculiarly for the trier of fact.” 

Therefore, “[o]nly if the alleged misrepresentations or omissions are so 

obviously unimportant to an investor that reasonable minds cannot differ 

on the question of materiality is it appropriate for the district court to rule 

that the allegations are inactionable as a matter of law.” 

Id. (citations omitted). See also Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir. 1995) 

(“whether adverse facts were adequately disclosed is a mixed question to be decided by 

the trier of fact”). Here, the descriptions of generalized market risks contained in the 

Registration Statement lack the specificity necessary to meaningfully warn investors of 

the adverse conditions and events identified in the Complaint. Therefore, such 

“warnings” do not insulate Defendants from liability for the misstatements and omissions 

in the Registration Statement. 

Further, the “risk disclosures” are couched as contingencies, even though those 

events had already occurred. For example, as discussed above, the Registration 

Statement contains “warnings” concerning the adverse consequences that could occur if 

Constar lacked sufficient funding to make necessary capital expenditures. See Section 4. 

a., supra; ¶¶ 85-90, 96-104, 110-21, 127-34. 

This renders the disclosures inadequate. “[A] defendant may not use cautionary 

language to protect himself when he is already aware that the risks he is cautioning 

against have come to fruition.” Viropharma, 2003 WL 1824914, at *8. See also Cell 

Pathways, 2000 WL 805221, at *11 (“bespeaks caution doctrine ‘is only available for 

forward-looking statements, and cannot be invoked for misleading statements of existing 

fact’”) (citations omitted); In re Towne Servs. Sec. Litig., 184 F. Supp. 2d 1308, 1319 

(N.D. Ga. 2001) (declining to dismiss §11 claim where “the Prospectus’ open-ended, 

general, and future-oriented warnings about [defendant’s] computer systems (and the 

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44

possibility of customer attrition) are misleading in light of severe, discrete problems [that 

defendant] had already suffered in this regard”). Accordingly, Defendants may not 

insulate themselves from liability simply by characterizing events as future risks, when 

those events have already occurred.20

Indeed, because the various “risks” described in the Registration Statement had 

already come to fruition, the “warnings” themselves were materially false and 

misleading. “There is no reason to think - at least, no reason that a court can accept at the 

pleading stage, before plaintiffs have access to discovery - that the items mentioned in 

[Defendants’] cautionary language were those thought at the time to be the (or any of the) 

‘important’ sources of variance.” Asher, 2004 WL 1687885, at * 7. See also Voit v. 

Wonderware Corp., 977 F. Supp. 363, 370 (E.D. Pa 1997) (statements couched as 

cautionary warnings may themselves be false and misleading); Provenz v. Miller, 102 

F.3d 1478, 1493 (9th Cir. 1996) (reversing summary judgment because so-called risk 

disclosures were themselves misleading when made).21

 

20 See also Huddleston, 640 F.2d at 544 (“To warn that the untoward may occur 

when the event is contingent is prudent; to caution that it is only possible for the 

unfavorable events to happen when they have already occurred is deceit; In re Pemstar, 

Inc. Sec. Litig., No. Civ. 02-1821 DWFSRN, 2003 WL 21975563, at *9 (D. Minn. Aug. 

15, 2003) (denying motion to dismiss §11 claim where defendant had disclosed that 

certain adverse trends could adversely affect demand for defendants’ services in the 

future but failed to disclose that problems had already begun). 

21 Defendants’ authorities do not compel a different result. Unlike here, in 

Defendants’ cases the companies included specific, non-generic risk disclosures in their 

public filings. See, e.g., Donald J. Trump Casino, 7 F.3d at 372 (finding that the 

prospectus contained abundant and meaningful cautionary language); Adams Golf, 381 

F.3d at 279(finding that “the cautionary statements relate directly to the claim on which 

plaintiffs allegedly relied”); Parnes v. Gateway 2000, Inc., 122 F.3d 539, 548-549 (8th 

Cir. 1997)(finding that the prospectus truly “bespeaks caution” because defendants went 

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Because the adequacy of the alleged cautionary language that purportedly 

neutralized Defendants’ untrue and misleading statements is uniquely a question of fact, 

it is inappropriate for resolution on a motion to dismiss pursuant to Fed. R. Civ. P. 

12(b)(6). Indeed, some courts have determined that resolution of this issue is 

inappropriate even at the summary judgment stage. In re Compaq Sec. Litig., 848 F. 

Supp. 1307, 1318 (S.D. Tex. 1993) (“Although the disclosures that contain optimistic 

statements also contain cautionary language, the court is not persuaded that these 

inclusions justify the conclusion, at the summary judgment stage, that the statements 

‘bespoke caution’ as a matter of law. Statements must contain more than vague 

cautionary language concerning such broad factors as competition, economic recession, 

and foreign exchange rates to ‘bespeak caution.’”).22

E. Defendants’ Loss Causation Arguments Are Baseless And 

Should Be Rejected 

Defendants argue in passing that there is a “complete disconnect between the 

alleged loss-producing event (the July 29, 2003 announcement) and the alleged 

misrepresentations/omissions.” See Defs. Mem. at 9. This argument – an attempt at 

arguing a lack of loss-causation – is improper on a motion to dismiss. 

Loss causation is not an element of a Section 11 claim. Lyne v. Arthur Andersen 

& Co., 772 F. Supp. 1064, 1067 (N.D. Ill. 1991); Miller v. New Am. High Income Fund, 

755 F. Supp. 1099, 1106-09 (D. Mass 1991), aff’d sub nom., Lucia v. Prospect St. High 

 

to great lengths to warn potential investors and convey the riskiness of the investment and 

directly addressed the substance of the statements that plaintiffs had challenged). 

22 As such, Defendants’ argument and the question of whether “optimistic 

statements regarding own product are inactionable” cannot be resolved here on a motion 

to dismiss. See Defs. Mem. at App. B, at 2. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 53 of 61
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Income Portfolio, Inc., 36 F.3d 170 (1st Cir. 1994); Billet v. Storage Tech. Corp., 72 

F.R.D. 583, 586 n.6 (S.D.N.Y. 1976); Emmi v. First Mfr. Nat’l Bank, 336 F. Supp. 629, 

635 (D. Me. 1971). Rather, in enacting Section 11(e), Congress unmistakably made 

“negative causation” an affirmative defense. Akerman v. Oryx Communications, Inc., 

810 F.2d 336, 341 (2d Cir. 1987). See also Bastian v. Petren Res. Corp., 892 F.2d 680, 

685 (7th Cir. 1990) (“absence of loss causation is an explicit defense”); Nielsen v. 

Greenwood, 849 F. Supp. 1233, 1247 (N.D. Ill. 1994) (“[it is] well-settled that loss 

causation is not a requirement . . . under § 11”); In re Fortune Sys. Sec. Litig., 680 F. 

Supp. 1360, 1364 (N.D. Cal. 1987) (once plaintiffs allege omission under Section 11, 

“causation is presumed and the burden is then on defendants to show that ‘factors other 

than’ the omissions caused the decline in the value of the stock for which plaintiffs seek 

to recover”). The measure and the causation of damages is not “an essential element of 

[plaintiffs’] case” that must be plead by Plaintiffs. See Celotex Corp. v. Cotreff, 477 

U.S.317, 323 (1986). Thus, the burden remains on Defendants to plead and prove that 

other factors caused the decline in the price of Constar’s stock. See Akerman, 810 F.2d at 

341-343.23 

 

23 In any event, damages in suits brought under the Securities Act of 1933 are 

determined by statute and are measured as the difference between the offering price and 

the stock price at the time of suit. 15 U.S.C. §77k(e). Under this formulation, Plaintiffs 

can readily establish that the members of the Class sustained damages. 

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F. The Underwriter Defendants are Liable for Constar’s False 

and Misleading Prospectus and Registration Statement24

The Underwriter Defendants move separately to dismiss the Complaint, but offer 

little in the way of new arguments (or authority) in support of their motion. Essentially, 

the Underwriters assert that the Complaint “does not contain a single factual allegation 

suggesting any improper conduct on the part of the Underwriter Defendants,” See

Memorandum of Law in Support of Underwriter Defendants’ Motion to Dismiss the 

Consolidated Amended Class Action Complaint (“Underwriters Mem.”) at 1.25 The 

Underwriters, however, misapprehend what Plaintiffs must plead to state a viable claim. 

As shown below, in their Complaint, Plaintiffs need only plead that the Underwriters 

participated in an IPO completed pursuant to a materially false and misleading 

Registration Statement. Because Plaintiffs have done so, the Underwriters’ motion 

should be denied. 

 

24 The Underwriter Defendants have incorporated by reference the arguments 

presented by the Constar Defendants. Therefore, the arguments set forth in response to 

the Constar Defendants’ motion to dismiss apply equally to the arguments presented by 

the Underwriters. 

25 The Underwriters also assert the opposite position – that Plaintiffs allege 

intentional misconduct by the Underwriters and, to the extent the allegations can be read 

to plead fraud, Plaintiffs have not satisfied the particularity requirements of Rule 9(b). 

See Underwriters’ Mem. at 3 n.4. As discussed herein, Plaintiffs need not plead their 

Section 11 claims with particularity because such claims are based on negligence and 

strict liability - not fraud. See Adams Golf, 381 F.3d at 273; Neuberger v. Shapiro, No. 

Civ. A. 97-7947, 1998 WL 408877, at *5 (E.D. Pa. July 17, 1998) (Rule 9(b) not 

applicable to claim under §11 where complaint “ma[de] no mention of intentional or 

reckless violations of the securities laws”); Other circuits are in accord. See Lone Star 

Ladies Inv. Club v. Schlotzsky’s, Inc., 238 F.3d 363, 369 (5th Cir. 2001); NationsMart, 

130 F.3d at 318-19; Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003). 

Therefore, the Complaint is subject only to the liberal notice pleading standard of Fed. R. 

Civ. P. 8. 

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G. The Complaint Adequately Alleges Section 11 Liability Against 

the Underwriter Defendants 

 Pursuant to the plain language of the statute, Section 11 imposes strict liability 

against every underwriter who participated in the Constar IPO, unless the underwriters 

establish the affirmative defense of due diligence. 15 U.S.C. §77k(a)(1)-(3). In 

Huddleston, 459 U.S. at 381-82, the Supreme Court explained: 

Section 11 of the 1933 Act allows purchasers of a registered security to 

sue certain enumerated parties in a registered offering when false or 

misleading information is included in a registration statement. The section 

was designed to assure compliance with the disclosure provisions of the 

Act by imposing a stringent standard of liability on the parties who play a 

direct role in a registered offering. If a plaintiff purchased a security 

issued pursuant to a registration statement, he need only show a material 

misstatement or omission to establish his prima facie case. Liability 

against the issuer of a security is virtually absolute, even for innocent 

misstatements. Other defendants bear the burden of demonstrating due 

diligence. See 15 U.S.C. § 77k(b). 

Id. (emphasis added) (footnotes omitted). See also Ernst & Ernst v. Hochfelder, 425 U.S. 

185, 200 (1976) (underlying congressional policy was to create express liability 

regardless of fault); Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994) (under §11, 

“defendants will be liable for innocent or negligent material misstatements”); In re 

Westinghouse Sec. Litig., No. 91-354, 1998 WL 119554, at *7 (W.D. Pa. Mar. 12, 1998) 

(scienter not required for §11 claim, mere negligence or innocent misrepresentations are 

actionable). Accordingly, to properly allege liability on the part of the Underwriters, all 

Plaintiffs must plead - which they have - is that the Underwriters participated in the 

Constar IPO, and that the Company’s the Registration Statement was materially false and 

misleading. 

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H. The Complaint Pleads Securities Violations and Not Corporate 

Mismanagement 

The Underwriters also seek to avoid liability for the materially false and 

misleading statements in the Registration Statement by re-casting Plaintiffs’ claims as 

nothing more than “mere mismanagement or internal disagreement regarding strategy.” 

Underwriter Mem. at 6-7. This is a red herring. 

Although Defendants’ conduct in allowing the Company to lose its competitive 

advantage and its customers may also amount to mismanagement, and although the truth 

about Constar’s business condition and financial problems may have been disclosed after 

the IPO, nowhere do Plaintiffs allege that Defendants are liable for that “corporate 

mismanagement.” See In re Home Health Corp. of Am. Sec. Litig., No. Civ. A. 98-834, 

1999 WL 79057, at *13 (E.D. Pa. Jan. 29, 1999) (“claims that defendants misrepresented 

or omitted information pertaining to existing, material events” will not be dismissed 

because they are not allegations of corporate mismanagement.). Instead, it is the falsity 

of the statements in the Registration Statement that forms the basis of Plaintiffs’ claims. 

What was disclosed after the IPO simply put the lie to those false statements. 

Accordingly, the Underwriters’ “corporate mismanagement” argument should be given 

short shrift. 

I. The Defendants are Liable Under Section 15(a) of the Securities Act 

 The Constar Defendants seek dismissal of Plaintiffs’ control person claim against 

the Individual Defendants and Crown on the sole ground that Plaintiffs’ claims based on 

Section 11 “fail as a matter of law.” Defs. Mem. at 46. As demonstrated throughout this 

brief, however, Plaintiffs adequately pled violations of Section 11 against all Defendants. 

Moreover, the Individual Defendants and Crown had the power and influence over 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 57 of 61
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Constar to be considered control persons under Section 15(a). See Ravisent, 2004 WL 

1563024, at *15 (“To establish a defendant is a control person, a plaintiff must 

demonstrate that ‘the defendant had actual power or influence over the allegedly 

controlled person.’”) (quoting Mobile Media, 28 F. Supp. 2d at 940). 

 Plaintiffs have met their burden of establishing control at this stage of the 

litigation. The Individual Defendants were the most senior officers and/or directors of 

Constar and each signed the Registration Statement. ¶¶ 34-41, 231. At the time of the 

IPO, Defendant Casey served as Chairman of the Board of Constar, Defendant Hoffman 

was Constar’s President and Chief Executive Officer, and Defendant Cook, was among 

other positions, Constar’s Chief Financial Officer. ¶¶ 34, 36-37. Each of the Individual 

Defendants had the ability to control the contents of the Registration Statement and could 

have prevented the issuance of false and misleading statements. The fact that the 

Individual Defendants were directors, and the most senior officers of Constar, is 

sufficient to demonstrate “actual power” or “influence” over Constar. See Ravisent, 2004 

WL 1563024, at *15 (allegations that defendants were CEO and CFO sufficient to 

demonstrate actual power or influence). 

 Crown was a controlling person of Constar within the meaning of Section 15 by 

virtue of its ownership of 100% of Constar’s stock until the IPO. ¶ 232. Crown 

controlled Constar’s corporate actions and the IPO. Id. Crown also had the power to 

control the contents of the Registration Statement. Therefore, Crown is liable as a control 

person under Section 15 of the Securities Act. See In re Enron Sec., Derivative & 

“ERISA” Litig., 235 F. Supp. 2d 549, 598 (S.D. Tex. 2002) (“Control can be established 

by demonstrating that the defendant possessed the power to direct or cause direction of 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 58 of 61
51

management and policies of a person through ownership of voting securities, by contract, 

business relationships, interlocking directors, family relationships and the power to 

influence and control the activities of another.”) (citing Ellison v. Am. Image Motor Co., 

Inc. 36 F. Supp.2d 628, 638 (S.D.N.Y. 1999). Thus, Crown’s ownership of 100% of 

Constar’s stock and its control over the management and operations of Constar up to the 

time of the IPO, is sufficient to establish, at this stage, that Crown had influence and 

power over Constar. 

Moreover, Plaintiffs need not prove the extent of Defendants’ control over 

Constar at this stage of the litigation. See Ravisent, 2004 WL 1563024, at *15 (“[t]he 

issue before us is whether plaintiffs have satisfied their burden in light of the 12(b)(6) 

motion, not whether Wilde and Liu were actually liable under this doctrine.”); see also In 

re Cabletron Sys. Inc., 311 F.3d 11, 41 (1st Cir. 2002) (“control is a question of fact that 

‘will not ordinarily be resolved summarily at the pleading stage.’”) (internal citations 

omitted). Thus, Plaintiffs’ have adequately stated a claim against Defendants under 

Section 15(a) to survive this motion. 

J. If Necessary, Leave to Amend Should Be Granted 

In the event that the Court finds that Complaint fails to plead any viable claims, 

Plaintiffs respectfully request that they be granted leave to amend.26

 

26 Leave to amend should be “freely given when justice so requires.” Fed. R. Civ. P. 

15(a). See also Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 230 (1962) (Rule 

15(a)’s mandate that leave to amend “‘shall be freely given when justice so requires’” “is 

to be heeded.”). As the Third Circuit stated in Burlington Coat Factory, Courts should be 

“hesitant to preclude the prosecution of a possibly meritorious claim because of defects in 

the pleadings.” 114 F.3d at 1435. 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 59 of 61
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III. CONCLUSION 

 For all the foregoing reasons, the motions of the Constar Defendants and the 

Underwriters to dismiss the Complaint should be denied. 

Dated: October 25, 2004 

 LAW OFFICES BERNARD M. GROSS, P.C. 

 ________________________________________ 

 Deborah R. Gross, I.D. No. 44542 

 1515 Locust Street, Second Floor 

 Philadelphia, PA 19102 

 Telephone: (215) 561-3600

Liaison Counsel for Lead Plaintiffs 

 and the Class 

Case 2:03-cv-05020-EL Document 75 Filed 10/25/04 Page 60 of 61
53

BERNSTEIN LIEBHARD & LIFSHITZ, LLP 

Jeffrey M. Haber 

Timothy J. MacFall 

 Stephanie M. Beige 

10 East 40th Street, 22nd Floor 

New York, NY 10016 

Telephone: (212) 779-1414 

 -and- 

 

 LERACH COUGHLIN STOIA 

 & ROBBINS LLP 

 Steven W. Pepich 

 Andrew J. Brown 

 Brian O. O’Mara 

401 B Street, Suite 1700 

 San Diego, CA 92101 

 Telephone: (619) 231-1058 

Counsel for Lead Plaintiffs 

 and the Class

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