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Austin, Texas-Investors’ allegations that a technology company and its officers should have known that a multimillion-dollar deal it touted in two press releases wouldn’t materialize can be the basis of securities fraud claims, the 5th U.S. Circuit Court of Appeals held recently. “Further discovery may refute the inferences, but it is not unwarranted to infer that when a company’s big deal collapses so fast, something was amiss at the outset,” Judge Edith Jones wrote for the three-judge panel in Andrew Plotkin v. IPaxess Inc. The plaintiffs alleged in their brief to the 5th Circuit that, within eight months of IPaxess Inc., previously known as Data Race Inc., announcing in a May 25, 2000, press release that it was entering into a joint venture with two other companies that had committed to $25 million a year in net purchases of IPaxess’ new remote access communications product, one of the companies filed for bankruptcy. The plaintiffs alleged that the second company was only a shell of the first. On April 21, the 5th Circuit panel, which also included judges Jerry Smith and Carl Stewart, reversed in part a 2003 decision by a Texas U.S. district court to dismiss the Plotkin plaintiffs’ complaint for failure to state a claim for which relief could be granted. The panel remanded the case to the district court. Court couldn’t ignore S. Cass Weiland, attorney for the Plotkin family members who brought the suit, said that, in the past, the 5th Circuit has made it difficult for plaintiffs to prove securities fraud. “I think there are good reasons why the 5th Circuit has been reluctant to grant plaintiffs a free ride when it comes to allegations of securities fraud,” said Weiland. But Weiland, a partner in the Dallas office of Washington-based Patton Boggs, said Plotkin presents facts, which became apparent in the immediate aftermath of the press releases, that the court couldn’t ignore. Mark T. Josephs, lead attorney for the defendants-IPaxess President and Chief Executive Officer Michael A. McDonnell and Chief Financial Officer James Scogin-said his clients stand by the statements made in the press releases. “We believe the statements are accurate,” said Josephs, a partner at Dallas’ Jackson Walker. According to the 5th Circuit, the plaintiffs originally filed their complaint in the U.S. District Court for the Northern District of Illinois, where the Plotkins live, in May 2001, alleging claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5. The plaintiffs also alleged common law fraud and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.

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