Investors Can’t State Claim For Cosi IPO

Judge John G. Koeltl (S.D.N.Y.) has dismissed all of the 1933 Act claims brought against Cosi, its executives, and its underwriter William Blair in relation to Cosi’s 2002 IPO. Originally "expected to earn $ 60 million in proceeds," the IPO netted only $ 33 million "due to demand that was weaker than anticipated." Only two months after the IPO, the casual restaurant chain announced that it had "determined to alter our growth strategy," and implement "franchising," mainly because of "Cosi's lack of sufficient capital to carry out the business plan described in the Prospectus." Cosi also announced that it "would be able to open approximately ten new restaurants in 2003, as opposed to the fifty-three to fifty-nine planned in the Prospectus," and that "it intended to dismiss twenty-seven percent of its personnel and to take a $ 1.7 million charge to account for severance and related costs in the first quarter of 2003." "Following the February 3, 2003 announcements, Cosi's stock price dropped thirty-one percent to $ 3.10"

Plaintiffs claimed "that the failure to disclose the possibility of pursuing a franchising model was the allegedly material non-disclosure." Unfortunately for them, Judge Koeltl disagreed. He said that "Plaintiffs do not allege facts that would establish that mere research into the possibility of pursuing a franchising model would be an event of significant importance to potential Cosi investors. The possibility of franchising, according to the plaintiffs' allegations, was still remote at the time the Prospectus was issued." Indeed, "the plaintiffs allege only that Cosi had researched the possibility of franchising for two months before the Prospectus was issued, and do not allege that a franchising plan had been submitted to or approved by the board, or that any affirmative steps had been taken to implement a franchising plan." The court held that it would simply be wrong to "to require the disclosure of the mere research of a potential business plan without any factual allegation that Cosi intended or had taken affirmative steps to implement the plan."

You can read In re Cosi, issued July 27, 2005, at 2005 U.S. Dist. LEXIS 15603.

Nugget: "Because the plaintiffs have not alleged that they purchased their shares in the IPO, they have failed to allege that they have standing to bring a claim under § 12(a)(2)."