|
Stanford University Law School
- Securities Class Action Clearinghouse
|
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
|
IN RE ASCEND COMMUNICATIONS |
) |
CASE No. CV 97-8861 NW MEMORANDUM OF DECISION |
This class action was brought against Ascend Communications, Inc. ("Ascend") and thirteen individual defendants who are officers and/or directors of Ascend, on behalf of all persons or entities who acquired Ascend stock during the class period of November 5, 1996 to September 30, 1997 ("class period"). Ascend develops, manufactures, sells and supports a broad range of high-speed digital wide area network access products designed to extend existing corporate networks to support applications such as video conferencing and Internet access. Plaintiffs allege that defendants violated the federal securities laws by making false and misleading statements informing the investing public that Ascend would be the first remote-access vendor to deliver a 56 Kbps modem and that Ascend's products incorporating the new technology would be operable and available in January 1997. According to the plaintiffs' allegations, the defendants knew or recklessly disregarded serious problems with the 56 Kbps modem product when they made those statements. The alleged motive for this deception was to profit through insider trading and by completing a merger with Cascade Communications, Inc. ("Cascade") using artificially inflated stock. At the close of the class period, analysts and the investing public learned of the problems the new modems were experiencing and the corresponding decrease in sales of Ascend's products. On September 30, 1997, the last day of the class period, the defendants warned the public that earnings would be one-third of what had been previously represented. Ascend stock dropped to $33 per share from the class period high of $80-1/4.
The Court has certified the class and established a sub-class of those who acquired securities in connection with Ascend's merger with Cascade. The class is alleging violations of § 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act") by all defendants and accompanying liability under § 20(a) for all individual defendants. The sub-class asserts claims against Ascend and specified individual defendants for violations of §§ 11 and 12(a)(2) of the Securities Act of 1933 ("the 1933 Act") and liability against the specified individual defendants under § 15. The defendants have now moved to dismiss the Second Amended Complaint primarily on the grounds that plaintiffs have failed to plead their claims with particularity as required by the Private Securities Litigation Reform Act (PSLRA) and Federal Rule of Civil Procedure 9(b). For the reasons discussed below, the Court grants defendants' motion to dismiss without prejudice.
Rule 9(b) requires that the plaintiffs plead the basis for their fraud claims with particularity in the complaint. See F.R.C.P. 9(b). The seminal Ninth Circuit case on Rule 9(b) pleading in the context of private securities litigation is In Re Glenfed, Inc. Securities Litigation, 42 F.3d 1541 (9th Cir. 1994) (en banc). Glenfed established that a plaintiffs securities fraud claim cannot survive a motion to dismiss under Rule 9(b) if the complaint merely identifies the allegedly fraudulent statement. Id. at 1548. Rather, the complaint must also explain "why the statement or omission complained of was false or misleading." Id. If the statement in question contradicted a fact that was both known and true at the time it was made, simply alleging the statement and the known truth will suffice to demonstrate why the statement was false. Id. But if the fraud claim is based on the discrepancy between an allegedly misleading statement and a later statement acknowledging a contradictory fact, it will not be enough to allege that the two statements were inconsistent. Rather, the plaintiff must explain "why the disputed statement was untrue or misleading when made," using evidence such as inconsistent contemporaneous statements or information known to the defendants at the time of the statement. Id. at 1549.
The plaintiffs concede that Rule 9(b) applies to Counts I and II of the complaint, which are based on violations of §§ 10(b) and 20(a) of the 1934 Act. However, they contend that the sub-class's claims for violations of §§ 11, 12(2) and 15 of the 1933 Act we grounded in negligence rather than fraud, and that Rule 9(b) is therefore inapplicable. See Plaintiffs' Memorandum of Points and Authorities in Support of Plaintiffs' Opposition to Defendants' Motion to Dismiss Consolidated Second Amended Complaint, at 38. Under Ninth Circuit law, Rule 9(b) applies to all of plaintiffs, claims.
The Ninth Circuit rule is that Rule 9(b) applies to § 11 claims "when they are grounded in fraud" even if the complaint expressly states otherwise. See In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1404 (9th Cir. 1994). Application of the Rule 9(b) pleading standard is appropriate if "the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims." Id. Furthermore, boilerplate language stating that the claims are based in negligence rather than fraud will not suffice to show an alternative basis for the claims. See In re Stratosphere Corp. Securities Litig., 1 F.Supp.2d 1096, 1104 (D. Nev. 1998). The court in In re Stac did not have the opportunity to apply Rule 9(b) to § 12 claims because none were present in that case. However, the court's reasoning is equally applicable to all plaintiffs' claims, and the court noted with approval cases that did apply Rule 9(b) to other 1933 Act claims. See In re Stac, 89 F.3d at 1404 (citing Melder v. Morris, 27 F.3d. 1097, 1100 n.6 (5th Cir. 1994) (applying Rule 9(b) to §§ 11 and 12(a)(2)); Shapiro v. UJB Fin Corp., 964 F.3d 272, 288 (3d Cir. 1992) (same); Sears v. Likens, 912 F.2d 889, 892-93 (7th Cir. 1990) (applying Rule 9(b) to 1933 Act claims)). Therefore, it is appropriate to apply Rule 9(b)'s heightened pleading requirement to the §§ 11, 12(a)(2), and 15 claims that are based in fraud.
The essence of the plaintiffs' §§ 11 and 12(a)(2) claims is that the defendants intentionally omitted cautionary information about ongoing problems with the 56 Kbps modems from the registration statement and merger announcements, in order to profit from inflated stock prices at the time of the merger. In the paragraph detailing the allegedly misleading statements in the registration statement, the plaintiffs claim: "To sustain an artificially high price of Ascend stock, defendants continued to disseminate materially false and misleading information, about Ascend's growth rate and prospects" Plaintiffs Consolidated Second Amended Complaint ("Complaint"), at ¶ 73. The complaint expressly states that "the statements...were materially false and misleading because at the time these statements were made, defendants knew or were reckless in disregarding that (a) software and firmware problems plagued the 56 Kbps technology; (b) the proposed products actually ran at transfer rates inferior than that represented by Ascend." Id. at ¶ 77. The claim that the "defendants knew or were reckless in disregarding" various problems is repeated for each set of allegations. See Id. at ¶¶ 72, 77, 81, 86. Plaintiffs are basing their §§ 11 and 12(a)(2) claims on defendants' knowing or reckless acts, not negligent or accidental behavior, so their allegations are based in fraud, not negligence. The § 15 claims are based on the substantive allegations of the §§ 11 and 12(a)(2) claims. Therefore, Rule 9(b) applies to all plaintiffs' claims.
In 1995, Congress amended both the 1934 Act and the 1933 Act to establish heightened pleading requirements in private securities litigation. See 15 U.S.C. §§ 77z-1, 77z-2, 78u-4 & 78u-5. If a plaintiff is alleging a false or misleading statement or omission of material fact under the 1934 Act, the complaint must now specify each misleading statement, why it is misleading, and the factual basis for any allegations made on information and belief. See 15 U.S.C. § 78u-4(b)(1). Similarly, if the defendant must have acted with a certain level of scienter for the plaintiff to recover money damages, the complaint must allege the facts "giving rise to a strong inference" that the defendant acted with that state of mind for each alleged act. See 15 U.S.C. § 78u-4(b)(2). Failure to meet these heightened pleading standards mandates dismissal of the complaint. See 15 U.S.C. § 78u-4(b)(3).
The PSLRA also created a substantial "safe harbor" in both the 1933 and 1934 Acts for forward-looking statements that are either immaterial, limited by "meaningful cautionary statements," or made without actual knowledge that the statement was false or misleading. See 15 U.S.C. §§ 77z-2(c), 78u-5(c). Forward-looking statements include financial projections, management plans and objectives, statements of future economic performance, the assumptions underlying any forward-looking statement, or reports by an outside reviewer hired by the issuer evaluating the issuer's forward-looking statements. See 15 U.S.C. §§ 77z-2(i), 78u-5(i). Statements protected by the safe harbor are not a basis for liability. Therefore, for each forward-looking statement, a complaint must now allege facts suggesting materiality, lack of meaningful cautionary language, and the actual knowledge of the speaker that the statement was false or misleading.
The parties agree that the PSLRA's requirements apply to the pleadings in this case. There is no governing Ninth Circuit law interpreting these PSLRA requirements, although a number of district courts in the Ninth Circuit have applied the PSLRA.
Although the plaintiffs structured their complaint with an eye to the requirements of the PSLRA, the complaint nevertheless does not meet the heightened pleading standards in many of its allegations. It is not sufficient to make conclusory allegations of each element required by the pleading standards; rather, the plaintiffs must offer specific facts supporting their allegations for each element.
The plaintiffs allege five counts in their complaint. The first is by the class against all defendants, alleging liability under § 10(b) of the 1934 Act and Rule 10b-5. Section 10(b) prohibits the use of "any manipulative or deceptive device or contrivance in contravention of" SEC regulations "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b). Although the plaintiffs make conclusory allegations that the defendants have participated in every category of conduct for which § 10(b) assigns liability, see Complaint ¶¶ 115-18, their substantive allegations consist solely of a series of misleading or false statements which are regulated by Rule 10b-5. Promulgated under § 10(b), Rule 10b-5 prohibits fraud in the purchase or sale of securities, including "any untrue statement of a material fact or [omission of a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). To state a claim under Rule 10b-5, plaintiffs must allege four elements: a misstatement or omission of material fact, scienter, reliance and resulting damages. See Paramour Fin. Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1157 (9th Cir. 1997); Wenger v. Lumisys, Inc., 2 F.Supp.2d 1231, 1239-40 (N.D. Cal. 1998).
The second count is by the class against the individual defendants, alleging liability as control persons under § 20(a) of the 1934 Act for the violations of § 10(b) and Rule 10b-5. Section 20(a) imposes liability on "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter ... unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts causing the violation" 15 U.S.C. § 78t(a). Liability must therefore first be established for § 10(b) and Rule 10b-5 before control person liability could be found. Then, plaintiffs would need to allege each individual defendant's "actual power or influence over the company." Powers v. Eichen, 977 F. Supp 1031, 1044 (SD. Cal. 1997); see also In re Silicon Graphics, Inc. Securities Litig., 970 F. Supp 746, 753 (ND. Cal. 1997) (same).
The third count is by the sub-class against Ascend and the individual defendants who signed the registration statement, alleging that they violated § 11 of the 1933 Act by issuing a registration statement containing untrue and misleading statements. See Complaint, ¶¶ 127-3 1. Section 11 authorizes suits against those who signed a registration statement, the directors and partners at the time the registration statement was filed, and enumerated others. See 15 U.S.C. § 77k(a). A defendant is liable under § 11 only if he did not have a reasonable belief after reasonable investigation that the statements were true and not misleading, but the burden is on the defendant to prove such reasonable investigation and belief. See 15 U.S.C. § 77k(b)(3). Plaintiffs must plead that the individual defendants signed the registration statement, that the registration statement contained false or misleading statements, and that the plaintiffs "purchased stock actually sold in the offering at issue," In re Stratosphere 1 F. Supp.2d at 1119. While § 11 itself does not require that the plaintiffs plead scienter, the PSLRA's safe harbor provisions require such pleading after any alleged misstatements that are forward-looking statements. See id. at 1109. As discussed above, Rule 9(b) also applies to the § 11 claims because they are grounded in allegations of fraud.
The fourth count is by the sub-class against Ascend and the same group of individual defendants for violating § 12(a)(2) of the 1933 Act by issuing false and misleading statements to the public in connection with the registration statement and the share offering for the Cascade merger. See Complaint, ¶¶ 137-39. Section 12(a)(2) imposes liability on individuals who offer or sell securities to a purchaser by means of a prospectus or oral communication that contains false or misleading statements. See 15 U.S.C. § 77l(a)(2). To establish liability under § 12(a)(2), plaintiffs must allege not just that the defendants signed the registration statement, but also that the defendants "actively solicited" purchase of the securities for "their own financial motives." See In re Stratosphere, 1 F.Supp.2d at 1120 (citing Pinter v. Dahl, 486 U.S. 622, 646-48 (1988) and Shaw v. Digital Equipment Corp., 82 F. 3d 1194, 1214-15 (1st Cir. 1996)). Scienter is an element of § 12(a)(2) liability, but the defendants once again bear the burden of showing that they "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." 15 U.S.C. § 77l(a). As with § 11, the scienter-pleading requirements of the PSLRA apply to all forward-looking statements, and Rule 9(b) applies because these claims are grounded in allegations of fraud.
In the fifth count, the sub-class alleges control person liability against specified individual defendants under § 15 of the 1933 Act, which imposes Liability on "[e]very person who ... controls any person liable under sections 77k or 77l of this title, ... unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist." 15 U.S.C. § 77o. As with the § 20(a) claim, plaintiffs must first prove a violation of § 11 or § 12(a)(2), and then must demonstrate that the individual defendant in question had actual power in the company. See Durham v. Kelly, 810 F.2d 1500, 1503 (9th Cir. 1987).
The plaintiffs have made some general allegations of control person liability, scienter, safe harbor applicability, and stock analysts' reliance on the defendants' information. Most of plaintiffs' allegations, however, are presented as a chronology of the defendants' alleged misstatements. The complaint does not specify which misstatements are the basis for each legal claim. Each alleged misstatement is identified and quoted at length from the news publication or other public document in which it was found, and the person who made the statement, is also identified, if that person was named in the publication. The misstatement is usually followed by allegations of materiality through reference to the change in stock prices, or the published responses of stock analysts after the statement. The reason that the statement was false when made is then substantiated through a series of allegations of technical problems and delays in shipping the 56 Kbps modems and of a corresponding decrease in customer interest in the product.
There are several failings that recur repeatedly in the plaintiffs' allegations. Some of the allegations are completely conclusory and merely repeat the words of the legal standard. See, e.g., Complaint ¶ 110. Such allegations do not meet even the basic standard of pleading to avoid dismissal under Rule 12(b)(6).
For Ascend or the individual defendants to be liable for statements that are the predictions of a stock analyst, the plaintiffs would have to demonstrate that the defendants endorsed or adopted the analyst's statements. See Wenger, 2 F.Supp.2d at 1249 (citing In Re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996)); In re Stratosphere 1 F.Supp.2d at 1115-16; Zeid v. Kimberley, 973 F.Supp. 910, 920 (ND. Cal. 1997) (citing Syntex, supra). To properly plead endorsement, the plaintiffs must identify the report, the insider who gave the information, the specific interactions between the insider and the analyst, and when the interactions occurred. See, e.g., Wenger, 2 F.Supp.2d at 1249. The plaintiffs must also allege a two-way flow of information between the insider and the analyst, such as review and approval of the article by the insider. See, e.g., id. The plaintiffs do not meet these standards because they merely identify the analysts' statement and make conclusory allegations that the defendants provided misinformation that was the basis of those statements. See, e.g., Complaint, ¶¶ 43-48.
Some of the statements alleged to be misleading are not violations of federal securities laws by their nature, such as statements that are vague optimistic statements, mere puffery, or statements of bare historical fact. See Wenger, 2 F.Supp.2d at 1245 ("disclosure of accurate historical data does not become misleading even if less favorable results might be predictable by the company in the future"; puffery, such as a statement about a good year, is not actionable because it does not actually affect anyone's opinion); In re Stratosphere, 1 F.Supp.2d at 1118 (general sunny statements, such as a statement that things are going smoothly, are not actionable); Zeid, 973 F.Supp at 921 (statements that a company is "on track" or improving competitive position are too vague for liability); In re Oak Technology Securities Litig., 1997 WL 448168, at *7 (N.D. Cal. 1997) (vague, amorphous statements, such as a company having an "advantage in the marketplace," are not a basis for liability because reasonable investors do not use them to make decisions).
Some of the statements do not have any connection with the underlying problems the plaintiffs assert were hidden from them. Plaintiffs seem to suggest that whenever Ascend made any statement about its business, however unrelated, it had an obligation to inform investors about its problems as well. Such a standard would permit no reasonable limit to liability, extending it to a company that issued any public statement whatsoever while experiencing problems that later led to stockholder losses. The message of a company's public statements must actually run counter to the truth for liability to arise under these federal securities laws. See Einstadt v. Centel Corp., 113 F.3d 738, 745 (7th Cir. 1997) (Posner, J).
The complaint makes few specific allegations against the individual defendants. Only Ejabat and Schneider are alleged to have actually made misleading statements. Only eight of the individual defendants signed the registration statement. The only specific allegation against the remaining four individual defendants is their sale of stock during the class period. All individual defendants are generally accused of involvement in the misleading statements as officers and directors of Ascend. As discussed below, the scienter allegations are merely conclusory, and the plaintiffs cannot use group pleading to bring claims against all the officers and directors because of the PSLRA's heightened pleading requirement for scienter.
Many of the plaintiffs' allegations, although they offer statements that could be the basis for liability if they were shown to be false or misleading, do not meet the heightened pleading standards of either 9(b) or the PSLRA. Few of the allegations appropriately allege scienter under the requirements of the PSLRA by offering facts for each misleading statement that give rise to a strong inference that the defendant acted with the necessary scienter. See 15 U.S.C. § 78u-4(b)(2). Many of the allegedly misleading statements are forward-looking statements of the sort protected by the PSLRA's safe harbor provisions.
The most far-reaching problem with plaintiffs' pleadings is their failure to sufficiently allege that the statements were false when made. Rather than offering contemporaneous facts in contradiction of the statements, they merely list problems that were revealed in later statements, without demonstrating that those problem either existed or were known to defendants at the time of the initial statements. See Glenfed, 42 F.3d at 1549; Ronconi v. Larkin, 1998 WL 230987, at *6 (ND. Cal. 1998); Wenger, 2 F.Supp.2d at 1250-51. Within the chronology, plaintiffs list articles discussing the extent of Ascend's problems with the 56 Kbps modems, dating from June 10, June 30, September 11, and September 30, 1997. See Complaint, ¶¶ 87-89, 101, 104. These reports of problems seem to be the only basis for the plaintiffs' allegations that earlier statements were false and misleading.
Plaintiffs' use of these published statements as the sole source for their allegations is ill conceived. For all events that occurred before these revelations, the plaintiffs are relying on fraud by hindsight: they are trying to demonstrate that the defendants' statements were misleading by offering later statements that reveal problems. This is the classic mistake addressed by Glenfeld. Plaintiffs must offer contemporaneous facts demonstrating that the problems they allege existed and were known to defendants when the statements were made. See Glenfeld, 45 F.3d at 1548-49.
The plaintiffs also face a serious problem with respect to their claims about events that occurred at the time of and after these revelations: once these problems were revealed publicly, they could no longer be the basis for a claim under the fraud on the market theory the plaintiffs are employing. After the information about technical and customer problems was revealed to the market, market prices should have reflected the adjustment necessary to give effect to that information, thus limiting the class of plaintiffs who are ultimately entitled to recovery.
Plaintiffs make merely conclusory allegations that defendants are liable as persons controlling those who violated other securities laws under § 20(a) of the 1934 Act and § 15 of the 1933 Act because they had exercised "power and influence," and because they had access to and concealed "adverse non-public information about the problems plaintiffs allege. See Complaint, ¶ 34. Plaintiffs do not make any specific allegations of each individual defendant's actual power over the company, either in general or in connection with Ascend's alleged misdeeds. See Powers v. Eichen, 977 F. Supp 1031, 1044 (SD. Cal. 1997); In re Silicon Graphics, Inc. Securities Litig., 970 F. Supp 746, 753 (ND. Cal. 1997). Rather, they simply list each individual's position in Ascend as an officer or director as the basis for the existence of such power. See Complaint, ¶¶ 21-34. Such general and conclusory allegations that merely restate the language of the legal standard will not suffice to establish control person liability. Therefore control person liability has not been established under either § 20(a) or § 15, and Counts 2 and 5 of the complaint must be dismissed.
Plaintiffs likewise make merely conclusory allegations that unspecified securities analysts relied on information provided by the defendants and "communicated" with the securities analysts "regularly" to assure them that Ascend's plans and profits were proceeding apace. See Complaint, ¶ 45. They allege that the defendants "caused" the analysts to issue false and misleading reports by providing misleading information, and "endorsed" and failed to correct those statements. See id., ¶¶ 46-47. Plaintiffs do not allege any facts to suggest adoption of the analysts' statements, as required to establish liability for the statements of securities analysts. See, e.g., Wenger, 2 F.Supp.2d at 1249. Nor are such details provided in the plaintiffs' chronology of Ascend's alleged misstatements; See, e.g., Complaint, ¶ 91. Therefore, plaintiffs have not pled the necessary facts to establish the defendants' liability for security analysts' predictions.
Plaintiffs allege that defendants had the motive and opportunity to make these misstatements. Most district courts agree that motive and opportunity pleading is still appropriate to establish scienter if it is properly pled under the PSLRA. See, e.g., Allison v. Brooktree Corp., 999 F.Supp 1342, 1350 (SD Cal. 1998); Markman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F.Supp 1297, 1312 (CD Cal. 1996). Plaintiffs' general allegations of scienter are conclusory and merely mimic the language of the legal standard. See Complaint, ¶ 108. Plaintiffs' allegations that defendants wished to inflate stock prices to benefit from the Cascade merger are also conclusory: they offer no facts other than the existence of the merger to suggest that defendants had such a motive. See, e.g., Complaint, ¶ 4.
Plaintiffs also allege that defendants were motivated by the possibility of benefiting from insider trading. Evidence of insider trading can be sufficient to demonstrate scienter. See, e.g., In re Stratosphere, 1 F.Supp.2d at 1116-17; Epstein v. Itron Inc., 993 F.Supp 1314, 1325 (E.D. Wash. 1998). In order to properly state a claim that a defendant was engaging in insider trading, plaintiffs would have to plead facts that show that the individual defendant's sales were unusual or suspicious. See In re Silicon Graphics, Inc. Securities Litig., 970 F.Supp 746, 767-68 (ND. Cal. 1997). Evidence of smaller or typical trades is irrelevant. See id. at 768. Furthermore, while evidence of trades constituting a large proportion of a defendant's holdings of stock is relevant to scienter, such evidence does not by itself satisfy the pleading requirement. See id.
Plaintiffs do not offer any evidence of defendants' trades before or after the class period to establish that their sales during the class period were unusual. Rather, they simply allege each defendant's sales and that the amount of stock sold in relation to the defendant's total holdings was "significant," offering the actual percentage of stock sold for only three of the defendants. See Complaint, ¶¶ 21-33; 109. While the amount sold by those three defendants was indeed a large proportion, plaintiffs offer no other facts to bolster this evidence and satisfy the pleading requirement. For the other defendants, bare allegations of "significant" sales will certainly not suffice to establish scienter. Furthermore, three of the defendants did not sell any stock at all during the class period. See id. ¶¶ 27, 29, 30. Plaintiffs also make conclusory allegations that "defendants were able to inflate and maintain an artificially high price of Ascend stock" between November 1996 and February 1997 and therefore sold large amounts of stock during that period "to profit from their fraudulent scheme." See id. ¶ 65. The plaintiffs' allegations are not sufficient to state a claim that the defendants engaged in insider trading because they do not establish that the defendants' sales were unusual by contrasting them with sales during other periods or tying them to specific misstatements or events.
Furthermore, insider trading cannot be used to attribute misstatements to a group. See In re Oak Technology Securities Litig., 1997 WL 448168, at *12 (N.D. Cal. 1997). Rather, the plaintiffs must demonstrate that each individual defendant possessed material information that should have been divulged under Rule 10b-5 if they wish to use insider trading to establish scienter. See id. Plaintiffs have not offered any explanation of how an individual defendant's trades are related to the alleged misstatements, through their timing or otherwise. They certainly have not alleged any facts suggesting that individual defendants possessed specific material information that should have been divulged when they made their trades, aside from the conclusory allegations that all defendants possessed unspecified information in their roles as officers and directors.
Plaintiffs also make conclusory allegations that the safe harbor does not apply to any of the defendants' statements, and that they have met the pleading requirement for any statements to which it does apply. See Complaint, ¶ 110. The plaintiffs provide nothing to substantiate these bare legal conclusions.
Plaintiffs claim these statements are misleading in asserting that Ascend would ship the new 56 Kbps modems in January. Because this assertion is unrelated to the merger with Cascade, it is a potential basis for liability only for Counts I and II of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act. None of these statements provide a basis for liability as pled in the complaint.
The first statement is an announcement by Rockwell that it had formed a strategic partnership with Ascend and intended to ship 56 Kbps modems in January. Since Ascend did not make this statement, it is not a basis for liability against the defendants.
The second statement is by Ascend, saying it will be the first remote access vendor to deliver the 56 Kbps modem. See id. To properly plead liability for this statement under the PSLRA and Rule 9(b), the plaintiffs would have to demonstrate that the statement was false or misleading when made. See Glenfeld, supra; 15 U.S.C. 78u-5(b)(2). Furthermore, as a statement of future plans and objectives, this is a forward-looking statement and so the plaintiffs must also allege facts suggesting that it was made with actual knowledge that it was false, was not accompanied by meaningful cautionary statements, and was material. See 15 U.S.C. 78u-5(i)(1)(B). While the plaintiffs allege that the modems had certain technical and supplier problems, they do not offer any facts to suggest that the problems existed on November 5, 1996, much less that the defendants actually knew of the problems on that date if they did exist. See Complaint, ¶ 54. Plaintiffs merely imply that defendants must have known about the problems because of the brief time period between November 5, 1996 and January 1, 1997, when plaintiffs allege the modems should have been delivered. See id. Plaintiffs do not even offer facts suggesting that the problems they list caused Ascend's failure to be the first 56 Kbps modem vendor, rather, they simply state the problems and imply that they were the cause. To meet the requirements of the PSLRA and Rule 9(b), the plaintiffs would have to offer contemporaneous facts suggesting that the problems they list were the cause of Ascend's failure to be the first vendor to provide the 56 Kbps modem, that those problems existed on November 5, 1996 and were severe enough on that date to preclude Ascend's statement from being true, and that the officer who caused that statement to be made on behalf of Ascend actually knew that Ascend could not follow through on its statement. Since such facts have not been alleged, this statement has not been sufficiently pled under the PSLRA.
The third statement is by individual defendant Ejabat, who said that the 56 Kbps technology could "open the door for a new generation of products" and so Ascend's "goal" was to deploy it "early." These are vague optimistic statements that do not give rise to liability. See Wenger, 2 F.Supp.2d at 1245; In re Stratosphere, 1 F.Supp.2d at 1118; Zeid, 973 F.Supp at 921 In re Oak Tech., 1997 WL 448168, at *7.
The excerpt from this article states that "no other WAN access product on the market delivers more (sic) comprehensive set of connectivity options," and that Ascend will be shipping a modem to support the Rockwell K56PLUS product beginning November first. See Complaint, ¶ 53. It is not clear that this statement necessarily refers to a 56 Kbps modem product, since Rockwell was only promising the modems by January 1, 1997, and the modems referred to in this statement were to have already begun shipping. There can be no liability for a statement that is unrelated to the plaintiffs' theory of liability. But even assuming that this statement is relevant, plaintiffs have not offered contemporaneous facts suggesting that other products did provide more connectivity options or that Ascend did not in fact intend to ship the product referred to in the statement. Plaintiffs have failed to meet the heightened pleading standard for the same reasons as those discussed regarding the second statement in the first article.
This article also quotes the same Ejabat statement as the first article, adding that Ascend is providing "the right technical solution" for complex transmissions. Like the earlier-quoted portion of Ejabat's statement, this additional comment about the "right technical solution" is too vague to be a basis for liability. See, ,e.g., In re Stratosphere, 1 F.Supp.2d at 1118; Zeid, 973 F.Supp at 921.
The plaintiffs do sufficiently allege that these statements were material based on the increase in stock price and trading volume on the date the statements were published, and based on positive securities analysts' response referring specifically to Ascend's plans. See Complaint, ¶¶ 55-58.
Plaintiffs claim these statements are misleading in stating that Ascend had sold certain products and that Ascend was meeting its customers' changing needs. Because these allegation are unrelated to the merger with Cascade, they are a potential basis for liability only for Counts I and II of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act. However, none of these statements are a basis for liability as pled in the complaint.
Ascend announced that it had formed a partnership with Bell Atlantic Network Integrations, under which BANI would market some of Ascend's products. See Complaint, ¶ 59. This is a simple statement of historical fact and therefore is not a basis for liability. See Wenger, 2 F.Supp.2d at 1245. Furthermore, the statement is not related to the alleged technical and supplier problems with the 56 Kbps modems, and so it does not substantiate the plaintiffs' theory of liability. The plaintiffs also have not shown that the statement was false or misleading: they do not allege that the partnership announcement was false, and it is not misleading to announce an actual business arrangement without an accompanying announcement of each company's unrelated problems.
This excerpt announces Uunet's purchase of MAX products from Ascend and states that Ascend had started installing the systems. See id., ¶ 60. This is another statement of historical fact and therefore is not a basis for liability. See Wenger, 2 F.Supp.2d at 1245. Furthermore, this statement is not even necessarily about the 56 Kbps modem product; the MAX product used slower modems as well. Therefore, this statement does not substantiate the plaintiffs' theory of liability. Even if this statement were one which could serve as a basis for liability, the plaintiffs have also failed to demonstrate that the statement was false or misleading. The plaintiffs do not allege that this sale did not take place. Rather, they simply allege that the statement was misleading because unspecified "customers" were refusing to buy the 56 Kbps modem until they knew it worked. See id., ¶ 62. This allegation does not directly contradict the announcement of a particular sale.
Ejabat said that Ascend bad been successful in addressing customers' changing needs "on an almost real-time basis," that their business was that of identifying challenges and addressing them with technology, and that "we intend to do more of the same." See id., ¶ 61. These are vague optimistic statements and mere puffery, which cannot serve as a basis for liability. Once again, plaintiffs do not directly contradict these statements. Rather, they merely allege that "customers" were not ordering the products because customer-specific. Features on the old modems weren't incorporated into the new modems. See id., ¶ 62. Plaintiffs do not allege particular customers who refused the 56 Kbps modem or particular orders that were canceled. Without additional specificity, these are merely conclusory allegations the do not meet the pleading requirements.
The plaintiffs have not sufficiently alleged materiality for these three statements. Plaintiffs have looked to securities analysts' reports to see if they responded to the allegedly misleading statements, and this is an appropriate method for alleging materiality. See id., ¶¶ 63-64. However, the two analysts' reports that they quote do not mention theses three statements or the subject matter of the three statements. Rather, the first analyst's report mentions the MAX TNT concentrater and the GRF 400 product, not the Bell Atlantic merger, the Uunet purchase, or Ascend's customer service. See id., ¶ 63. Likewise, the second analyst's report also does not mention these issues. This second report would serve as evidence generally of the materiality of the belief that the 56 Kbps modem was going to ship soon and be successful, but those facts were not suggested in these statements, so the report is irrelevant to the materiality of these statements. See id., ¶ 63.
Plaintiffs claim these statements are misleading in asserting that Ascend would ship the new 56 Kbps modems in April and in their claims about the modems' level of performance product availability. Plaintiffs allege these statements were made for the purpose of increasing stock prices for the Cascade merger and generally, so they are a potential basis for liability for Counts I, II, IV, and V of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act and §§ 12(a)(2) and 15 of the 1933 Act That statements do not create a basis for liability as pled in the complaint.
This article states that Ascend's 56 Ups modems would begin shipping that month "And will further enhance the industry-leading functionality of the MAX." See Complaint, ¶ 71. The article states that the modems could operate "up to 56 Kbps," and the software is described. See id. None of these statements can be a basis for liability because none are directly attributed to Ascend. Later in the article, direct quotes are attributed both to Ascend and to a securities analyst. It is not clear whether the above statements were based on information provided by Ascend or by third parties.
Furthermore, even if then statements were directly attributed to Ascend, they would not substantiate plaintiffs' claims. The statement that the 56 Kbps modems would begin shipping that month is a forward-looking statement of future management plans. See 15 U.S.C. §§ 77z-2(i), 78u-5(i). Plaintiffs have not pled that this statement was material, was made without meaningful cautionary statements and was made with actual knowledge that it was false or misleading. Rather, they have simply reiterated the same litany of technical and supplier problems with the modems, without alleging when these problems arose or when defendants became aware of them. See Complaint, ¶ 72. The statement about "industry-leading functionality" is mere puffery that does not provide a basis for liability. See, e.g., In re Stratosphere, 1 F.Supp.2d at 118; Zeid, 973 F.Supp at 921. Finally, the description of the modems and the accompanying software have not been shown to be false when made, because plaintiffs once again do not offer contemporaneous facts showing that the alleged problems existed on April 15, 1997 or that defendants knew of them on that date. Rather, they have simply listed problems drawn from later statements and have once again implied that they must have existed and been known on the date these statements were made. See Complaint, ¶ 72.
Bauer, a Vice President of Ascend who is not named as a defendant, said the modems "provide a new level of performance and flexibility ... while maintaining backward compatibility." See Complaint, ¶ 71. The statement about a "new level of performance and flexibility" is vague puffery which cannot establish liability. See, e.g., In re Stratosphere, 1 F.Supp.2d at 1118; Zeid, 973 F.Supp at 921. The statement about "backward compatibility" has not been shown to be false or misleading when made, because of the same failure to offer particular contemporaneous facts discussed above. See Complaint, ¶ 72.
In regard to all of these statements, plaintiffs have failed to make allegations that directly contradict defendants' statements. They do not allege that technical problems were brought to the attention of Ascend's officers and directors, nor that any documents or other evidence indicate that anyone at Ascend knew at this time that they would not really be able to ship the product. They do not allege any tests of the modem or other facts that existed at the time of the statements to contradict their assertions. Rather, plaintiffs merely allege that Ascend wanted to increase its stock price after its stock had dropped because of competition in the market. See id., ¶¶ 66-70. Finally, plaintiffs do not sufficiently allege materiality here as they do not make any allegations, even conclusory ones, to suggest that these statements had any effect on the market.
Plaintiffs claim the registration statement for the Cascade merger was misleading because it made only boilerplate cautionary statements about the risks associated with new products rather than revealing problems specific to the 56 Kbps modem product. See Complaint, ¶ 77. Because these allegations are related to the merger with Cascade, they are a potential basis for liability for all counts of the complaint. However, these statements are not a basis for liability as pled in the complaint.
On April 16, 1997, Ascend filed the registration statement, signed by certain individual defendants. See Complaint, ¶ 73. The registration statement made vague optimistic statements about the positive effects of the merger, including becoming a company that is a "leading provider" of wide area networking solutions "with a more complete portfolio" of products "supported by a global organization." See id., ¶ 74. Ascend felt that the "combined company will be in a stronger competitive position" to produce new technology, asserted that "Ascend provides the major components of a remote networking solution," and detailed its products. See id., ¶¶ 75-76. Ascend claimed that its product architectures "facilitate rapid, flexible customer deployments" that "has allowed Ascend to rapidly develop new product and additional features." See id., ¶ 77.
Plaintiffs allege these statements were misleading because of the cautionary language in the registration statement was boilerplate rather than addressing the technological problems they assert existed. See id., ¶¶ 77-78. Plaintiffs claim that defendants must have known of these problems because of the "timing": 48 days lapsed between filing the registration statement and a public announcement of problems that would delay shipment of the modems. See id., ¶ 77. There is disagreement among the district courts over whether boilerplate warnings will suffice if particular problems are present. Compare In re Stratosphere, 1 F.Supp.2d at 1096 with Zeid, 930 F.Supp at 436. However, the Court need not resolve this issue, because plaintiffs' allegations that specific problems were present and that the defendants knew about the problems are based solely on hindsight, which will not suffice under any rule. Plaintiffs do not offer any specific facts to suggest that the problem existed or that the defendants knew about these problems on April 16, 1998. Forty-eight days is not such a short period of time that it necessitates these conclusions, particularly since the technological problems in question were caused by a failure in a supplier's chip and not in a part produced by Ascend. Because all the statements in question were forward-looking statements predicting the future plans and economic performance of the merge company, allegations of scienter are required to substantiate all legal claims. Plaintiffs do not make any allegations of materiality.
Plaintiffs claim these statements are misleading because they were intended to give the impression that Ascend could grow and dominate the market using its 56 Kbps modem. See Complaint, ¶ 81. Plaintiffs allege these statements were made for the purpose of increasing stock prices for the Cascade merger and generally, so they are a potential basis for liability for Counts I, II, IV and V of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act and 12(a)(2) and 15 of the 1933 Act. However, none of these statements can provide a basis for liability as pled in the complaint.
This article stated that Ascend was offering a "flex program" to facilitate upgrades to the 56 Kbps technology. See Complaint, ¶ 79. Plaintiffs do not allege the program did not exist but do allege that the announcement was misleading because of the same technology and supplier problems. See id., ¶ 81. The description of the flex program is a statement of historical fact about a program Ascend was actually offering. It would be misleading because of technical problems with the modem only if those problems actually existed at the time the flex program was announced, Ascend knew of the problems, and the problems would prevent the flex program from taking place. Plaintiffs have not offered contemporaneous facts to suggest that any of these three conditions were true.
This article quoted defendant Ejabat as saying that there were no roadblocks ahead, with the caveat that "all the cylinders have to work and you have to execute on your plans." See id., ¶ 80. Ejabat also said that "we see the company continuing to grow" although it would probably not achieve the forty percent per quarter rate it had experienced before. See id. When asked to predict future growth, he said he expected performance at the higher end of what the industry was doing, or perhaps thirty to fifty percent over the next few years. See id.
The predictions of Ascend's growth are forward-looking statements as statements of future economic performance and financial projections. See 15 U.S.C. §§ 77z-2(i), 78u-5(i). These statements are protected by the safe harbor because they are accompanied by meaningful cautionary statements that they would try to grow "as much as [they could] manage," that they did not expect to grow as much as they had in the past, and that these predictions were contingent on everything working out as planned. See Complaint, ¶ 80. Furthermore, plaintiffs have not alleged actual knowledge on the part of Ejabat that his statements were false or misleading, but have just offered the same unsubstantiated allegations of technical problems that they wish to project back from the date of their revelation. See id., ¶ 81. To demonstrate actual knowledge for these statements about future economic performance, plaintiffs would have to demonstrate that Ejabat knew the growth he was predicting was not possible.
Because plaintiffs have not provided the question Ejabat was answering when he said there were no roadblocks ahead, it is not obvious what his answer was intended to convey. In the context of the questions and answers that follow it, the statement about roadblocks appears also to be a statement about the company's general economic performance in the future and does not appear to be focused on the performance of the 56 Kbps modems or Ascend's plans for the future few months. As such, it is a forward-looking statement of future economic performance subject to the same pleading requirements as the rest of the statements in this excerpt.
Even if the plaintiffs demonstrated that the "roadblocks" statement was intended to be focused on issues of immediate performance of the 56 Kbps modems, plaintiffs would have to demonstrate its falsity by offering contemporaneous facts suggesting that the alleged technical problems actually existed on May 13, 1997. The technical problems delaying modem shipment were announced within a period of three weeks from this publication. This time period is short enough that it is at least plausible that Ejabat should have been informed of the problems by this point. However, it is also possible that Ascend became aware of the chip problems only immediately before the shipping delays, particularly since the problems were in chips provided by a supplier and not produced by Ascend itself. Furthermore, although this interview was published on May 13, 1997, plaintiffs do not offer any information suggesting when Ejabat actually made the statements. If plaintiffs wish to rely solely an later revelations to substantiate their claims that certain problems existed, it is their burden to demonstrate that the revelations were of problems that were actually contemporaneous with earlier statements. Therefore, in order to meet the pleading requirement, plaintiffs would have to either meet the heightened pleading standard for forward-looking statements or offer contemporaneous facts suggesting that the "roadblocks" language was meant to refer to Ascend's immediate success and that the problems existed and should have been known at the time the statement was made.
Plaintiffs claim these statements are misleading in asserting that the delay in modem shipments would not hurt sales and that Ascend would ship a large number of modem by the end of the year. Plaintiffs allege these statements were made for the purpose of increasing stock prices for the Cascade merger and generally, so they are a potential basis for liability for Counts I, II, IV, and V of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act and §§ 12(a)(2) and 15 of the 1933 Act. However, none of these statements can provide a basis for liability as pled in the complaint.
Defendant Schneider announced that there had been a delay in shipments of the 56 Kbps modem products. See Complaint, ¶ 84. He said that the customers did not want any product shipped to them until the problem was taken care of, but that "he did not expect the delay to hurt sales this quarter." See id. This is a forward-looking statement as a financial projection and statement of future economic performance. Once again, plaintiffs have not properly pled materiality, lack of cautionary statements and actual knowledge of falsity in order to exempt the statement from the safe harbor provisions. See 15 U.S.C. §§ 77z-2(c), 78u-5(c). Plaintiffs state that customers were refusing to buy the 56 Kbps modems, but they do not specify any particular customers who refused to buy, any particular orders that were canceled or refused, or any time frame in which such refusals occurred. See Complaint, ¶ 86. Such bare allegations do not meet the standards of the PSLRA or Rule 9(b).
The article also says that "the glitch has been ironed out and Ascend is working to catch up on Max production" but this is not explicitly attributed to Schneider or Ascend. See id. Schneider said that "the onus is on our manufacturing to catch up" and that the company had just started shipping the modems. See id. Plaintiffs do not offer any allegations that contradict these statements.
Plaintiffs allege that "defendants caused" an announcement to be made that Ascend would ship one million 56 Kbps modems to Internet Service Providers by the end of the summer and that other ISPs would upgrade as well, including Prodigy, EarthLink and the Microsoft Network. See id. Plaintiffs once again allege these statements were false on the basis of later revelations that unspecified customers would not buy until they knew that the modems worked, and that the delays were hurting sales to international customers. See id., ¶ 86. As discussed above, these allegations are not particular enough to demonstrate that these statements were false or misleading when made. Plaintiffs do not allege that the number of customers who would not buy was so great that Ascend did not have orders for one million modems, or that the named purchasers were not actually purchasers. Furthermore, this article does not directly attribute this statement to Ascend, nor do plaintiffs allege any facts suggesting how defendants "caused" it to be released.
The plaintiffs do not make any allegations of materiality.
Plaintiffs claim these statements are misleading in asserting that Ascend was overcoming production delays. Because these allegations relate to statements made after the merger with Cascade, they are a potential basis for liability only for Counts I and II of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act. However, none of these statements in this report can provide a basis for liability as pled in the complaint.
Plaintiffs offer this securities analyst's report with only conclusory allegations that the defendants provided the information. See Complaint, ¶ 91. The plaintiffs do not offer the necessary facts to indicate that the defendants endorsed or adopted the report and would therefore be liable for its contents. See Wenger, 2 F.Supp.2d at 1249; In re Stratosphere, 1 F.Supp.2d at 1115-16; Powers, 977 F.Supp at 1042; Zeid v. Kimberley, 973 F.Supp at 920 (ND. Cal. 1997). Therefore, this article cannot be a basis for liability against the defendants.
Plaintiffs claim these statements are misleading in asserting that Ascend had not lost any business due to the 56 Kbps modem problems. Because these allegations are unrelated to the merger with Cascade, they are a potential basis for liability only for Counts I and II of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act. However, none of these statements are a basis for liability as pled in the complaint.
On July 15, 1997, Ejabat is reported to have said in a conference call with investors and analysts: "over the course of the year as a whole, Ascend has not lost any business due to the 56K snafu" and "[w]e are either maintaining or increasing our market share in our businesses." See Complaint, ¶ 93. Like Ejabat's May 13, 1997 statement that there were no roadblocks ahead, these statements at least have the potential to substantiate the plaintiffs' claims if they were properly pled. However, plaintiffs cannot succeed in alleging that these July statements were false when made by relying on September revelations of unspecified losses of customers and sales. Rather, plaintiffs must allege that customers were actually abandoning Ascend and moving to other companies because of the 56 Kbps modem problems, and they must offer specific facts about specific losses that had taken place by the date of this statement.
Plaintiffs claim these statements are misleading in asserting that some Ascend products were likely to show sales growth, the integration of Cascade was smooth, and the 56 Kbps modem problems were solved. Because these statements occurred after the merger with Cascade, they are a potential basis for liability only for Counts I and II of the complaint, alleging violations of §§ 10(b) and 20(a) of the 1934 Act. However, none of these statements can provide a basis for liability as pled in the complaint.
This article reports that Ejabat said sales for that quarter and the next would be higher than the previous quarters, and that stock prices rose thereafter. At a conference, Ejabat apparently told analysis and investors that certain Cascade products that do not appear to be 56 Kbps modem products were likely to show sales growth. He said the integration of Cascade was "proceeding smoothly" and that Ascend planned to broaden its products in response to customer demands. Ejabat also said that Ascend had solved the problems that caused the modem shipment delays and that the company was shipping the full range of products with the chips "in volume." See Complaint, ¶ 97.
This article quotes statements Ejabat allegedly made at a conference that was closed to the press. See id. Therefore, the author is not reporting based on first-hand observation, and it is not clear on what basis these statements are being reported and whether they can properly be attributed to Ejabat.
The statements about Cascade products expanding and the integration of Cascade proceeding smoothly are unrelated to plaintiffs' allegations about problems with the 56 Kbps modems and therefore cannot be a basis for liability. Ejabat's speculation about future sales is forward-looking, and plaintiffs have not shown that he had actual knowledge that his statements were false, that the statements were material, or that they were not accompanied by sufficient cautionary statements.
Like Ejabat's May 13 and July 16 statements, his statements about ongoing sales, that the Max products were being shipped "in volume," and that the 56 Kbps modem problem was solved could be a basis for liability if plaintiffs properly pled that the statements were false when made. Once again, plaintiffs' bare allegations that unspecified customers were refusing to buy the 56 Kbps modems are not particular enough to counter these statements.
Because the plaintiffs have not properly pled their allegations under Rule 9(b), Rule 12(b)(6), and the PSLRA of 1995, the Court grants the defendants' Motion to dismiss without prejudice.
IT IS SO ORDERED.
|
DATED: February 2, 1999 |
/s/ |
Source: Scanned paper copy of court-stamped document