TOWER C. SNOW, JR. (State Bar No. 58342)
KEVIN P. MUCK (State Bar No. 120918)
JANE ROWEN (State Bar No. 162455)
JAMES A. LICO (State Bar No. 169017)
ROBIN J. REILLY (State Bar No. 191579)
BROBECK, PHLEGER & HARRISON LLP
One Market, Spear Street Tower
San Francisco, CA 94105
Telephone: (415) 442-0900
MEREDITH N. LANDY (State Bar No. 136489)
BROBECK, PHLEGER & HARRISON LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telephone: (650) 424-0160
Attorneys for Defendants
Andrew K. Ludwick, Paul J. Severino, William J. Ruehle,
Ronald V. Schmidt, Jeffry R. Allen, Gary J. Bowen,
Dominic Orr, R. Stephen Cheheyl and Bay Networks, Inc.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
|
PAUL BERGER, JOHN QUERCI, ROBERT Plaintiffs, vs. ANDREW K. LUDWICK, PAUL J. SEVERINO,
Defendants. |
) |
No.
C-97-0728-CAL CLASS ACTION REPLY MEMORANDUM IN Date: July 31, 1998 |
I. INTRODUCTION
II. PLAINTIFFS ARE UNABLE TO EXCUSE THEIR INADEQUATE "INFORMATION AND BELIEF" ALLEGATIONS
V. PLAINTIFFS' OPPOSITION CONFIRMS THAT THEY CANNOT ESTABLISH LOSS CAUSATION
VI. CONCLUSION
Acito v. IMCERA Group, Inc.,
47 F.3d 47 (2d Cir. 1995)
Cosmas v. Hassett,
886 F.2d 8 (2d Cir. 1989)
Epstein v. Itron, Inc.,
993 F. Supp. 1314 (E.D. Wash. 1998)
Fecht v. Price Co.,
70 F.3d 1078 (9th Cir. 1995),
cert. denied, 517 U.S. 1136 (1996)
Fisk v. Superannuities, Inc.,
927 F. Supp. 718 (S.D.N.Y. 1996)
Glassman v. Computervision Corp.,
90 F.3d 617 (1st Cir. 1996)
Grossman v. Novell, Inc.,
120 F.3d 1112 (10th Cir. 1997)
Hanon v. Dataproducts Corp.,
976 F.2d 497 (9th Cir. 1992)
Hockey v. Medhekar,
No. C-96-0815 MHP, 1998 U.S. Dist. LEXIS 4297
(N.D. Cal. Mar. 31, 1998)
Hockey v. Medhekar,
[Current Binder] Fed. Sec. L. Rep.
(CCH) ¶ 99,465 (N.D. Cal. April 15, 1997)
In re Convergent Technologies Sec. Litig.,
948 F.2d 507 (9th Cir. 1991)
In re GlenFed, Inc. Sec. Litig.,
42 F.3d 1541 (9th Cir. 1993)
In re Gupta Sec. Litig.,
No. C-94-1517 FMS, 1995 U.S. Dist. LEXIS 21847
(N.D. Cal. July 18, 1995)
In re Silicon Graphics, Inc. Sec. Litig.,
970 F. Supp. 746 (N.D. Cal. 1997)
In re Silicon Graphics, Inc. Sec. Litig.,
[1996-1997 Transfer Binder] Fed. Sec. L. Rep.
(CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996)
In re Syntex Corp. Sec. Litig.,
855 F. Supp. 1086 (N.D. Cal. 1994),
aff'd, 95 F.3d 922 (9th Cir. 1996)
In re VeriFone Sec. Litig.,
784 F. Supp. 1471 (N.D. Cal. 1992),
aff'd, 11 F.3d 865 (9th Cir. 1993)
Mathews v. Centex Telemanagement, Inc.,
[1994-1995 Transfer Binder] Fed. Sec. L. Rep.
(CCH) ¶ 98,440 (N.D. Cal. June 8, 1994)
McGonigle v. Combs,
968 F.2d 810 (9th Cir.),
cert. dismissed sub nom., 506 U.S. 948 (1992)
Novak v. Kasaks,
--- F. Supp. ---, No. 96 Civ. 3073 (AGS),
1998 WL 107033 (S.D.N.Y. March 10, 1998)
Press v. Chemical Investment Services Corp.,
988 F. Supp. 375 (S.D.N.Y. 1998)
Queen Uno Ltd. Partnership v. Coeur d'Alene Mining Corp.,
No. 97-WY-1431-CB, 1998 U.S. Dist. LEXIS 5698
(D. Colo. Apr. 13, 1998)
Ronconi v. Larkin,
No. C-97-1319-CAL, 1998 U.S. Dist. LEXIS 6364
(N.D. Cal. May 1, 1998)
San Leandro Emergency Med. Group
Profit Sharing Plan v. Philip Morris Cos.,
75 F.3d 801 (2d Cir. 1996)
Siegel v. Lyons,
[1996-1997 Transfer Binder] Fed. Sec. L. Rep.
(CCH) ¶ 99,227 (N.D. Cal. April 26, 1996)
Stack v. Lobo,
903 F. Supp. 1361 (N.D. Cal. 1995)
Zeid v. Kimberley,
973 F. Supp. 910 (N.D. Cal. 1997)
Zuckerman v. Foxmeyer Health Corp.,
[Current Binder] Fed. Sec. L. Rep.
(CCH) ¶ 90,186 (N.D. Tex. March 31, 1998)
Federal Rules of Civil Procedure
Rule 9(b)
Securities Exchange Act of 1934
Section 10(b)
Section 21D(b)(1)-(2)
Section 21D(b)(1)(b)
Section 21E(c)(1)(B)
Plaintiffs' Opposition ("Opp.") actually underscores the fatal deficiencies of their Second Amended Complaint ("SAC"). In response to defendants'1/ motion to dismiss, plaintiffs are unable to point to any factual allegations in the SAC sufficient to: identify the purported basis for their information and belief averments; create a strong inference of scienter; establish that any of the challenged statements are actionable; or establish loss causation. Indeed, a number of plaintiffs' arguments are based on mischaracterizations of both the law and their own allegations -- a sure sign that the SAC fails, despite three pleading efforts and explicit instruction from this Court, to state a cognizable claim. The SAC should be dismissed in its entirety with prejudice.
Plaintiffs admit that the entire SAC is based upon "information and belief" (Opp. at 6-7, SAC ¶ 10), and that the Reform Act requires them to "state with particularity all facts upon which" their allegations are based. However, plaintiffs make no real effort to argue that they have actually pled "all facts." Rather, they offer up a series of unpersuasive arguments in an effort to convince the Court that it should ignore both the plain language of the statute and the legislative history.
The most thorough discussion of the requirements for "information and belief" pleading is found in In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997) (hereafter "Silicon Graphics II"). In that case, the court explained that both the express language of the Reform Act -- specifically, Section 21D(b)(1)(b) -- and the legislative history mandate that plaintiffs must "include the names of confidential informants, employees, competitors, Government employees, members of the media, and others who have provided information leading to the filing of the case." Id. at 763. Accord Novak v. Kasaks, --- F. Supp. ---, No. 96 Civ. 3073 (AGS), 1998 WL 107033 at *7 (S.D.N.Y. March 10, 1998) (allegations virtually identical to those in the present case found inadequate to satisfy the Reform Act).
Plaintiffs make no effort to show that they have complied with these requirements, and for good reason: the SAC does not identify a single person, internal document, or any other source for plaintiffs' allegations of misconduct. They simply make conclusory averments on information and belief -- e.g., that Bay's Executive Committee "frequently discussed" product development problems (SAC ¶ 60), it "was known internally among the Bay sales force" that certain products could not be delivered on time (id. ¶ 66), the sales force was "instructed" by "upper management" to hold the market (id.), and defendant Ruehle "orchestrated" a program of "channel stuffing" (id. ¶ 99) -- and ask the Court to pretend that occasional references to unidentified "former employees" somehow satisfies the Reform Act's requirement of pleading "all facts."2/
Nor do plaintiffs make any effort to explain why the analysis and holding of Silicon Graphics II should be ignored. They do not attack the court's reasoning or its review of the legislative history, and certainly make no effort to argue that the holding is inconsistent with the statutory language. Instead, plaintiffs mindlessly argue that, when this Court dismissed the First Amended Complaint on February 6, it never specifically adopted Silicon Graphics II. Opp. at 8. Needless to say, the fact that this Court did not mention the case by name at the hearing is hardly a legitimate basis for arguing that its holding should be ignored.3/
Even more remarkable than their decision to ignore Silicon Graphics II is plaintiffs' mischaracterization of the cases upon which they purport to rely. Indeed, plaintiffs' principal authority, Queen Uno Ltd. Partnership v. Coeur d'Alene Mining Corp., No. 97-WY-1431-CB, 1998 U.S. Dist. LEXIS 5698 (D. Colo. Apr. 13, 1998), actually agrees with the pertinent portions of Silicon Graphics II. Plaintiffs conveniently ignore Coeur d'Alene's statement that it:
agrees with Silicon Graphics that if plaintiffs pleading a complaint based on information and belief have in their possession internal documents or information obtained from confidential informants, then they must identify specific facts regarding the documents and set forth the names of and information provided by the informants. . . .
Id. at *28 n.4 (emphasis added).4/ Because plaintiffs affirmatively allege that the entire SAC is based on information and belief (SAC ¶ 10), and because they do not specify any of their alleged sources, the Coeur d'Alene court would find that they have failed to comply with the Reform Act.5/
Plaintiffs also argue (in a footnote) that because their allegations are based on the "investigation of counsel," they are somehow exempt from Section 21D(b)(1)(b). This is nonsense. First, plaintiffs themselves have specifically admitted that, except for allegations concerning plaintiffs and their attorney, "[a]ll allegations made in this [SAC] are based on information and belief. . . ." SAC ¶ 10. Moreover, as noted in Silicon Graphics II, if allegations are not made on personal knowledge, they "must be based on information and belief -- that is the only alternative." 970 F. Supp. at 763. See also Hockey, 1998 U.S. Dist. LEXIS 4297 at *16 (rejecting argument that complaint was not based on "information and belief" where plaintiffs alleged that it was "based in part on 'information obtained from former employees and discussions with consultants'. . ."); Novak, 1998 WL 107033 at *7 (Reform Act's requirements apply despite allegation that complaint was based upon "investigation of counsel").6/
In dismissing the First Amended Complaint, this Court noted that plaintiffs had not complied with the Reform Act's clear pleading requirements. They have completely failed to demonstrate that -- despite adding a few vague references to unidentified "former employees" -- the SAC represents an improvement over the previous effort. Consequently, the SAC should be dismissed.
Plaintiffs make only a superficial effort to argue that the SAC contains factual allegations creating a "strong inference" of scienter. Despite the importance of the issue, they devote fewer than four pages of their Opposition to it (Opp. at 9-13), and do little more than repeat the conclusory and speculative assertions in their SAC.
As the Court is aware, the Reform Act created a substantially higher burden for pleading scienter. Plaintiffs must set forth specific facts establishing: (a) that each alleged misstatement was false at the time it was made; and (b) a "strong inference" that each misstatement was made with scienter. Section 21D(b)(1)-(2). Conclusory assertions that defendants "knew" -- much less that they "must have known" -- statements to be false are inadequate to create the requisite strong inference. Tr. 5:8-19; Zeid v. Kimberley, 973 F. Supp. 910, 914 (N.D. Cal. 1997).
Significantly, plaintiffs make no effort to analyze the various alleged misstatements in the SAC and explain, for each, what facts purportedly establish scienter. The reason for this omission is that the SAC contains no such facts. Instead, plaintiffs make a few scattershot arguments which fail to comply with the Reform Act's rigorous standards.
First, plaintiffs' contention that Bay "admitted" (long after the fact) the falsity of several statements made during the class period cannot withstand scrutiny. The principal "admission" identified in the Opposition is pulled from Bay's September 1996 letter to shareholders. Plaintiffs claim that, "Bay admitted . . . that back on December 31, 1995, [it] knew that revenues were down." Opp. at 11. In reality, Bay "admitted" no such thing, and plaintiffs know it. Bay's actual statement, as quoted in the SAC, is as follows:
[a]s multiple switching alternatives came to market mid-year, however, we saw increased pressure on our switching products, as well as on our shared media hub offerings, resulting in slower revenue growth. . . .
SAC ¶ 131. By its terms, this statement merely notes that competing products became available mid-year and, in hindsight, it appeared that the resulting competitive pressures slowed revenue growth. At no point does Bay "admit" that it knew (by December 1995 or any other time) that its "revenues were down."7/ The fact that plaintiffs twist Bay's actual statement beyond recognition demonstrates that even they understand the allegations of the SAC are insufficient.
Equally ineffectual is the argument that Bay "admitted" that statements concerning the 28115 were false, and that this purported "admission" somehow demonstrates scienter. Opp. at 17. Plaintiffs aver that Bay said in its 1996 Annual Report that the 28115 was "introduced in early fiscal 1996" (which began on July 1, 1995), and that this is inconsistent with statements made in May and July 1995 that the first shipments of the product had occurred in January 1995. However, in light of plaintiffs' concession that the 28115 actually did begin shipping in January 1995 (SAC ¶ 45), and was shipping in commercial quantities by August 1995 (id. ¶ 56) -- in other words, had been rolled out and was generally available "early in fiscal 1996" -- they have failed to demonstrate any inconsistency. More importantly, even if the statements could be construed as inconsistent, that fact would do nothing to establish that, in the May-July 1995 time period, any of the defendants had knowledge (or were egregiously reckless in not knowing) that false statements were made. See In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994); Ronconi v. Larkin, No. C-97-1319-CAL, 1998 U.S. Dist. LEXIS 6364 at *16-18 (N.D. Cal. May 1, 1998).8/
Plaintiffs fare no better with the argument that defendants "must have known" of problems with Bay's products. Opp. at 11. Indeed, the only explanation plaintiffs provide for this desultory argument is a lone footnote, in which plaintiffs merely repeat their conclusory averments that defendants, as insiders, knew -- in some unexplained way, and without reference to any paragraph of the SAC -- that Bay's products were "late-to-market," their sales forces were fighting, inventory was "ballooning," and revenues were falling. Opp. at 11 n.25. Such bald allegations fall far short of what is required to plead scienter under the Rule 9(b) and the Reform Act. See Hockey, 1998 U.S. Dist. LEXIS 4297 at *29-31; Stack v. Lobo, 903 F. Supp. 1361, 1370 (N.D. Cal. 1995); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1095 (N.D. Cal. 1994), aff'd, 95 F.3d 922 (9th Cir. 1996) ("plaintiffs' allegation that Defendants possessed 'internal corporate data known only to them' comes nowhere close to satisfying Fed.R.Civ.P. 9(b)"); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812 (2d Cir. 1996) (general allusions to unspecified internal corporate data are insufficient to withstand a motion to dismiss).9/
Plaintiffs' arguments regarding defendants' knowledge of alleged business and organizational problems also fall flat. Plaintiffs aver that despite Bay's wildly successful quarterly results, defendants "knew" the Company was plagued by problems, as evidenced by "channel stuffing" and a build-up in inventory. Opp. at 19. However, the allegations of "channel stuffing" and inventory build-up are completely conclusory. Plaintiffs allege no facts establishing the existence of such problems or their purported magnitude. Moreover, even if plaintiffs had pled such facts, there is still nothing in the SAC establishing that defendants knew of those problems or that such knowledge demonstrates that any statement was made with scienter. In the absence of particularized facts, plaintiffs have failed to establish scienter. Tr. 5:8-19; Zeid, 973 F. Supp. at 914.
Ultimately, plaintiffs are left with nothing more than the complaint that "Bay's revenues and profits flattened, in an industry that was growing leaps and bounds." Opp. at 19. This argument reveals that, despite plaintiffs' efforts to dress it up, the SAC is premised on nothing more than impermissible "fraud by hindsight."
In an effort to save the SAC, plaintiffs again cling to motive and opportunity. Even if this theory were still viable post-Reform, it would have no application here because Bay purchased stock during the class period. Plaintiffs completely ignore Mathews v. Centex Telemanagement, Inc., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,440 (N.D. Cal. June 8, 1994), in which the court dismissed the complaint for lack of scienter where the company purchased 209,500 shares during the class period. The court found that "[i]t would have made no sense to purchase that stock if defendants knew the prices to be inflated." Id. at 91,038. See also Allison v. Brooktree Corp., Case No. 97-0852 SM (POR), March 10, 1998 Order Granting Defendants' Motion to Dismiss at p. 13 ("The court observes that Plaintiffs have a particularly difficult task to demonstrate motive by means of stock sales when the primary alleged wrongdoer was purchasing, and not selling, stock").
Plaintiffs have failed to make any cogent response to either the holding or reasoning of Mathews. Their only reply is the half-hearted (and completely unsupported) argument that "the buy-back was a logical element of the scheme to inflate the stock price for acquisitions." Opp. at 12. The SAC contains no facts whatsoever supporting such conjecture. In the absence of specific facts, plaintiffs' conclusory allegations are wholly inadequate to save the SAC. Zeid, 973 F. Supp. at 918 and 923-24.10/
Plaintiffs also do not dispute the fact that, if they contend defendants' stock sales are indicative of scienter, it is their burden to establish that such sales were out of line with prior trading practices and made at times to maximize personal benefit from undisclosed information. Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995). Yet plaintiffs do not even argue that they have satisfied their burden, thereby conceding that the SAC is defective in this respect as well.11/
Plaintiffs' final argument is that defendants "admitted" that they knew of Bay's revenue slowdown in December 31, 1995. As explained above (see Sec. III.A.), defendants admitted no such thing, and the SAC contains no facts establishing that any of the defendants knew in December 1995 that Bay's revenue growth would slow. By deliberately mischaracterizing Bay's statement as an "admission," plaintiffs demonstrate again they cannot point to any facts alleged in the SAC which create a strong inference of scienter. The SAC should be dismissed in its entirety with prejudice.
Although plaintiffs' failure to plead scienter dooms their claims, there is another independent basis for dismissal: the SAC does not contain facts establishing that any of the alleged misstatements are actionable. Plaintiffs' claims are based on two categories of challenged statements -- i.e., those relating to Bay's products (the Centillion 100, 5000AH and 28115), and those relating to purported business and organizational issues -- but neither can support a Section 10(b) claim as matter of law.
All of the challenged statements which refer to the Centillion 100 and 5000 AH are forward-looking, and thus plaintiffs must plead specific facts showing not only that the statements were false when made, but that defendants had actual knowledge of the falsity of those statements at the time they were made. Section 21E(c)(1)(B). As explained below, plaintiffs' allegations of falsity follow the exact formula recently rejected by this Court in Ronconi:
Plaintiffs' allegations of falsity really amount to the following: 'Defendants said X. X was false. X was false because the opposite of X was true. Or X was false because X did not later come true.' [¶] While such a syllogism might be a sufficient statement of falsity in ordinary expression, it is not adequate under the standards of law for pleading violations of the Securities Exchange Act of 1934.
1998 U.S. Dist. LEXIS 6364 at *12. Instead, "plaintiffs must allege facts or evidence that shows why the statement was false at the time it was made. It is not sufficient simply to allege that a statement was false, or that it did not later come true." Id. Because plaintiffs in the present case have not satisfied this burden, claims based on the forward-looking statements must be dismissed.
Plaintiffs have utterly failed to establish that Bay's August 14, 1995 press release (stating that the "target general availability" for the Centillion 100 was October 1995) was false when made or that the defendants knew the statement was false when made. Instead, plaintiffs merely repeat conclusory allegations. Plaintiffs assert that "it was known internally among the Bay sales force" that Bay could not deliver the Centillion product on schedule, but that the sales force was instructed on orders from "Bay's upper management" to take customer orders anyway to "hold the market." SAC ¶ 66. However, plaintiffs allege no facts supporting those bald assertions. There is no indication of when "the sales force" purportedly learned that the Centillion products could not be delivered on schedule, what facts provided them with this knowledge, or from whom they obtained such knowledge. Similarly, there is no indication of which individuals in "Bay's upper management" purportedly instructed the sales force to take customer orders to "hold the market," or when that purported directive was made. Nor can plaintiffs rely on the allegation that the product did not ship until early 1996 as evidence that the statement of target general availability -- made six months earlier -- was false when made. Opp. at 19, 20. As this Court has noted, the fact that a statement turns out to have been wrong does not mean that it was false when made. Ronconi, 1998 U.S. Dist. LEXIS 6364 at *12. See also Syntex, 95 F.3d at 934.12/ In sum, the SAC does not contain facts sufficient to state a claim based on the Centillion 100.
The SAC also fails to establish the falsity of Bay's September 12, 1995 press release (stating that "the Model 5000 AH . . . [is] scheduled for availability in the fourth [calendar] quarter of 1995") or two subsequent statements (one in October and one in November) stating that Bay was on track with its products. Plaintiffs now make two arguments in response: (1) unnamed "former Bay employees" have stated that they knew in September that the 5000 AH could not be ready by December, and so defendants must have known; and (2) the shortness of time between the September press release and the scheduled availability date, and the allegation that the target date was not met, somehow establish falsity. Opp. at 18, 21-22. Both arguments are meritless.13/
First, plaintiffs plead no particularized facts underlying their claim that "knowledgeable former employees" knew the 5000 AH would not be ready by the date projected. There is no identification of these former employees, nor any allegation as to what they supposedly knew, what this "knowledge" was based upon or how such "knowledge" could be imputed to the defendants. Plaintiffs' allegation is legally indistinguishable from a statement that "X was false because the opposite of X was true." See Ronconi, 1998 U.S. Dist. LEXIS 6364 at *12. Furthermore, plaintiffs' statement that "if they [the former employees] knew . . . upper management did as well" (Opp. at 18 n. 38), is a non sequitur that does not come close to pleading particularized facts showing actual knowledge of falsity by defendants.
Second, there is no merit to plaintiffs' assertion that falsity and knowledge of falsity are established by the shortness of time between the statements and projected availability date. Plaintiffs rely on Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995), cert. denied 517 U.S. 1136 (1996), but the facts and standard of proof in that case are completely distinguishable. Fecht used a pre-Reform standard (when scienter could be averred generally), and plaintiff in that case was not required to plead facts showing a "strong inference" of scienter (let alone actual knowledge). Here, plaintiffs are challenging a forward-looking statement requiring actual knowledge of falsity, circumstantial evidence of scienter by a shortness of time between an alleged misrepresentation and a subsequent event is not nearly enough. Moreover, unlike the present case, at the time the defendants made the optimistic statements in Fecht, they already had knowledge of contradictory facts and information that they did not disclose to investors. See Syntex, 95 F.3d at 933 (distinguishing Fecht). Because plaintiffs have failed to establish falsity or actual knowledge of falsity with respect to the 5000 AH, claims based on that product should be dismissed with prejudice.14/
In response to the argument that the SAC fails to establish the falsity of statements concerning the 28115, plaintiffs really make just one contention: that Bay purportedly made "admissions" in its 1996 Annual Report which were inconsistent with statements made in May and July 1995. As explained above (see Sec. III.A), plaintiffs have failed to demonstrate any such inconsistency. Thus, the statements regarding the 28115 are not actionable because plaintiffs have failed to allege adequately that they were false when made.
Plaintiffs' claims based on statements regarding the success of the merger, including conflicts between the sales forces, are eviscerated by two recent key cases which are directly on point: Ronconi and Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997). Plaintiffs try in vain to distinguish Ronconi, and have ignored Grossman completely.
In Ronconi, this Court dismissed the complaint because plaintiffs had not pled particularized facts sufficient to establish that optimistic statements about a merger were false when made. Plaintiffs in that case alleged that the statements were false because the two merging companies were experiencing difficulty integrating their operations and sales forces, and the merger was "plagued by continuing problems." 1998 U.S. Dist. LEXIS 6364 at *5. As in this case, plaintiffs alleged that defendants made false statements to inflate the merged company's stock price so they could sell their shares at substantial profits and complete a stock-for-stock acquisition.
Plaintiffs attempt to distinguish Ronconi by arguing that the statements were predictions of the future, rather than positive historic statements of fact. Opp. at 19-20 n. 39. While some of the statements in Ronconi were forward-looking, many were not. Indeed, they were the same types of statements attributed to Bay (and, if anything, were more bullish).15/ Plaintiffs also claim that the plaintiffs in Ronconi alleged only general assertions of troubled operations, whereas they provide details of specific problems, thus demonstrating falsity. Opp. at 20 n. 39. In fact, the SAC alleges no particularized facts whatsoever establishing that the challenged statements were false when made. Ronconi thus dooms plaintiffs' claims.
Equally fatal is Grossman, which rejected claims based on optimistic statements concerning the Novell-WordPerfect merger, including statements that the merged company had experienced "substantial success" in integrating the sales forces of the two companies, that the merger was moving "faster than we thought," and that "[b]y moving rapidly to a fully integrated sales force, we are leveraging our combined knowledge of the expanding scope of network solutions." 120 F.3d at 1121. These statements -- which, again, are virtually identical to those attributed to Bay -- were found to be immaterial as a matter of law. Id. at 1121-22 ("these are the sort of soft, puffing statements, incapable of objective verification, that courts routinely dismiss as vague statements of corporate optimism"). Unable to distinguish Grossman, plaintiffs simply ignore it.
As discussed in defendants' moving papers, the allegations that Bay failed to disclose "channel stuffing" or "inventory build-up" are nothing more than the claim that the Company should have disclosed projections that revenues and earnings were likely to decrease. Such a claim is not actionable under Section 10(b). VeriFone, 784 F. Supp. at 1481; In re Convergent Technologies Sec. Litig., 948 F.2d 507, 516 (9th Cir. 1991). Plaintiffs' only response is a weak (and unsuccessful) attempt to distinguish VeriFone.16/ They are unable to offer any factual or legal basis for their claim that the alleged omissions are actionable under the securities laws.
In any event, plaintiffs do not adequately allege particularized facts establishing that there was any "channel stuffing," or that the inventories were believed to be at excessive levels during the relevant time period. See Section III.A, supra. Thus, even if plaintiffs could theoretically premise a claim on such alleged omissions (which they cannot), they have failed to establish that at the time of the challenged statements there was anything to disclose. See GlenFed, 42 F.3d at 1548 (plaintiff must set forth facts showing that alleged misstatement was "false when defendant uttered it"). Any claims based on non-disclosure of alleged "channel stuffing" or inventory build-up must therefore be dismissed.
Plaintiffs' opposition reveals a fundamental misunderstanding of loss causation -- and, in the process, highlights their failure to plead that element adequately. Despite several pages of argument, plaintiffs are unable to identify factual allegations in the SAC establishing that any of the purported misstatements about Bay's products or supposed business and organizational problems "caus[ed] the loss for which they seek to recover." McGonigle v. Combs, 968 F.2d 810, 821 (9th Cir.),
Plaintiffs are unable to make any credible argument that purported misrepresentations about the 28115 caused their alleged losses. Recognizing that the SAC admits the 28115 was shipping in commercial quantities by August 1995 (long before Bay's stock price declined), plaintiffs offer a wild and illogical theory in the hope of surviving a motion to dismiss. In their Opposition, they suggest (for the first time) that delays with the 28115 caused -- in some unexplained way -- "excess inventory" and "channel stuffing" months later, which in turn caused sales to decline the following year. Not only does this "domino theory" make no sense, it is unsupported by any allegations in the SAC. By resorting to such arguments, plaintiffs concede that the SAC contains no facts connecting the 28115 to any loss. See Fisk v. Superannuities, Inc., 927 F. Supp. 718, 729 (S.D. N.Y. 1996) (dismissing Section 10(b) claim where complaint failed to allege damage was caused by the misrepresentations and omissions at issue).
Plaintiffs do not even bother to argue in their Opposition that the SAC establishes loss causation with respect to the 5000 AH or Centillion 100 products -- a concession that statements regarding those products are not actionable. Plaintiffs attempt to show that they have alleged loss causation with respect to another product, the 58000 (Opp. at 14-15), but mischaracterize their own pleading. Nowhere in the SAC do plaintiffs allege that defendants made any misstatement concerning the 58000. The only reference plaintiffs point to is an alleged statement in September 1995 that the 58000 had been "unveiled" -- a statement which is not even alleged to be false.18/
As to the remaining category of misstatements alleged in the SAC (i.e., sales force conflicts, channel stuffing and inventory problems), plaintiffs devote only a footnote to the argument that they have established loss causation. Opp. at 15 n. 34. Again, they are unable to identify any facts tying these alleged misstatements and omissions to a drop in Bay's stock price. The paragraphs of the SAC cited by plaintiffs (¶¶ 24, 132-36) make no mention of alleged sales force conflicts, channel stuffing or inventory problems, much less allege that they caused plaintiffs' losses. Thus, there can be no recovery based on those omissions. McGonigle, 968 F.2d at 820-21.
After three separate pleading efforts, plaintiffs' opposition confirms that they are unable to plead facts sufficient to state a claim under the federal securities laws. Accordingly, the SAC should be dismissed in its entirety with prejudice.
|
Dated: June 12, 1998 |
BROBECK, PHLEGER & HARRISON LLP By_______________________________________ Attorneys for Defendants |
1/ "Defendants" are Bay Networks, Inc. ("Bay" or "the Company"), Andrew K. Ludwick, Paul J. Severino, William J. Ruehle, Ronald V. Schmidt, Jeffry R. Allen, Gary J. Bowen, Dominic Orr and R. Stephen Cheheyl.
2/ Plaintiffs' argument that they should not be required to reveal the identities of "interviewees" is a red herring. The Reform Act simply requires that plaintiffs provide all facts upon which the allegations are based including, inter alia, the names of those persons who have provided infor mation upon which plaintiffs purport to rely -- whether or not they have been "interviewed" by counsel. Put another way, plaintiffs cannot immunize facts from disclosure by "interviewing" persons with knowledge and then claiming some sort of privilege. See In re Gupta Sec. Litig., No. C-94-1517 FMS, 1995 U.S. Dist. LEXIS 21847 at *4 (N.D. Cal. July 18, 1995) (discovery of facts -- e.g., identities of persons with pertinent knowledge -- is proper and does not implicate the work product doctrine).
3/ In reality, this Court said at the February 6, 1998 hearing that defendants' attack on plaintiffs' "information and belief" allegations were well taken. Transcript of February 6, 1998 Hearing on Motion to Dismiss (hereafter "Tr."), attached as Exh. G to the Declaration of Kevin P. Muck, filed May 4, 1998 ("Muck Decl.") at 10-11. As the Court will recall, defendants' argument was based in large part on Silicon Graphics II.
4/ Coeur d'Alene went on to note that, to the extent Silicon Graphics II could be read to hold further that plaintiffs must have data from internal documents or confidential informants before they can make allegations on "information and belief," it disagreed. However, Silicon Graphics II holds no such thing. Judge Smith merely held that plaintiffs must provide all facts detailing their sources of information, whatever (or whoever) those sources might be. 970 F. Supp. at 763-64.
5/ Plaintiffs' citations to Epstein v. Itron, Inc., 993 F. Supp. 1314 (E.D. Wash. 1998) and Hockey v. Medhekar, No. C-96-0815 MHP, 1998 U.S. Dist. LEXIS 4297 (N.D. Cal. Mar. 31, 1998), are similarly unavailing. Epstein did not even discuss the Reform Act's requirements for "information and belief" pleading. In Hockey, the court noted that the Reform Act imposed heightened requirements on plaintiffs who rely on "information and belief," and cited Silicon Graphics II with approval. 1998 U.S. Dist. LEXIS 4297 at *15-17.
6/ Moreover, the cases that attempt to draw a distinction between allegations based on "information and belief" and those based on "investigation of counsel" suggest that the latter category is subject to more stringent pleading requirements. See, e.g., Coeur d'Alene, 1998 U.S. Dist. LEXIS 5698 at *25-26. Thus, even if the distinction made sense, plaintiffs could hardly salvage their defective allegations by arguing that the Court apply a more rigorous standard.
7/ In fact, any such suggestion would be absurd. Bay posted record revenues of $541.6 million for the December 1995 quarter (Muck Decl., Exh. D), and $521.7 million for the "disappointing" March 1996 quarter (Muck Decl., Exh. A).
8/ Plaintiffs' failure to plead scienter with respect to the 28115 is highlighted by defendants' alleged stock sales. Although plaintiffs argue that defendants sold stock while in possession of adverse information, virtually all of the alleged sales occurred in or after August 1995 (SAC ¶ 98) -- after the alleged problems with the 28115 were resolved and plaintiffs themselves allege the product was being shipped in commercial quantities (id. ¶ 56).
9/ Plaintiffs' reliance upon Epstein, 993 F. Supp. 1314 and Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989), is misplaced. In Epstein, unlike the present case, plaintiffs alleged facts establishing that the company's core technology -- on which the survival of the company depended -- was fatally flawed, and the gravity of the problem created a strong inference that the company's CEO knew of the problem. 993 F. Supp. at 1326-27. Similarly, in Cosmas (a pre-Reform case), plaintiffs alleged specific facts supporting an inference that defendants knew (contrary to bullish statements about its prospects for sales to the People's Republic of China) that strict import restrictions had been imposed which severely restricted the company's ability to send products to China, and ultimately led to the company's bankruptcy. 886 F.2d at 10-11 and 13. By contrast, plaintiffs in this case are unable to plead particularized facts showing that Bay was experiencing such potentially fatal problems, much less that defendants were aware of them.
10/ In fact, the timing of the acquisitions alleged in the SAC is inconsistent with plaintiffs' theory. Of the three alleged stock-for-stock acquisitions, one was completed only two weeks into the class period, and one was completed after the period ended altogether. SAC ¶ 33.
11/ Plaintiffs cite a random Texas case for the proposition that whether insider trading constitutes evidence of scienter is a fact question not properly raised on a motion to dismiss. Opp. at 12, citing Zuckerman v. Foxmeyer Health Corp., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,186 at 99,657-58 (N.D. Tex. March 31, 1998). Of course, the post-Reform law in this Circuit is exactly the opposite. See, e.g., In re Silicon Graphics, Inc. Sec. Litig., [1996-1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996) (hereafter "Silicon Graphics I") (dismissing case for lack of scienter because insider's sales did not give rise to a strong inference of fraud); Hockey v. Medhekar, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,465 (N.D. Cal. April 15, 1997) (hereafter "Medhekar") (dismissing complaint for lack of scienter, because plaintiffs had not met their burden of showing that insider sales were in suspicious amounts).
12/ Moreover, a statement of the "target general availability" of a product is a soft prediction which is immaterial. Syntex 95 F.3d at 933 ("[a]ny statements related to future sales of new products were merely forecasts, optimistic speculations as to how the market would react to the new products"); In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1485 (N.D. Cal. 1992), aff'd, 11 F.3d 865 (9th Cir. 1993).
13/ Plaintiffs' contention that, "because of Bay's announcements," the market was under the belief in January 1996 that the 5000 AH had already been released (Opp. at 18) is completely baseless. Plaintiffs' contention arises from an article in a trade magazine which erroneously stated that the 5000 AH had been released. SAC ¶ 71. There are no facts alleged that any of the defendants had anything whatsoever to do with that article. Syntex, 855 F. Supp. at 1097 (plaintiffs must show that "the company adopted, endorsed or sufficiently entangled itself with the [third party reports] to render them attributable to [the company]").
14/ In addition to the foregoing, all of plaintiffs' claims regarding the 28115, Centillion 100 and 5000 AH are not actionable because plaintiffs have failed to plead facts establishing strongly optimistic statements about the products and specific internal reports in stark contrast to those optimistic statements. Glassman v. Computervision Corp., 90 F.3d 617, 635 (1st Cir. 1996). Plaintiffs' effort to distance themselves from Glassman by citation to Hanon v. Dataproducts Corp., 976 F.2d 497 (9th Cir. 1992), is unavailing. Hanon is consistent with Glassman, because in Hanon the defendants made strongly optimistic statements about a product which were in stark contract to internal reports and documents. Id. at 502.
15/ The Ronconi statements included the following: "significant progress" had been made in consolidating the two companies; "[a] major achievement during the second quarter was the consoli dation and restructuring of the company's U.S. and international field sales organizations"; "the consolidation had been completed, and earnings growth was expected during the next several years thanks to sales and costs synergies from the merger"; "a major achievement in the second quarter was consolidating and regrouping its U.S. and foreign field sales operations." 1998 U.S. Dist. LEXIS 6364 at *9-10.
16/ Plaintiffs' attempt to distinguish VeriFone on the grounds that it is an omissions case rather than a misstatement case is unavailing. A look at footnote 47 of plaintiffs' opposition illustrates that they are alleging that material information was omitted which made otherwise literally true statements misleading. Thus, VeriFone is applicable.
17/ Plaintiffs attempt to excuse their inability to plead loss causation by suggesting that the element need not be alleged with particularity. However, inasmuch as the Reform Act confirmed loss causation is an element of a Section 10(b) claim (see Section 21D(b)(4)), there is no basis for concluding that plaintiffs should be excused from the requirements of Rule 9(b). See Press v. Chemical Investment Services Corp., 988 F. Supp. 375, 383 (S.D.N.Y. 1998) (elements of claim, including loss causation, must be alleged in conformity with Rule 9(b)).
18/ Plaintiffs do not allege that the 58000 had not been unveiled at the time of the statement. Indeed, in alleging the reasons why the September 1995 statement was purportedly misleading, plaintiffs do not even mention the 58000. SAC ¶ 62.
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